Report and Recommendation of the President to the Board of Directors

Project Number: 38183 October 2007

Proposed Loan, Asian Development Fund Grant, and Technical Assistance Grant Independent State of Samoa: Power Sector Expansion Project

CURRENCY EQUIVALENTS (as of 09 October 2007)

Currency Unit – tala (ST)

ST1.00 = $0.391

$1.00 = ST2.558 $1.00 = A$1.119

A$1.00 = $0.893 $1.00 = Y117.41 Y1.00 = $0.009

ABBREVIATIONS

ADB – Asian Development Bank ADF – Asian Development Fund AusAID – Australian Agency for International Development CDM – clean development mechanism CEF – Clean Energy Fund CEO – chief executive officer DNA – designated national authority DSR – debt-service ratio EARF – environmental assessment and review framework EIRR – economic internal rate of return EMMP – environmental monitoring and management plan EPC – Electric Power Corporation ESU – environment and social unit GDP – gross domestic product GEF – Global Environment Facility IEE – initial environmental examination JBIC – Japan Bank for International Cooperation LARF – land acquisition and resettlement framework LARP – land acquisition and resettlement plan MOF – Ministry of Finance MWTI – Ministry of Works, Transport and Infrastructure NAPA – National Adaptation Program of Action PEAR – preliminary environmental assessment report PMC – project management committee PMU – project management unit PPMS – project performance monitoring system PSC – project steering committee PUMA – planning and urban management agency RFMA – resident financial management advisors RSA – rapid social assessment SCADA – system control and data acquisition SFR – self-financing ratio SPREP – Secretariat of the Pacific Regional Environment Programme SWA – Samoa Water Authority TA – technical assistance UNDP – United Nations Development Programme WACC – weighted average cost of capital

WEIGHTS AND MEASURES

GWh – gigawatt-hour kV – kilovolt kWh – kilowatt-hour MW – megawatt

NOTE

(i) The fiscal year (FY) of the Government and the Electric Power Corporation ends on 30 June. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2007 ends on 30 June 2007.

(ii) In this report, “$” refers to US dollars unless otherwise stated.

Vice President C. Lawrence Greenwood, Jr., Operations 2 Director General P. Erquiaga, Pacific Department (PARD) Director I. Bhushan, Pacific Operations Division (Area B), PARD Team leader C. Litwin, Senior Energy Specialist, PARD Team members S. Blaik, Water Supply and Sanitation Specialist, PARD E. Brotoisworo, Senior Safeguards Specialist, PARD R. O’Sullivan, Senior Counsel, Office of the General Counsel (OGC) C. Png, Counsel, OGC S. Tumiwa, Senior Energy Specialist, Regional and Sustainable

Development Department

CONTENTS

Page LOAN AND PROJECT SUMMARY i MAP

HI. THE PROPOSAL ��H1 �HII. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES ��H1

�HA. Performance Indicators and Analysis ��H1 �HB. Analysis of Key Problems and Opportunities ��H3

�HIII. THE PROPOSED PROJECT ��H6 �HA. Impact and Outcome ��H6 �HB. Outputs ��H6 �HC. Asian Development Fund (ADF) IX Grant Component ��H8 �HD. Special Features ��H8 �HE. Project Investment Plan ��H9 ��HF. Financing Plan ��H10 ��HG. Implementation Arrangements ��H12

��HIV. TECHNICAL ASSISTANCE CLUSTER 16 ��HV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS ��H16

��HA. Economic and Financial Analyses ��H16 ��HB. Impacts ��H17 ��HC. Risks and Assumptions ��H19

��HVI. ASSURANCES AND CONDITIONS 20 ��HA. Specific Assurances 20 ��HB. Conditions for Loan and Grant Effectiveness ��H22 ��HC. Conditions for Disbursement ��H22

��HVII. RECOMMENDATION ��H22 APPENDIXES 1. Design and Monitoring Framework 24 2. Power Sector Analysis 29 3. Electric Power Corporation’s Investment Plan 34 4. Financial Performance and Projections of the Electric Power Corporation 40 5. External Assistance to the Power Sector 45 6. Detailed Cost Estimates 48 7. Eligibility Criteria and Procedures for Candidate Subprojects 50 8. Project Implementation Schedule 53 9. Procurement Plan and Contract Packages 54 10. Disbursement and Funding Arrangements 57 11. Technical Assistance Cluster 60 12. Economic and Financial Analyses 63 13. Summary Poverty Reduction and Social Strategy 69

SUPPLEMENTARY APPENDIXES (available upon request) A. Outline Terms of Reference for Consulting Services B. Technical Assistance Report C. Land Acquisition and Review Framework D. Environmental Assessment and Review Framework E. Initial Environmental Examination for the Hospital Feeder Upgrading Project – Stage 1 F. Summary Initial Environmental Examination G. Power Sector Analysis H. Financial Performance and Projections I. Economic Analysis J. Financial Analysis

LOAN AND PROJECT SUMMARY Borrower Independent State of Samoa Classification Targeting classification: General intervention

Sector: Energy Subsector: Energy sector development Themes: Sustainable economic growth, capacity development Subthemes: Fostering physical infrastructure development, promoting economic efficiency and enabling markets, institutional development

Environment Assessment

The two core subprojects are classified category B and C. An initial environmental examination was completed for the category B project. An environmental assessment review framework was completed to guide candidate subprojects. No category A subprojects will be financed.

Project Description The Power Sector Expansion Project comprises (i) support to the

Electric Power Corporation’s (EPC) investment plan 2008–2015 through three investment components and a project management component, and (ii) a technical assistance (TA) cluster for Implementing the Samoa National Energy Policy. EPC’s investment plan 2008–2015 comprises a series of individual subproject investments in power generation and transmission. The three investment components comprise (i) Component A, consisting of the stage 1 expansion and underground cabling of the Hospital Feeder which forms part of EPC’s underground cabling program for the transmission network to provide protection from cyclones, (ii) Component B, consisting of the supply and installation of single- and three-phase prepayment meters to improve EPC’s collection performance and lay the foundation for effective demand-side management, and (iii) Component C, consisting of 17 candidate subprojects including 11 transmission projects, four generation projects, a system control and data acquisition project, and voltage, current, and stream-flow-gauging measurement equipment. The project management component (Component D) comprises the recruitment of a project manager and implementation consultants to build capacity and help implement EPC’s investment plan.

Rationale Reliable power supply is essential for enhancing the quality of life

of all Samoans. Good performance of the power sector and reliable electricity services are vital for promoting private sector investments to diversify the economy and achieve sustainable economic growth. The performance of the power sector is increasingly becoming a hindrance to economic growth. High system losses and voltage drops have resulted in poor reliability and quality of electricity supply. As a consequence, consumers are resorting to more expensive self-generation.

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With peak demand growing at about 3% annually in the medium term, EPC’s challenge is to improve its operational efficiency and financial performance while ensuring sufficient generation and transmission capacity is available to provide a reliable and high quality electricity supply. EPC’s investment plan 2008–2015 is driven by (i) the need to improve EPC’s collection performance, (ii) the need to remove transmission bottlenecks to improve reliability and quality of supply, and (iii) capacity requirements to meet growing peak demands. In the longer term, the objective is to reduce Samoa’s reliance on imported fuels by promoting clean, indigenous, and renewable energy resources. Although Samoa’s debt situation has significantly improved, the economy remains import-dependent and vulnerable to climatic and global price shocks. The Asian Development Fund (ADF) grant to the Government will ease the macroeconomic impact of the large financing requirements in the power sector.

Impact and Outcome The Project forms part of the Government’s power sector

development plan to improve the capacity of the sector to provide sustainable and reliable electricity services to all consumers at affordable prices. To achieve this objective, the Project will help EPC to improve the quality, reliability, and cost-effectiveness of power supply by (i) supporting EPC’s investment plan to meet growing demand, (ii) improving the operational efficiency of EPC, (iii) improving the financial performance of EPC, (iv) establishing effective regulation of the power sector, (v) developing a demand-side management strategy to promote energy efficiency and conservation, and (vi) developing clean energy resources through the establishment of a clean energy fund (CEF), a clean development mechanism (CDM) subfund, and a designated national authority (DNA).

Project Investment Plan The project investment cost is estimated at $100 million, including

taxes and duties of $2.23 million. Financing Plan

ADF = Asian Development Fund. Source: Asian Development Bank (ADB) estimates.

Source Total

($ million) % Asian Development Bank ADF Loan 26.61 26.61Asian Development Bank ADF Grant 15.39 15.39Japan Bank for International Cooperation 38.00 38.00Government of Australia 8.00 8.00Electric Power Corporation 12.00 12.00

Total 100.00 100.00

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An ADF loan of $26.61 million and an ADF grant of $15.39 million to the Independent State of Samoa will help finance the Project. The ADF loan will have a 32-year term, including a grace period of 8 years, and interest rate of 1% during the grace period and 1.5% thereafter, and such other terms and conditions set forth in the financing and project agreements. The ADF grant to the Government will ease the macroeconomic impact of the large financing requirements in the power sector. The Japan Bank for International Cooperation (JBIC) will provide cofinancing of $38 million equivalent in Japanese yen, to be administered by the Asian Development Bank (ADB), for the Project. The loan is expected to have a 30-year term, including a grace period of 10 years, at an interest rate of 0.45%. The Government of Australia will provide grant cofinancing of $8 million. The grant is to be administered by ADB and is to be provided as Government of Samoa equity to EPC for counterpart financing of the Project, with terms and conditions set forth in the financing and subsidiary financing agreements.

Allocation and Relending Terms

The ADF loan, the ADF grant, and the JBIC loan will be relent by the Government to EPC. The relending will be based on such terms and conditions as set forth in the subsidiary financing agreement between the Government and EPC. Such terms and conditions will include the relending to be released in two tranches, an interest rate of 6.5%, and such conditions set forth in the financing agreement. The first tranche, which will finance subprojects completed by 30 June 2012, will have a 25-year term, including a grace of period of 5 years. The second tranche, which will finance the remaining subprojects, will have a 25-year term, including a grace period of 8 years. The Government will utilize the ADF grant by converting a portion of the EPC loan principal to grants conditional on timely and within-budget implementation of subprojects. The interest payment from EPC to the Government on the ADF grant will provide ongoing financing for a CEF and a CDM subfund to be established under the CEF.

Period of Utilization 31 December 2016 Estimated Project Completion Date

30 June 2016

Implementation Arrangements

EPC will be the implementing agency. A project steering committee (PSC) will be established for interministerial coordination and to provide overall project direction. A project management committee (PMC) will be formed within EPC to provide coordination between project and nonproject activities. EPC will establish a project management unit (PMU), to be led by

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an externally recruited project manager, for day-to-day management and implementation of the Project. Implementation consultants will be recruited to support the PMU. The Project will be implemented over a period of 8 years. Bid documents for core subprojects are under preparation such that contracts can be awarded prior to loan effectiveness. Construction activities are expected to commence in the first quarter of 2008. The eligibility criteria, project preparation requirements, and approval process for candidate subprojects have been established.

Executing Agency The Ministry of Finance Procurement Procurement under the Project, including for ADB, JBIC,

Government of Australia, and EPC financing, will follow ADB’s Procurement Guidelines (2007, as amended from time to time). ADB’s standard bid documents will be used for procuring ADB, JBIC, and Government of Australia financed goods and services. Requirement of environmental monitoring and management plans will be reflected in all civil works bid and contract documents. A procurement plan and tentative contract packages have been prepared. International competitive bidding procedures will apply to major contracts for all subprojects. Shopping procedure will apply to contract packages of less than $100,000.

Consulting Services Consulting services will be required for a project manager and

project implementation. Consultants will be selected and engaged in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time). A project manager will be recruited internationally as an individual for an initial period of 36 months in accordance with ADB procedures. A consultant firm will be engaged to provide 69 person-months of international consulting services over a period of 36 months for project implementation. The firm will be recruited using quality-and cost-based selection procedures. Individual consultants may be recruited for specific assignments in accordance with ADB procedures.

Project Benefits and Beneficiaries

Inadequate and unreliable power supply is becoming an increasing hindrance to economic growth and is affecting all consumers in Samoa. The Project will help improve the quality and reliability of electricity services, meet growing demand, and reduce EPC’s (and ultimately consumers’) exposure to fluctuating international fuel prices. Improvements in EPC’s financial and operational performance will enhance cost-effectiveness of power supply and, once the benefits of the expansion program are realized, reduce requirements for tariff increases.

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Regulatory reform and the establishment of a regulatory agency will help balance the interests of all sector stakeholders and promote cost-effective private sector participation and transparency in the power sector.

Risks and Assumptions EPC’s investment plan and financing arrangements have been

prepared considering the impact on Samoa’s debt and EPC’s ability to service its debt to the Government. The ADF grant will ease the macroeconomic impact of the large financing requirements in the power sector. The Government of Australia will provide a grant to be provided as Government of Samoa equity to EPC. This equity will enable EPC to meet its counterpart financing requirements for the Project. Political commitment to implementing power sector reforms is needed for improving the performance of the sector, to ensure that EPC can repay its debt to the Government, and to ensure that investments translate into benefits for electricity consumers. The TA cluster for Implementing the Samoa Energy Policy will assist the Government in (i) the consultation process, (ii) drafting and amending legislation, and (iii) establishing the regulatory agency. Assurances under the Project reflect the key milestones for regulatory reform. The selection and sequencing of subprojects under the investment plan has been prepared in consideration of EPC’s financial and implementation capacity. To ensure affordability of the investment plan to EPC, timely adjustments to tariffs need to be made in response to changes in EPC’s costs. Until a formal tariff mechanism can be established within the context of the regulatory framework, the Government has introduced a fuel surcharge that allows EPC to pass on fluctuating fuel costs. To address EPC’s poor collection performance, arrears by government ministries and state-owned entities will be cleared prior to loan effectiveness, and prepayment metering will be installed for EPC’s consumers. In the case of certain basic social services where suspending electricity services may not be possible, budgetary allocations will be paid directly to EPC for electricity consumption. The assurances under the Project include the provision that 75% of all consumers will have prepayment meters by the end of 2012. Draft bid documents have been prepared to help ensure timely implementation for core subprojects. Approval of advance procurement action will help ensure that construction activities can commence to meet scheduled commissioning targets. Advance recruitment of the project manager and implementation consultants will help mitigate EPC’s capacity constraints in project preparation and procurement activities. To the extent possible, EPC will apply plant design, supply, and install contracts to reduce the burden of coordination of construction activities.

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Technical Assistance The TA cluster for Implementing the Samoa National Energy

Policy comprises four components. Component 1 will help promote renewable energy resources through (i) the establishment of a CEF and a CDM subfund to be established under the CEF, (ii) identifying a project pipeline, (iii) increasing public awareness on clean and renewable energy, and (iv) providing initial capitalization. Component 2 will establish capacity building for the DNA to enable Samoa to benefit from the CDM. Component 3 comprises support for regulatory and policy reforms in the power sector. Component 4 will provide resident financial management advisors to help EPC (i) improve planning; (ii) ensure that investments are affordable and contribute to improving financial sustainability; and (iii) improve the transparency of costs, tariff setting, and accountability to the Government and consumers.

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on (i) a proposed loan; (ii) a proposed grant, both to the Independent State of Samoa for the Power Sector Expansion Project; (iii) the proposed administration of a loan from the Japan Bank for International Cooperation (JBIC); (iv) following approval by the Government of Australia, the proposed administration of a grant from the Government of Australia; and (v) following approval by the Government of Australia, the proposed administration of a conditional grant from the Government of Australia under a loan buy down mechanism for a portion of the loan. The report also describes a proposed technical assistance (TA) cluster for Implementing the Samoa National Energy Policy, and if the Board approves the proposed loan and grant, I, acting under the authority delegated to me by the Board, will approve the Asian Development Bank (ADB) (i) providing a portion of the technical assistance, and (ii) administering the balance of the technical assistance financed by the Government of Australia and the Government of Finland.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Performance Indicators and Analysis

2. Despite vulnerabilities to external factors, the Independent State of Samoa has experienced stable economic growth over the last 5 years. Real gross domestic product (GDP) grew at around 4% per annum, well above the average growth rate of the Pacific region economies. Economic growth is mainly driven by agriculture, construction, finance, and business services. Samoa is also benefiting from an increase in tourism. Further broadening of economic activity and private sector development are key strategies towards sustaining economic growth rates and reducing poverty. The Government’s Strategy for the Development of Samoa 2005–2007 lays the foundation for sustainable and broad-based economic growth supported by continued reforms and private sector development to improve the quality of life for all people in Samoa. Ensuring that sufficient power is available to meet growing demand is essential to achieving a broader economic base and reducing the country’s vulnerability to external shocks. The design and monitoring framework is in Appendix 1. 3. The energy sector in Samoa has undergone rapid transformation over the last decade towards having an energy supply based on imported petroleum and hydropower-generated electricity. This transformation has been driven by economic growth that has resulted in increasing demand for electricity and transportation. Energy demand in Samoa is met by three main sources: biomass (47%), fossil fuel (45%), and hydropower (8%). Biomass is mainly used for cooking, whereas imported petroleum is used for transportation and power generation. Imports of petroleum products account for 15% of Samoa’s total import expenditure. Power generation accounts for about 20% of total imported petroleum. 4. The Energy Unit of the Ministry of Finance (MOF) has the overall responsibility for policy and strategic planning for the power sector. In the absence of an electricity act, the Electric Power Corporation (EPC) Act (1980) and the Public Bodies Act (2001) govern the power sector. Under the provisions of the EPC Act, the Licensing Committee is responsible for issuing licensing for electrical works, generation, and distribution of electricity. 5. EPC, a wholly owned government corporation established in 1972, is vested with all operating responsibilities for the power sector. The EPC Act (1980) mandates EPC with the authority for generation, transmission, and distribution of electricity throughout Samoa. The utility operates as a separate entity and is defined as a public trading body under the Public

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Bodies Act (2001), with the principal objective of operating as a commercial business. The State Owned Enterprise Monitoring Division is mandated with monitoring the financial performance of EPC. EPC is governed by a board of directors, the composition of which is specified in the EPC Act. EPC has 482 employees and services about 29,800 consumers throughout Samoa. With the rural electrification program nearing completion, about 95% of the population has access to electricity. The average household consumption is 76 kilowatt-hours (kWh) per month. 6. EPC’s power system comprises a grid each on Upolu and Savai’i islands, which together account for nearly all energy sales, and small stand-alone solar and diesel generation schemes on two isolated islands. The total installed capacity of EPC is 37.2 megawatts (MW), including 24.7 MW of diesel generation. However, available and firm capacity is significantly less. 7. The generation on Upolu, which accounts for 90% of EPC’s total generation, comes from a mix of diesel and hydropower stations. The main power station on Upolu is located at Tanugamanono and has five diesel generation units with a combined available generation capacity of 17.9 MW. One of the units is kept on standby and is scheduled for retirement in 2009. The load factor is about 66% and the average fuel efficiency is 4 kWh per liter (l). Of the 12.5 MW of hydropower generation capacity, 6.7 MW is firm, and 4.0 MW of this comes from the Afulilo storage hydropower scheme on Upolu. The remaining hydropower capacity comes from four run-of-the-river schemes on Upolu, one of which is scheduled for retirement in 2009 unless refurbished. The run-of-the-river hydropower schemes suffer from large output reductions during the dry season, resulting in significant reductions in available energy. The total energy produced in 2006 was 101.0 gigawatt-hours (GWh). 8. Power is distributed from the power stations via 22 kilovolts (kV) and 6.6 kV radial transmission lines. Along these transmission lines, transformers step the voltage down to supply local demand. The overall system losses on Upolu were estimated at 19.2% of energy produced in 2006. Overloading of the existing Hospital Feeder, which carries 70% of energy sold on Upolu, contributes significantly to the high system losses and voltage drops. 9. Savai’i has one operational diesel power station located at Salalologa. The power station has six secondhand generation units with a combined available capacity of 5.2 MW. The estimated load factor is 41% and the total energy produced is 11.1 GWh. Fuel efficiency is estimated at 3.3 kWh per l. Power is distributed via 22 kV transmission lines with step-down transformers and a low voltage network to supply local demand. The transmission and distribution system losses were estimated at 21.4% in 2006. 10. In 2006, peak electricity demands reached 17.6 MW on Upolu and 3.0 MW on Savai’i. With a peaking factor�F

1 of 1.5 on Upolu, about 20.5 MW can be met reliably. With peak demand on Upolu growing by 7.3% in the very near term and by 4% beyond 2009, a shortfall of 0.3 MW is expected in 2008. By 2011, this shortfall will have increased to 5 MW unless additional generation capacity is installed. In terms of annual energy, the existing capacity can meet requirements until 2013 when a 1.3 GWh shortfall is predicted. This shortfall will increase to 25.7 GWh by 2020. Some of the existing capacity from self-generation (estimated to be about 8 MW) could be used to reduce peak system requirements in the short term. On Savai’i, the existing diesel power station is estimated to meet capacity and annual energy requirements assuming appropriate operations and maintenance of the existing generation units.

1 Calculated as peak power demand divided by average power demand.

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11. An automatic tariff adjustment mechanism was approved in 2001 but has never been implemented. Instead, tariff submissions are made to cabinet, which regulates and approves electricity tariffs. Before the 15% increase in May 2005, tariffs had remained constant since 2001. A simplified tariff structure, which became effective in February 2007, allows for a fuel surcharge of 15%, subject to review by cabinet every 6 months. For 2007 this implies a 14% increase in average tariffs. The highest tariff category for domestic consumers has been abolished and a single tariff applies to all nondomestic consumers. The average tariff for 2007 is estimated at ST0.712 ($0.26) per kWh overall and ST0.62 ($0.23) per kWh for domestic consumers. B. Analysis of Key Problems and Opportunities

1. Power Sector Priorities

12. The overarching goal for the power sector is to provide sustainable and reliable electricity services to all consumers at affordable prices. Developing indigenous and renewable energy resources to reduce the economy’s risk exposure to foreign exchange fluctuations and fuel price increases is a high development priority for Samoa and is articulated in the Strategy for the Development of Samoa. Consistent with this goal, the Samoa National Energy Policy (2007) identifies the development of renewable energy resources and the promotion of energy efficiency and conservation for end users as vital to achieving a sustainable energy sector. Likewise, EPC’s Corporate Plan 2007 identifies the provision of reliable and affordable electricity services as the vision for the corporation, and the development of renewable energy resources as a key longer-term objective. Development of hydropower and other renewable resources will help to replace fuel-generated power and reduce EPC’s exposure to foreign exchange fluctuations and fuel price increases. The power sector analysis is in Appendix 2. 13. While the development of indigenous and renewable energy sources is important for realizing the priorities for the energy sector, socially acceptable, technically feasible, and affordable renewable energy resources for power generation are limited in Samoa. Recent experience from a consultation process for hydropower development on Savai’i shows that community concerns and, sometimes, misconceptions of the impacts, can be a constraining factor. With the transport sector absorbing 80% of imported petroleum, it is evident that measures for energy conservation and development of alternative energy resources must cover the energy sector as a whole. To address the priorities for the energy sector, the Government will establish a clean energy fund (CEF) and a designated national authority (DNA) to promote renewable energy development and energy conservation, and examine policy measures in support of energy conservation covering the energy sector as a whole. 14. EPC is currently utilizing existing self-generation capacity on an as-needs basis. In the short term, EPC plans to continue to use self-generation on a standby basis to meet peak demand requirements during the dry season. The priority is to upgrade the transmission capacity to (i) improve utilization of existing generation plants, (ii) reduce system losses, (iii) improve reliability and security of supply to the main industrial and commercial consumers, and (iv) address the overloading on the existing underground transmission line to the hospital. Consistent with the priorities outlined in the Government’s National Adaptation Program of Action (2005), EPC aims to reduce the exposure of its transmission network to cyclones through underground cabling of selected transmission lines. The underground cabling program, which is included in EPC’s investment plan 2008–2015, comprises five subprojects: (i) the Hospital Feeder upgrading project – Stage 1, (ii) Upolu diesel power station to Fuluasou Substation 22 kV underground cable project, (iii) Hospital Feeder upgrading project – Stage 2, (iv) Fuluasou

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Substation to Apia Wharf area 22 kV underground cable project, and (v) Fuluasou Substation to Laulumauga via Vaigaga 22 kV underground cable project. 15. Unpredictable long-term financing for needed investments is a key factor constraining EPC’s efforts to move away from reactive management to more proactive planning, maintenance, and customer relations. EPC is increasingly placing emphasis on planning, but both technical and financial capacity for long-term investment planning is constrained. With technical assistance from ADB,�F

2 EPC developed an investment plan for generation and transmission investments for the period 2008–2015. EPC’s investment plan, which considers the capacity of EPC to manage project implementation and the affordability of capital investments, is detailed in Appendix 3. 16. In the short term, EPC’s investment requirements for generation are driven by growing peak demand. To reduce investment requirements, which may unduly burden the utility’s financial position, EPC has identified the need for demand-side management measures, including the introduction of bulk power purchase agreements with large consumers that encourage off-peak consumption. To ensure that demand-side management measures for all consumers are effective, installation of prepayment meters is included as a core subproject in EPC’s investment plan. 17. Appropriate arrangements for tariff setting, technical regulation, and private sector participation are becoming increasingly important to improving the performance of the power sector in Samoa. The Government has recognized that the existing arrangements are a key development constraint for the power sector and is considering reforms to improve the performance of the sector and encourage cost-effective private sector participation. Discussions on regulatory options for the power sector have been taking place through a TA project provided by ADB (footnote 2). These discussions have focused on the need for an electricity act to govern all stakeholders in the power sector in Samoa, and for a regulatory agency�F

3 to be established to (i) remove existing regulatory functions from EPC, (ii) provide appropriate arrangements for tariff setting, and (iii) enable private sector participation to reduce public sector investment requirements and promote least-cost generation to meet growing electricity demand.

2. EPC’s Financial Performance and Management

18. Over the past 6 years, EPC has struggled to improve its financial performance to satisfactory levels. Due largely to inadequate tariff levels and poor collections performance, EPC has been unable to meet its debt service obligations and still fund capital investments. EPC’s financial performance gradually improved up to FY2004, before weakening again in FY2005, primarily because of higher fuel prices. Although tariffs were increased by 15% in May 2005 and a fuel surcharge was introduced in February 2007, these were not sufficient to fully offset higher fuel costs. The impact of tariff increases and the fuel surcharge has been limited by EPC’s inability to significantly improve its collections performance. The collections performance has progressively deteriorated over the past 6 years and is a major factor adversely affecting net cash flows. Government entities account for a disproportionate share of EPC’s arrears from

2 ADB. 2006. Technical Assistance to the Independent State of Samoa for Preparing the Power Sector Expansion

Program. Manila. 3 The Government is considering establishing an independent regulatory agency for the power sector alone (a single

sector regulator) or mandate a regulatory agency to cover multiple infrastructure sectors (a multisector regulator). A multisector regulator would expand the roles and function of the existing independent regulator for the telecommunications sector.

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electricity sales. While electricity sales to government entities account for 11% of total sales, they account for 55% of existing total arrears. 19. To ensure timely tariff adjustments in response to changes in EPC costs, there is a need to establish a formal mechanism for determining tariffs within the context of an overall regulatory framework for the electricity sector. This is particularly important during the growing daily peak in demand when EPC relies most heavily on expensive diesel generation. 20. Over the past 2 years, EPC has taken measures to improve its collections. It has begun to introduce prepayment metering and has so far installed 1,200 meters, primarily for domestic customers and small businesses. The investment plan will extend prepayment metering to all EPC customers, including three-phase meters for government ministries and entities and private sector consumers. In the case of government-defined basic social services (such as hospitals and health clinics) where suspending electricity service may not be possible, budgetary allocations will be paid directly to EPC for electricity consumption. EPC has begun requiring full upfront payment for most rechargeable works, although some exceptions to this policy remain. The EPC board has also recently approved policies on consistent application of debt write-offs and disconnections. The financial performance and projections of EPC is in Appendix 4. 21. A financial management assessment of EPC’s internal controls and accounting and audit procedures was undertaken. EPC’s financial management practices and procedures are considered to be generally adequate for both the construction and operational phases of the Project. The project management unit (PMU) established within EPC will be responsible for project financial management and accounting. The PMU will utilize EPC’s existing financial management and accounting systems in undertaking these functions. EPC’s accounts and reporting structures are based on international financial reporting standards. 22. EPC’s financial statements are audited by a firm of external auditors on behalf of the Government’s Audit Office. Over the period assessed (FY2002–FY2006), the auditor issued an unqualified opinion, meaning that the financial statements were deemed to provide a true and fair view of the financial position of EPC. However, ADB’s financial management assessment identified certain deficiencies in these statements, which indicate weaknesses in the external auditing process. To address these deficiencies, resident financial management advisors (RFMAs) will provide ongoing support for improving internal budgeting and expenditure controls, consolidating accounts, and financial reporting and forecasts to the EPC board, the Government, and ADB.

3. External Assistance to the Sector

23. ADB has been involved in the power sector in Samoa since 1971 with the provision of an initial TA project which was instrumental in the establishment of EPC in 1972. ADB has assisted the development of the power sector in Samoa through seven previous loans, amounting to $21.05 million, and 14 TA projects, amounting to $3.013 million. The most recent loan, approved in 2001, was cancelled in 2006.�F

4 A number of other donors and multilateral development banks have been active in the power sector, including the Australian Agency for International Development (AusAID), European Investment Bank, Global Environment Facility (GEF), Japan International Cooperation Agency, United Nations Development Programme (UNDP), and the World Bank. The external assistance to the power sector is in Appendix 5.

4 ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Independent State of Samoa for the Power Sector Improvement Project. Manila (Loan 1886-SAM).

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4. Lessons

24. A number of lessons have emerged from ADB’s support to the power sector in Samoa. Cost overruns have historically been related to delays in implementation. Deferred loan effectiveness and technical and procurement aspects have been the major contributing factors to delays in project implementation. 25. Preparation of accurate cost estimates is a difficult task for infrastructure projects in Samoa given the country’s reliance on international markets, particularly for civil works contracts in Australia and New Zealand. Physical contingencies need to be sufficient to allow for technical uncertainties and the selection of procurement methods must consider the capacity to manage and coordinate contracts, and the ability to attract sufficient qualified bidders. 26. Samoa has experienced cost overruns on a majority of infrastructure projects funded by ADB and the World Bank. Cost overruns in the power sector have resulted in either a reduction in the project scope or a request for supplementary financing. These requests have been associated with delays that have led to further cost increases because of the need to extend bids. ADB review missions concluded that a sector loan modality would add flexibility and help avoid delays associated with supplementary loan processing. 27. In general, EPC has complied with covenants related to ADB’s safeguards. However, EPC’s compliance with financial performance covenants has been very limited in prior loans. In 2005, ADB undertook a comprehensive assessment of EPC’s financial performance which concluded that the covenants needed to be refined to achieve a strong focus on cash flows. In addition, reporting requirements to the EPC board and the Government for covenant compliance need to be in place to support desirable outcomes. Covenants compliance also needs to be supported by targeted capacity building to address identified weaknesses and by ongoing policy dialogue with the Government during implementation.

III. THE PROPOSED PROJECT

A. Impact and Outcome

28. The unreliable and poor quality electricity supply is affecting all consumer groups and is becoming an increasing constraint to private sector development and economic growth. The power sector expansion project has been identified to support the Government’s overarching objective of providing sustainable and reliable electricity services to all consumers at affordable prices. To achieve this objective, the Project will help EPC to improve the quality, reliability, and cost-effectiveness of power supply. B. Outputs

29. The Project forms part of the Government’s power sector development plan to improve the capacity of the sector to meet growing electricity demand and improve quality, reliability, and cost-effectiveness of power supply by (i) supporting EPC’s investment plan to meet growing demand, (ii) improving the operational efficiency of EPC, (iii) improving the financial performance of EPC, (iv) establishing effective regulation of the power sector, (v) developing a demand-side management strategy to promote energy efficiency and conservation; and (vi) developing clean energy resources through the establishment of a CEF, a clean development mechanism (CDM) subfund, and a DNA.

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30. EPC’s investment plan for 2008–2015 will meet forecasted demand requirements up until 2019 when new capacity will be required on Upolu, and help EPC improve its collection performance through the installation of prepayment meters. The investment plan comprises (i) four generation projects, (ii) 11 transmission projects, (iii) single- and three-phase prepayment metering, (iv) a system control and data acquisition (SCADA) project, and (v) portable equipment for measuring voltage and current and stream-flow gauging. Increased transmission capacity on Upolu and the installation of prepayment meters have been prioritized to improve EPC's collection performance and provide the foundation for effective demand-side management measures. The capacity of the transmission network will be increased to (i) reduce system losses, (ii) improve reliability and quality of supply to the main business and commercial load center in Apia, and (iii) reduce the load on the existing underground transmission line to the hospital. EPC will reduce the vulnerability of its transmission network through underground cabling of selected transmission lines. Investments in generation are prioritized to meet growing peak demand and replace diesel-generated power. Increased generation capacity on Upolu will be required in 2010 and a mini-hydropower project on Savai’i is scheduled for commissioning in 2014. 31. The SCADA and equipment for measuring voltage and current will help EPC improve its operational efficiency through (i) improved system controls and monitoring, (ii) benchmarking of standard industry performance indicators, and (iii) enabling targeted loss reduction measures. 32. The investment comprises the following components.

(i) Component A: Hospital Feeder Upgrading Project – Stage 1. The project forms part of EPC’s underground cabling program for the transmission network to provide protection from cyclones. The project, which is the first stage of the two-stage upgrading and underground cabling of the Hospital Feeder, will relieve the overloaded Hospital Feeder by transferring the town center and Mulinuu Point branches to the underutilized Vaitele Feeder. A 22 kV underground cable with a length of 900 meters (m) will be constructed and replace the existing 6.6 kV transmission line overhead section from Togafuafua to Saleufi. The project will improve utilization of the existing Vaitele Feeder and improve reliability of supply to the central business and parliamentary area, and to the hospital. The Tanugamanono Power Station will be reinforced by installation of a new 6.6 kV 22 kV transformer to support the 22 kV underground cable, and nine new 22 kV 400 volts (V) distribution transformers to replace the existing 6.6 kV 400 V transformers.

(ii) Component B: Single- and Three-Phase Prepayment Metering Project. This

component involves the supply and installation of 21,000 single-phase (10 amperes [A]–100 A); 200 three-phase prepayment meters (10 A–160 A); and 50 three-phase current transformer prepayment meters (160 A–800 A) on Upolu and Savai’i commencing in 2008. EPC plans to have prepayment meters for at least 75% of its consumers installed by the end of 2012. The Project will improve EPC’s collection performance and lay the foundation for effective demand-side management.

(iii) Component C: candidate subprojects. Candidate subprojects comprise three

generation and eight transmission subprojects on Upolu and one generation

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project and three transmission subprojects on Savai’i. The SCADA system and measurement equipment will cover the power systems on both islands.

(iv) Component D: project management. To ensure timely implementation, EPC

has established a PMU dedicated solely to the implementation of the investment plan. An externally recruited project manager and international project implementation consultants will be appointed for an initial period of 3 years to assist the PMU, build capacity, and coordinate and implement the investment plan.

33. The investment plan is accompanied by institutional and regulatory measures to improve the financial and operational performance of EPC, and the overall performance of the power sector. EPC’s collection performance will be improved through (i) the installation of prepayment meters, (ii) consistent application of the disconnection policy, and (iii) improvements to financial controls. 34. The TA cluster for Implementing the Samoa National Energy Policy comprises four components that aim to (i) help improve EPC’s financial performance through the provision of RFMAs; (ii) develop a regulatory framework that will establish a regulatory agency to govern all stakeholders in the power sector; (iii) promote energy efficiency through the development of a demand-side management and energy conservation strategy and public awareness campaign; and (iv) promote development of clean energy through the establishment of a CEF and CDM subfund and by assisting the Government with enabling the environment for participation in carbon-market trading through the establishment of, and capacity building for, the DNA. C. Asian Development Fund (ADF) IX Grant Component

35. The proposed ADF grant of $15.39 million to the Government will ease the macroeconomic impact of the large financing requirements for the power sector expansion project. The Government will provide the grant to EPC as a loan on the same terms as the loan from ADB. The Government will utilize a portion of the grant as an incentive scheme for EPC for timely implementation of subprojects under the investment plan. Upon EPC meeting the scheduled commissioning dates for each of the subprojects, the Government will provide 7% of the project cost as a grant to EPC, up to a ceiling of $10 million from 2008 to 2015. Projects commissioned after 31 December 2015 will not be eligible under the grant incentive scheme. The implementation schedule and commissioning dates for each of the candidate subprojects will be approved by the project steering committee (PSC) at subproject approval stage prior to implementation. The grant incentive scheme will help improve discipline in project implementation such that the benefits of the investments will reach electricity consumers in a timely manner. D. Special Features

36. Donor Coordination. Donor coordination and consultations with AusAID, GEF, and JBIC have been key features of project preparation. Because of the emphasis on regulatory and governance aspects of the power sector in Samoa, the Government of Australia will help finance the regulatory and policy reform component of the TA cluster for Implementing the Samoa National Energy Policy. Development of the feasible and affordable investment plan and policy dialogue has been undertaken with EPC and the Government jointly with AusAID and JBIC. JBIC will provide joint cofinancing as the first project under the Accelerated Cofinancing

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Scheme with ADB.�F

5 The Government of Australia will provide a grant as joint cofinancing for the Project to address affordability of counterpart financing requirements, which is a particular issue for EPC in the early years of the investment plan. Initial consultations have been undertaken with GEF on the CEF. The consultations will continue as part of the implementation of the establishment of the CEF, the CDM subfund, and the DNA. 37. Climate Change Adaptation. The Project supports the objectives of the Government’s National Adaptation Program of Action (2005) through the underground transmission network cabling program. The program will help to reduce exposure of transmission assets to cyclones and reduce the impacts to EPC and consumers of cyclone damage to the transmission network. 38. Power Sector Reform. Investments in the power sector will be accompanied by institutional and regulatory reform to improve the financial and operational performance of EPC, and the overall performance of the power sector. Assistance to undertaking the reform process is provided through the TA cluster for Implementing the Samoa National Energy Policy and is supported by assurances under the financing agreement between ADB and the Government. 39. Macroeconomic Sustainability. The provision of the ADF grant will ease the macroeconomic impact of the large financing requirements for the power sector expansion project. In addition, the Government of Australia will provide $8 million to the Government for counterpart financing of the Project.�F

6 40. Financing Arrangements. The sector loan modality will help EPC to improve longer-term investment planning through the provision of predictable financing. The sector loan modality will also help mitigate the risk of further delays associated with supplementary loan processing in the event of cost overruns. The Government utilization of a portion of the ADF grant as an incentive scheme to EPC will help improve timely implementation of subprojects. The Government will also utilize the interest rate payment from EPC on the grant to provide ongoing financing of a CEF and a CDM subfund. 41. Pilot Financing Approach to Reforms in Developing Countries. The Government of Australia will provide a grant of A$4 million to the Government of Samoa to buy down a portion of the ADF loan. The loan buy down mechanism will be triggered by the Government achieving specific reform measures by 31 December 2012, including (i) the establishment of an independent technical and price regulator for the power sector, (ii) EPC’s collection performance improving such that accounts receivable do not exceed 2 months of electricity sales for a minimum of 2 years, and (iii) 75% of all EPC’s active electricity customers are using prepayment meters. The use of this pilot mechanism constitutes an innovative approach to promoting reforms in developing countries, especially in the Pacific region. This is the first time that ADB is engaging in such a loan buy down mechanism. E. Project Investment Plan

42. The project investment cost is estimated at $100 million, including taxes and duties of $2.23 million. The Project comprises two core investment subprojects, 17 candidate investment subprojects under EPC’s investment plan, and a project management component which will be implemented during the 2008–2015 investment period. The core subprojects comprise the 5 The joint cofinancing framework agreement for the Accelerated Cofinancing Scheme with ADB was signed on 26

September 2007. 6 The $8 million will be disbursed over the 8-year investment plan and constitute the Government of Samoa’s equity

in EPC.

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Hospital Feeder upgrading project – stage 1, through the construction of a 22 kV underground cable from Togafuafua to Saleufi, and the supply and installation of single- and three-phase prepayment meters. The project management component comprises recruitment of a project manager and implementation consultants, initially for a period of 3 years. The cost estimates are summarized in Table 1 and detailed in Appendix 6.

Table 1: Project Investment Plan ($ million)

Item Amountsa

A. Base Cost 1. Component A: Hospital Feeder Upgrading Project – Stage 1 1.06 2. Component B: Single- and Three-Phase Prepayment Metering Project 6.24 3. Component C: Candidate Subprojects 69.04 4 Component D: Project Management 3.66 Subtotal (A) 80.00 B. Contingencies 1. Physicalb 4.67 2. Pricec 10.12 Subtotal (B) 14.79 C. Financing Charges During Implementationd 5.21 Total (A+B+C)e 100.00 a In May 2007 prices. b Computed at 14% for hydropower projects, 10% for system control and data acquisition, and 5% for other

subprojects. c Computed at an average annual rate of 1.7% on foreign exchange costs and 3.9% on local currency costs over the

2008–2015 investment plan. d Includes interest during construction, computed at the 6.5% relending rate from Government to the Electric Power

Corporation and including the interest of 1% during grace period and 1.5% thereafter, which will be settled through cash payments on the Asian Development Fund loan portion.

e Includes taxes and duties of $2.18 million. Sources: Asian Development Bank and Electric Power Corporation estimates. F. Financing Plan

43. The Government of Samoa has requested a loan of $26.61 million and a grant of $15.39 million from ADF to help finance the Project. The loan will have a 32-year term, including a grace period of 8 years, an interest rate of 1.0% during the grace period, and 1.5% thereafter, and such other terms and conditions set forth in the financing and project agreements. The beneficiary will be the Independent State of Samoa. 44. The Government has requested a loan of $38 million equivalent in Japanese yen from JBIC for joint cofinancing of the Project, to be administered by ADB. The loan is expected to have a 30-year term, including a grace period of 10 years, at an interest rate of 0.45%. 45. The ADF loan, the ADF grant, and the JBIC loan will be provided to the Independent State of Samoa and then relent by the Government to EPC. The relending will be based on such terms and conditions set forth in the subsidiary financing agreement between the Government and EPC. Such terms and conditions will include the relending to be released in two tranches, an interest rate of 6.5%, and such conditions set forth in the financing agreement. The first tranche, which will finance subprojects completed by 30 June 2012, will have a 25-year term, including a grace period of 5 years. The second tranche, which will finance the remaining subprojects, will have a 25-year term, including a grace period of 8 years. The Government will

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assume the foreign exchange risk arising from the ADB and JBIC loans. ADB and JBIC will finance 80% of the estimated project costs. The Government of Australia will provide $8 million representing 8% of the estimated project costs (as described more fully in paragraph 46 below). EPC will provide $12 million as counterpart financing, which represents 12% of the estimated project costs. Table 2 presents the financing plan, and the detailed cost estimates by financier are detailed in Appendix 6 (Table A6.2).

Table 2: Financing Plan ($ million)

Source Total %

Asian Development Bank ADF Loan 26.61 26.61 Asian Development Bank ADF Grant 15.39 15.39 Japan Bank for International Cooperation 38.00 38.00 Government of Australia 8.00 8.00 Electric Power Corporation 12.00 12.00

Total 100.00 100.00 ADF = Asian Development Fund. Source: Asian Development Bank estimates.

46. The Government has requested a grant of $8 million from the Government of Australia to help finance the Project on a joint cofinancing basis. The grant will be provided as Government of Samoa equity to EPC for the purpose of meeting counterpart financing requirements of the Project, with terms and conditions set forth in the subsidiary financing agreement between the Government and EPC. ADB typically seeks Board approval for the administration of grant funds from cofinanciers only when cofinancing commitments are in place. In the case of the proposed Government of Australia grant, the cofinancing agreement between the Government of Australia and ADB will be entered into following Board approval of the Project. To avoid any Project delay, the Board is requested to approve the administration of the proposed grant, in an amount not exceeding $8 million, which is expected to be confirmed subsequent to the date of Board approval. Approval of the Government of Australia grant will be reported to the Board in accordance with the standard reporting procedures. If the Government of Australia does not approve grant financing, the Government may make alternative arrangements, satisfactory to ADB, to cover the funding shortfall.

47. The ADF grant of $15.39 million will ease the macroeconomic impact of the large financing requirements for the Project. The grant will be relent to EPC on the same terms as the ADB and JBIC loans. The interest payment from EPC to the Government on the grant portion will provide ongoing financing for a CEF and a CDM subfund.�F

7 MOF will provide annual reports to ADB on the interest payment directed to the CEF and CDM subfund. The Government will utilize a portion of the grant as an incentive scheme for EPC for timely implementation of subprojects under the investment plan. Seven percent of projects costs, or a maximum of $10 million of the EPC loan principal, can be converted to grants conditional on timely and to-budget implementation of subprojects. MOF will report to ADB when EPC has met the conditions that will trigger conversion to grants and advise of the amount of the loan principal to be converted into grants to EPC. 7 The TA cluster for Implementing the Samoa National Energy Policy will assist in the establishment of a CEF and a

CDM subfund.

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G. Implementation Arrangements

1. Project Management

48. MOF will be the executing agency for the Project and has assigned EPC as the implementing agency. A PSC will be established to provide overall project direction.�F

8 The chief executive officer (CEO) of MOF will chair the PSC. Other PSC members comprise (i) the general manager of EPC, (ii) the attorney general, and (iii) the CEOs of the Ministry of Natural Resources and Environment, the Ministry of Women, Community and Social Development, the Samoa Water Authority, and the Ministry of Commerce, Industry and Labour. PSC meetings will be convened on a quarterly basis commencing in October 2007. Special PSC meetings may be convened to consider extraordinary project issues. A project management committee (PMC) will be formed within EPC to provide coordination between project and nonproject activities. The PMC will be chaired by the general manager and comprise EPC management and the project manager. The PMC will convene on a weekly basis commencing in October 2007. 49. EPC will establish a PMU for the day-to-day management and implementation of the project. The PMU will be led by an externally recruited project manager who will be responsible for the daily tasks associated with project delivery and control. The project manager will be engaged for an initial period of 3 years. The PMU will include personnel seconded from existing EPC staff resources or recruited specifically for the PMU. Project implementation consultants will be recruited to provide technical support and on-the-job training for the PMU personnel over the first 3 years of the Project. The PMU will be responsible for project planning, monitoring and reporting, and cost and quality control. The PMU will (i) undertake project management and administration, (ii) plan and implement cost effective and sustainable infrastructure investments to meet consumer demand, (iii) maintain project accounts, (iv) oversee procurement procedures to ensure compliance with Government and ADB policies and procedures, (v) liaise with ADB for quarterly project progress updates and other reporting and communication matters, and (vi) prepare the project completion report of the Government. The Government will ensure that, throughout the project implementation period, EPC provides adequate allocations of counterpart funds to ensure proper project implementation. EPC will provide adequate office space for the PMU and implementation consultants and ensure that the facilities provided are operated and maintained appropriately.

2. Candidate Subproject Preparation and Approval

50. Preparation. The PMU will identify candidate subprojects and obtain approval from the EPC board and MOF to assess the feasibility of the candidate subprojects. The PMU will prepare a feasibility study for each candidate subproject in accordance with the detail and quality required to enable ADB to assess the suitability of the candidate subproject. The feasibility study will contain evidence of the candidate subproject’s eligibility under the agreed criteria. The feasibility study will provide (i) technical analysis and description; (ii) subproject rationale, scope, and components; (iii) cost estimates and financing plan; (iv) implementation arrangements; (v) an environmental assessment; and (vi) a land acquisition and resettlement assessment. The feasibility studies will include a set of relevant benchmark and performance indicators for the subproject which will be monitored through the progress reports. The feasibility study will also contain an update of EPC’s investment plan and an analysis of the impacts on EPC’s 5-year financial projections, key financial ratios, and compliance with loan covenants.

8 Similar PSCs are being used for overall strategic guidance and coordination for infrastructure projects funded by

other international financing institutions.

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51. Eligibility Criteria. The PSC, the EPC board, and ADB, in consultation with the PMU, will appraise subprojects in accordance with the eligibility criteria and procedures outlined in Appendix 7. 52. Approval Process. Candidate subproject feasibility studies will be submitted to ADB for review and approval. After ADB has endorsed the feasibility study, the PMU will submit the feasibility study to the EPC board and the PSC for review and approval. Implementation of a candidate subproject may only proceed following the endorsement of the candidate subproject feasibility study by the PSC, the EPC board, and ADB. Civil works may only commence once the land acquisition and resettlement plan (LARP) and initial environmental examinations (IEE) have been approved by ADB, and the development concept approval of the Preliminary Environmental Assessment Report (PEAR) is issued by the Planning and Urban Management Agency (PUMA).

3. Implementation Period

53. The PMU will be established prior to loan effectiveness. Bid documents for core subprojects are under preparation such that construction activities can start in the first quarter of 2008. The subprojects will be implemented over 8 years and are expected to be completed by 31 December 2015. The project implementation schedule is detailed in Appendix 8.

4. Procurement

54. The equipment, materials, and works financed by the proceeds of the ADB loan and grant, the JBIC loan, and the Government of Australia grant will be procured in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time). The relevant sections of ADB’s Anticorruption Policy (1998, as amended to date) will be included in all contracts. ADB’s bid documents will be used for procuring ADB, JBIC, and Government of Australia financed goods and services. Requirements of environmental monitoring and management plans (EMMP) will be reflected in all civil works bid and contract documents. The draft procurement plan outlines (i) the particular contracts for the goods and works; (ii) the proposed method for procurement of goods and works financed by ADB, JBIC, and the Government of Australia; and (iii) the related ADB review procedures. EPC will update the procurement plan as needed for the duration of the Project. The procurement plan and contract packages are detailed in Appendix 9.

5. Consulting Services

55. Consulting services will be required for (i) project management, (ii) preparation of candidate subprojects, (iii) construction supervision, and (iv) contract management. Consultants will be selected and engaged in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time). A firm will be selected through international competition using quality-and cost-based selection method to provide project implementation consulting services. About 69 international person-months will be required for project implementation. Individual consultants may be recruited for specific assignments in accordance with ADB’s procedures. The project manager will be recruited internationally as an individual for an initial period of 36 months in accordance with ADB’s procedures. The outline terms of reference for the project manager and implementation consultants is in Supplementary Appendix A.

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56. In response to EPC’s request, ADB is providing assistance for the recruitment of the project manager and implementation consultants. ADB is assisting in the selection processes on behalf of EPC, which will be responsible for negotiating the contracts with the consultants and for supervising the consultant’s services.

6. Anticorruption Policy

57. The Government will take a number of measures to improve governance and transparency in the power sector. Strengthening the regulatory framework for the sector will provide segregation between EPC and regulatory functions. Accountability to sector stakeholders will be strengthened through public consultations and information, particularly with regards to tariffs and the cost of electricity supply. The consistent application of disconnections will improve EPC’s ability to provide reliable electricity supply to all consumers. Benchmarking will improve awareness and transparency of EPC’s technical and operational performance. Strengthening EPC’s financial management capabilities and reporting through the provision of RFMAs�F

9 will improve the Government’s oversight of EPC. 58. ADB’s Anticorruption Policy was explained to and discussed with EPC and the Government. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project. To support these efforts, relevant provisions of the Anticorruption Policy are included in the loan and grant regulations and the bidding documents for the Project. In particular, all contracts financed by ADB in connection with the Project shall include provisions specifying the right of ADB to audit and examine the records and accounts of EPC and all contractors, suppliers, consultants, and other service providers as they relate to the Project.

7. Disbursement Arrangements

59. The proceeds from the ADF loan, the ADF grant, the JBIC loan, and the grant provided by the Government of Australia for the proposed Project will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). The Government will submit separate withdrawal applications for the ADF loan, ADF grant, JBIC loan, and the Government of Australia grant. To promote efficiency in processing disbursements from four different sources under the Project, a minimum value per withdrawal application is set at $100,000 equivalent or an amount determined to be a reasonable minimum.�F

10 Reimbursement and direct payment procedures will apply for consulting services, civil works, and equipment supply and installation. Reimbursement procedures will apply to land acquisition and resettlement. The disbursement and funding arrangements is in Appendix 10.

8. Advance Action and Retroactive Financing

60. To facilitate timely implementation of the Project, ADB has approved advance procurement action and retroactive financing for defined contracts of core subprojects as outlined in the procurement plan and for procurement of consulting services. Up to 20% of loan proceeds are eligible for retroactive financing. Retroactive financing is applicable to eligible expenditures, which must have been incurred before loan effectiveness, but generally no earlier

9 The RFMAs will be provided through the TA cluster for Implementing the Samoa National Energy Policy. 10 The minimum value per withdrawal for consulting services is set at $30,000 equivalent or an amount determined to

be a reasonable minimum.

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than 12 months before signing of the financing and project agreements. The Government and EPC have been advised that approval of advance procurement action and retroactive financing does not commit ADB, JBIC, and the Government of Australia to financing the Project.

9. Accounting, Auditing, and Reporting

61. EPC will continue to engage independent auditors acceptable to ADB to audit its annual financial statements and annual project accounts. The scope of work for the auditors will be extended to include audit of EPC’s compliance with ADB’s financial loan covenants. Audit reports will be submitted to ADB together with the respective financial reports and the memorandum of issues identified during the audit process. Annual financial reports will be prepared using international financial reporting standards, and audits will be conducted using international standards on auditing. EPC will maintain separate accounts for the Project. Within 6 months of the end of the financial year, EPC will submit annual audited project accounts and annual audited financial statements of EPC. The annual financial statements, which will be consolidated for all of EPC’s operations, will record equity contributions by the Government of Samoa.��F

11 By 28 February each year (commencing 28 February 2008), EPC will also prepare and provide ADB 5-year financial projections in a form agreed with ADB. The financial projections will reflect updates in EPC’s investment plan. 62. EPC will submit quarterly progress reports for individual subprojects to ADB. These reports will include a description of (i) the physical progress of the subproject; (ii) any difficulties encountered and or anticipated along with corrective actions; (iii) the implementation progress on the land acquisition and resettlement framework (LARF), environmental assessment and review framework (EARF), and subproject IEE’s and EMMPs as applicable; (iv) the reasons for any delays in project implementation and recommendations for corrective actions; and (v) the summary of financial accounts comprising project expenditures during the previous quarter, year to date, and total to date. The quarterly progress reports will also include key performance and benchmark indicators as identified in the approved subproject feasibility studies. As needed, the progress reports will include updates of the procurement plan. EPC will submit subproject completion reports within 3 months of subproject completion. The subproject completion report will (i) provide an assessment of the execution and operation of the subproject, (ii) provide the status of compliance with loan covenants, and (iii) include results on subproject outcomes and performance. 63. MOF will provide annual reports to ADB on the interest payment from the relent grant to EPC directed to the CEF and CDM subfund. MOF will report to ADB when EPC has met conditions for the grant incentive scheme and advise as to the amount of the loan principal to be converted into grants to EPC.

10. Project Performance Monitoring and Evaluation

64. EPC will establish a project performance monitoring system (PPMS) to facilitate the reporting requirements. The PPMS will assess progress and implementation of the Project, including (i) resettlement activities, (ii) compliance with the EARF and subproject EMMPs, and (iii) compliance with ADB’s loan covenants. The PPMS will also monitor the operational efficiency and financial position and projections of EPC to enable benchmarking against other utilities.

11 Recorded equity contributions will include annual disbursed amounts of the $8 million grant from the Government

of Australia.

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11. Project Review

65. ADB will undertake an inception mission 1 month after loan effectiveness or 1 month after fielding of project implementation consultants, whichever is later. Review missions will be undertaken at 6-monthly intervals (starting 6 months after the inception mission) for the initial 3 years of the Project. The review missions will include an evaluation of (i) project scope and costs; (ii) implementation arrangements; (iii) progress in implementing the LARF, EARF, and subproject IEEs and EMMPs as applicable; and (iv) achievement of scheduled targets and identification of project risks. The review missions will also undertake ongoing policy dialogue on (i) EPC’s operational efficiency and financial performance, (ii) the Government’s progress on power sector reforms, and (iii) compliance with loan covenants. ADB will field a midterm review 4 years after loan effectiveness.

IV. TECHNICAL ASSISTANCE CLUSTER

66. The TA cluster for Implementing the Samoa National Energy Policy forms part of the Government’s power sector development plan to improve access to sustainable and reliable electricity services to all consumers in Samoa. The TA cluster will (i) promote the development of clean energy resources in Samoa through the establishment of a CEF; (ii) enable Samoa to participate in, and benefit from, carbon-market trading through the establishment of, and capacity building for, the DNA; (iii) develop effective regulation of the power sector and promote demand-side management and energy conservation through support to regulatory and policy reform in the power sector; and (iv) help improve EPC’s financial performance through the provision of RFMAs. The TA cluster is described in Appendix 11 and detailed in Supplementary Appendix B.

V. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

67. The Power Sector Expansion Project will help provide sustainable and reliable electricity services to all consumers in Samoa. The unreliable and poor quality electricity supply is affecting all consumers and is becoming an increasing constraint to the expansion of the tourism industry and economic growth. Once the benefits of the investment plan have been realized, improvements in power supply cost effectiveness will reduce the need for tariff increases. 68. EPC’s investment plan for 2008–2015 comprises a series of individual subproject investments in generation and transmission which will improve the quality and reliability of electricity supply and meet forecast demand on Upolu and Savai’i. The investment plan is accompanied by institutional and power sector reform measures to ensure that project benefits will reach all electricity consumers in Samoa. A. Economic and Financial Analyses

69. As subprojects included under the investment plan are not stand-alone investments that yield benefits in isolation from other investments in the power sector, the economic and financial analyses were undertaken using a time-slice approach for EPC’s two power systems on Upolu and Savai’i. The analyses are conducted for 23 years, including the investment period of 8 years. Oil prices were assumed to be constant at $60 per barrel (bbl) throughout the period of analysis. Estimated annual CDM credits of $45,000 for the Savai’i hydropower project were included in the analyses. The economic and financial analysis is in Appendix 12.

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70. Least-cost analyses were undertaken for the underground cabling program on Upolu and for the hydropower project on Savai’i. Under conservative assumptions on the cost of cyclone damage to the transmission lines, it would take about two cyclones for the underground cabling program to become least-cost. During the first year of full operation, the hydropower project on Savai’i would replace 96% of generation by the existing diesel power station at Salelologa. With demand growth, this percentage will drop to 75% by 2020. The results show that the hydropower project is least-cost if the average oil price over the period of analysis exceeds $53.50 per bbl. 71. In the absence of an investment plan on Upolu, the economic analysis assumes that EPC would serve demand from its existing generation capacity. Unserved demand initially represents deficits in peak capacity. The transmission system will increasingly become a bottleneck for power supply to consumers and system losses will increase. The economic internal rate of return (EIRR) for the investments on Upolu is estimated at 13.6%. Benefits which are difficult to quantify, such as those associated with the noise and emission control program at the Tanugamanono power station and the protection of transmission lines against climate change, have not been included in the analysis. The result is most sensitive to the estimated capital costs. Capital cost increases of more than 14% would make the EIRR fall below 12%. 72. In the absence of investments on Savai’i, it is assumed that EPC would meet demand with its existing diesel power station. No improvements in the power factor or system upgrades would take place. The without-investment scenario is associated with increased system losses and higher operations and maintenance costs. Under the base-case fuel price assumption of $60 per bbl, the economic analysis yields an EIRR of 10.7%. As the hydropower project is a major component of the investments on Savai’i, the economic results are most sensitive to operations and maintenance costs, and in particular to assumptions on international fuel prices. An international fuel price of $67 per bbl will increase the EIRR to 12%. 73. The financial analyses assume that all project capital and operations and maintenance costs are borne by EPC. The financial benefits comprise projected sales based on tariff projections, demand forecasts, and estimated carbon credits of $45,000 per year. The incremental financial costs comprise capital, operations and maintenance, and system losses. Financial benefits and costs were discounted by the weighted average cost of capital (WACC), calculated at 4.5. The financial net present values discounted at the WACC for the investment plan are ST44.1 million ($17.3 million) for the investments on Upolu and ST27.9 million ($10.9 million) for Savai’i. The financial rates of returns are 7.0% for the investments on Upolu and 12.1% for Savai’i. The financial result for Upolu is most sensitive to an increase in capital costs, followed by a reduction in sales. The investment plan would remain financially viable if investment cost increases do not exceed 31%. The financial result for Savai’i is most sensitive to changes in fuel prices, but the international oil price would need to drop to below $27 per bbl to undermine financial viability. B. Impacts

74. To ensure that social, land acquisition, resettlement, and environment impacts are mitigated under the Project, EPC will establish an environment and social unit (ESU) to plan, implement, and coordinate land acquisition, resettlement, and environmental activities prior to loan effectiveness. The ESU will initially be an integral part of the PMU but will eventually become a permanent unit within EPC. The ESU will be responsible for establishing a register to

18

record and monitor temporary and permanent land acquisition and record consultations and grievances relating to land acquisition and resettlement.

1. Land Acquisition and Resettlement

75. A LARF (Supplementary Appendix C) has been prepared in accordance with the Taking of Lands Act (1964) and ADB’s Involuntary Resettlement Policy (1995), Handbook on Resettlement (1998), Operations Manual F2 on Involuntary Resettlement (2006), Handbook on Poverty and Social Analysis (2001), and Handbook for Incorporation of Social Dimensions in Projects (1994).��F

12 The LARF will guide the preparation and procedures for land acquisition and resettlement plans (LARPs) for candidate subprojects under EPC’s investment plan. Subprojects classified category A will require a LARP, category B subprojects will require a short LARP, and category C subprojects will not require any LARP. Candidate subproject LARPs will be prepared in full consultation with affected people and disclosed to them in draft form and included in the feasibility studies for candidate subprojects. Compensation and entitlements will be consistent with those in the entitlement matrix outlined in the LARF. All affected people will be provided with compensation if (i) land is permanently or temporarily acquired, (ii) their crops and trees are damaged or destroyed, or (iii) access to their traditional lands is limited or blocked as a result of the subproject. Lack of legal documents pertaining to their customary rights of occupancy, or lack of titles, will not affect affected people’s eligibility for compensation. 76. The two core subprojects (the Hospital Feeder upgrading project – stage 1, and the supply and installation of prepayment meters) will not have land acquisition and resettlement impacts, are classified category C, and do not require LARPs.

2. Social and Gender

77. A summary poverty reduction and social strategy was developed based on the findings of an initial poverty reduction and social assessment and social surveys. During development of EPC's investment plan, consultations with representatives of communities, government ministries, and other stakeholders were undertaken. Focus-group consultations were held with women. No specific impacts to women are envisaged. If land acquisition is required, women will be incorporated into the consultation and decision-making process. A summary poverty reduction and social strategy is presented in Appendix 13.

3. Environment

78. An EARF (Supplementary Appendix D) has been prepared in accordance with the Government’s environmental requirements as set out in the Planning and Urban Management Act (2004), the Draft Planning and Urban Management (Environmental Impact Assessment) Regulations (2007), and ADB’s Environment Policy (2002) and Environmental Assessment Guidelines (2003).��F

13 The EARF will guide the preparation and approval procedures of environmental assessments of candidate subprojects under EPC’s investment plan. Subprojects with environmental category A are not envisaged and will not be eligible for ADB financing under the Project. 12 ADB. 1994. Handbook for Incorporation of Social Dimensions in Projects. Manila; ADB. 1998. Handbook on

Resettlement. Manila; ADB. 2001. Handbook on Poverty and Social Analysis. Manila; and ADB. 2006. Operations Manual. Section F2: Involuntary Resettlement. Manila.

13 ADB. 2003. Environmental Assessment Guidelines. Manila.

19

79. Candidate subproject IEEs will be included in the feasibility studies for submission to ADB. An EMMP will be required for subprojects classified as environmental category B or B-sensitive. Subproject feasibility reports will identify adequate funding for EMMPs. Subproject EMMPs will be reflected in the bid documents, incorporated into project design, and included in civil works contracts for subprojects. The PMU and contractors will be guided by the EMMPs in managing, monitoring, and reporting environmental impacts and compliance. Civil works may only commence once the IEE report of subprojects are approved by ADB and the development concept approval of the PEAR is issued by PUMA. 80. The Hospital Feeder upgrading project – stage 1 is classified environmental category B, and the supply and installation of prepayment meters project is classified category C. An IEE has been prepared for the Hospital Feeder upgrading project – stage 1 (Supplementary Appendix E). The summary initial environmental examination is in Supplementary Appendix F. An IEE is not required for the prepayment metering project. C. Risks and Assumptions

81. Debt Sustainability. EPC’s investment plan and financing arrangements have been prepared considering Samoa’s debt sustainability. To ease the macroeconomic impact of the large financing requirements in the power sector, ADB will provide an ADF IX grant of $15.39 million. The ADB and JBIC concessional loans are projected to increase Samoa’s external debt burden from 37% of GDP in 2007 to about 39% in 2011. 82. Political Commitment to Power Sector Reform and Good Governance. Power sector reform, including cabinet and parliamentary approval of an electricity act to govern all stakeholders and the establishment of a regulatory agency, is critical to improving the performance of the power sector and ensuring that investments translate into benefits for electricity consumers. The TA cluster for Implementing the Samoa National Energy Policy will assist the Government (i) in the consultation process, (ii) to draft and amend legislation, and (iii) establish the regulatory agency. Assurances under the Project reflect the key milestones for regulatory reform. 83. EPC’s Affordability. EPC’s affordability of the investment plan and debt repayment capacity has been carefully considered in the selection and timing of subprojects. To ensure that timely adjustments to tariffs can be made in response to increases in EPC costs, a formal mechanism for determining tariffs within the context of an overall regulatory framework needs to be established. Until a tariff mechanism can be established, the Government has introduced a fuel surcharge which is subject to review by cabinet every 6 months.��F

14 Ongoing policy dialogue and annual updates of EPC’s financial projections will help assess tariff requirements. To address EPC’s poor collection performance, the Government will clear all arrears by government ministries and state-owned entities prior to loan effectiveness, and prepayment metering will be installed for EPC consumers. The assurances under the Project include that 75% of all consumers are on prepayment meters by the end of 2012. In the case of certain basic social services where suspending electricity services may not be possible, budgetary allocations for electricity consumption will be paid directly to EPC. 84. Counterpart Financing. EPC’s ability to provide counterpart financing is expected to be limited before the major financial benefits of the investment plan are realized. It is estimated that EPC will be able to provide $12 million of the total counterpart financing requirement over the

14 More frequent reviews are being considered by cabinet.

20

2008–2015 investment period, leaving a residual amount of $8 million. The Government of Australia will finance the portion beyond the capacity of EPC, and this will be reflected as the Government’s equity in EPC. 85. EPC’s Implementation Capacity and Cost Overruns. To manage the risk of delays, consultations with the attorney general have been held to ensure that Government requirements for loan effectiveness are addressed in a timely manner and draft bid documents have been prepared to help ensure timely implementation of core subprojects. Approval of advance procurement action will help ensure that construction activities can commence in accordance with the implementation schedule. Advance recruitment of the project manager and implementation consultants will help mitigate EPC’s capacity constraints in project preparation and procurement activities. To the extent possible, EPC will apply plant design, supply, and install contracts to reduce the burden of coordination of construction activities.

VI. ASSURANCES AND CONDITIONS

A. Specific Assurances

86. In addition to the standard assurances, the Government and the EPC have given the following specific assurances, which are incorporated in the legal documents.

(i) EPC shall ensure that the PMU and ESU are adequately staffed and resourced; (ii) the Government and EPC shall ensure that all candidate subprojects are

selected and approved based on the agreed eligibility criteria and approval procedures;

(iii) the Government and EPC shall ensure that the annual aggregate disbursements of the Government of Australia grant for the Project are treated as the Government of Samoa equity in EPC’s annual financial statements and audited accounts, and will be reflected in EPC’s share capital when EPC is registered as a limited company;

(iv) the Government shall establish an incentive scheme for canceling repayment by EPC of the grant relent by the Government through treating such portion as a grant from the Government to EPC (up to 7% of Project costs or up to a ceiling of $10 million) when agreed conditions are met by EPC;

(v) the Government shall establish a regulatory framework for the power sector through: (a) submitting a draft Electricity Act and draft amendments to the EPC Act 1980 for cabinet and parliamentary consideration by 31 December 2009; (b) following approval of the draft legislation, approving resource allocations, and a funding mechanism for a power sector regulatory agency for FY2010; and (c) appointing the regulator by 31 December 2010;

(vi) the Government shall have settled all electricity arrears of government ministries and government-owned entities as of 30 April 2008 by 31 July 2008;

(vii) the Government and EPC shall ensure that prepayment meters are installed on: (a) all new electricity connections by 30 June 2008; and (b) a minimum of 75% of all electricity connections by 31 December 2012. Where the Government has determined that prepayment meters shall not be installed in certain government ministries and government-owned entities providing basic government services, the Government shall make a budgetary allocation in each fiscal year for the cost of providing power for these services and pay such cost directly to EPC;

21

(viii) the Government and EPC shall implement the policies on: (a) service disconnection and reconnection; (b) writing off outstanding customer debts; and (c) the use of prepayment meters;

(ix) the Government shall ensure that EPC maintains: (a) for FY2008 to FY2015, cash from internal sources equivalent to not less than 12% of the annual average of EPC’s capital expenditures incurred, or expected to be incurred, for that fiscal year, the previous fiscal year and the next fiscal year; (b) for FY2016 onwards, cash from internal sources equivalent to not less than 12% of the annual average of EPC’s capital expenditures incurred, or expected to be incurred, for that fiscal year, the previous fiscal year and the next fiscal year; (c) with respect to any debt to be incurred by EPC, an estimated cash flow for each fiscal year during the term of the debt to be incurred of at least 1.3 times the estimated debt service requirements of EPC in such fiscal year on all debts of EPC, including the debt to be incurred; and (d) accounts receivables equivalent to not more than 2 months’ equivalent of annual billing for power generation and supply and for all other services provided by EPC;

(x) the Government shall, prior to the commencement of civil works for any project facility: (a) following obtaining the requisite approvals, acquire all land and property for implementing the Project; (b) ensure that all land acquisition, compensation, resettlement and rehabilitation activities as specified in the relevant LARP have been completed; (c) ensure that the subproject site is free and clear of all obstructions; and (d) ADB shall have issued its “no-objection” prior to the award of civil works contracts;

(xi) the Government and EPC shall: (a) ensure that any land acquisition, compensation, relocation, resettlement and rehabilitation, as applicable, with respect to the Project is carried out in accordance with the LARP, the LARF, all applicable laws and regulations in Samoa and ADB’s Policy on Involuntary Resettlement (1995); and (b) be responsible for the compensation of affected people. In case of discrepancies between the applicable laws and regulations and ADB’s Policy on Involuntary Resettlement (1995), ADB’s Policy on Involuntary Resettlement (1995) shall apply to the subprojects financed by ADB, the Government of Australia and/or JBIC.

(xii) EPC shall ensure that: (a) where there is any significant change in the design of any subproject covered by a LARP or any substantial changes in resettlement impacts, the relevant LARP is: (i) updated based on a detailed measurement survey, (ii) disclosed to affected persons, and (iii) subsequently provided to ADB for its approval prior to commencement of related civil works; (b) there are requirements in the civil works contractors’ contracts with EPC for the contractors to comply with each LARP; and (c) the ESU supervises and monitors closely civil works contractors to ensure compliance with the requirements of each LARP and their respective terms;

(xiii) EPC, through the ESU, shall: (a) establish and maintain a register to record and monitor land acquired for the Project on both a temporary and permanent basis; and (b) keep complete records on consultations and grievances relating to land acquisition and resettlement;

(xiv) EPC shall: (a) design, construct, operate, maintain, and monitor the project facilities in accordance with all applicable laws and regulations in Samoa, and ADB’s Environment Policy (2002); (b) minimize any adverse environmental impacts arising from the Project by implementing the mitigation measures prescribed in each IEE and PEAR; and (c) ensure that the EMMP prepared for

22

any subproject is incorporated into the design of each subproject, implemented, and updated when the detailed engineering design becomes available;

(xv) EPC shall ensure that: (a) the civil works contractors comply with all environmental impact mitigation requirements in each EMMP and prepare, on a quarterly basis, mitigation progress and monitoring checklists; and (b) the ESU monitors closely civil works contractors to ensure compliance with the environmental impact mitigation requirements identified in the IEE and EMMP; and

(xvi) EPC shall ensure that, prior to the commencement of civil works for any subproject facility: (a) the PUMA shall have approved the application for development consent for any subproject; and (b) ADB shall have approved the IEE for any subproject.

B. Conditions for Loan and Grant Effectiveness

87. The following are the conditions for loan and grant effectiveness: (i) the Government shall have (a) settled all electricity arrears of government ministries and government-owned entities as of 30 September 2007; (b) entered into a subsidiary financing agreement with EPC in form and substance satisfactory to ADB; and (c) established the PSC; (ii) EPC shall have established the PMC, the PMU and the ESU; (iii) the JBIC loan shall be fully effective; and (iv) the Government shall have obtained commitment from the Government of Australia with respect to the availability of the Government of Australia grant for the Project. C. Conditions for Disbursement

88. No withdrawal shall be made from the loan account and the grant account: (i) until the Government of Australia grant shall have been transferred to an account at ADB and be available for the Project; (ii) for any subproject (and no civil works shall commence) until: (a) the PUMA of the Ministry of Natural Resources and Environment shall have approved the application for development consent of the PEAR for any such subproject facility; and (b) ADB shall have approved the IEE for any such subproject facility; and (iii) for the Vaita’i Hydropower Subproject, until the beneficiary shall have entered into a legally binding agreement, or obtained a court order, for the compensation of with the relevant customary landowners for the acquisition of the requisite land for the subproject, in the event where the Vaita’i Hydropower Subproject is selected as a subproject. Such agreement shall include terms and conditions with respect to the 20 meter-wide road reserve required to accommodate the existing access road from Sili Village to the Vaita’i Hydropower Subproject site, inclusive of shoulders and table drains.

VII. RECOMMENDATION

89. I am satisfied that the proposed loan and grant would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve

(i) the loan in various currencies equivalent to Special Drawing Rights 17,151,000.00 to the Independent State of Samoa for the Power Sector Expansion Project from ADB’s Special Funds resources with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Financing and Project Agreements presented to the Board;

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(ii) the grant not exceeding the equivalent of $15,390,000 to the Independent State

of Samoa, from ADB’s Special Funds resources, for the Power Sector Expansion Project in accordance with the terms and conditions set forth in the draft Financing and Project Agreements presented to the Board;

(iii) the administration by ADB of a loan not exceeding the equivalent of $38,000,000

to the Independent State of Samoa for the Power Sector Expansion Project to be provided by the Japan Bank for International Cooperation in accordance with the proposal set forth in paragraph 44 of this report;

(iv) in the event the Government of Australia approves grant financing not exceeding

the equivalent of $8,000,000 to the Independent State of Samoa for the Power Sector Expansion Project, the administration by ADB of such grant in accordance with the proposal set forth in paragraph 46 of this report; and

(v) in the event the Government of Australia approves the conditional grant not

exceeding the equivalent of A$4,000,000 to the Independent State of Samoa to assist in the repayment of a portion of the proposed loan under a loan buy down mechanism, the administration by ADB of such grant in accordance with the terms and conditions set forth in the draft Loan Buy Down Agreement presented to the Board and in paragraph 41 of this report.

Haruhiko Kuroda President

26 October 2007

24 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Targets/Indicators

Data Sources/Reporting Mechanisms

Assumptions and Risks

Impact Access to sustainable and reliable electricity services at affordable prices

Consumer satisfaction ratings of EPC’s services Complaints to EPC’s consumer service division

Annual reports on consumer satisfactions Number of complaints over 1 year

Assumptions • Cost of power supply is reflected in timely

electricity tariff adjustments • Timely payment of arrears and electricity bills

by Government entities

Outcome Improved quality, reliability, and cost-effectiveness of power supply

System average duration interruption index baseline established and verified by 4th quarter 2008 and reduced by 20% by 2015 Average interruption frequency index baseline established and verified by 4th quarter 2008 and reduced by 20% by 2015 Cost of generation established and published by 1st quarter 2009

EPC’s quarterly progress reports and annual financial report ADB mission’s back-to-office reports Indicators published in EPC’s annual corporate plans and financial reports by FY2009 and onward EPC’s corporate plan

Assumptions • Effective regulation of the power sector is

established • Effective monitoring and reporting of EPC’s

costs • Stakeholders support EPC’s activities • EPC implements independent consumer

satisfaction surveys • Clean energy resources are cost effective • Financing for clean energy project is

available • Implementation of demand-side and energy

conservation measures

Outputs 1. EPC’s investment plan meets demand

requirements

Power system capacity for energy and power meets demand requirements on Savai’i and Upolu

EPC’s annual corporate plans and financial reports Project progress and completion reports ADB review missions and field visits

Assumptions • Counterpart financing is made available on

time • Effective project management unit • Timely recruitment of implementation

consultants • Timely completion of bid documents and

procurement of goods and services • Implementation of effective stakeholder

consultations • Effective and timely implementation of social

and environment requirements • Land acquisition is completed prior to

commencement of construction activities • Effective demand-side management

measures

Appendix 1 25

Design Summary Performance Targets/Indicators

Data Sources/Reporting Mechanisms

Assumptions and Risks

2. Operational efficiency of EPC improves

Baselines for technical system losses are established and verified by 4th quarter 2008 and are reduced by 10% by 4th quarter 2010 and 20% by 4th quarter 2012 Baseline for nontechnical system losses established and verified by 4th quarter 2008 and reduced by 10% by 2010.

EPC’s corporate plan Project completion reports ADB review missions and field visits ADB reviews and approvals of bid documents EPC annual performance and monitoring reports to the board of directors and Ministry of Finance

• SCADA system installed and operating • Transmission and generation investments

implemented on a timely basis

3. The financial performance of EPC improves

Consistent application of disconnection policy Fuel audits conducted on all EPC’s diesel power stations Timeliness of tariff adjustments in response to costs EPC’s collection performance improves such that accounts receivables are below 2 months of sales Government consumers’ share of EPC’s accounts receivables reduced from

Number of consumers in arrears by more than 30 days and number of those consumers disconnected Amount of accounts receivables aged more than 60 and 90 days are written off EPC’s monthly fuel audits EPC’s audited annual financial compliance reports to ADB

• Effective implementation of prepayment system and cut-off policy

• Stable or lower international fuel prices • Tariffs are adequate to cover all operating

expenses, depreciation, taxes, and interest expense

• Introduced safeguards for fuel management are effective

• Effective financial advisory services to EPC • Consumer’s acceptance of prepayment

meters • Government commitment to either utilize

prepayment meters or to sufficient budgetary allocations for electricity consumption by Government entities

• Political commitment to timely tariff adjustments

26 Appendix 1

Design Summary Performance Targets/Indicators

Data Sources/Reporting Mechanisms

Assumptions and Risks

55% in 2007 to less than their share of total sales by 31 December 2009 Share of electricity consumers on prepayment metering increases from 5% in 2007 to 75% by 31 December 2012 Self-financing ratio is minimum 12% for 2008–2015; self-financing ratio is minimum 20% commencing 2016 Debt-service ratio is minimum 1.3

4. Effective regulation of the power sector is established

Electricity Act to govern the power sector established by 31 December 2009 Amendments of the EPC Act consistent with the Electricity Act by 31 December 2009 Regulatory agency established by 31 December 2010

Parliament consideration of the draft Electricity Act Parliament consideration of amendments to the EPC Act Government communication with ADB

• Wide political commitment to power sector reforms

5. Energy demand-side management Energy conservation and demand-side management public awareness campaign implemented

Consultant’s reports ADB review missions

• Effective stakeholder consultations and public awareness campaign

6. Development of clean energy Number of projects by energy subsector financed by the clean

Annual reports of the clean energy fund

• Effective promotion of clean energy • Effective stakeholder consultations and

participation

Appendix 1 27

Design Summary Performance Targets/Indicators

Data Sources/Reporting Mechanisms

Assumptions and Risks

energy fund Number of projects by energy subsector eligible for clean development mechanism Electricity produced by clean energy resources (baseline of 45 GWh in 2006)

Annual reports of the designated national authority

Activities with Milestones Inputs 1. The financial performance of EPC improves (2007 onwards) 1.1. Uniform application of disconnection and write-off policies approved, disseminated, and

implemented from October 2007 1.2. Prepayment meter policy implemented from December 2008 1.3. Resident financial management advisors recruited by March 2008; intermittent

implementation period to January 2010 2. EPC’s investment plan meets demand requirements, and operational performance of

EPC improves (2007 onwards) 2.1. Project implementation preparation 2.1.1. Establishment of the project management unit and recruitment of the project manager

prior to loan effectiveness (advance activity) 2.1.2. Recruitment of implementation consultants (advance activity) 2.1.3. Bid documents issued for core subprojects (advance activity) 2.1.4. Contracts issued and contractors fielded for core subproject by 31 March 2008 2. 2. Implementation of core subprojects (2008–2015) 2.2.1 Construction of the Hospital Feeder upgrading project – stage 1 commences 1st

quarter, 2008; commissioning in 4th quarter, 2008 2.2.2 Supply and installation of prepayment meters commences 1st quarter, 2008;

sequential commissioning from 3rd quarter, 2008 2.3. Implementation of candidate subprojects (2008–2015) 2.3.1. Identification of subprojects and preparation of feasibility reports 2.3.2. Preparation of bid documents 2.3.3. Contracts issued and contractors fielded for detailed design and or construction of

subprojects 2.3.4. Contracts issued for the supply of equipment and materials

• Project: − ADF loan financing: $26.61 million − ADF grant financing: $15.39 million − JBIC financing: $38 million − Government of Australia grant financing:

$8 million − Government of Samoa/EPC counterpart

financing: $12 million − Implementation consultants: $2.86

million − Project manager (36 person-months):

$0.75 million • Technical Assistance Cluster:

− ADB TA financing (JSF): $0.6 million − Government of Finland: $0.35 million − Government of Australia: $0.9 million − Government of Samoa/EPC: $0.335

million − Consultants (42.5 person-months):

$1.143 million

28 Appendix 1

Activities with Milestones Inputs 2.4. Reporting (2008–2015) 2.4.1. EPC prepares and submits quarterly progress reports, updates of the investment plan,

and financial projections to ADB and Government 3. Establishment of effective regulation of the power sector (2008–2010) 3.1. Regulatory advisor and legal experts recruited and fielded by March 2008 3.2. Phase 1: Scoping for a regulatory framework: cabinet decision on the principles of

power sector regulation by August 2008 3.3. Phase 2: Development of the regulatory framework and drafting of legislation: cabinet

and parliamentary consideration by December 2009 3.4. Phase 3: Implementation of the regulatory framework: establishment of the regulatory

agency and appointment of regulator by 2010 4. Energy demand-side management (March–August 2008) 4.1. Energy demand-side advisor recruited and fielded by March 2008 4.2. Development of an energy demand-side management strategy 4.3. Stakeholder consultations and public awareness campaign 5. Promotion and Development of clean energy resources (March 2008–February 2009) 5.1. Recruitment and fielding of consultants for the clean energy fund and clean

development mechanism subfund, and for the designated national authority by March 2008

5.2. Establishment of the governance and operational structure and working guidelines for the clean energy fund, clean development mechanism subfund, and the designated national authority

5.3. Identification of project pipeline for the clean energy fund 5.4. Public awareness campaign 5.5. Capacity building and training 5.6. Public awareness campaign

ADB = Asian Development Bank, ADF = Asian Development Fund, EPC = Electric Power Corporation, FY = fiscal year, GWh = gigawatt-hour, JBIC = Japan Bank for International Cooperation, JSF = Japan Special Fund, SCADA = system control and data acquisition, TA = technical assistance.

Appendix 2

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POWER SECTOR ANALYSIS A. Power Sector Overview

1. The power sector in Samoa has undergone rapid transformation over the last decade towards having an energy supply based on imported petroleum and hydropower-generated electricity. This transformation has been driven by economic growth that has resulted in increasing demand for electricity and transportation. Energy demand in Samoa is met by three main sources: biomass (47%), fossil fuel (45%), and hydropower (8%). Biomass is mainly used for cooking, whereas imported petroleum is used for transportation and power generation. Imports of petroleum products account for 15% of Samoa’s total import expenditure. Power generation accounts for about 20% of total imported petroleum. 2. The Energy Unit of the Ministry of Finance (MOF) has the overall responsibility for policy and strategic planning for the power sector. The Electric Power Corporation (EPC) is vested with all operating responsibilities for the power sector. EPC is a wholly owned government corporation established in 1972. The utility operates as a separate entity and is defined as a public trading body under the Public Bodies Act (2001) with the principal objective of operating as a commercial business. The EPC Act (1980) mandates EPC with the authority for generation, transmission, and distribution of electricity throughout Samoa. 3. EPC is governed by a board of directors, the composition of which is specified in the EPC Act. The chairman is the minister of the Ministry of Works, Transport and Infrastructure (MWTI) and the general manager is the deputy chairman. The Government is represented on the board of directors by the chief executive officers of MOF, MWTI, and Ministry of Commerce, Industry and Labour. Nongovernment representation comprises representatives of law practitioners, the Chamber of Commerce, and domestic consumers. The general manager is the legal representative of EPC and is responsible for the administration and management of corporate business. The corporation has 482 employees and services about 29,800 consumers throughout Samoa. With the rural electrification program nearing completion, about 95% of the population has access to electricity. The average household consumption is 76 kilowatt-hours (kWh) per month. B. The Power Systems

4. EPC’s power system comprises a grid on each of Upolu and Savai’i islands, which together account for nearly all energy sales, and small stand-alone solar and diesel generation schemes on two isolated islands. The total installed capacity of EPC is 37.2 megawatts (MW), including 24.7 MW of diesel generation. 5. The generation on Upolu, which accounts for 90% of EPC’s total generation, comes from a mix of diesel and hydropower stations. Residential consumers accounted for 25% of sales in 2006. The main power station on Upolu is located at Tanugamanono and has five diesel generation units with a combined available generation capacity of 17.9 MW. One of the units is kept on standby and is scheduled for retirement in 2009. The load factor is about 66% and the average fuel efficiency is 4 kWh per liter (l). Of the 12.5 MW of hydropower generation capacity, 6.7 MW is firm, and 4.0 MW of this comes from the Afulilo storage hydropower scheme on Upolu. The remaining hydropower capacity comes from four run-of-the-river schemes on Upolu, one of which is scheduled for retirement in 2009 unless refurbished. The run-of-the-river hydropower schemes suffer large reductions in output during the dry season, resulting in a significant reduction in available energy.

30 Appendix 2

6. Peak electricity demands on Upolu reached 17.6 MW in 2006. With peak demand growing by 7.3% in the short term and by 4% beyond 2009, a shortfall of 0.3 MW is expected in 2008. By 2010, this shortfall will have increased to 4.1 MW if no new generation plants are commissioned. EPC plans to utilize the existing capacity from self-generation by consumers (estimated to be at least 8 MW) to reduce peak requirements in the short term. By 2011, EPC will need to invest in new generation capacity. By 2015, the deficit will increase to 9 MW, representing 33% of peak demand. 7. The power system on Upolu faces immediate challenges in order to (i) improve utilization of existing generation assets, (ii) reduce losses and meet demand, and (iii) improve reliability of services to consumers. The total energy produced in 2006 was 101.0 gigawatt-hours (GWh). Energy is distributed from the power stations via 22 kilovolt (kV) and 6.6 kV radial transmission lines. Along these transmission lines, transformers step the voltage down to supply local demand. Power system losses on Upolu are estimated at 19.2% of energy produced, inclusive of nontechnical losses. 8. Investment needs in the power system on Upolu are driven by the need to (i) remove transmission bottlenecks to reduce losses, and (ii) improve reliability and capacity to meet peak demand. If investments in the transmission network are undertaken to reduce system losses, the existing generation capacity can meet energy requirements until 2018 when a 6.2 GWh shortfall is expected. This shortfall will increase to 20.1 GWh by 2020 unless additional generation capacity is installed. 9. Savai’i has one operational diesel power station located at Salalologa. The power station has six secondhand generation units with a combined available capacity of 5.2 MW. The estimated load factor is 41% and the total energy produced in 2006 was 11.1 GWh. Fuel efficiency is estimated at 3.3 kWh per l. 10. Savai’i accounts for about 10% of energy sales in Samoa and the majority of consumers are residential consumers. Peak electricity demand reached 3.0 MW in 2006 and is predicted to grow at 4.3% annually in the short term. Beyond 2009, the peak demand growth is expected to slow to around 3.0%. The existing diesel power station is estimated to meet capacity and annual energy requirements (assuming appropriate operations and maintenance of the existing generation units) but there is an urgent need to (i) improve the control system at the powerhouse, (ii) reduce technical and nontechnical power system losses, (iii) improve fuel control and conduct regular fuel audits, and (iv) eventually reduce fuel consumption through renewable energy resources. Power is distributed via 22 kV transmission lines with step-down transformers and a low voltage network to supply local demand. The total power system losses are estimated at 21.4%, including nontechnical losses. C. Sector Policy

11. The energy sector in Samoa comprises four subsectors including petroleum, power, transport, and renewable energy. The overarching goal for the energy sector is to enhance the quality of life for all Samoans through access to reliable, affordable, and environmentally sound energy services and supply. Developing indigenous and renewable energy resources and energy conservation measures to reduce the economy’s risk exposure to foreign exchange fluctuations and fuel price increases is a high development priority for Samoa and is articulated in the Strategy for the Development of Samoa. Consistent with this goal, the Samoa National Energy Policy 2007 emphasizes the development of the country’s renewable energy resources

Appendix 2

31

and promotion of energy efficiency and conservation for end users as vital to achieving a sustainable energy sector. 12. For the power sector, the National Energy Policy outlines the objective as providing efficient and reliable electricity services to all consumers at affordable prices. Consistent with this objective, EPC’s corporate plan identifies the provision of reliable and affordable electricity services as the vision for the corporation. 13. The small size of the Samoan economy makes the country vulnerable to impacts of climate change and global warming. Samoa has little ability to directly impact climate change and global warming. The Government’s National Adaptation Program of Action (NAPA) 2005 is a national implementation strategy for mitigating and adapting to climate change over the long term. The NAPA emphasizes the importance of measures to adapt to the changing global environment, including the prioritization of protection of key infrastructure assets. EPC is responsible for undertaking protective measures for the power sector. D. Sector Priorities

14. The Government’s program for the power sector focuses on three immediate priorities: (i) EPC’s investment plan to improve reliability of power supply and meet growing demand, (ii) improved financial performance of EPC, and (iii) the establishment of effective regulation for the power sector to improve arrangements for tariff setting and technical regulation, and promote cost-effective private sector participation. An enabling environment that promotes renewable energy resources is a key longer-term priority. 15. While the development of indigenous and renewable energy sources, and improvements in efficiency of EPC’s operations, are key strategies for realizing the Government’s priorities and EPC’s corporate plan, socially acceptable, technically viable, and affordable renewable energy resources are limited in Samoa. Development of potential hydropower schemes and other renewable resources will help to replace fuel-generated power and reduce EPC’s exposure to foreign exchange fluctuations and fuel price increases. However, these renewable options will not help address the need to meet peak demand. The power sector is currently characterized by excess energy and capacity shortages, particularly during the dry season. In the short term, capacity constraints on Upolu could be met by utilizing existing self-generation on an as-needs basis. EPC has emphasized measures to reduce peak requirements. An immediate priority is to install prepayment meters to all consumers to lay the foundation for effective demand-side management. EPC is also considering bulk-purchase agreements with major consumers which will provide incentives for off-peak consumption. 16. The priority for EPC is to upgrade the transmission capacity to (i) improve utilization of existing generation plants, (ii) reduce system losses, (iii) improve reliability and security of supply to main industrial and commercial consumers, and (iv) address overloading on the existing underground transmission line to the hospital. Consistent with the priorities outlined in the NAPA (2005), EPC aims to reduce the exposure to cyclones of its transmission network through the underground cabling of selected transmission lines. The underground cabling program, which is included in EPC’s investment plan 2008–2015, comprises five subprojects: (i) Hospital Feeder upgrading project – stage 1, (ii) Upolu diesel power station to Fuluasou Substation 22 kV underground cable project, (iii) Hospital Feeder upgrading project – stage 2, (iv) Fuluasou Substation to Apia Wharf area 22 kV underground cable project, and (v) Fuluasou Substation to Laulumauga via Vaigaga 22 kV underground cable project.

32 Appendix 2

17. On Savai’i, the key immediate priorities are to improve the power factor, improve voltages, and reduce system losses. EPC has also commenced conducting audits to improve fuel control. The medium-term priority is to develop the island’s hydropower potential to reduce fuel consumption. However, a key constraint to hydropower development in Samoa is the political nature of the consultation processes and the disagreements between affected communities. If the hydropower potential cannot be realized, Savai’i will continue to rely on diesel for power generation. 18. Unpredictable long-term financing for needed investments is a key factor constraining EPC’s efforts to move away from reactive management to more proactive planning, maintenance, and customer relations. EPC is increasingly placing emphasis on least-cost planning of investments, but both technical and financial capacity for long-term investment planning are likely to remain constrained in the short term. 19. Over the past 6 years, EPC has struggled to improve its financial performance to satisfactory levels. This is largely due to poor collections performance in combination with inadequate and delayed tariff adjustments in response to fuel price increases. The effect of the tariff increases has also been limited by EPC’s inability to significantly improve its collections performance. Government entities account for a disproportionate share of EPC’s arrears from electricity sales. While electricity sales to government entities account for 11% of total sales, they account for 59% of existing total arrears. 20. EPC has taken measures to improve its collections. It has begun to introduce prepayment metering and has so far installed 1,200 meters, primarily for domestic customers and small businesses. The investment plan will extend prepayment metering to all EPC customers, including three-phase meters for government ministries and entities, and private sector consumers. In the case of certain social services, such as hospitals and water supply where suspending electricity service may not be possible, it is proposed that government budgetary support to these entities will incorporate a specific allocation for electricity. In cases where these allocations are not being used to pay EPC, the Government would withhold the allocation and make payment directly to EPC. 21. To ensure that timely adjustments to tariffs can be made in response to increases in EPC costs, there is a need to establish a more formal mechanism for determining tariffs within the context of an overall regulatory framework for the electricity sector. An automatic tariff adjustment mechanism was approved by the Government in 2001, but has not been fully implemented. While this mechanism provides for automatic tariff adjustments resulting from movements in fuel prices and foreign exchange rates, it lacks incentives to promote efficiency gains by EPC. There is also an opportunity to improve the existing tariff structure and bulk purchase arrangements with large consumers to provide incentives for energy conservation and demand-side management. This is particularly important during the growing daily peak in demand when EPC relies most heavily on expensive diesel generation. 22. In the absence of an electricity act, the EPC Act (1980), EPC Amendments Acts (2001), and the Public Bodies Act (2001) govern the power sector. The State Owned Enterprise Monitoring Division is mandated with monitoring the financial performance of EPC. Under the provisions of the EPC Act, the Licensing Committee is responsible for issuing licensing for electrical works, generation, and distribution of electricity. 23. An automatic tariff adjustment mechanism was approved in 2001 but has not been fully implemented. Instead, tariff submissions are made to cabinet, which approves electricity tariffs.

Appendix 2

33

Before the 15% increase in May 2005, tariffs had remained constant since 2001. A simplified tariff structure, which became effective in February 2007, allows for a fuel surcharge of 15%. The fuel surcharge is subject to review by cabinet every 6 months. There is currently no mandated public consultation process in the existing tariff approval process. An ongoing public consultation process on the cost of electricity services and tariff setting is particularly important considering EPC’s exposure to international fuel prices. About 60% of generation is currently supplied by diesel generation. With growing demand, the impact of fuel prices on tariff requirements will increase over time. 24. Existing arrangements do not include formal technical regulation or monitoring of technical performance. The lack of specifications of technical standards inhibits monitoring and benchmarking of EPC’s technical performance to ensure investments and operations and maintenance are undertaken to an appropriate standard or at least-cost. 25. Appropriate arrangements for tariff setting, technical regulation, and private sector participation are becoming increasingly important for improving the performance of the power sector in Samoa. The Government has recognized that the existing arrangements are a key development constraint for the power sector and is embarking on a reform process to improve the performance of the sector and encourage cost-effective private sector participation. Discussions on regulatory aspects of the power sector have been taking place through technical assistance provided by the Asian Development Bank.��F

1 These discussions have focused on the need for an electricity act to govern all stakeholders in the power sector in Samoa, and for a regulatory body to be established to (i) remove existing regulatory functions from EPC, (ii) provide appropriate arrangements for tariff setting, and (iii) enable private sector participation to reduce public sector investment requirements and promote least-cost generation to meet growing electricity demand. Supplementary Appendix G provides a detailed analysis of the power sector in Samoa.

1 Asian Development Bank. 2006. Technical Assistance to the Independent State of Samoa for Preparing the Power

Sector Expansion Program. Manila.

34 Appendix 3

ELECTRIC POWER CORPORATION’S INVESTMENT PLAN 1. The Electric Power Corporation’s (EPC) power system comprises a grid on each of Upolu and Savai’i islands, which together account for nearly all energy sales, and small stand-alone solar and diesel generation schemes on two isolated islands. The total installed capacity of EPC is 37.2 megawatts (MW), including 24.7 MW of diesel generation. A. The Power System on Upolu

2. The generation on Upolu, which accounts for 90% of EPC’s total generation, is a mix of diesel and hydropower stations. The main power station on Upolu is located at Tanugamanono and has five diesel generation units with a combined available generation capacity of 17.9 MW. One of the units is kept on standby and is scheduled for retirement in 2009. The load factor is about 66% and the average fuel efficiency is 4 kilowatt-hours (kWh) per liter (l). Of the 12.5 MW of hydropower generation capacity, 6.7 MW is firm, and 4.0 MW of that comes from the Afulilo storage hydropower scheme. The remaining hydropower capacity comes from four run-of-the-river schemes on Upolu, one of which is scheduled for retirement in 2009 unless refurbished. The run-of-the-river hydropower schemes suffer from large reductions in output during the dry season, resulting in a significant reduction in available energy. 3. Investment needs in generation are mainly driven by growing peak electricity demands. Peak demand on Upolu reached 17.6 MW in 2006 (Table A3.1). With peak demand growing by 7.3% in the short term and by 4% beyond 2009, a shortfall of 0.3 MW is expected in 2008. By 2010, this shortfall will have increased to 4.1 MW if no new generation plants are commissioned. EPC plans to utilize the existing capacity from self-generation by consumers (estimated to be at least 8 MW) to reduce peak requirements in the short term. By 2011, EPC would need to invest in new generation capacity. By 2015, the deficit will increase to 9 MW, representing 33% of peak demand.

Table A3.1: Upolu Power Balance

(MW)

Year Peak Demand

Total Firm Generation

Capacity

Firm Capacity at N-1

Reserve

Power Balance at

N-1

Reserve Firm Generation

Capacity 2005 17.0 24.6 20.5 3.6 7.7 2006 17.6 24.6 20.5 3.0 7.1 2007 19.7 24.6 20.5 0.9 5.0 2008 20.8 24.6 20.5 (0.3) 3.8 2009 21.7 24.6 20.3 (1.4) 2.9 2010 22.6 22.8 18.5 (4.1) 0.2 2011 23.5 22.8 18.5 (5.0) (0.7)

MW = megawatt, N-1 = total generation capacity minus the largest generator. Sources: Asian Development Bank and Electric Power Corporation estimates. 4. The total energy produced on Upolu in 2006 was 101.0 gigawatt-hours (GWh). Energy is distributed from the power stations via 22 kilovolt (kV) and 6.6 kV radial transmission lines. Along these transmission lines, transformers step the voltage down to supply local demand. Total power system losses on Upolu are estimated at 19.2% of energy produced. The transmission system, which is aging, overloaded, and poorly maintained, is increasingly becoming a bottleneck to the reliable supply of electricity.

Appendix 3 35

5. Investment needs in the transmission network are driven by the need to reduce losses and increase capacity to improve reliability and meet peak demand. If investments in the transmission network are undertaken to reduce system losses, the existing generation capacity can meet energy requirements until 2013 when a 1.3 GWh shortfall is expected.��F

1 This shortfall will increase to 25.7 GWh by 2020 unless additional generation capacity is installed. 6. Load-flow analysis was conducted on individual transmission lines and the power system as a whole for peak demand. The analysis shows that voltage drops and losses are excessive on two of the three 6.6 kV transmission lines, including the Hospital and Alaoa transmission lines. Overloading of the existing Hospital Feeder, which carries more than 10% of energy sold on Upolu, contributes significantly to the high overall system losses and voltage drops. By 2011, the Hospital Feeder is estimated to be 30% overloaded. The underutilized 22 kV Vaitele Feeder is identified as a prime candidate to provide relief for the Hospital Feeder. The West Coast 22 kV transmission line, which supplies power to consumers west of Apia, shows risk of overloading by 2011. Voltage drops at peak demand are predicted to increase from 8.9% in 2006 to 15.5% in 2016 as the demand on the transmission line increases. Losses are estimated to increase from 4.3% in 2006 to 7.4% by 2016. Similarly, the South Coast transmission line will experience voltage drops before 2016. The results of the load-flow analysis are in Table A3.2 and peak technical system losses are reported in Table A3.3.

Table A3.2: Summary Results of Upolu Load-Flow Analysis

Transmission Line

Capacity (kV) Main Findings

Alaoa 6.6 • Very excessive voltage drops: 10% in 2006 increasing to 18% in 2016. • High losses: 8% in 2006 increasing to 13% by 2016

Beach Road 6.6 • Losses: less than 1% in dry season but 11% in wet season

Hospital 6.6

• Very excessive voltage drops: 11% in 2006 increasing to 20% in 2016. • Loading: overloaded by 34% in 2011 reaching 69% by 2016 • High losses: 6% in 2006 increasing to 11% by 2016

East Coast 22 • Voltage drops: 5% in 2006 increasing to 8% by 2016 • Loading: 8% overloaded in dry season on part of the transmission line by 2016

Vaitele 22 • Low losses: less than 1% • Loading: under loaded

West Coast 22

• Excessive voltage drops: 9% in 2006 increasing to 16% by 2016 • Loading: 5% overloaded in 2011 on part of the transmission line, increasing to 31% by 2016 • High Losses: 4% in 2006 increasing to 7% by 2016

South Coast 22 • Excessive voltage drops: 5% in 2006 increasing to 9% by 2016 • Losses: 3% in 2006 rising to 4% by 2016 • Other: lightly loaded transmission line but very long

Tanugamanono Substation 22/6.6 • Loading: overloaded in dry season 2016

• Losses: 1% in 2006 rising to 2% in 2016 kV = kilovolt. Source: Asian Development Bank.

1 With the N-1 reliability criteria (total generation capacity minus the largest generator).

36 Appendix 3

Table A3.3: Summary System Technical Losses at Peak

Year Season Total Diesel generation

(MW)

Total Hydropower Generation

(MW)

Peak Demand (MW)

Total Losses (%)

2006 Dry 13.59 4.6 17.57 3.44 Wet 8.33 10.0 17.57 4.18 2011 Dry 20.10 4.6 23.50 4.71 Wet 14.71 10.0 23.50 4.90 2016 Dry 25.85 4.6 28.60 6.08 Wet 20.37 10.0 28.60 5.84

MW = megawatt. Source: Asian Development Bank. 7. Reliability and system losses are significantly affected by cyclones. In 2004, when cyclone Heta hit Samoa, system losses increased by 21% for the year. Consumers in the main industrial and business districts were left without power for several weeks. The direct costs for power sector infrastructure were estimated at $2.8 million. To reduce the vulnerability to cyclones and other weather events of the transmission network, EPC plans to place underground key transmission lines that serve the major load centers in Apia. B. The Power System on Savai’i

8. Savai’i has one operational diesel power station at Salalologa. The power station has six secondhand generation units with a combined available capacity of 5.2 MW. The estimated load factor is 41% and the total energy produced in 2006 was 11.1 GWh. Fuel efficiency is estimated at 3.3 kWh per l. 9. Savai’i accounts for about 10% of energy sales in Samoa and the majority of consumers are residential consumers. Peak electricity demand reached 3.0 MW in 2006 and is predicted to grow at 4.3% annually in the short term. Beyond 2009, the peak growth is expected to slow to around 3.0%. The power balance is shown in Table A3.4. The existing diesel power station is estimated to meet capacity and annual energy requirements (assuming appropriate operations and maintenance of the existing generation units) but there is an urgent need to (i) improve the control system at the powerhouse, (ii) reduce technical and nontechnical power system losses, (iii) improve fuel control, and (iv) conduct regular fuel audits. To reduce fuel consumption on Savai’i and diversify energy sources, EPC aims to develop the hydropower potential.

Table A3.4: Savai’i Power Balance

Year Peak Demand (MW)

Total Sales (GWh)

Total Generation Capacity

(MW)

Reserve Firm Generation Capacity

(MW) 2005 2.9 8.93 5.2 2.2 2006 3.0 8.41 5.2 2.2 2007 3.1 8.54 5.2 2.1 2008 3.3 8.91 5.2 1.9 2009 3.4 9.48 5.2 1.8 2010 3.5 9.82 5.2 1.7 2011 3.6 10.17 5.2 1.6 GWh = gigawatt-hour, MW = megawatt. Sources: Asian Development Bank and Electric Power Corporation.

Appendix 3 37

10. Power is distributed via 22 kV transmission lines with step-down transformers and a low voltage network to supply local demand. The total power system losses are estimated at 21.4%, including nontechnical losses. A load-flow analysis was conducted for the two 22 kV transmission lines on Savai’i. The results are summarized in Table A3.5.

Table A3.5: Summary Results of Savai’i Load-Flow Analysis

Transmission Line

Capacity (kV) Main Findings

Asau 22

• Very excessive voltage drops: 10% in 2006 increasing to 16% in 2016.

• Loading: no overloads • High losses: 5% in 2006 increasing to 9% by 2016

Puapua 22 • Voltage drops: 4% in 2006 increasing to 5% by 2016 • Loading: no overloads • Low losses: 2.5% in 2006 to 2016

kV = kilovolt. Source: Asian Development Bank. C. Electric Power Corporation’s Investment Plan

11. With technical assistance from the Asian Development Bank (ADB), EPC has developed an investment plan for generation and transmission investments for the period 2008–2015. The investment plan is consistent with the Government’s and EPC’s immediate priorities to secure reliability of power supply to the main economic growth center and the hospital, and improve revenue collection for EPC through installation of prepayment meters for all consumers. An immediate priority is to install prepayment meters to all consumers to improve and lay the foundation for effective demand-side management. EPC is also considering bulk-purchase agreements with major consumers to provide incentives to switch from peak to off-peak consumption. 12. EPC’s power systems are currently characterized by excess energy and capacity shortages, particularly during the dry season. EPC has prioritized increasing the capacity of the transmission network to improve reliability and security of supply to the main business and commercial load center in Apia, and reduce the load on the existing underground transmission line to the hospital. EPC aims to reduce the vulnerability of its transmission network through underground cabling of selected transmission lines. The underground cabling program comprises the Hospital Feeder upgrading project and the Vaitele underground cable project. These transmission lines evacuate power to the hospital and the main industrial and commercial areas of Apia. To support EPC’s loss-reduction program, portable equipment for measuring voltage and current are included for purchase in 2008. This will help identify measures for further loss reduction. 13. On Savai’i, the immediate priorities are to improve the power factor, improve voltages, and reduce system losses. A mini-hydro plant that will reduce fuel consumption on the island is scheduled for commissioning in 2014. To identify future feasible hydropower projects on both Upolu and Savai’i, water-flow gauging measurement equipment has been included for purchase in 2008. EPC’s investment plan is detailed in Table A3.6.

38 Appendix 3

Table A3.6: Electric Power Corporation Investment Plan 2008–2015

Description Costa ($ million)

Implementation Start Dateb

Commissioning Date

A. Core Subprojects 1. Hospital Feeder upgrading project -

stage 1 1.09 Q1 2008 Q4 2008

2. Single- and three-phase prepayment metering project

6.07 Q1 2008 Q3 2008–Q4 2012

B. Candidate Subprojects 1. Upolu (a) Generation

Tanugamanono Power Station noise and emission control program

0.87 Q2 2008 Q4 2008

Refurbishment of Alaoa hydropower station

1.40 Q2 2009 Q3 2010

Upolu diesel power station project

31.77 Q3 2009 Q4 2010–2014

(b) Transmission Upgrade of the Alaoa 6.6 kV

transmission line to 22 kV project

1.14 Q1 2009 Q4 2009

Upolu diesel power station to Fuluasou Substation 22 kV underground cable project

1.49 Q1 2009 Q4 2010

Hospital Feeder upgrading project - Stage 2

6.35 Q3 2009 Q4 2010

22 kV Fuluasou Substation project

1.40 Q3 2009 Q4 2010

Low voltage network expansion program

0.29 Q3 2008 Q4 2008–Q4 2014

Fuluasou Substation to Apia Wharf area 22 kV underground cable project

1.97 Q4 2011 Q2 2013

Fuluasou Substation to Laulumauga via Vaigaga 22 kV underground cable project

4.20 Q4 2011 Q2 2013

22 kV overhead conductor upgrading program

3.17 Q1 2008 Q3 2008–Q4 2014

2. Savai'i (a) Generation

Hydropower scheme 11.21 Q4 2012 Q4 2014 (b) Transmission

Puapua–Asau transmission line 1.24 Q3 2008 Q4 2009

Appendix 3 39

Description Costa ($ million)

Implementation Start Dateb

Commissioning Date

22 kV reconductoring project Power factor improvement

program 0.25 Q3 2008 Q4 2009

Low voltage network expansion program

2.56 Q3 2008 Q4 2008–Q4 2014

3. Project management unit and implementation consultants

3.61 Engagement: Q3 2007

4. Measurement equipment (electric high voltage and current and stream-flow gauging)

0.11 Q1 2008 Q4 2008–

5. SCADA 2.48 Q3 2008 Q4 2009–Q4 2014 Total Investment Costs 82.67

kV = kilovolt, Q = quarter, SCADA = system control and data acquisition. a Exclusive of taxes, duties, and price contingencies. b Commencement of design and documentation (after the feasibility study is prepared and approved by Asian

Development Bank and the project steering committee). Source: Asian Development Bank estimates.

40 Appendix 4

FINANCIAL PERFORMANCE AND PROJECTIONS OF THE ELECTRIC POWER CORPORATION

A. Financial Performance: Fiscal Years 2001–2006

1. Over the past 6 years, the Electric Power Corporation (EPC) has struggled to improve its financial performance. Due largely to inadequate tariff levels and poor collections performance, EPC has been unable to meet its debt service obligations and still fund capital investments that are essential to meet growing electricity demand. With 90% of its debt payable to the Government under 12 separate loans, EPC secured an agreement to restructure this debt into a single loan in 2002. Although this reduced annual debt service by 30%, EPC again fell into arrears. By July 2006, it had paid only 55% of the amount due under the restructuring and was in arrears by just under ST9 million ($3.5 million). With continuing growth in sales and reduced unit operating costs, EPC’s financial performance gradually improved up to FY2004, before weakening again in FY2005, primarily because of higher fuel prices. Although tariffs were increased by 15% in May 2005, this was not sufficient to fully offset higher fuel costs. Fuel prices continued to increase, and by August 2006 were 75% higher than in mid-2004. In February 2007, a fuel surcharge was introduced that implied an effective average tariff increase of 14%. However, the impact of tariff increases has been limited by EPC’s inability to significantly improve its poor collections performance, a disproportionate share of which is due to government accounts. 2. Sales and Profitability. About 95% of EPC’s revenue is generated from the sale of electricity. Since FY2001, electricity revenue has increased just over 50% (about four times the growth in sales) due to the cancellation of prompt payment discounts and proportionately greater nondomestic consumption. This revenue growth, combined with lower unit operating costs, enabled EPC to earn modest net profits over the FY2003–FY2006 period after net losses the two previous years. Net profit peaked in FY2004 at ST2.4 million ($0.9 million) on revenue of ST53.7 million ($21.1 million) before declining to just over ST0.3 million ($0.1 million) in FY2005 and ST1.4 million ($0.6 million) in FY2006. This decline in profitability was due primarily to higher fuel prices and an increase in the proportion of diesel generation. With existing hydropower facilities operating at or near capacity, increases in supply are being provided almost entirely from diesel generation. In FY2006, diesel generation represented 53% of total energy supply, up from 48% in FY2002. 3. Cost Structure. EPC’s cost structure reflects its small scale of operations, distance from major markets, and particularly, its reliance on diesel generation. The overall cost of supply was ST0.71 per kilowatt-hour (kWh) ($0.28 per kWh) sold in FY2006. Fuel is by far the single largest expense item, representing 74% of generation costs and 53% of EPC’s total costs. This leaves EPC highly exposed to changes in world oil prices. 4. Tariffs. Given EPC’s vulnerability to volatile world oil markets, the delay in adjusting tariffs to cover rapidly increasing fuel prices since 2004 has resulted in a significant deterioration in EPC’s financial position. The average tariff remained unchanged between 1998 and 2005 although the structure was revised in 2001 to incorporate block tariffs for domestic customers (Table A4.1). The 15% increase in May 2005 was insufficient to cover the significant increases in EPC’s costs that had accumulated since 1998. The most recent increase (14% in February 2007) is a fuel surcharge which will be reviewed in 6 months on the basis of fuel prices at that time.

Appendix 4 41

Table A4.1: Historic Tariffs (ST per kWh; current prices)

Item September

1998 November

2001 May 2005

February 2007 a

Domestic 1–50 kWh per month — 0.50 0.58 0.67 51–200 kWh per month — 0.60 0.69 0.79 > 200 kWh per monthb — 0.72 0.83 0.79 Nondomestic — 0.60 0.69 0.79 All Customers Flat Rate 0.60 — — — Averagec 0.60 0.59 0.68 0.77 kWh = kilowatt-hour. a As of February 2007, the domestic blocks are 1–50 kWh per month and > 51 kWh per month. b Weighted average tariff based on tariffs in effect at end of fiscal year. c Including the fuel surcharge. Source: Electric Power Corporation.

5. Despite a gradual improvement in profitability up to FY2004, EPC has continued to experience serious cash flow difficulties, which has caused it to fail to meet its debt service obligations and significantly curtail capital investments. With negative net cash flows in 3 of the past 6 years, the cash balance declined from ST16.4 million ($6.4 million) at the beginning of FY2001 to ST4.7 million ($1.9 million) by the end of FY2006. Given its weakening cash position, capital investments had to be limited to an annual average of ST12.9 million ($5.1 million)��F

1 over this period. Although modest in relation to EPC’s investment needs, capital spending placed a significant strain on the corporation because over 80% was self-financed. This left insufficient residual cash flow to service EPC’s debt. 6. Collection Performance. EPC’s poor collection performance, which has progressively deteriorated over the past 6 years, has been a major factor adversely affecting net cash flows. At the end of FY2006, gross receivables were ST14.4 million ($5.6 million), equivalent to 80 days of annual electricity billings, up from 53 days in FY2001. By the end of May 2007, receivables had increased to ST15 million ($5.9 million), despite a partial settlement of government arrears in February 2007. Of this total, ST12.5 million ($4.9 million) is attributable to electricity sales, of which ST7.4 million ($2.9 million), or 59% of the total, are in arrears. EPC’s receivables in its nonelectricity account��F

2 totaled ST2.5 million ($1.0 million) at the end of March 2007. 7. Government Arrears. Although EPC has made some progress in achieving better collections from its private sector customers, its inability to take action against delinquent government accounts has blocked any meaningful improvement in collections. While sales to the Government account for 11% of the total, 55% of existing arrears are due to the Government. EPC’s largest single debtor is the Samoa Water Authority (SWA), which held arrears of ST1.9 million ($0.7 million) at the end of May 2007. This amount represents 47% of electricity arrears held by the Government and 26% of total electricity arrears. SWA’s arrears

1 Reported capital expenditures appear to overestimate actual expenditures because of accounting deficiencies in

the separation of total expenditures between those for capital works and operations and maintenance. 2 These relate to new connection charges and other capital works (referred to as rechargeable works) as well as to

old arrears from electricity sales, primarily from accounts now inactive.

42 Appendix 4

would have been much higher if the Government had not periodically intervened to settle these arrears on behalf of SWA. 8. Covenant Compliance. With its weak financial performance, EPC has achieved only limited compliance with its financial covenants applied under existing Asian Development Bank (ADB) loans (Table A4.2).

Table A4.2: Status of Covenant Compliance Indicator ADB Covenant FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 Return on Average Net Fixed Assets

Minimum: 4% FY2002–FY2004, minimum 6% thereafter

(1.8%) (0.1%) 1.1% 1.6% 0.4% 1.2%

Self-Financing Ratio (5 yr ave) Minimum: 20% (18%) (10%) (2%) 9% 14% 26%

Net Income/(Loss) (ST million) Minimum: 0 (3.74) (0.74) 1.38 2.32 0.28 1.39

Debt-Service Ratio (times) Minimum: 1.3 0.38 0.68 1.21 1.51 1.21 1.44

Receivables (months of sales) Maximum: 2 months

1.80 1.90 2.30 3.10 2.60 2.70

ADB = Asian Development Bank, FY = fiscal year. Source: ADB estimates. B. Projected Financial Performance

9. Financial projections have been prepared for EPC for the FY2007–FY2017 period. The assumptions and analysis are detailed in Supplementary Appendix H. Assuming that oil prices remain at $60 per barrel (bbl) in constant prices, the financial projections indicate a need for two tariff increases of 10% each over the FY2008–FY2012 period. These tariff increases will generate the additional cash flow needed to cover operating expenses, debt service, and a portion of the counterpart funding for the investment plan. The first increase, which would need to be implemented by early 2009, would raise the average tariff from its present level of ST0.77 per kWh ($0.30 per kWh) to ST0.85 per kWh ($0.33 per kWh). The second increase of 10% in early 2012 would raise the average tariff to ST0.94 per kWh ($0.37 per kWh). Once the regulatory agency is established and becomes fully operational, a mechanism for regular tariff reviews and adjustments will be in place. Therefore, beyond 2012, smaller annual increases of just over 5% per year (equivalent to real increases of about 2% annually) are assumed to be implemented. 10. Cash Generation. EPC’s financial performance is projected to be satisfactory provided that required tariff increases are implemented and collection performance improves. Operating net cash flows are projected to almost double from ST14.7 million ($5.8 million) in FY2006 to ST26.2 million ($10.3 million) by FY2015. Over the initial phase of the investment plan, this cash needs to be allocated largely towards meeting counterpart financing requirements as well as debt service on EPC’s existing Government loan. As the investment plan is progressively implemented, cash is increasingly allocated to meeting interest and principal repayment on its loans to the Government.

11. Profitability. Net profit is projected to improve significantly over the next 3 years, increasing from ST1.4 million ($0.5 million) in FY2006 to ST7.6 million ($3.0 million) in FY2010, because of the tariff increase in 2009 and continued growth in sales. However, over the next 5 years (2011–2015) of the forecast period, net profit is anticipated to be much lower, averaging

Appendix 4 43

ST3.6 million ($1.4 million) per year. This is due to three main factors: (i) tariff increases are limited to a maximum of one every second year; (ii) as the investment plan is implemented, interest and depreciation expenses increase significantly; and (iii) there is a need for real increases in certain expenditure items, such as repairs and maintenance, in order to recover from past underfunding. 12. Counterpart Financing. Even with the projected tariff increases and improved collections, EPC is not expected to have the capacity to provide the entire $20 million equivalent counterpart financing required for the investment plan. It is estimated that EPC will be able to provide $12 million of the total counterpart funding requirement over the FY2008–FY2015 investment period. The Government will provide equity injections into EPC to cover the residual amount of $8 million. About 65% of the Government contribution will be required over the 3-year period between FY2010 and FY2012. As the benefits from the investment plan are realized, revenue growth, in combination with efficiency improvements, will enable EPC to meet a progressively larger share of counterpart funding. Over the last 3 years of the Project, EPC will provide 75% of the required counterpart funding. 13. Covenant Compliance. The financial projections indicate that EPC can meet the agreed financial covenants provided that the required tariff increases are implemented together with improved collection performance. EPC will need to carefully assess and monitor its cash generation in order to ensure that it can comply with the self-financing covenant��F

3 over the investment period. EPC’s self-financing capacity will vary from year to year, depending on its cash generation and on the size of the capital investments in each year. Although cash generation will generally improve over the forecast period, the self-financing ratio (SFR) will be weakest between FY2011 and FY2013. The SFR is projected to be 12% in FY2013, the peak investment year, and 19% in both FY2011 and FY2012. As operating cash flows continue to improve and as capital expenditures decline beyond FY2015, the self-financing capacity should improve to meet an SFR of at least 20%.

14. Improved cash generation should enable EPC to comply with the debt-service ratio (DSR) covenant in each year over the forecast period provided that tariff increases are implemented. Prior to the commencement of principal repayments in FY2013, the DSR should remain well above the covenanted minimum of 1.3. However, with the commencement of debt service, the DSR is projected to drop to 1.6. 15. EPC’s ability to achieve and maintain receivables at or below the covenanted maximum of 2 months worth of sales will depend upon its collections performance and the extent to which it writes off uncollectible arrears. Collections will receive an immediate boost with the Government’s agreement to settle a significant portion of its arrears in FY2008. However, EPC will also need to make a large write-off of uncollectible private sector arrears during FY2008 to bring receivables down to 2 months of sales. While these immediate steps will address much of the existing arrears, only significantly improved collections performance will maintain receivables at acceptable levels. With the progressive introduction of prepayment metering, EPC is projected to be able to improve collections to levels sufficient to maintain its receivables at between 1.8 and 2 months over the forecast period.

3 The covenant for the SFR is 12% for FY2008–FY2015 and 20% for 2016 onwards.

44 Appendix 4

C. Sensitivity Analysis

16. A sensitivity analysis was undertaken to assess the impact of adverse changes in selected key variables on the financial performance of EPC. The variables tested were (i) a lower rate of sales growth, (ii) a higher rate of increase in fuel prices, and (iii) a slower rate of improvement in collections performance. The tariffs required to achieve satisfactory financial performance under the tested variables are given in Table A4.3.

Table A4.3: Results of Sensitivity Analysis (ST per kWh)

Existing Required Average Tariffs

Scenario FY2007 FY2009 FY2012 FY2015

Total Increasea

(%) Base Case 0.77 0.85 0.94 1.12 45 Lower Sales Growthb 0.85 0.95 1.14 48 Higher Fuel Pricesc 0.93 1.04 1.26 64 Less Improvement in Collection Performanced 0.85 0.96 1.18 53

FY = fiscal year, kWh = kilowatt-hour. a Total increase over FY2007–FY2015 period. b Growth in sales assumed to be 65% of the base case. c Average fuel price based on $75 per barrel. d Collections remain at 95% for both electricity and rechargeable works. Source: Asian Development Bank estimates.

17. The analysis indicates that EPC’s vulnerability to fuel prices has the greatest impact on tariffs. Under the base-case, projected fuel prices over the forecast period have been assumed to correspond to a world crude oil price of $60 per bbl, expressed in constant 2007 prices. For the sensitivity analysis, fuel prices are assumed to correspond to $75 per bbl, also expressed in constant 2007 prices. This higher cost of fuel would require that EPC’s average tariff be increased by 64% over the FY2007–FY2015 period, compared to 45% under the $60 per bbl base case. The sensitivity analysis is likely to underestimate the true impact on tariff requirements as higher world oil prices would also increase the general price level of other inputs required by EPC. 18. In all three scenarios assessed under the sensitivity analysis, the key factor driving the need for higher tariffs is the requirement to self-finance a portion of EPC’s capital investment plan while also covering operating costs and existing debt-service obligations. Without such tariff increases, EPC would not be able to finance its $12 million contribution to the Project.

Appendix 5 45

EXTERNAL ASSISTANCE TO THE POWER SECTOR 1. The Asian Development Bank (ADB) has been active in the power sector in Samoa since 1971 when it provided the first technical assistance (TA) project. In total, ADB has provided 14 TA projects and seven loans for power sector development. The Electric Power Corporation (EPC) was corporatized in 1972 in the course of ADB’s first power development loan to Samoa. ADB has provided financing for two completed hydropower projects and two others for upgrades of diesel generation and transmission projects. The Afulilo hydropower project was approved in 1986.��F

1 The project was cofinanced by the Australian Agency for International Development (AusAID), European Investment Bank, European Union, and the World Bank. In April 1993, ADB approved supplementary financing��F

2 to meet cost overruns of $2.0 million. The project was successfully commissioned in June 1993. The most recent loan aimed at the expansion of capacity of the existing Afulilo hydropower projects was cancelled in 2005 because of cost increases associated with technical difficulties and implementation delays.��F

3 A summary of ADB’s loans to the power sector are summarized in Table A5.1.

Table A5.1: ADB Loans to the Power Sector

Amount ($'000)

Loan No.

Project

Approval

Date ADB Government Cofinancing Total

0132 Power Project 19 Jun 1973 2,300 2,300 0254 Hydropower

Development (Western Samoa)

18 Dec 1975 1,400 1,400

0392 Second Power Project 29 Mar 1979 3,450 3,450

0813 Afulilo Hydroelectric Project

04 Dec 1986 5,400 1,515 10,285 17,200

1019 Emergency Power Rehabilitation

17 May 1990 500 500

1228 Afulilo Hydroelectric Project (Supplementary Loan)

22 Apr 1993 2,000 2,000 2,600 6,600

1886 Power Sector Improvement Projecta

17 Dec 2001 6,000 1,500 7,500

Total 21,050 5,015 12,885 38,950 ADB = Asian Development Bank. a Part of the loan amount was cancelled. Net loan amount was $512,518. Source: ADB. 2. ADB’s TA projects have focused on (i) project preparation, (ii) institutional strengthening and policy reforms, (iii) tariff and revenue studies, and (iv) commercialization and improvement of the financial management of EPC. ADB commenced project preparation for the Savai’i

1 ADB. 1986. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to

Western Samoa for the Afulilo Hydropower Project. Manila. 2 ADB. 1993. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to

Western Samoa for the Afulilo Hydroelectric Project. Manila 3 ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Independent State of Samoa for Power Sector Improvement Project. Manila.

46 Appendix 5

hydropower project in 2002,��F

4 but the project did not proceed at that time due to community concerns. A list of ADB’s TA projects is provided in Table A5.2.

Table A5.2: ADB Technical Assistance to the Power Sector

Amount ($'000) TA

No. Project Approval Date ADB Government Cofinancing Total

0049 Feasibility Study of the Power Supply Project

16 Mar 1971 64.0 8.0 72.0

0049 Feasibility Study of the Power Supply Project (Supplementary)

18 Apr 1974 1.5 1.5

0091 Power Project 19 Jun 1973 37.5 37.5

0091 Power (Supplementary) 18 Dec 1975 14.5 14.5

0287 Tariff Study and Revaluation of Assets

29 Mar 1979 70.0 70.0

0350 Feasibility Study of the Fagaloa/Afulilo Hydropower Scheme

22 Apr 1980 348.0 348.0

0580 Energy Planning and Institutional Support

29 Dec 1983 148.0 18.0 166.0

0608 Afiamalu Pump-Assisted Hydropower Project

29 Jun 1984 250.0 165.0 415.0

0828 Improvement of Electric Power Corporation’s Financial Management

04 Dec 1986 200.0 200.0

1303 Consultancy Services Related to the Western Samoa Emergency Power Rehabilitation Loan

30 May 1990 40.0 40.0

1311 Power System Planning Study

05 Jun 1990 140.0 12.0 152.0

2267 Institutional Support and Power Development Study for the EPC

27 Dec 1994 350.0 17.0 367.0

3203 Institutional Strengthening of Electric Power Corporation

09 Jun 1999 150.0 150.0

3808 Strengthening Energy Loss Reduction and Maintenance Management Capacity of the Electric Power Corporation

17 Dec 2001 150.0 150.0

3985 Preparing the Savai'i Renewable Energy Project

15 Nov 2002 300.0 100.0 400.0

4 ADB. 2002. Technical Assistance to the Independent State of Samoa for Preparing the Savai'i Renewable Energy

Project. Manila.

Appendix 5 47

Amount ($'000) TA

No. Project Approval Date ADB Government Cofinancing Total

4791 Preparing the Power Sector Expansion Program

8 Jun 2006 450.0 135.0 300.0 885.0

Total 2,713.5 455.0 300.0 3,468.5 ADB = Asian Development Bank, EPC = Electric Power Corporation, TA = technical assistance. Source: ADB. 3. Samoa has been actively involved in a number of regional initiatives for clean energy in the Pacific, including the Renewable Energy and Energy Efficiency Program (REEP).��F

5 Samoa hosts the Secretariat of the Pacific Regional Environment Programme (SPREP). SPREP is an intergovernmental agency that provides assistance and technical advisory services to Pacific island countries, territories, and administrations for the protection and sustainable management of the environment. It has programs on renewable energy, climate change, and biodiversity conservation. SPREP also coordinates the United Nations Development Programme’s (UNDP’s) Regional Energy Program for Poverty Reduction. With Global Environment Facility (GEF) financing, UNDP also supports the Pacific Islands Greenhouse Gas Abatement through the Renewable Energy Project with SPREP. 4. Through UNDP, the GEF has provided financing for solar photovoltaic systems to electrify villages in the two smaller islands between the main islands of Upolu and Savai’i. 5. The Japan International Cooperation Agency has, through its volunteer program, provided technical staff in engineering, and funded computers and equipment for EPC. The Government of Australia and AusAID have, through its Youth Ambassador and nongovernment organization programs, supported the development of a geographical information system for the distribution system and for development of renewable biofuel. EPC has requested AusAID to continue its ongoing support for (i) activities for demand-side management, (ii) capacity building for the establishment of a unit for land acquisition and environment within EPC, and (iii) continuation of the work on the geographical information system. These activities support the Power Sector Expansion Project.

6. Donor coordination and consultations with AusAID, GEF, and JBIC have been key features of project preparation. Because of the emphasis on regulatory and governance aspects of the power sector in Samoa, the Government of Australia will help finance the regulatory and policy reform component of the TA cluster for Implementing the Samoa National Energy Policy. Development of the feasible and affordable investment plan and policy dialogue has been undertaken with EPC and the Government jointly with AusAID and JBIC. JBIC will provide joint cofinancing as the first project under the Accelerated Cofinancing Scheme with ADB.��F

6 The Government of Australia will provide a grant as joint cofinancing for the Project to address affordability of counterpart financing requirements, which is a particular issue for EPC in the early years of the investment plan. Initial consultations have been undertaken with GEF on the clean energy fund. The consultations will continue as part of the implementation of the establishment of the clean energy fund, the clean development mechanism subfund, and the designated national authority. 5 ADB. 2003. Technical Assistance for the Renewable Energy and Energy Efficiency Program for the Pacific. Manila. 6 The joint cofinancing framework agreement for the Accelerated Cofinancing Scheme with ADB was signed on 26

September 2007.

48 Appendix 6

DETAILED COST ESTIMATES

Table A6.1: Detailed Cost Estimates by Expenditure Category ST‘000 $‘000 % Foreign % Base Foreign Local Total Foreign Local Total Exchange Costs A. Investment Costs

1. Land Acquisition and Resettlement 0 11,159 11,159 0 4,376 4,376 0.0 5.5

2. Civil Works 3,949 14,691 18,641 1,549 5,761 7,310 21.2 9.1 3. Equipment Supply and Installation 151,775 5,331 157,106 59,520 2,091 61,610 96.6 77.0 4. Consultant Services 7,212 5,069 12,281 2,828 1,988 4,816 58.7 6.0 5. Taxes and Duties 0 4,808 4,808 0 1,885 1,885 0.0 2.4 Subtotal (A)a 162,936 41,059 203,995 63,896 16,102 79,998 79.9 100.0

B. Contingencies 1. Physicalb 9,530 2,373 11,902 3,737 930 4,668 80.1 5.8 2. Pricec 16,468 9,340 25,809 6,458 3,663 10,121 63.8 12.7 Subtotal (B) 25,998 11,713 37,711 10,195 4,593 14,789 68.9 18.5

C. Financial Charges During Implementationd

1. Interest During Constructione 5,883 7,410 13,293 2,307 2,906 5,213 44.3 6.5 Subtotal (C) 5,883 7,410 13,293 2,307 2,906 5,213 44.3 6.5

Total (A+B+C)f 194,817 60,182 255,000 76,399 23,601 100,000 76.4 125.0 a In May 2007 prices. b Computed at 14% for hydropower development, 10% for system control and data acquisition, and 5% for other subprojects. c Computed at an average annual rate of 1.7% on foreign exchange costs and 3.9% on local currency costs over the 2008–2015 investment plan. d Includes interest during construction, computed at the 6.5% relending rate from the Government to the Electric Power Corporation and including

an interest rate of 1% during grace period and 1.5% thereafter, which will be settled through cash payments on the Asian Development Fund loan portion.

e Interest during construction for Asian Development Fund loan will be settled through cash payments. f Includes taxes and duties of $2.18 million. Source: Asian Development Bank estimates.

Appendix 6 49

Table A6.2: Detailed Cost Estimate by Financier ($ million)

ADF = Asian Development Fund, EPC = Electric Power Corporation, JBIC = Japan Bank for International Cooperation. a The overall financing percentage will be 22.2% for the ADF grant and the Government of Australia grant. The financing percentage for the ADF and Government

of Australia grant proceeds will be changed over years as follows: (i) the financing percentage for the ADF grant will be 7.7% (rounded to 7%) for FY2008–FY2012 and 22.2% (rounded to 22%) thereafter; and (ii) the financing percentage for the Government of Australia grant will be 14.5% (rounded to 15%) for FY2008–FY2012 and zero thereafter. For disbursement purposes, the financing percentages will be rounded.

b In May 2007 prices. c Computed at 14% for hydropower, 10% for system control and data acquisition, and 5% for other subprojects. d Computed at average annual rate of 1.7% on foreign exchange costs and 3.9% on local currency costs over the 2008–2015 investment plan. e Includes interest during construction, computed at the 6.5% relending rate from the Government to the Electric Power Corporation and including an interest rate

of 1% during grace period and 1.5% thereafter, which will be settled through cash payments on the Asian Development Fund loan portion. f Includes taxes and duties of $2.18 million. Interest during construction for the ADF loan will be settled through cash payments. Source: Asian Development Bank estimates.

ADF Loan ADF Grant JBIC Loan Government of Australia EPC

$ % $ % $ % $ % $ % Cost

A. Investment Cost

1. Land Acquisition and Resettlement 0.00 0.0 0.00 0.0 0.00 0.0 1.53 35.0 2.84 65.0 4.38

2. Civil Works 3.47 47.5 0.00 0.0 3.09 42.2 0.00 0.0 0.75 10.3 7.31

3. Equipment Supply and Installation 18.99 30.8 8.42 13.7a 28.98 47.0 5.22 8.5a 0.00 0.0 61.61

4. Consultant Services 0.00 0.0 4.57 94.9 0.00 0.0 0.00 0.0 0.25 5.1 4.82 5. Taxes and Duties 0.00 0.0 0.00 0.0 0.00 0.0 0.00 0.0 1.89 100.0 1.89 Subtotal (A)b 22.46 12.99 32.07 6.76 5.73 80.00

B. Contingencies

1. Physicalc 1.31 28.1 0.76 16.2 1.87 40.1 0.39 8.4 0.33 7.2 4.67

2. Priced 2.84 28.1 1.64 16.2 4.06 40.1 0.85 8.4 0.72 7.2 10.12

Subtotal (B) 4.15 2.40 5.93 1.25 1.06 14.79

C. Financing Charges During Implementatione

1. Interest During Construction 0.00 0.0 0.00 0.0 0.00 0.0 0.00 0.0 5.21 100.0 5.21

Subtotal (C) 0.00 0.00 0.00 0.00 5.21 5.21

Total Project Costs (A+B+C)f 26.61 15.39 38.00 8.00 12.00 100.00

% Total Project Costs 26.6 15.4 38.0 8.0 12.0

50 Appendix 7

ELIGIBILITY CRITERIA AND PROCEDURES FOR CANDIDATE SUBPROJECTS 1. The Power Sector Expansion Project forms part of the Electric Power Corporation’s (EPC) power sector expansion program to provide sustainable and reliable electricity services to all consumers at cost-efficient prices. The project will improve the capacity to meet growing electricity demand and improve cost-effectiveness of power supply by (i) improving the operational efficiency and financial performance of EPC, (ii) improving quality and reliability of electricity supply at least cost, and (iii) establishing an effective regulatory structure for the power sector. 2. The project management unit (PMU) will identify candidate subprojects meeting the criteria set forth in para. 3 below and will obtain approval from the EPC board to assess the feasibility of the candidate subprojects and inform the project steering committee (PSC) of the pending subproject feasibility study. The PMU will then prepare a feasibility study for each candidate subproject. The candidate subproject feasibility report will, among other things, provide (i) technical analysis and description; (ii) subproject rationale, scope, and components; (iii) cost estimates and a financing plan; (iv) implementation arrangements; (v) an environmental assessment; and (vi) a land acquisition and resettlement assessment. The feasibility report will also contain an update of EPC’s investment plan and an analysis of the candidate subproject’s impacts on EPC’s 5-year financial projections, key financial ratios, and compliance with Asian Development Bank (ADB) covenants. Each feasibility report will be submitted to ADB for review and approval and will contain sufficient evidence of the candidate subproject’s eligibility under the agreed criteria and will be prepared in accordance with the detail and quality required to enable ADB to assess the viability and suitability of the candidate subproject. The feasibility reports will include a set of relevant benchmark and performance indicators for the subproject which will be monitored through progress reports. After ADB has endorsed the feasibility study, the PMU will submit the feasibility study to the EPC board and the PSC for review and approval. Implementation of a candidate subproject may only proceed following the endorsement of the candidate subproject feasibility report by the PSC, the EPC board, and ADB. The subproject selection process is shown in Figure A7. 3. To be eligible for financing through the project, (structural) subprojects must be selected in accordance with the following criteria.

(i) The subproject (a) contributes to the objectives of the Power Sector Development Plan, (b) is identified as a high priority project in EPC’s annual business plan, and (c) is included in EPC’s investment plan.

(ii) The subproject is technically feasible and meets the Government’s technical standards and requirements.

(iii) The subproject is justified as the most feasible subproject to achieve the stated objectives and is shown to be least-cost among feasible alternatives.

(iv) A land acquisition and resettlement plan (LARP) will have been prepared for the subproject in accordance with the land acquisition and resettlement framework (LARF), if required, and EPC will have submitted written confirmation to ADB that the landowner and or lessee (in the case of freehold and state-owned land) or the matai��F

1 (in the case customary land), acting on behalf of affected persons under the subproject, is agreeable to the land acquisition and resettlement plan terms and conditions.

1 The title matai is an elected chief representing an extended family unit. The title may be bestowed on anyone in the

customary Samoan society.

Appendix 7 51

(v) An environmental screening will have been conducted for the subproject and an initial environmental examination (IEE), preliminary environmental assessment report (PEAR), and environmental management and monitoring plan (EMMP) will have been prepared for the subproject, in each case, in accordance with the provisions of the environmental assessment and review framework.

(vi) ADB determines that EPC has the necessary staffing, implementation, and financial management capacity to implement the subproject or, in the alternative, EPC can provide specific assurances that assessed shortcomings can be rectified, such as by adding qualified staff or providing timely in-service training.

(vii) The subproject's implementation timeframe is reasonable, and surveys and design can be prepared and reviewed, and safeguard processes and procedures followed and implemented, within the project period.

(viii) The financing plan clearly identifies confirmed sources of financing, including counterpart financing, and includes the provision of budgetary resources to meet (a) counterpart funding requirements for capital expenditures during the construction phase, (b) resettlement costs, as applicable, (c) environmental management costs, (d) loan repayment requirements, and (e) routine operations and maintenance costs.

(ix) The subproject will not adversely impact on EPC’s ability to meet its financial covenants under the ADB loan and grant.

(x) All required Governmental approvals shall have been obtained. 4. No subproject classified category A, in accordance with ADB’s Environment Policy (2002), shall be eligible for financing under the Project.

52 Appendix 7

PMU identifies candidate subproject and submits outline

for approval by EPC board

EPC board endorses

preparation of feasibility study

candidate subproject?

No.

PMU notifies the PSC of the EPC board endorsement and prepares feasibility study and

submits to ADB for review and approval

Yes.

ADB endorses feasibility study?

No.

PMU submits feasibility study to EPC board and the PSC for

review and approval.

Yes.

EPC board and Ministry of Finance

endorses feasibility No.

PMU informs ADB of EPC board and the PSC endorsement of the

subproject

Yes.

PMU commences implementation of the subproject

ADB = Asian Development Bank, EPC = Electric Power Corporation, PSC = project steering committee, PMU = project management unit. Source: Asian Development Bank.

Figure A7: Subproject Selection Process

Appendix 8 53

PROJECT IMPLEMENTATION SCHEDULEa

Component 2008 2009 2010 2011 2012 2013 2014 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 Core Subprojects Hospital Feeder Upgrading Project – Stage 1 Single- and Three-Phase Prepayment Metering Project

Upolu Generation

Tanugamanono Power Station Noise and Emission Control Program

Refurbishment of Alaoa Hydropower Station Upolu Diesel Power Station Project

Transmission Upolu Upgrade of the Alaoa 6.6 kV Transmission Line to 22 kV Project

Upolu Diesel Power Station to Fuluasou Substation Underground Cable Project

Hospital Feeder Upgrading Project - Stage 2 22 kV Fuluasou Substation Project Low-Voltage Network Expansion Program Fuluasou Substation to Apia Wharf Area 22 kV Underground Cable Project

Fuluasou Substation to Laulumauga via Vaigaga 22 kV Underground Cable Project

22 kV Overhead Conductor Upgrading Program

Generation Savai'i

Hydropower Scheme

Transmission Savai'i

Puapua–Asau Transmission Line 22 kV Reconductoring Project

Power Factor Improvement Program Low-Voltage Network Expansion Program

Measurement Equipment Measurement Equipment (electric high voltage/current and stream flow gauging)

SCADA

SCADA

Consultants PMU, Implementation Consultants

kV = kilovolt, PMU = project management unit, SCADA = system control and data acquisition. a Implementation start is defined as commencement of design and documentation (after the feasibility study is prepared and approved by the Asian Development Bank and

the project steering committee). Source: Asian Development Bank.

54 Appendix 9

PROCUREMENT PLAN AND CONTRACT PACKAGES

Table A9.1: Procurement Plan

Project Information A. Core Subprojects 1. Hospital Feeder Upgrading Project – Stage 1 2. Single- and Three-phase Prepayment Metering Project

B. Candidate Subprojects 1. Upolu a. Generation

(i) Tanugamanono Power Station noise and emission control program

(ii) Refurbishment of Alaoa hydropower station (iii) Upolu diesel power station project

b. Transmission (i) Upgrade of the Alaoa 6.6 kV transmission line to 22 kV

project (ii) Upolu diesel power station to Fuluasou Substation 22 kV

underground cable project (iii) Hospital Feeder upgrading project - Stage 2 (iv) 22 kV Fuluasou Substation project (v) Low voltage network expansion program (vi) Fuluasou Substation to Apia Wharf area 22 kV

underground cable project (vii) Fuluasou Substation to Laulumauga via Vaigaga 22 kV

underground cable project (viii) 22 kV overhead conductor upgrading program

2. Savai'i a. Generation (i) Hydropower scheme b. Transmission (i) Puapua–Asau transmission line 22 kV reconductoring

project (ii) Power factor improvement program (iii) Low voltage network expansion program

3. Measurement Equipment Supply of high voltage/current and stream-flow gauging equipment

4. System Control and Data Acquisition (SCADA) Supply, installation, and operation of SCADA system

Country Independent State of Samoa Name of Borrower Government of Samoa Project Name Samoa Power Sector Expansion Project Loan Reference Date of Effectiveness Amount $ $80 million Of which Committed, $ Executing Agency Electric Power Corporation Approval Date of Original Procurement Plan Approval of most recent Procurement Plan Publication for Local Advertisements Period Covered by this Plan January 2008 to December 2015 kV = kilovolt, MW = megawatt, SCADA = system control and data acquisition. Sources: Asian Development Bank and Electric Power Corporation.

Appendix 9 55

Table A9.2: Procurement Thresholds, Goods and Related Services, Works, and Supply and Install

Procurement Method Threshold ICB Works $100,000 (minimum)a ICB Goods $500,000 (upper limit) Shopping $100,000 (upper limit) ICB = international competitive bidding. a National competitive bidding is not feasible due to the lack of local contractors and suppliers, and the small size of

Samoa. Source: Asian Development Bank.

Table A9.3: Procurement Thresholds, Consultants Services Procurement Method Threshold Quality- and Cost-Based Selection (QCBS), Full Technical Proposal, quality-cost ratio for evaluation of proposals to be 80:20.

$1,000,000 or greater

Source: Asian Development Bank.

Table A9.4: Indicative List of Contract Packages Goods, Works, and Consulting Services

Location Contract Description Estimated

Costa

($ million)

Procurement Method

Expected Date of

Advertisement

Prior Review

(Y/N) Core Subprojects Upolu Hospital Feeder Upgrading

Project – Stage 1 (W-DSI)b 1.09 ICB Oct 2007 Y

Upolu / Savai'i

Single- and Three-phase Prepayment Metering (W-SIM)c

6.07 ICB Oct 2007 Y

Upolu Project manager 0.75 Individual Selection

Jun 2007 Y

Upolu Project implementation consultants

2.86 QCBS Aug 2007 Y

Candidate Subprojects Upolu Tanugamanono Power Station

noise and emission control program (W-DSI)b

0.87 ICB May 2008 Y

Upolu Refurbishment of Alaoa hydropower station (W-SI)

1.40 ICB Sep 2008 Y

Upolu Upolu diesel power station inclusive of plant and control equipment (W-DSI)c

31.77 ICB Oct 2009 Y

Upolu Upgrade of the Alaoa 6.6 kV transmission line to 22 kV project (W-SI)

1.14 ICB Jul 2009 Y

Upolu Upolu diesel power station to Fuluasou Substation 22 kV underground cable project (W-DSI)b

1.49 ICB Apr 2009 Y

Upolu Hospital Feeder upgrading project – Stage 2 (W-DSI)b

6.35 ICB Oct 2009 Y

Upolu 22 kV Fuluasou Substation project inclusive of equipment (W-DSI)b

1.40 ICB Nov 2009 Y

56 Appendix 9

Location Contract Description Estimated

Costa

($ million)

Procurement Method

Expected Date of

Advertisement

Prior Review

(Y/N) Upolu Low voltage network expansion

program (G) 0.29 ICB Goods Oct 2008 Y

Upolu Fuluasou Substation to Apia Wharf area 22 kV underground cable project (W-DSI)b

1.97 ICB Jan 2012 Y

Upolu Fuluasou Substation to Laulumauga via Vaigaga 22 kV underground cable project (W-DSI)b

4.20 ICB Jan 2012 Y

Upolu 22 kV overhead conductor upgrading program (G)

3.17 ICB Goods Mar 2008 Y

Savai'i Hydropower scheme (DSI)b 11.21 ICB Jan 2013 Y Savai'i Puapua–Asau transmission line

22 kV reconductoring project (G) 1.24 ICB Aug 2008 Y

Savai'i Power factor improvement program (G)

0.25 ICB Goods Aug 2008 Y

Savai'i Low voltage network expansion program (G)

2.56 ICB Goods Sep 2008 Y

Upolu / Savai'i

Measurement equipment - electric high voltage/current (G)

0.06 Shopping Mar 2008 N

Measurement equipment - stream-flow gauging (G)

0.05 Shopping Mar 2008 N

Upolu / Savai'i

SCADA (DSIO)e 2.48 ICB Sep 2008 Y

DSI = design, supply, install, and operate; DSIO = works - design, supply, install, and operate; EPC = Electric Power Corporation, G = goods supply; ICB = international competitive bidding; kV = kilovolt; QCBS = quality- and cost-based system, SCADA = system control and data acquisition; W-DSI = works contract, design; W-SIM = supply, install, and maintain; W-SI = supply and install. a Exclusive of taxes, duties, and price contingencies. b A single-stage, two-envelope procedure will be used. Separate envelopes for technical and financial proposals will be

submitted simultaneously. Bids will be evaluated using an 80:20 technical/financial weighting. c EPC will prequalify bidders in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time).

Bidding for the Upolu diesel power station, inclusive of plant and control equipment, will be limited to prequalified bidders.

d Contract to cover supply, installation, and maintenance of prepayment meters until 31 December 2014. e Contract to cover operation, maintenance, and upgrading of SCADA system until 31 December 2015. Sources: Asian Development Bank and Electric Power Corporation.

Appendix 10 57

DISBURSEMENT AND FUNDING ARRANGEMENTS

A. Introduction

1. The proceeds from the Asian Development Bank (ADB) loan and grant, the Japan Bank for International Cooperation (JBIC) loan, and the grant provided by the Government of Australia for the proposed Project will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). The Government will submit separate withdrawal applications for the Asian Development Fund (ADF) loan, the ADF grant, the JBIC loan, and the Government of Australia grant. To promote efficiency in processing disbursements from four different sources under the Project, a minimum value per withdrawal application is set at $100,000 equivalent or an amount determined to be a reasonable minimum.��F

1 Reimbursement and direct payment procedures will apply for consulting services, civil works, and equipment supply and installation. Reimbursement procedures will apply to land acquisition and resettlement. B. ADB Loan and Grant

2. ADB loan proceeds will be utilized to finance civil works (48% of financing) and equipment supply and installation (31% of financing). ADB grant proceeds will be utilized for consulting services and equipment supply and installation. For consulting services, the financing percentage of 95% will be applied to individual claims. The total financing of ADB grant proceeds under the category of equipment supply and installation represents 13.7%. The financing percentages that provide the basis for withdrawal for the ADB grant for equipment supply and installation will apply on an annual basis in accordance with Table A10.1. ��F

2 Reallocation of the ADB loan and grant proceeds among categories can be made in accordance with ADB established procedures.

Table A10.1: Annual Financing Percentages for the ADB Granta

Year Equipment Supply and Installation (% of Base Cost)

Consulting Services (% of Base Cost)

FY2008 7 95 FY2009 7 95 FY2010 7 95 FY2011 7 95 FY2012 7 95 FY2013 22 95 FY2014 22 95 FY2015 22 95 ADB = Asian Development Bank, FY = fiscal year. a For disbursement purposes, the financing percentages have been rounded as compared to Appendix 6,

Table A6.2: Detailed Cost Estimates by Financier. Source: ADB estimates.

1 The minimum value per withdrawal application for consulting services is set at $30,000 equivalent or an amount

determined to be a reasonable minimum. 2 For FY2008–FY2012, financing percentage will be 7% and 22% thereafter due to front loading of the Government

of Australia grant proceeds for this specific category.

58 Appendix 10

C. Japan Bank for International Cooperation Loan

3. The JBIC loan will be utilized for civil works (42% of financing) and equipment supply and installation (47% of financing), as detailed in Appendix 6 (Table A6.2). Disbursements for the JBIC loan will be administered by ADB. Two withdrawal applications, signed by the authorized signatory of the Government, together with relevant supporting documents, will be submitted to ADB and JBIC simultaneously. Direct payment and reimbursement procedures will be applied in accordance with the Loan Disbursement Handbook. ADB and JBIC may reasonably request additional information or documentation related to disbursements under the Project. Reallocation of the JBIC loan proceeds can be done among cost categories in accordance with ADB established procedures, subject to prior approval of JBIC. D. Government of Australia Grant

4. The Government of Australia will provide a grant for the purpose of counterpart financing requirements of the Government of Samoa. The grant will be administered by ADB and will be utilized to finance land acquisition and resettlement and equipment supply and installation. The financing percentage of 35% will be applied to individual payment requests for land acquisition and resettlement. The financing percentages for equipment supply and installation will be applied in accordance with Table A10.2, which will provide the basis for withdrawal for the Government of Australia grant. The total financing of the Government of Australia grant proceeds for equipment supply and installation represents 8.5%.

Table A10.2: Annual Financing Percentages for the Government of Australia Granta

Year Land Acquisition and Resettlement (% of Base Cost)

Equipment Supply and Installation (% of Base Cost)

FY2008 35 15 FY2009 35 15 FY2010 35 15 FY2011 35 15 FY2012 35 15 FY2013 35 0 FY2014 35 0 FY2015 35 0 FY = fiscal year. a For disbursement purposes, the financing percentages have been rounded as compared to Appendix 6,

Table A6.2: Detailed Cost Estimates by Financier. Source: Asian Development Bank estimates. 5. Disbursements of the Government of Australia grant for the purpose of financing eligible project expenditures will be in accordance with the Loan Disbursement Handbook and other arrangements as stipulated below. Requests for disbursements will be submitted to ADB. 6. Reimbursement procedures will apply to eligible expenditures for land acquisition and resettlement. Land acquisition and resettlement will be carried out in accordance with the Taking of Land Act (1964) and ADB’s Involuntary Resettlement Policy (1995). The expenditures will be reimbursed based on submission of the following supporting documentation, or as otherwise could be reasonably requested by ADB.

Appendix 10 59

(i) Withdrawal applications for eligible land acquisition and resettlement compensation payments.

(ii) A copy of the relevant inventory of losses identifying (a) the affected person(s), and, where applicable, the matai (footnote 1, Appendix 7) representing the affected person; (b) the nature of the losses incurred by the affected person(s); and (c) the agreed compensation payable to the affected person(s).

(iii) Evidence of the agreed compensation to the affected person(s) in the form of (a) copy of the cancelled check (check that has been paid), which shows the check number, the payee, the payment date, and the amount; or (b) a receipt signed by the affected person(s) or, where applicable, by the matai representing the affected person(s) as identified in the inventory of losses

7. The equipment supply and installation will be mostly paid through direct payment procedure. 8. Reallocation of the Government of Australia grant proceeds can be done among cost categories in accordance with ADB established procedures, subject to prior approval of the Government of Australia.

60 Appendix 11

TECHNICAL ASSISTANCE CLUSTER 1. During the Asian Development Bank (ADB) loan Fact-Finding Mission for the proposed Power Sector Expansion Project in May 2007, the Government of the Independent State of Samoa (the Government) confirmed its request for a technical assistance (TA) cluster for the development of sustainable and reliable electricity services to support economic growth. Following the Government’s request, an understanding was reached on the TA cluster impact, outcome, outputs, implementation arrangements, cost, financing arrangements, and terms of reference.��F

1 The TA cluster is included in the country operations business plan (2007–2009) for Samoa.��F

2 2. The TA cluster forms part of the Government’s power sector development program and is included in the proposed Power Sector Expansion Project. The objective is to improve access to sustainable and reliable electricity services for all consumers in Samoa by improving the quality, reliability, and cost-effectiveness of power supply. The TA cluster will (i) promote the development of clean energy resources in Samoa through the establishment of a clean energy fund (CEF); (ii) enable Samoa to participate in, and benefit from, carbon-market trading through the establishment of, and capacity building for, a designated national authority (DNA); (iii) develop effective regulation of the power sector and promote demand-side management and energy conservation through support for regulatory and policy reform in the power sector; and (iv) help improve EPC’s financial performance through resident financial management advisors (RFMAs). The technical assistance report is in Supplementary Appendix B. 3. The TA cluster supports the Government’s priorities for the power sector through four components: Component 1 comprises the establishment of a CEF and a clean development mechanism (CDM) subfund; Component 2 will establish and build capacity of a DNA; Component 3 will support the Government in undertaking regulatory and policy reform in the power sector; Component 4 will provide RFMAs to EPC. Capacity building and stakeholder consultations are integral parts of all components. 4. Component 1: Establishment of the CEF. The CEF will help improve the coordination of financing sources for clean energy resources in Samoa and is envisaged as a revolving fund. Component 1 will (i) help establish the governance and operational structure, human resources, and working and reporting guidelines of the CEF and a CDM subfund, (ii) identify a project pipeline, and (iii) increase public awareness on clean and renewable energy. The CDM subfund will help finance initial transactions costs associated with getting eligible projects additional financing under the CDM. This may include preparation of project design documents, validation of project design documents by an operational entity or independent third party validator, and registration of projects with the CDM executive board. 5. Component 2: Establishment of, and Capacity Building for, the DNA. The establishment of a DNA will enable Samoa to benefit from the CDM. Component 2, which will be implemented jointly with Component 1 to ensure that the two components are well coordinated, will, through a consultative process; (i) establish the operational structure and resource requirements; (ii) develop working guidelines and procedures for the DNA, (iii) provide capacity building and hands-on training for stakeholders and DNA staff in procedural requirements using a pilot project (identified in the project pipeline under Component 1); and (iv) raise public awareness on the role, functions, and requirements of the DNA.

1 The TA first appeared in ADB Business Opportunities on 4 July 2007. 2 ADB. 2007. Country Operations Business Plan (2007–2009): Independent State of Samoa. Manila.

Appendix 11 61

6. Component 3: Regulatory and Policy Reform in the Power Sector. Component 3 comprises support for the development of (i) a demand-side management and energy conservation strategy, (ii) a legal framework to govern all stakeholders in the power sector, and (iii) the establishment of a regulator. The demand-side management and energy conservation strategy will focus on the policy environment and tax incentives to promote energy efficiency. Support to regulatory reform will be implemented in three phases allowing for stakeholder consultation and political decision processes. The first phase will focus on the scoping of a regulatory framework that will allow the Government to make a decision in principle on the roles, functions, and structure of a regulatory agency, including the independence, authority for tariff regulation, and accountability of the regulator and the scope for multisector regulation. The first phase will guide the direction of subsequent phases. Phase 2 will develop the regulatory framework, including the drafting of new legislation and amendments to existing legislation for consideration by cabinet and parliament and the preparation of a detailed budget and resource assessment for approval in the forthcoming budget year. Once the Government has approved the legislation and the budget of the regulator, recruitment of a suitable regulator and initial capacity building and the development of working guidelines of the regulator can commence. 7. Component 4: RFMAs to the Electric Power Corporation. Two RFMAs (one accountant and one analyst) will be engaged to assist EPC in (i) improving internal budgeting and expenditure controls; (ii) consolidating accounts and financial reporting and forecasts to the EPC board, the Government, and ADB; and (iii) developing peak and off-peak tariffs and bulk purchase agreements with EPC’s major customers. Capacity building and training is an integral task of all aspects of the work. Component 4 will help EPC (i) improve longer-term least-cost planning; (ii) ensure that investments are affordable and contribute to improving financial sustainability; and (iii) improve the transparency of costs, tariff setting, and accountability to the Government and consumers. 8. The total cost of the TA cluster is estimated to be $2,185,000 equivalent. The Government has requested ADB to finance $1,850,000 equivalent. Table A11.1 shows the financing by component. The equivalent of $350,000 will be financed on a grant basis by the Government of Finland; $900,000 equivalent will be financed by the Government of Australia; $600,000 equivalent will be financed on a grant basis by the Japan Special Fund, funded by the Government of Japan. The Government of Samoa will finance office accommodation, and remuneration and per diem of counterpart staff in the equivalent of $335,000.

62 Appendix 11

Table A11: Financing by Technical Assistance Cluster Component

Financing Technical Assistance Cluster Component External Source

Amount ($'000)

Counterpart Financing

Amount ($'000)

Establishment of a Clean Energy Fund

Government of Finland

350 Government of Samoa

65

Establishment of, and Capacity Building for, the Designated National Authority

Japan Special Fund

150 Government of Samoa

30

Regulatory and Policy Reform in the Power Sector

Government of Australia

900 Government of Samoa

160

Resident Financial Management Advisors to the Electric Power Corporation

Japan Special Fund

450

Government of Samoa

80

Source: Asian Development Bank estimates. 9. The Ministry of Finance (MOF) will be the executing agency for the TA cluster and has assigned the Energy Unit of the MOF as the implementing agency for components 1, 2, and 3. The Energy Unit will oversee day-to-day implementation of the consultants and facilitate coordination of activities, training, and workshops. Counterpart staff has been assigned from the attorney general’s office for drafting of legislation under Component 3. The attorney general will be responsible for submission of draft legislation to cabinet and for parliamentary consideration. EPC has been assigned as the implementing agency for Component 4 and will provide office space and counterpart staff for the RFMAs. The chief executive officer of MOF will provide overall strategic guidance for the TA cluster components and facilitate submission of draft cabinet papers. 10. A total of 42.5 person-months of consulting services will be required to implement the TA cluster. To improve coordination and take advantage of the synergies between components 1 and 2, one firm will be engaged to provide 14.5 person-months of consulting services for components 1 and 2 on an intermittent basis over a period of 12 months. One firm will be engaged under Component 3 to provide 18 person-months of intermittent consulting services over a period of 20 months, and two individual consultants will be engaged under Component 4 to provide 10 person-months of consulting services on an intermittent basis to EPC over a period of 2 years commencing in February 2008.

Appendix 12

63

ECONOMIC AND FINANCIAL ANALYSES 1. Samoa is a small and highly import-dependent country that relies largely on official transfers and remittances for foreign currency revenues. Despite vulnerability to external shocks, the Independent State of Samoa has experienced stable economic growth over the last 5 years. Real gross domestic product (GDP) grew at around 4% per annum, well above the average growth rate of the Pacific region economies. The annual long-term growth rate is expected to be around 3.5%. Economic growth is mainly driven by agriculture, construction, finance, and business services. Samoa is also benefiting from an increase in tourism. Further broadening of economic activity and private sector development are key strategies for sustaining economic growth rates and reducing poverty. 2. The Government’s Strategy for the Development of Samoa 2005–2007 lays the foundation for sustainable and broad-based economic growth supported by continued reforms and private sector development to improve the quality of life for all people in Samoa. Ensuring that sufficient power is available to meet growing demand is essential to achieving a broader economic base and reducing the country’s vulnerability to external shocks. A. Power Demand and Supply Balances

3. The power sector in Samoa has undergone a rapid transformation over the last decade towards an energy supply based on imported petroleum and hydropower-generated electricity. This transformation has been driven by economic growth that has resulted in increasing demand for electricity and transportation. Energy demand in Samoa is met by three main sources: biomass (47%), fossil fuel (45%), and hydropower (8%). Biomass is mainly used for cooking whereas imported petroleum is used for transportation and power generation. Imports of petroleum products account for 15% of Samoa’s total import expenditure. Power generation accounts for about 20% of total imported petroleum. 4. More than 90% of the country’s electricity demand is on Upolu, which is also the main source of growth in Samoa. Peak electricity demand reached 17.6 megawatts (MW) in 2007. Annual peak demand is expected to grow by 7% in the short term and by 4% beyond 2009 (Table A12.1). By 2008, the Electric Power Corporation (EPC) will not be able to reliably meet demand.��F

1 In the short term, EPC will utilize existing self-generation by large consumers to meet peak demand.��F

2 By 2010, the existing run-of-the-river hydropower station at Alaoa will be refurbished and by 2011 EPC will need to commission additional generation capacity to meet both energy and peak demands.

1 Assumes a reliability criteria of the available capacity minus the capacity of the largest generator. 2 The capacity of existing self-generation is estimated to be about 8 MW.

64 Appendix 12

Table A12.1: Power Balance - Upolu System (Without-Investment Plan)

Year Peak

Demand (MW)

Total Firm Generation

Capacity (MW)

Firm Capacity at N-1 Reserve

(MW)

Power Balance at N-1 (MW)

Reserve Firm Generation

Capacity (MW)

2002 15.8 24.6 20.5 4.7 8.8 2003 15.9 24.6 20.5 4.6 8.7 2004 16.2 24.6 20.5 4.3 8.4 2005 17.0 24.6 20.5 3.6 7.7 2006 17.6 24.6 20.5 3.0 7.1 2007 19.7 24.6 20.5 0.9 5.0 2008 20.8 24.6 20.5 (0.3) 3.8 2009 21.7 24.6 20.3 (1.4) 2.9 2010 22.6 22.8 18.5 (4.1) 0.2 2011 23.5 22.8 18.5 (5.0) (0.7)

MW = megawatt, N-1 = total generation capacity minus the largest generator. Sources: Asian Development Bank (ADB) and EPC.

5. Peak demand on Savai’i is expected to grow by 4% annually to 2009. With a longer-term growth in peak demand of 3%, the existing diesel power station at Salalologa is estimated to meet capacity and annual energy requirements until 2015, when a 0.4 MW generator is scheduled for retirement. A power factor improvement project has been scheduled for 2010 to improve operational efficiency. A hydropower development, scheduled for commissioning in 2015, is a key priority to reduce diesel consumption on Savai’i. If the proposed hydropower development project can be commissioned, 81% of energy requirements on Savai’i can be met from renewable resources in 2015. The Project will also reduce noise and pollution from the power station. B. Investment Plan

6. The investment plan covers the two power systems on Upolu and Savai’i. EPC’s investment plan will meet forecast demand requirements up until 2019, when new capacity will be required on Upolu, and help EPC improve its collection performance through the installation of prepayment meters. The investment plan comprises three generation and nine transmission projects on Upolu, and one generation and three transmission projects on Savai’i. Investment in single- and three-phase prepayment meters, system control and data acquisition (SCADA), and portable equipment for measuring voltage and current and for stream-flow gauging are included for both the Upolu and Savai’i power systems. 7. Identified generation projects are based on analysis of the power and energy balances for each of the power systems. Investments in the transmission networks are driven by the need to improve reliability, reduce losses, and meet peak requirements, and have been identified based on detailed load-flow analysis of the performance of individual transmission lines, and the system as a whole. The timing of investments in generation on Upolu is initially driven by peak capacity requirements. The existing generation capacity can meet energy requirements to 2013

Appendix 12

65

when a 1.3 gigawatt-hour (GWh) shortfall is expected.��F

3 Investment in hydropower generation on Savai’i aims to replace fuel costs of the existing power station at Salalologa. The timing of commissioning of the hydropower project is determined based on the need for adequate time to address community concerns, and the financial and implementation capacity of EPC. 8. Projects under the investment plan are prioritized to improve reliability and security of power supply to the main load center in Apia and to improve EPC’s revenue collection. EPC plans to improve utilization of the existing transmission system, and reliability of supply, by replacing the existing 6.6 kilovolt (kV) overhead transmission lines with a 22 kV underground cable. This is the first phase of a three-phase underground program that aims to secure electricity supply to the main load centers and the hospital, and protect the key transmission lines against cyclone damage. The underground program is expected to be fully completed by 2013. EPC’s revenue collection will be improved through the installation of prepayment meters to all consumers on Upolu and Savai’i. The supply, installation, and operation of the SCADA system will enhance the control systems and improve operational system efficiency on both Savai’i and Upolu. Transmission upgrades and expansion of the low voltage distribution network will take place throughout the investment plan, commencing in 2008. EPC’s investment plan is detailed in Appendix 3 and Supplementary Appendix G. C. Least-Cost Analysis

9. Projects under the investment plan were included and sequenced to account for EPC’s financial and implementation capacity. Feasible alternatives for the proposed generation projects are limited. The generation projects included for expansion on Upolu include the refurbishment of the existing 1 MW Alaoa hydropower station by 2010 and a new 12.9 MW diesel power station for which commissioning of three 4.3 MW diesel generators would be sequenced between 2011 and 2014. Up until 2011, EPC may face capacity shortages in reliably meeting peak demand during the dry season. Utilization of existing stand-by self-generation capacity enables EPC to manage the risk of capacity shortages until adequate transmission capacity has been commissioned. Two possible hydropower sites at Lotofagauta and Tia'vea were identified on Upolu. However, given technical, capacity, cost, and social uncertainties with these projects, they were not included in EPC’s investment plan for 2008–2015. 10. A least-cost analysis for generation options on Savai’i was undertaken to ascertain whether the proposed 1 MW firm capacity run-of-the-river hydropower scheme would represent the least economic cost option for meeting demand to 2030. The capital costs include cost for resettlement and land acquisition. Taxes, duties, and value-added government sales tax were excluded for all capital, insurance, and operations and maintenance costs. 11. Average annual output is estimated at 11.8 GWh, which would provide 96% of generation requirements on Savai’i in 2015. With demand growth, the share of hydropower would reduce to 75% by 2020. The balance of generation requirements would be met by the existing diesel power station, which would mostly be used to meet peak demand. The hydro-diesel mix option was compared to a diesel-only option, where the existing power station would be maintained to meet demand growth to 2030. Commencing in 2015, 3,355 tons (t) of diesel fuel would be saved annually; by 2017, savings would increase to 3,446 t annually. The result of the least-cost analysis is presented in Table A12.2. The results of the sensitivity analysis

3 This energy balance deficit assumes that transmission investments are undertaken as per the investment plan to

reduce system losses.

66 Appendix 12

suggest that the hydro-diesel mix option would become unviable at an international oil price about $53.5 per barrel (bbl), equivalent of an economic cost of ST1.316 per liter (l).

Table A12.2: Least-Cost Analysis

Fuel Price Hydro-Diesel Mix (NPV) Diesel Only (NPV) International Price

of Crude Oil ($ per bbl)

Economic Cost of Diesel in Samoa

(ST per liter) $

per kWh ST per kWh

$ per kWh

ST per kWh

45 1.113 0.176 0.449 0.167 0.425

60 1.470 0.209 0.532 0.215 0.549

75 1.835 0.242 0.618 0.267 0.680 Bbl = barrel, kWh = kilowatt-hour, NPV = net present value, ST = Samoan tala. Source: Asian Development Bank estimates. 12. The underground cabling program on Upolu aims at enhancing transmission capacity and improving reliability to the main load centers in Apia, the industrial area at Vailima, and the hospital. The program will commence in 2008 and be fully completed by the end of 2014. It includes (i) two stages of upgrading and underground cabling of the existing 6.9 kilometers (km) of the Hospital Feeder (1.1 km of which is currently underground), (ii) upgrading the capacity and underground cabling of the Vaitele Feeder, and (iii) underground cabling of a new 22 kV transmission line from the proposed Vaitele Substation to the wharf area and through the industrial area at Vailima to the airport. 13. The first stage of the Hospital Feeder upgrade will improve utilization of the Vaitele Feeder and reduce the load on the Hospital Feeder. Load-flow analysis show that the Hospital Feeder is currently experiencing overloads and voltage drops, and is increasingly becoming a bottleneck to reliable electricity supply both to Apia’s main commercial and government district and to the hospital. By 2011, overloading on this transmission line will be 30% and the voltage drops will have increased from 11% in 2006 to 20% by 2016, when the overloading will be about 70%. Losses are estimated to increase from 6% in 2006 to 11% by 2016. 14. Since the early 1990s, Samoa has experienced four serious cyclones. The two cyclones in the early 1990s caused damage estimated at $120 million (26% of GDP) and $200 million (46% of GDP). With global warming, the incidence and severity of cyclones can be expected to increase in the future. The 2004 cyclone caused damage to key infrastructure assets alone estimated at $25 million, excluding the cost to the power sector and impacts on economic activity. EPC estimated the cost of damage to power sector assets at $2.8 million in addition to a loss of 2.73% of total sales for 2004. 15. The difference in economic net present value costs for the underground cabling program versus overhead transmission lines is $4.04 million. Assuming that the costs of damage from a cyclone would amount to 25% of the investment cost in overhead transmission lines, it would take about two cyclone events for the underground program to become least cost. Cost saving associated with the longer economic life of underground cables, reduced operation and maintenance costs, and loss of economic production and activity, including the opportunity cost of self-generation caused by disruptions in power supply associated with cyclone damage, have been excluded from the analysis. Underground cabling of key transmission lines forms part of the Government’s national risk management strategy to improve resilience against natural hazards and climate change.

Appendix 12

67

D. Economic Analysis

16. As subprojects included under the investment plan are not stand-alone investments that yield benefits in isolation from other investments, the economic analysis was undertaken for EPC’s two power systems on Upolu and Savai’i using a time-slice approach. The analysis is conducted from 2008 to 2030 with an investment period from 2008 to 2015. The economic capital costs include investment costs and costs for project management and implementation, environment management and mitigation, and resettlement and land acquisition. It was assumed that the economic opportunity cost of land is 25% of the financial compensation. 17. The net economic benefits for the two power systems on Upolu and Savai’i were derived by comparing the performance of the power systems on Upolu and Savai’i under a with-investment plan scenario and a without-investment plan scenario. On Upolu, 97% of the capital cost for prepayment meters and 78% of the SCADA costs and project management and implementation were allocated to the system, with the remaining 3% of the capital cost for prepayment meters and 12% of SCADA costs and project management and implementation allocated to Savai’i. It was assumed that EPC staff costs (the second largest operation and maintenance cost after fuel) would remain the same under both the with-investment and without-investment scenarios. 18. In the absence of an investment plan on Upolu, the economic analysis assumes that EPC would serve demand from its existing generation capacity. Unserved demand initially represents deficits in peak capacity. The transmission system will become an increasing hindrance to power supply to consumers and system losses will increase until generation capacity reached its maximum output in 2017.��F

4 With increased system losses and growing demand, energy deficits will commence in 2013. Incremental benefits were valued at the willingness to pay, estimated at ST0.99 per kWh.��F

5 The economic internal rate of return (EIRR) for the investments on Upolu is estimated at 13.6%. Benefits which are difficult to quantify, such as those associated with the noise and emission control program at the Tanugamanono power station and with protection of transmission lines against climate change, have not been included in the analysis. The result is most sensitive to the estimated capital costs, followed by the assumptions of benefits. Capital cost increases of more than 14% would make the EIRR fall below 12%. A 20% reduction in benefits would reduce the EIRR to just below 12%. 19. The with-investment scenario on Savai’i would yield benefits associated with reduced fuel and operation and maintenance costs and an annual economic benefit of $45,000 in carbon-market credits associated with the reduced diesel usage resulting from the hydropower project. The without-investment scenario assumes that no new investments will take place on Savai’i. Demand would be met by the existing diesel power station at increased fuel and operation and maintenance costs. The calculations do not include benefits associated with reduction of noise and fumes from the existing power station at Salalologa. The analysis under the base-case fuel price (the equivalent of $60 per bbl) yields an EIRR of 10.7%. The result is most sensitive to changes in operation and maintenance costs followed by capital costs. If the international oil price over the period averaged $67 per bbl, the EIRR increases to 12%. A capital cost increase of more than 4% would reduce the EIRR to below 10%. The details of the economic analysis are in Supplementary Appendix I. 4 The existing overhead lines to main load centers in Apia would also remain vulnerable to cyclones. 5 The methodology for calculating the willingness to pay followed the approach outlined in ADB’s Economics and

Research Department Technical Note No.3, Measuring Willingness to Pay for Electricity. The estimated weighted average willingness to pay for domestic and nondomestic consumers is ST0.99 ($0.388) per kWh.

68 Appendix 12

E. Financial Analysis

20. The financial analysis was undertaken based on a comparison of the financial costs and benefits associated with the investment plan for the two separate power systems on Upolu and Savai’i. Financial benefits comprise (i) projected revenue based on tariff projections, (ii) load forecasts, and (iii) estimated carbon credits of $45,000 per year. The incremental financial costs comprise capital, operation and maintenance (including fuel), and system losses. Financial benefits and costs were discounted by the weighted average cost of capital (WACC), calculated at 4.5% (Table A12.3). The WACC is calculated in real terms for EPC’s investments for 2008–2015. The financing sources comprise EPC’s equity contributions (financed through retained earnings), the Government’s equity contributions (financed by the Government of Australia), and foreign exchange loans from the Asian Development Bank (ADB) and the Japan Bank for International Cooperation (JBIC) relent to EPC in local currency at an interest rate of 6.5%. The cost of EPC’s equity is estimated at 15.2% on the basis of a risk-free rate of 9.6% of New Zealand dollar denominated bonds issued by the Government of New Zealand, and adjusted for Samoa. Assumptions underlying the WACC computations include that EPC will not be required to pay tax, and an average domestic inflation of 3.6%.

Table A12.3: Weighted Average Cost of Capital Government

Relending of Loans Item ADB JBIC

Government and EPC Equity Total

Amount ($ million) 42 38 20 100 Weighting (%) 42.00 38.00 20.00 100 Nominal Cost (%) 6.50 6.50 15.20 Tax Rate (%) 0.00 0.00 0.00 Tax Adjusted Nominal Cost (%) 6.50 6.50 15.15 Inflation Rate (%) 3.58 3.58 3.58 Real Cost (%) 2.82 2.82 11.16 Weighted Average Cost of Capital (%) 1.18 1.07 2.23 4.48

ADB = Asian Development Bank, EPC = Electric Power Corporation, JBIC = Japan Bank for International Cooperation. Source: ADB estimates.

21. The financial net present values discounted at the WACC for the investment plan is ST44.1 million ($17.3 million) for the investments on Upolu and ST27.9 million ($10.9 million) for Savai’i. The financial rates of returns are 7.0% for Upolu and 12.1% for Savai’i. The financial result for Upolu is most sensitive to an increase in capital costs, followed by a reduction in benefits (sales). The investment plan would remain financially viable if capital cost increases do not exceed 31%. The financial result for Savai’i is most sensitive to changes in fuel prices, but the international oil price would need to drop to below $27 per bbl to undermine financial viability. The details of the financial analysis are in Supplementary Appendix J.

Appendix 13 69

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY A. Linkages to the Country Poverty Analysis

Is the sector identified as a national priority in country poverty analysis?

Yes

No

Is the sector identified as a national priority in country poverty partnership agreement?

Yes

No Contribution of the sector or subsector to reduce poverty in Samoa: Despite vulnerability to external shocks, the Independent State of Samoa has experienced stable economic growth over the last 5 years. Real gross domestic product grew at around 4% per annum, well above the average growth rate of the Pacific region economies. Economic growth is mainly driven by agriculture, construction, finance, and business services. Samoa is also benefiting from an increase in tourism. Further broadening of economic activity and private sector development are key strategies for sustaining economic growth rates and reducing poverty. The Government’s Strategy for the Development of Samoa 2005–2007 lays the foundation for sustainable and broad-based economic growth supported by continued reforms and private sector development to improve the quality of life for all people in Samoa. Ensuring that sufficient power is available to meet growing demand is essential to achieving a broader economic base and reducing the country’s vulnerability to external shocks. With the rural electrification program nearing completion, 95% of the population has access to electricity. Good performance of the power sector and reliable electricity services are vital for promoting private sector investments to diversify the economy and achieve sustainable economic growth. Electricity is also an intermediate input to the provision of basic social services, including health, education, and water supply. Inadequate and unreliable power supply is an increasing hindrance to economic growth and is affecting all consumers in Samoa. Poor people are disproportionately affected by poor reliability and quality of power supply, and by inefficiencies in the power sector.

B. Poverty Analysis Targeting Classification: General intervention What type of poverty analysis is needed? The 2002 Household Income Expenditure Survey shows that a high proportion of households use electricity as a main source of lighting. The average household consumption is 76 kilowatt-hours (kWh) per month and electricity expenditure accounts for about 4% of average household expenditure in Samoa. Affordability of appliances is the major determinant of electricity demand, and electricity consumption is strongly correlated with income. Poor people typically spend comparatively more on electricity but generally consume small amounts of electricity for basic lighting and an electric fan. Access to the electricity grid has had significant expenditure-reducing effects for poor households, and this has allowed them to become more energy efficient. However, with deteriorating quality and reliability of supply, the impact on poor households is disproportional as appliances need to be replaced more often. The Electric Power Corporation’s (EPC) investment plan includes prepayment meters for all consumers on Savai’i and Upolu. Prepayment meters allow households to be more aware of their electricity consumption and better manage their consumption to match income streams. EPC has so far installed 1,200 prepayment meters on Upolu and social acceptance is high. A rapid social assessment (RSA) was conducted within the Sili area on the south coast of Savai'i. Community participation through key respondent interviews and focus-group discussions in the project areas highlighted several major perceived sector issues. (i) Electricity is a major cost to most households in Savai'i. RSA survey data analysis showed that households on Savai'i allocate on average 10% of monthly income to purchase electricity. Of the residential households surveyed, 32% stated that they are unable to pay electricity bills on time due to household cash flow constraints, and 14% had had their electricity supply disconnected due to late payment. A number of households (16%) stated that their neighbors had opted not to reconnect the electricity supply as they are unable to pay their monthly electricity bills. (ii) The majority of residential and commercial consumers (67%) rated the quality of EPC’s services as good, 31% rated EPC's service as average, and 2% were dissatisfied. Survey respondents expressed concern over the growing frequency of electricity supply interruptions and 84% stated that the quality of electricity services on Savai'i needs to improve. During the second half of 2006, there were 32 power supply interruptions which lasted for an average of 40 minutes each. (iii) About 97.3% of the RSA respondents agreed that electricity is important to households and businesses because of the benefits provided by electricity and its contribution to the maintenance of peace and order in the villages through the provision of street lighting. Most households surveyed (74%) stated that they were unwilling to pay high electricity tariffs for improved electricity services. (iv) Perceived benefits of the electrical services include (a) prolonging the study time of school children, (b) savings on expenses and making household chores convenient, (c) enjoyment in watching television programs or listening to radio programs, and (d) enhancement of skills which are dependent on electricity, such as refrigeration and electronic repairs and steel fabrication.

70 Appendix 13

C. Participation Process

Is there a stakeholder analysis? Yes No A stakeholder analysis was prepared as part of the community and household consultations for the Vaita'i Hydropower Subproject. A physical scale model was displayed to the communities and used to explain the impacts of the Vaita'i hydropower project during a series of community meetings undertaken in March 2007. A project information booklet was provided in the Samoan language to ensure that the impacts of the project could be clearly understood. Separate consultations were also undertaken with women. In general, affected people responded positively to the project but consensus has not been reached. Therefore, the project is postponed until 2013 or until such time as the communities accept the project. Until acceptable renewable generation sources can be developed on Savai’i, the people of Savai’i will have access to electricity supplied from the existing diesel power station at Salalologa. EPC’s investment plan includes a control system and a power factor improvement project for the power system on Savai’i. This is expected to lead to improvements in quality and reliability of electricity supply provided that existing diesel generators are operated and maintained adequately. Candidate subprojects will require community acceptance prior to implementation. An environmental and social unit will be formed within EPC and will operate within the project management unit. The environmental and social unit will be responsible for stakeholder consultations and manage project environmental, land acquisition, and resettlement activities. Project information booklets will be prepared for each candidate subproject and disclosed to affected people in the wider community. Further stakeholder analysis will be undertaken as part of the power sector reform in order to fully understand and take into account the views, interests, and impacts on all stakeholder groups. This analysis will be supported through the technical assistance (TA) cluster for Implementing the Samoa National Energy Policy. Is there a participation strategy? Yes No The participation strategy outlining the community consultation and participation framework for the Power Sector Expansion Project is included in the land acquisition and resettlement framework. EPC consults with landowners prior to land acquisition. Representatives from EPC inform the affected parties, in advance, of EPC’s intention to acquire land and compensation matters. Further consultations take place during and after detailed design and prior to the preparation of a full census of affected people and inventory of losses. The subproject land acquisition and resettlement plans will be made available to affected people. The objectives of the subproject, the amount of land required, compensation entitlements, and grievance redress mechanisms will be disclosed to affected people in the local language. The TA cluster for Implementing the Samoa National Energy Policy incorporates the preparation and implementation of stakeholder participation and consultations into the reform process and awareness-building for development of renewables. D. Gender Development Strategy to maximize impacts on women: Currently, no specific adverse impacts to women are foreseen. The development of subprojects involves community consultations and EPC will actively encourage representation by women at all public meetings to ensure that women (i) fully understand the subproject and its benefits, (ii) become involved in collective decision making, and (iii) raise the issues and concerns affecting them in respect to the subproject and identify suitable mitigation measures to address concerns. Social investigations show that poor and vulnerable groups are adequately catered for within traditional Samoan society and will receive an equitable share of any compensation. No specific remedial actions are thought necessary. Has an output been prepared? Yes No: No Adverse gender impacts are foreseen.

Appendix 13 71

E. Social Safeguards and Other Social Risks Item

Significant/

Not Significant/ None

Strategy to Address Issues

Plan Required

Resettlement

Significant

Not significant

None

Land acquisition for the Project will generally involve fallow agricultural lands. For the core subprojects, no land acquisition or resettlement effects are anticipated. Future subprojects may have resettlement impacts. Procedures for land acquisition are included in the land acquisition and resettlement framework prepared for the Project.

Full

Short

None

Affordability

Significant

Not significant

None

The Project will contribute to the Government’s objective of providing a reliable and secure electricity supply at cost-effective prices. More frequent and timely tariff adjustments will be required to ensure that project benefits are sustainable.

Yes

No

Labor

Significant

Not significant

None

Short-term employment opportunities may be generated during the construction phase of the Project. Longer-term employment opportunities, particularly in the service sector, could also be generated by commercial and industrial development resulting from more reliable power supply.

Yes

No

Indigenous Peoples

Significant

Not significant

None

The project is not envisaged to have any impacts on indigenous people.

Yes

No

Other Risks and/or Vulnerabilities

Significant

Not significant

None

No other social project risks beyond land acquisition were identified. Community acceptance will be required for all subprojects financed by ADB grant and loan, JBIC loan, and Government of Australia grant. The stakeholder communication strategy will identify and propose remedies to social risks related to power sector reforms.

Yes

No