Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: PAD651

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED GRANT

IN THE AMOUNT OF SDR 13 MILLION(US$20 MILLION EQUIVALENT)

TO THE

REPUBLIC OF YEMEN

FOR THE

MOCHA WIND PARK PROJECT

February 11, 2014

Middle East and North Africa RegionSustainable Development Department

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed without WorldBank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective December 31, 2013)

Currency Unit = Yemeni Riyal (YR)US$1 = YR 215

US$1.54 = SDR 1

FISCAL YEARJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMS

AfD French Agency for Development (Agence Franqaise de D6veloppement)AFSED Arab Fund for Socio-Economic DevelopmentAMF Arab Monetary FundCAS Country Assistance StrategyCBY Central Bank of YemenCCGT Combined Cycle Gas TurbineCDM Carbon Development MechanismCERs Carbon Emissions ReductionsCFE Carbon Fund for EuropeCOCA Central Organization for Controls and AuditDOE Designated Operational EntityEIRR Economic Internal Rate of ReturnESIA Environmental and Social Impact AssessmentFM Financial ManagementGDP Gross Domestic ProductGEF Global Environment FacilityGNR Government of National ReconciliationGOY Govemment of YemenGWh Gigawatt hoursHFO Heavy fuel oilICB International CompetitiveBiddingIDA International Development AssociationIFAD International Fund for Agricultural DevelopmentIFR Interim Financial ReportIPF Investment Project FinancingISDB Islamic Development BankISN Interim Strategy NoteLNG Liquified Natural GasMAF Mutual Accountability FrameworkMENA Middle East and North Africa regionMOEE Ministry of Electricity and EnergyMOF Ministry of FinanceNPV Net Present ValueOFID OPEC Fund for International DevelopmentPEC Public Electricity CorporationPMU Project Management UnitPPP Private-Public Partnership

1

PSP Power Sector ProjectRAP Resettlement Action PlanREAP Rural Energy Access ProjectRPF Resettlement Policy FrameworkSPC Special Purpose CompanyTA Technical AssistanceTCF Trillion cubic feetTPSD Transitional Program for Stabilization and DevelopmentWTP Willingness to PayYR Yemeni Riyal

Regional Vice President: Inger AndersenCountry Director: Hartwig Schafer

Sector Director: Junaid Kamal AhmadSector Manager: Charles Joseph Cormier

Task Team Leader: Jianping Zhao

H1

REPUBLIC OF YEMEN

MOCHA WIND PARK PROJECT

Table of Contents

I. Strategic Context....................................................1A. Country Context................. .................................... 1

B. Sectoral and Institutional Context .................. 2..... ............. 2

C. Higher Level Objectives to which the Project Contributes .......... 5......5

II. Project Development Objective ................. 7....... ................. 7A. Project Beneficiaries ..................................... ........ 7

B. PDO Level Results Indicators ................... 7..... ............. 7

III. Project Description...................................................7A. Project components.............................................7

B. Project Financing...............................................8

C. Lessons Learned and Reflected in the Project Design ................ 9

IV. Implementation .................................................... 11A. Institutional and Implementation Arrangements ......................... 11

B. Results Monitoring and Evaluation.................. ................ 12

C. Sustainability ................................................. 12

V. Key Risks and Mitigation Measures......................................13VI. Appraisal Summary.................................................14

A. Economic and Financial Analysis...................................14

B. Technical.................................................... 15

C. Financial Management.......................................... 16

D. Procurement.................................................. 17

E. Social...................................................... 17

F. Environment................................................. 18

Annex 1: Results Framework and Monitoring..................................21Annex 2: Detailed Project Description........................................ 24Annex 3: Implementation Arrangements...................................... 27Annex 4 Operational Risk Assessment Framework (ORAF).........................40Annex 5: Implementation Support Plan....................................... 43Annex 6: Economic and Financial Analysis ................... 16.... ........... 46Assumptions for Financial Analysis.................................. ....... 50

iii

PAD DATA SHEET

Yemen, Republic of

Mocha Wind Park Project (P1 46055)

PROJECT APPRAISAL DOCUMENT

MIDDLE EAST AND NORTH AFRICA

MNSEE

Report No.: PAD651

Basic Information

Project ID EA Category Team Leader

P146055 B - Partial Assessment Jianping Zhao

Lending Instrument Fragile and/or Capacity Constraints [ ]Investment Project Financing Financial Intermediaries [ ]

Series of Projects [ ]

Project Implementation Start Date Project Implementation End Date

07-March-2014 30-Jun-2019

Expected Effectiveness Date Expected Closing Date

01-May-2014 30-Jun-2019

Joint IFC

No

Sector Manager Sector Director Country Director Regional Vice President

Charles Joseph Cormier Junaid Kamal Ahmad Hartwig Schafer Inger Andersen

Borrower: Ministry of Planning and International Cooperation

Responsible Agency: Ministry of Electricity and Energy

Contact: Dr. Saleh Hassan Sumai Title: Minister

Telephone 967-1-326191 Email:No.:

Project Financing Data(in USD Million)

] Loan [ ] Grant [ ] Guarantee

[] Credit [X] IDA Grant [ ] Other

Total Project Cost: 144.00 Total Bank Financing: 20.00

Financing Gap: 0.00

1

Financing Source Amount

BORROWER/RECIPIENT 19.00

IDA Grant 20.00

Arab Fund for Economic and Social Development (AFESI) 65.00

OPEC Fund for International Development (OFID 20.00

Saudi Arabia: Saudi Fund for Development (SFD) 20.00

Total 144.00

Expected Disbursements (in USD Million)

Fiscal Year 2015 2016 2017 2018 2019

Annual 2.20 2.00 12.60 2.20 1.00

Cumulative 2.20 4.20 16.80 19.00 20.00

Proposed Development Objective(s)

The development objective of the Project is to increase the supply of cost-effective renewable windelectricity.

Components

Component Name Cost (USD Millions)

Physical Investment 18.00

Consulting Services and Market Development 2.00

Institutional Data

Sector Board

Energy and Mining

Sectors / Climate Change

Sector (Maximum 5 and total % must equal 100)

Major Sector Sector % Adaptation MitigationCo-benefits % Co-benefits %

Energy and mining Other Renewable Energy 100

Total 100

ZI certify that there is no Adaptation and Mitigation Climate Change Co-benefits information

applicable to this project.

Themes

Theme (Maximum 5 and total % must equal 100)

Major theme Theme %

Financial and private sector development Infrastructure services for private sector 50development

ii

Environment and natural resources Climate change 50management

Total 100

Compliance

Policy

Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [X]

Does the project require any waivers of Bank policies? Yes [ ] No [X]

Have these been approved by Bank management? Yes [ ] No [X]

Is approval for any policy waiver sought from the Board? Yes [ ] No [X]

Does the project meet the Regional criteria for readiness for implementation? Yes [X] No [ ]

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 X

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waterways OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X

Legal Covenants

Name Recurrent Due Date Frequency

Schedule 2, Section 1.2 (a) No 30 months after N/Aeffectiveness

Schedule 2, Section 1.2 (b) 36 months aftereffectiveness

Description of Covenant(a) The Recipient has established and operationalized the Special Purpose Company no later than 30

months after the effective date, ensuring independent ownership and operation of the WindFarm.

(b) The Special Purpose Company and the Public Electricity Corporation have not later than 36months after the effective date executed and delivered a power purchase agreement in form andsubstance satisfactory to the Association.

111

Conditions

Name Type

Article V, 5.01 Effectiveness

Description of Condition

The respective Co-financing Agreements have been executed and delivered and all conditionsprecedent to the effectiveness of each Co-financing Agreement or to the right of the Recipientto make withdrawals under any Co-financing Agreement (other than the effectiveness of theAgreement) have been fulfilled.

Team Composition

Bank Staff

Name Title Specialization Unit

Banu Setlur Senior Environmental Environmental Specialist MNSEESpecialist

Sydnella E. Kpundeh Senior Program Program Assistant ECSSDAssistant

Chaogang Wang Senior Social Senior Social MNSSUDevelopment Specialist Development Specialist

Hayat Taleb Al-Harazi Program Officer Program Officer MNARS

Edith Ruguru Mwenda Senior Counsel Senior Counsel LEGAM

Maria Florencia Liporaci Senior Program Senior Program MNSSDAssistant Assistant

Maiada Mahmoud Abdel Finance Officer Finance Officer CTRLAFattah Kassem

Andrianirina Michel Eric Finance Officer Finance Officer CTRLARanjeva

Jamal Abdulla Abdulaziz Senior Procurement Senior Procurement MNAPCSpecialist Specialist

Nagwan Ahmed Sharhan Program Assistant Program Assistant MNCYE

Moad M. Alrubaidi Sr Financial Financial Management MNAFM

Management Specialist Specialist

Non Bank Staff

Name Title Office Phone City

Locations

Country First Location Planned Actual CommentsAdministrativeDivision

iv

I. Strategic Context

A. Country Context

1. Yemen experienced far-reaching political unrest from February to November 2011,impacting an already fragile economic and social landscape. The economy contracted by 10.5percent in 2011 from a growth of 7.7 percent in 2010. The turmoil, combined with fuelshortage and high commodity prices forced many into poverty. The number of people livingbelow the poverty line increased by an estimated 12 percentage points in the two years of2011 and 2012.1 Even prior to this latest crisis, Yemen was already one of the poorestcountries in the world. The country has a Gross Domestic Product (GDP) per capita ofUS$1,160 (2010) compared with an average US$2,321 for lower middle-income countriesand US$3,597 for the Middle East and North Africa (MENA) region. The population livingbelow the national poverty line was 35 percent in 2005/2006, increasing to 54.5 percent bythe end of 2011 with poverty more widespread and persistent in rural areas.2

2. Following a power transfer agreement, President Ali Abdullah Saleh stepped downafter 33 years. A transition Government of National Reconciliation (GNR) was formed inearly December 2011, elections took place in February 2012, and Mr. AbdoRabbo MansoorHadi assumed office as the new President. The GNR is in the process of undertakingconstitutional reforms, preparing for the next general election, and working to stabilize thecountry's complex security and economic situation. In addition, the GNR has to respond topressing social demand for better governance, equity, employment, and a more open society.

3. The transition is confronted with long-standing economic, political, and structuralchallenges. Currently, around 70 percent of those employed work in the informal sector withlow productivity, and most of those formally employed work for the government, orgovernment dependent entities. Economic and fiscal opportunities are impeded because asignificant part of Yemen's industrial assets or economic activities is partially or fully stateowned, including power sector assets.

4. The economy has started to recover, but remains weak. GDP is reported to haveregistered a slight growth in 2012, inflation decelerated substantially from 23 percent in 2011to 5.5 percent in 2012, and the current account deficit narrowed in 2012 to about 3 percent ofGDP compared to 4 percent in 2011. The Yemeni Riyal (YR) exchange rate came underhigh pressure in 2011 leading the Central Bank of Yemen (CBY) to adopt a number ofpolicies and measures that included the reduction of its foreign reserves in response to thebasic commodity import bill. However, since early 2012, the exchange rate has stabilized ataround 214 YR/US$.

5. At the donor conference in Riyadh in September 2012, the international communitycommitted to support Yemen in its recovery. Donor countries and agencies (Kingdom ofSaudi Arabia, United States of America, Germany, United Kingdom, Netherlands,Switzerland, France, Spain, Arab Fund, Arab Monetary Fund (AMF), the World Bank, the

1 Joint Social and Economic Assessment, World Bank, UN, EU, Islamic Development Bank, and MOPIC, 20122 Ibid.

1

European Union (EU), Islamic Development Bank (ISDB), OPEC Fund for InternationalDevelopment (OFID), and International Fund for Agricultural Development (IFAD)) pledgedUS$6.372 billion towards the priorities of the Transitional Program for Stabilization andDevelopment (TPSD). The subsequent Mutual Accountability Framework (MAF) committedboth the GNR and donors to a set of specific actions towards recovery and growth.

6. Overall, the macroeconomic outlook during the transitional period 2013-14 willdepend on a number of factors, in particular political and security uncertainties, and globaleconomic growth. Yemen's economic growth is forecasted to be at around 4.4 percent for2013.3 The fiscal outlook for 2014 remains weak as increasing revenues depends on therestoration of hydrocarbon production, and the implementation of various reforms such as theincrease in investment expenditures which is expected to be co-funded from the donorconference pledges.

7. Visible progress, such as increased accountability and transparency in government,civil society participation, and private sector development, will be important to boost theconfidence in Yemen's economy over the next several years. Furthermore, efforts to improveservice delivery will be important to empower individuals and communities so that they cantake decisive steps for the betterment of their lives. Restoring and improving electricityservice delivery features a key consideration in the MAF and GNR's efforts as it: (i)produces quick wins, where tangible results are felt by the public in the short-term; and (ii)provides a critical venue for private sector investment and growth which is the key to jobcreation and economic stabilization.

B. Sectoral and Institutional Context

8. Yemen is the least electrified country in MENA. Despite the rapid growth inelectricity supply for the decade prior to the 2011 crisis, Yemen remains an energy poorcountry with installed capacity at about 1,200 MW in 2010 and about half of the populationwith no access to electricity (75 percent in rural areas). Per capita electricity consumptionwas only 190 kWh in 2009, compared to a MENA average of 1,418 kWh and a worldaverage of 2,751 kWh.

9. Until 2009, all electricity was generated through the combustion of heavy fuel oil(HFO) and diesel, when the first gas-fired Marib I power plant was commissioned. In 2010,HFO and diesel fired-power plants accounted for about 70 percent of grid-connectedgeneration. In addition, there are millions of small diesel units owned by industry,commercial establishments and households to combat the frequent blackouts of the lack ofaccess to the grid-connected electricity. The key feature of the HFO/diesel dominated powergeneration systems is the associated high electricity costs and heavy pollution. Despite anaverage consumer tariff of about US$8 cent/kWh, which is higher than the consumer pricesin most MENA countries, it covers only about 25 percent of the economic cost of supply.Therefore, diversification of energy supply and gradually shifting to a less costly generationmix is vital to the long-term sustainable development of the energy sector. Several studies todetermine the least cost generation expansion plan were carried out and the generally

The 2013 growth estimate is subject to the resumption of all oil revenues, (IMF, December 2012).

2

accepted conclusion is that gas-based Combined Cycle Gas Turbine (CCGT) using locallyproduced natural gas is the most cost effective option. The government developed a longterm vision for the power sector to ensure sustainable sector development in 2008. A keyelement of the strategy was to implement a gas-to power policy to significantly lower thecost of electricity generation and thus reduce government fuel subsidies.

10. However, to determine the scale and time frame of the gas-to-power program, theavailability of natural gas both in amount and timing is required. As of 2011, certified gasreserves were reported to be 10.2 trillion cubic feet (tcf), of which about 9.2 tcf have beencommitted for exports as Liquefied Natural Gas (LNG). The Government has allocated 1 tcfof certified gas reserves for power generation. The amount is only sufficient to support theoperations of the Marib I power plant at an 80 percent capacity factor over 25 years. Whilethere are other proven gas reserves which have not yet been certified, the total currentuncommitted reserves are reported to be only sufficient to support Marib I, as well as MaribII, currently under construction. This would support generation capacity of 1,000 MW for 20years. This is far from sufficient to meet the required fuel demand for the required expansionof generation capacity.

11. Renewable energy can play an important role in resolving the country's energysupply constraints. Through a Global Environmental Facility (GEF) grant implemented bythe World Bank, the Rural Energy and Renewable Energy Development Project carried out adetailed assessment of the potential of renewable energy resources in Yemen that could beexploited for grid and off-grid electrification. Resources assessed include wind, solar,geothermal, small hydropower and biomass. These resources have the potential to sustainlarge-scale commercial power development as well as small-scale decentralized systems tomeet the energy needs of rural and remote communities. The studies indicated that almostall renewable technologies have lower dynamic unit cost than diesel power generation. Thegreatest potential for grid-connected power supply lies with wind power which accounts forabout 60 percent of the total renewable potential. Grid-connected onshore wind power is alsothe least cost renewable energy option. While solar energy has huge potential, it is currentlyonly economically competitive for off-grid Photovoltaic (PV) installations in remote areas inYemen.

12. Prior to the political crisis, the Government made some headway in pursuing windbased generation. Despite the Government's ambitious wind development program anddevoted efforts, achieving results on the ground is complex and timely, as evidenced in anumber of developed and developing countries. There exist a large number of institutional,regulatory, financial and technical barriers to wind power development, particularly in theinitial stages of the process. The development and implementation of the first 60 MW windpower at Mocha will seek to address these barriers with extensive support from donors anddevelopers, and will be the basis for further expansion of wind power generation in Yemen.

13. The impact of the 2011 crisis was strongly felt in the power sector. Power supplieswere cut in half, and the financially frail energy sector was further weakened. Transmissionlines were damaged, and a lack of fuel seriously disrupted the operation of most powerplants. The decline in service coupled with social instability resulted in a significant increase

3

in electricity theft and a decrease in the collection rate. The conflict put most constructionactivities on hold. The precarious financial position of the power sector further deteriorated.The disruption also delayed the implementation of ongoing and planned power generation,transmission and distribution projects, impacting the power supply situation over the comingyears. In a business as usual scenario, consumers with access will continue to suffer fromfrequent and long hours of power shedding and new connections would have to bepostponed.

14. In response, the transition government acted quickly to restore electricity supplyservices by repairing and rehabilitating damaged power generation and delivery facilities. Italso resorted to using the fast-track but most expensive option of power supply - small rentaldiesel units. While increasing reliance on rental diesel units helped to quickly increaseelectricity supply to meet public expectations, it has devastating impacts on the sector'sfinancial viability and the Government's fiscal sustainability. In 2012, the state-owned PublicElectricity Corporation's (PEC) financial losses more than doubled and the Government'sfuel subsidy amounted to about US$3 billion, of which about 50 percent went to the powersector.

15. It is therefore paramount that the Government refocuses its efforts on addinggeneration capacity with power projects which are part of the least cost generation mix, inaddition to the policy reforms currently under consideration. Despite the long lead timesrequired for the commissioning of power projects, such a strategy will help the sector movetowards securing long-term supply and improving financial sustainability in the longer term.

Rationale for Bank's Involvement

16. The Bank has been an important development partner in the energy sector in Yemen.During the three-year period prior to the political crisis in early 2011, the Bank assisted theGovernment to undertake several activities to identify the key issues and challenges in theenergy sector, and to propose actions needed to move the sector towards fiscal sustainability.The key activities included: (i) an independent review of the legal, contractual, fiscal, andlicensing terms and procedures associated with upstream oil and gas activities; (ii) ananalysis of the potential options and distribution analysis for a possible energy subsidyreform, along with a potential roadmap; (iii) an analysis of options and recommendations onan investment program on gas-to-power and the related market structures necessary to ensureeconomic benefits of such a program; (iv) an analysis of power sector issues and proposedreform strategy to ensure sustainability; and (v) an analysis of wind energy potential andrecommendations of actions needed to implement a wind power development program. Eachof these activities addressed specific sub-sector issues, however, there has been limitedprogress by the Government of Yemen (GoY) in implementing some of therecommendations in large part due to the financial crisis.

17. A further and more important consideration is that the economic, social and politicallandscape in the country has changed dramatically since the political crisis in early 2011. Ithas become imperative to develop a well-coordinated energy sector strategy, whichencompasses all the key segments of the energy sector, fully reflects the new landscape of the

4

country and is endorsed by the social and political groups of the new society. At the requestof the Government, the Bank is currently assisting with the preparation and implementationof a comprehensive energy strategy. The Bank also seeks to work with other donors tosupport strategic investments in the energy sector that will ensure the supply of low costenergy and long term financial viability of the sector. Since 2006, the Bank has supportedtwo lending projects in the power sector; the Power Sector Project (P086865) (PSP) toincrease generation efficiency, strengthen the transmission and distribution system andpromote financial viability; and the Rural Energy Access Project (P092211) (REAP) toextend electricity access to rural households and promote new models of rural electrification.Both projects have experienced implementation delays, partly because of design andimplementation issues, and partly because of the political crisis in the country. Many lessonsand experiences from these projects were incorporated in the design and preparation of theproposed project.

18. The Mocha Wind Power Project would be the first wind power project to bedeveloped and implemented in Yemen, and will represent 5 percent of the installed capacityin the country. Its implementation success will have a huge demonstration impact on thefuture development of the wind power industry. Although wind power technology is verymature internationally, it is completely new in Yemen and experience has shown thatinternational expertise is invaluable when this technology is first introduced in a country.Technical assistance was provided to prepare a wind resource measurement, the feasibilitystudy, and the environmental and social impact assessment, which has helped mobilizeUS$122 million in co-financing from three other donors: the Arab Fund for Socio-EconomicDevelopment (AFSED), OFID and the Saudi Fund. The continued involvement of the Bankin the implementation stage is considered critical by both the Government and the otherfinanciers.

19. The Bank's comparative advantage includes its technical expertise and experience insupporting similar projects in other countries in particular with regard to the procurement,installation, commissioning and maintenance of turbines consistent with best internationalpractice and standards. The GOY and the co-financiers have very limited experience in thearea of wind power procurement, construction and operation. In addition, the Bank hassignificant experience in building of commercially independent power generation companiesgovernance structures and commercial arrangements to ensure transparency andaccountability. Finally the Bank has experience to support the technical assistancecomponent, which includes a long term wind measurement program, preliminaryenvironmental and social impact assessments, and capacity building activities, which wouldhelp lay a solid foundation for Yemen to scale up its wind power development either throughprivate financing or public-private partnerships.

C. Higher Level Objectives to which the Project Contributes

20. The overriding objective of the World Bank Group's Interim Strategy Note(ISN)(Report 70943-YE) for FY2013-2014 discussed by the Board of Executive Directors inNovember 2012 is to "help the Government produce tangible results that stabilize thetransition in the short-term, while laying the groundwork for medium-term reforms and

5

sustainable longer-term benefits". The ISN proposes to support this objective across threestrategic pillars: (i) achieving quick wins and protecting the poor by creating short-term jobs,restoring basic services, improving access to social safety nets, and revitalizing livelihoods;(ii) promoting growth and improving economic management by helping maintain macrostability, strengthening fiscal policies and public financial management, and improving theenabling environment for private sector growth and competitiveness; and (iii) enhancinggovernance and local service delivery by supporting transparency, accountability, capacitybuilding, institutional strengthening, and improved citizen engagement.

21. This project directly contributes to pillar (ii) by piloting the generation and provisionof low cost renewable electricity which first and foremost contributes to promoting growththrough the creation of an enabling environment for private investment, and improvingeconomic management through reducing the need for energy subsidy. Numerous studies bythe Bank and other agencies and practical experiences from the Bank's client countriesdemonstrate that affordable, reliable and sustainable energy supply is a critical element of anenabling environment for private sector growth and competitiveness. The project alsoindirectly supports pillar (iii)by supporting increased transparency and accountability in theflow of funds within the power sector through the design of the project, namely the creationof a commercially independent power generation company. Finally, the project is alignedwith MENA's Regional Strategy supporting the pillar of Growth.

22. The project is in line with MAF which contributes towards the overarching goals setout by the GOY to restore political, security and economic stability and enhance statebuilding. The project directly contributes to one of the pillars underpinning MAF: pillar (iv)increase effectiveness of key service sectors, and partnering with the private sector in PublicPrivate Partnership (PPP). It also indirectly contributes to other pillars including pillar (ii)create employment opportunities and pillar (iii) promote good governance and rule of law. Arecent survey (Enterprise Survey) of tens of thousands of firms indicates that more firmscited electricity as a major constraint to do business, a key element for job creation, than anyother factor. The project is therefore expected to contribute to the national developmentpriorities outlined in the MAF to facilitate Yemen's progress towards economic stability andprosperity.

23. At a higher level, the project will contribute to laying the groundwork for sustainablelong-term benefits as the low cost electricity to be generated by renewable energy will helpspur economic growth and reduce energy subsidy by Government. Moreover, the project willdemonstrate the feasibility of wind power development in Yemen and will test the appetite ofprivate investors to engage in the energy sector through a public-private partnership or awholly-owned private investment. The project is aligned with the World Bank Group's twingoals as in the long term, the project will contribute to the development and supply ofaffordable and sustainable energy which is needed to end extreme poverty and promoteshared prosperity.

6

II. Project Development Objective

24. The project development objective (PDO) is to increase the supply of cost-effectiverenewable wind electricity.

A. Project Beneficiaries

25. The primary project beneficiaries are the existing and potential electricity consumersin Yemen who will have increased access to power supply to meet their current and growingdemands. The additional electricity generated will improve the reliability of electricityservice for already connected consumers and provide electricity access to new consumers.Although the project will benefit the general public which consists of 50% of men and 50%of women, women are likely to benefit more as women are often engaged in household workand home production activities. The access to electricity will improve the conditions forhousehold work and reduce the need for labor work. Access to electricity creates jobopportunities, often in low-skill or informal sector, in industries that favor female workers.Children could also benefit more as study conditions both at home and school are improvedand more advanced healthcare equipment are made available. The GoY will also benefit frombeing able to limit the growth in the subsidies that it pays to Public Electricity Corporation(PEC) for electricity generated using HFO and diesel or purchased from private rental power.

B. PDO Level Results Indicators

26. Achievement of the development objective will be assessed based on: (i) renewableenergy capacity (wind) constructed; (ii) electricity generated from wind power; (iii)economic competitiveness of electricity generated from wind power; and (iv) the number ofdirect project beneficiaries. other performance indicators include the capital cost and theavailability of the wind farm. A detailed results framework is presented in Annex 1.

III. Project Description

A. Project components

27. The proposed Project will consist of the following components:

28. Component 1 - Physical Investment (US$121 million, of which IDA US$18million): The proposed component will support the construction of a wind farm at Mocha ofapproximately 60 MW generation capacity. The wind farm will be connected to an existingsubstation through a new 132 kV transmission line of about 2.5 km. The substation is part ofthe national grid which is owned and operated by PEC. The wind farm will be implementedby a Supply and Installation contractor. The selection of the contractor will be based onInternational Competitive Bidding (ICB) process. The unit size and number of wind turbineswill be determined during the procurement of the Supply and Installation contractor. Thecontractor will be retained to provide full services for the wind farm for at least three years.This component will initially be implemented by a Project Management Unit (PMU)established under the Ministry of Electricity and Energy (MOEE). A Special Purpose

7

Company (SPC) will be created as a wholly government owned entity to own and operate thewind farm before it is completed and is operational. The precise form of the SPC and thetiming of its creation are being investigated. An international engineering firm is beingemployed to assist with the procurement process of the Supply and Installation contactor andwith supervision during the construction stage.

29. Component 2 -Consulting Services and Market Development (US$7.0 million, ofwhich IDA US$2 million): The proposed component consists of the following sub-components: (i) an international engineering consulting firm employed to assist the PMU inthe procurement and contracting of the supply and installation contractor and in theconstruction supervision of the project throughout the construction phase and the initialoperation stage; (ii) an international consulting firm employed to assist MOEE to designtendering procedures and documents for competitive procurement of PPP wind projects andto assist MOEE with the tendering process; (iii) advisory service for SPC which wouldoperate commercially with clear contractual arrangement with the electricity off-taker; (iv)advisory service and instruments for the implementation of regional long-term windmeasurement program in three to five wind development zones; (v) consulting service forpreliminary environmental and social impact assessments, grid connection planning forpromising wind sites; and (vi) other consulting services as needed and capacity buildingactivities, including external audit fees.

30. The Ministry of Electricity and Energy is taking into consideration CleanDevelopment Mechanism (CDM) under the Kyoto Protocol, to provide additional financialsources. The MOEE intends to enter into an agreement with the World Bank to develop aCDM operation and sell part of the Certified Emission Reductions (CERs) resulting from theoperation of Mocha Wind project to the Carbon Funds managed by the World Bank. Theannual amount of CERs to be purchased by the Bank acting as Trustee and the time periodfor the purchase are yet to be discussed and agreed to. The price of the CERs will bedetermined based on the prevailing price of carbon at the time of agreement signing. In casethe Bank is no longer in the position to purchase the CERs for the Carbon Funds it manages,the recipient will look for alternative buyers in the open market.

31. Payments of CER revenues will be made annually subject to verification by anindependent Designated Operational Entity (DOE) accredited by the CDM Executive Boardestablished under the Kyoto Protocol. The World Bank's Carbon Finance Unit will supportMOEE financially and technically in project registration, verification and certification ofCERs generated by the project.

B. Project Financing

32. IDA funds to be provided for the proposed project will be in the form of anInvestment Project Financing (IPF), which will be made available to the GoY as a grant. TheIDA fund will initially be passed on to MOEE which will prepare and implement the newfacility. An SPC will be created to own and operate the wind farm. The grant will be onlentby the Government to the SPC at terms and conditions acceptable to IDA once the SPC iscreated.

8

Project Cost and Financing

33. The total estimated project cost, including physical and price contingencies andinterest during construction is US$144 million, including taxes and duties. IDA will providea grant of US$20 million equivalent. Additional financing support for the project will beprovided by AFSED, OFID, and the Saudi Fund. The GoY will provide the remaining fundsfrom its own resources.

Table 1: Cost by Local and Foreign

Local Foreign Total ProjectProject Components ($m) ($m) Cost ($m)1. Physical Investment 17.10 96.90 114.00

2. Consulting services & 0.00 6.90 6.90market development

1. Operating costs 1.00 1.00

2. Taxes and Duties 16.00 16.00

5. Contingency 0.90 5.20 6.10

Total 35.00 109.00 144.00

Table 2: Project Cost Allocation by Financiers

Project Components IDA AFSED OFID GOY Saudi Fund Total Project Cost

USS m % of Total US$ m % of Total US$ m % of Total US$ m % of Total US$ m % of Total US$ m % of Total

1. Physical investment 17.00 15% 59.00 52% 19.00 17% 0.00 0% 19.00 17% 114.00 79%

2. Consulting services &capacity building 1.90 28% 5.00 72% 0.00 0% 0.00 0% 0.00 0% 6.90 5%

Contingency 1.10 15% 1.00 14% 1.00 14% 3.00 42% 1.00 14% 7.10 5%

Taxes and Duties 0.00 0% 0.00 0% 0.00 0% 16.00 100% 0.00 0% 16.00 11%

Total 20.00 14% 65.00 45% 20.00 14% 19.00 13% 20.00 14% 144.00 100%

C. Lessons Learned and Reflected in the Project Design

34. The proposed project is the third Bank-financed energy sector operation in Yemensince 2006, and the first wind power project in the country. As such, the project design hasbenefitted from lessons learnt from Bank projects in Yemen in the energy and other sectors,and similar wind projects financed by the Bank in other countries. The two energy projects,

9

both under implementation, are facing implementation difficulties and the lessons derivedfrom the implementation experiences gained from these projects is presented below.

35. Procurement Delays. The PSP was restructured due to implementation delays,among other issues, arising mainly from the late start and prolonged procurement processingof three large contracts which account for more than 70 percent of the total project cost.Based on this experience, the procurement process of the supply and installation contractorunder the proposed project, which accounts for more than 90 percent of the project cost, hasalready commenced. It is expected that the bidding process would have been launched by thetime the project is presented to the Board for approval. In addition, the roles andresponsibilities of the various government agencies in the procurement process were notclearly defined and streamlined. The roles and responsibilities of the various governmentagencies related to procurement of the proposed project have been streamlined so that thePMU, assisted by international consultant, will be fully responsible for the procurementactivities. The Government will only review to ensure that government rules and proceduresare followed.

36. Delays in Employing International Consultants and Implementing TechnicalAssistance (TA) Activities. Both the PSP and the REAP suffered significant delays instarting project implementation due to the prolonged process of procuring and mobilizinginternational consultants which were required to assist the PMU in the preparation of biddocuments and the conducting of the bidding process for the major supply and installationpackages. The procurement of such consultants was normally launched after Board approvalor even grant/credit effectiveness. Based on this experience, the bid document for the mainpackage for the proposed project was prepared with the assistance of an internationalconsultant funded by Agence Franqaise de D6veloppement (AfD) funds. The procurement ofthe international consultant to assist in bidding process and construction management waslaunched in the early stage of project preparation and is expected to be selected shortly.There were also long delays under both projects in implementing the TA activities due to theweak institutional capacity of MOEE, PEC and PMUs in defining the scope of work andpreparing Terms of Reference in a timely manner. Under the proposed project, aninternational wind specialist will be recruited to assist the PMU/MOEE to implement the TAactivities.

37. Delays in Processing Counterpart Funds. Counterpart funds from the Governmentmade up 30 percent of the PSP's total cost and activities financed under GoY's cost-sharingallocation were not provided in a timely manner, thus also impacting implementation aspects.Under the proposed project, the Government's contribution to project financing has beenlimited to taxes and duties plus a small amount of operating expenditures and has beenextensively discussed and agreed with the Ministry of Finance.

38. Impact of Effectiveness Conditions. The REAP became effective on September 30,2010, after a 16-month delay, and is currently rated Unsatisfactory. The project had sevenconditions of effectiveness, of which two were instrumental in delaying effectiveness. One isrelated to the establishment of new institutions which have never been tested and the other isrelated to the loan effectiveness of a co-financer. The proposed project will reduce the

10

number of conditions of effectiveness by addressing such issues from the outset. Forinstance, the project does not mandate the establishment of the project company prior togrant effectiveness in order to allow for a flexible design based on sector and countrycontext. The project team has coordinated very closely with other donors on the processingschedule of the project. As end of January 2014, the financing from all other three donors aresecured with loan/credit agreements already approved by the Parliament of Yemen.

39. Procurement of Wind Power. The experience from successful and similar projectsfinanced by the Bank in other countries indicates that good procurement arrangements andimplementation is critical to the success of wind projects. Consistent with lessons learnt, thewind turbines will be implemented through a Supply and Installation contractor with aservice contract of at least three years, which will be procured based on the delivered unitcost of electricity generated rather than total capital costs. This has proven effective incountries with poor institutional capacity. A pre-bid meeting will be held prior to bidsubmission as specified in the bid document, which will increase the chance for a successfulprocurement process. Other lessons and experiences from Bank-financed wind powerprojects will also be taken into consideration during the procurement process.

IV. Implementation

A. Institutional and Implementation Arrangements

40. The MOEE will be responsible for coordinating and supervising the implementationof the project as the Government Ministry of the power sector. For the implementation ofComponent I and the associated consulting services under component II, initially a PMUcreated by MOEE and the GoY has agreed to create an SPC to undertake all the activities.The SPC will own and operate the wind farm according to commercial principles. Theprecise form and organizational structure of the SPC is currently under review and the SPCdedicated to power generation will be created and made operational at least three monthsbefore the wind farm is put into commercial operation. Before the SPC is legally created andoperational, a transitional arrangement has been put in place to implement the project. MOEEhas established a PMU to undertake all the day-to-day management and operations of theproposed project. The PMU, which overseas several generation projects under preparation,currently has 30 staff, including a project director, a number of technical specialists, aprocurement specialist and two procurement assistants, a financial specialist and twoaccountants, an environmental and social specialist, an internal auditor, and other service andsupport staff. Although the PMU is responsible for four generation projects, currently onlythe wind power project and Marib power project are active. The PMU director has the overallresponsibility for project management and is supported by wind power specialists. Otherspecialists provide support as needed. The number of staff and their composition will beassessed from time to time based on project progress. Some of the PMU staff closelyinvolved with Mocha Wind Power Project, including the technical specialist, financialspecialist and accountant will be transferred to the SPC to be created. Once the SPC isoperational, the ownership and operation of the Wind Farm and the obligations thereunderwill be transferred to the SPC pursuant to a subsidiary loan and implementation agreement tobe entered into between the MOF and SPC, under terms and conditions approved by IDA.

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The SPC will operate as a legally independent company according to commercial principleswith MOEE's oversight roles limited to sector policy and regulation aspects.

41. During preparation, international firms were contracted to prepare the feasibilitystudy, the Environmental and Social Impact Assessment (ESIA) report, and the draft biddingdocuments. The MOEE has also started the process of procuring an international engineeringfirm to assist in the procurement, construction management and supervision of the MochaWind Power Project. The engineering firm is in the final stage of selection and the consultingcontract is expected to be awarded by Board presentation of the project. An experiencedinternational contractor will be procured to design, supply and install the wind farm and willprovide full services for the wind farm for at least three years after commissioning. The staffof the PMU or future SPC will be trained on site and will take over the operation andmaintenance of the wind farm thereafter. Other independent consultants will be employed toprovide independent monitoring and evaluation of the implementation of the Environmentaland Social Management Plan and any land acquisition and resettlement work if needed.

42. For implementation of the studies, consulting services and capacity building activitiesassociated with the national wind policies and programs under Component II, MOEE willhave direct responsibility. MOEE will be assisted by specialists in clearly defining the scopeof work, preparing terms of reference for consulting services and procuring the consultingservices.

B. Results Monitoring and Evaluation

43. The MOEE, through the PMU/SPC, with the help of the implementation consultant,will monitor project progress against the agreed performance indicators listed in Annex 1.Data on actual project outputs and outcomes will be gathered, analyzed and included inquarterly progress reports to be submitted to the World Bank.

44. The PMU, with the help of the implementation consultant, will monitor the day-to-day project implementation of the physical components and contactor performance, includingmonitoring the implementation aspects of the ESIA and Resettlement Policy Framework(RPF).

C. Sustainability

45. The proposed project represents a landmark step for Yemen in exploiting its vastrenewable energy resources to meet growing energy demand, particularly taking into accountits declining oil and gas production. Project sustainability is reliant on the ability of theMOEE/PMU to prepare, implement and operate the wind farm successfully. The highprobability that the wind farm would be successful is assured by designing and implementingthe wind farm according to internationally accepted technical criteria and standards.Moreover, implementation and initial operation would be contracted to experiencedinternational firms, who will also be tasked with training MOEE/PMU staff. It is hoped thatthe success of the project could catalyze wind power development in Yemen by other privateand public developers. The Mocha Wind Power project is likely to be economically viable

12

provided that the world crude oil price does not drop below US$35/bbl, which is unlikely forthe foreseeable future. But the financial sustainability of wind power industry in Yemenwould depend on PEC's financial viability and consequent capacity to pay for the windelectricity received from wind farm projects, which would depend on continued reform ofenergy pricing and the GoY's subsidy scheme.

V. Key Risks and Mitigation Measures

A. Risk Ratings Summary Table

Risk Category Rating

Stakeholder Risk Moderate

Implementing Agency Risk

- Capacity Substantial

- Governance High

Project Risk

- Design Moderate

- Social and Environmental Moderate

- Program and Donor Moderate

- Delivery Monitoring and Sustainability High

- Other (Optional)

- Other (Optional)

Overall Implementation Risk High

B. Overall Risk Rating Explanation

46. The design of the proposed project is simple and involves a proven technology.However it is the first wind power project to be developed and operated in Yemen. Theproject has been designed to minimize the risks associated with limited capacity andcapability in designing, preparing, constructing and operating a wind farm project. Theproject objective is simple and does not require major policy changes by the GoY. This isparticularly important given the institutional and political context in Yemen.

47. The overall project risk is rated High. Although measures have been taken tominimize the risks seen in the two on-going energy projects in Yemen, there are a few riskswhich are not easy to mitigate. The three main risks are: (i) the security situation in Yemencould deter many qualified international firms from participating in the bidding process,which could result in either much higher price for the Supply and Installation contractor orcomplete failure of the bidding process; (ii) the excessive involvement of multiple agenciesin project and the general poor performance of government agencies could lead to significantdelays in project implementation despite the agreed mitigation measures; and (iii) the poorfinancial position of PEC could affect its ability to make full payment to the project for the

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electricity it purchased, although the payment is very likely to be sufficient to cover theoperating cost of the wind farm.

48. Potential risks are summarized in the Operational Risk Assessment Framework (seeAnnex 4). Most risks identified are considered manageable, while others remain high evenafter realistic mitigation measures are applied.

VI. Appraisal Summary

A. Economic and Financial Analysis

49. Economic Analysis: The primary benefit of the Mocha Project is the incrementalenergy supplied to electricity customers in Yemen, which was valued at customer willingnessto pay (WTP). A potential additional benefit was also counted in the form of carbon creditswhich could be claimed owing to the substitution of wind power for an equivalent amount ofthermal generation.

50. Empirical data on household WTP for incremental electricity is heavily influenced bythe urban residential tariff charged to customers connected to the PEC grid, which, at lessthan 2 US cents per kWh, barely covers the cost of transmission and distribution4 . Theweighted average WTP across all households is only 5.4 US cents per kWh , which is wellbelow the incremental cost of new supply. Yet there are a number of areas of Yemen wherehouseholds are connected to smaller grids (e.g. the PEC isolated grids or private and co-operative grids) where end-user tariffs are higher and the WTP is also demonstrably higher.Since these households have the same general income characteristics as householdsconnected to the PEC grid, and consume approximately the same amounts of electricityrelative to the hours of available service, it was decided to use the WTP of this restrictedsample of consumers (9.8 US cents per kWh) as a proxy for the WTP of all households. Thecost benefit analysis of the project yielded an Economic Internal Rate of Return (EIRR) of10.5 percent and a Net Present Value (NPV) of US$3.4 million at a 10 percent discount rate.

51. While the distortions effected by the tariff subsidies justify basing household WTP ononly a segment of the population, it was decided to also test the economic viability of theproject on the basis of cost effectiveness, i.e. by comparing the cost of the wind farm to thecost of incremental sources of power generation, using costs associated with the plantrecently constructed at Marib as a comparator. The analysis showed the long term averageeconomic cost of power from the Marib plant as 7.3 US cents per kWh. More recent bids toconstruct a second phase of the Marib plant have come in at capital costs roughly doublethose of the initial plant. Based on these quotes, the expected cost of power from the MaribII plant is 9.3 US cents per kWh. The average economic cost of power from Mocha isestimated at 8.1 US cents per kWh, slightly higher than the cost of Marib I. Details of theanalysis are provided in Annex 6. Given that gas is not a renewable resource, and that

4 The residential tariff was increased to 6 YR/kWh (approximately 2.5 US cents at current exchange rates) onJuly 1, 2010.5 The calculations of household WTP are based on analysis of a comprehensive household survey of energy usecarried out in Yemen in 2004.

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developing the country's wind resources reduces the risk of reliance on fossil fuels (andvulnerable pipelines) for power supply, the Mocha project is economically justifiable on thebasis of cost effectiveness. Furthermore, Yemen has a limited gas reserve which is notsufficient to meet the country's power generation needs, the cost of generation with alternateliquid fuels at current fuel prices (with crude oil in the neighborhood of US$100 per barrel)6

is two to three times the cost of wind power - 21.5 cents per kWh in the case of HFO and31.2 cents per kWh in the case of diesel.

52. Financial Analysis: The financial analysis focused on the financial structuring of theSPC which will be established to own and operate the wind farm, including its workingcapital requirements and required tariff structure. Pro forma financial analysis for theimplementation period and the first 10 years of operation are provided in Annex 6. Keyfindings of the financial analysis include:

* During a three year preparation and construction period, the PMU will requireapproximately US$1 million in working capital (local currency), mainly to cover thestaff salary of the PMU and miscellaneous expenditures for travel, office facilities.Any interest during construction will be directly paid by the government.

* A tariff of 8.5 US cents per kWh (2010 dollars) will be sufficient to ensure profitableoperations and generate sufficient cash flow to provide a satisfactory debt servicecoverage ratio. An average tariff of 2.0 US cents per kWh will be sufficient to ensurethat the farm has adequate cash flow to maintain its operations.

B. Technical

53. The project has been designed and will be implemented according to internationallyaccepted technical criteria and standards. The chosen technologies are proven asdemonstrated by many completed and ongoing wind projects around the world, althoughwind power technology is new to Yemen. The engineering companies which carried out thefeasibility study and prepared the bidding documents are very experienced.

54. Wind resource measurement data from a three year program as well as meteorologicaldata from 1990 was analyzed. However, only one full year of data (1996) is consideredreliable. Although this presents quite a bit of uncertainty as to whether data from 1996 isconsidered representative for multiple years, the use of single year data is considered to bereasonable for a public-financed project. Wind resources at the site were modeled at differentheights using WASP software and the results show that there is sufficient wind for a windfarm at Mocha. The average wind velocity ranges from 7.5 m/s at a height of 40 m to 8.54m/s at a height of 80 m, which are considered as favorable for wind power generation. Theexpected capacity factor has been evaluated in the range of 35 percent to 45 percentdepending on the type of turbines used.

55. The 60 MW feasibility study calculated the gross Energy P50 values for a 60 MWwind farm depending on the wind turbines. The annual energy production varies between 194GWh/year for 850 kW wind turbines and 231 GWh/year for 2 MW wind turbines.

6 The price of crude would need to drop below US$25/bbl for HFO thermal generation to be competitive withthe proposed wind farm. See Annex 6 for details.

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56. The site condition is assessed through analysis of boreholes and is found suitable forthe recommended wind turbine design, although deep foundations are recommended for theconstruction of towers. The wind turbines can be transported to harbors not far from the windfarm site and then by road to the project site. The wind farm will be connected to the gridthrough a 132 kV overhead transmission in the free bay of the GIS of Mocha substation. Agrid behavior analysis was performed to ascertain the impact of its connection on powerflows, contingencies, short circuit flows and transient stability after the installation of the 60MW wind farm.

C. Financial Management

57. The newly established PMU under MOEE (Generation Management PMU) will beresponsible for financial management aspect of project implementation. The financialmanagement assessment has been conducted by the Bank and the overall FinancialManagement (FM) risk is determined to be high. It concluded that the project has three majorFM risks: (a) the PMU in charge of managing the project and project reporting is newlyestablished and it does not have well defined comprehensive formal procedures and controlsapplicable to the Project. It does not have an acceptable accounting system yet and is staffedwith MOEE's civil servants with limited experience in the Bank's financial management anddisbursement procedures; (b) the financing arrangement is a bit complex as the project's costis financed by multiple donors and it requires a clear and segregated financial recording andreporting; and (c) there is the possibility of inadequate government funding, and delay inbudget transfer of allocation which could cause delays in the availability of funds to the PMUand the project. The PMU has a financial officer, and an internal auditor, and twoaccountants selected by MOEE with limited experience with IDA-financed projects.

58. A set of actions to strengthen PMU's financial management capacity and mitigate theFM risks include the following: (i) training the appointed financial manager, internal auditor,and accountants on the Bank's financial management and disbursement guidelines; (ii)agreement with the MOEE on the procedures, controls and safeguards to be applied duringproject implementation including agreement on the format of the interim financial reportacceptable for all donors, and documenting these controls and procedures in the Project'sfinancial manual; (iii) installation of an automated accounting system following cash basiswhich will generate quarterly Interim Financial Reports (IFRs) capable of reporting sourcesand uses of funds, based on terms of reference acceptable to the Bank; and (iv) annual auditof the project financial statements by an independent external auditor, selected by Yemen'sCentral Organization for Controls and Audit (COCA) and acceptable to IDA. The FMManual was submitted and reviewed and found acceptable. The PMU will use their existingautomated accounting system to record and report on all project transactions. It is agreed theexisting system will be further developed to meet the reporting format as per IDA'srequirement and the FM Manual to include reporting on all sources and uses of funds bycomponent, category, activity and donor.

59. The PMU will prepare the project's interim financial reports on a quarterly basis to besubmitted to the Bank and donors within 45 days from the end of each quarter, and the

16

annual audited financial statements to be submitted not later than 6 months after the end ofeach calendar year. Annex 3 provides additional details on the financial management anddisbursement arrangements.

60. The assessment has concluded that with the implementation of the above actions, theproposed financial management arrangements are adequate to provide the Bank withreasonable assurance, accurate and timely information on the status of the grant as requiredby the IDA.

D. Procurement

61. An assessment of the capacity of the PMU and MOEE to implement procurementactivities under the project was carried out. Although the PMU has hired a procurementspecialist and its staff has general knowledge of the Bank's procurement policies andexperience of procuring goods and materials for conventional power projects, it has limitedcapacity to carry out procurement activities related to the proposed project. The project willconsist of procurement of high-value supply and installation contract for wind farm which isnew to Yemen. MOEE has supervised the implementation of several IDA financed projects,but hardly any procurement capacity has been developed. In addition, most IDA financedprojects have experienced challenges, particularly in the preparation of bidding documentsfor complex packages, the complex administrative system to review and approveprocurement documents and decisions by the government. To mitigate the risk of delay andto ensure project readiness, the procurement process of the Supply and Installation contractorunder the proposed project, which accounts for more than 90 percent of the project cost, hasalready commenced. The bid document for the package, prepared with the assistance of aninternational consulting firm, has been reviewed and approved by all financiers, which willjointly finance the contract. It is expected that the bidding process would be launched by thetime the project is presented to the Board for approval. An international engineering firm isbeing employed to assist in bid clarification, bid evaluation and contract negotiation. Theengineering firm will be selected and contracted prior to the launch of the bidding process. Inaddition, the roles and responsibilities of the various government agencies in the procurementprocess were not clearly defined and streamlined. The roles and responsibilities of thevarious government agencies related to procurement have been streamlined.

62. Risk mitigation measures have been discussed with PMU/MOEE and agreed. Theprocurement plan for the project (dated January 22, 2014) acceptable to the Bank for the first18 months was agreed to. It will be updated at least annually (or as required) to reflectproject implementation needs. A brief summary of the procurement capacity assessment andproject procurement arrangements and risk mitigation measures is provided in Annex 3.

E. Social

63. The overall social impact of the project is expected to be positive. It seeks to provide accessto modern infrastructure and clean energy supply. Providing modem infrastructure wouldcreate the prospect for increased income-earning and investment opportunities in Yemen ingeneral and in the project area in particular. Increased income and investment opportunities

17

would cultivate the path for a better quality of life. The project will create some employmentopportunities for local communities and additional sources of income. During theconstruction and operation phase, the project will need to hire people to handle securityaspects of its works and will create demand for agriculture products and food supplyservices. The additional and predictable income would substantially improve their quality oflife and their livelihoods.

64. At current project design, none of the project activities would involve resettlement oflocal populations and/or the acquisition of privately-held land. In the unlikely event of theneed for involuntary land acquisition, a RPF has been prepared in compliance with the BankPolicy on Involuntary Resettlement OP 4.12 and relevant government laws and regulation inYemen in 2010.If involuntary resettlement and land acquisition is unavoidable, aResettlement Action Plan (RAP), in line with the RPF, would be prepared and disclosed priorto the actual acquisition of the land. Since the preparation of the RFP, there has been nochange to the nature and usage of the land for the project site. Therefore the previous RFPremains valid.

65. The project will use a participatory approach. The project is planning to involve widerange of stakeholders in the planning and implementation of the Environmental and SocialManagement Plan, disclosed in-country on July 15, 2013 and on the Bank's website onAugust 12, 2013. There is a plan to build the capacities of local authorities on the know-howof the project and, a comprehensive plan to ensure that stakeholders are sufficiently consultedand fully participating in the project. This will include the PMU, Local Councils and localNGOs.

F. Environment

Project Environmental Classification

66. The project is classified as Category B, according to the World Bank OperationPolicy on Environmental Assessment (OP 4.01) requiring partial assessment. An ESIA reportcovering the wind farm and associated activities was prepared in 2010 by an independentthird party consultant according to Terms of Reference that was reviewed by the Bank. TheESIA includes an assessment of the potential impacts of the project and the likelysignificance of such impacts and recommended mitigation measures. The ESIA also includesan Environmental and Social Management Plan (ESMP) outlining institutional settings,mitigation measures, and monitoring plan for the potential impacts expected duringconstruction and operation phases of the project. The net environmental impact of the projectwill be positive as it is expected that the proposed wind farm will lead towards a reduction inair emissions. Since the preparation and disclosure of the ESIA, there has been no change tothe social and physical environment surrounding the project site. The scope of the projectremains the same as well as the environment and social risks as indicated in the 2010 ESIA.Therefore, the environmental classification also remains the same and the previouslyprepared ESIA and RPF are still valid.

Public Consultation and Disclosure ofESIA and RPF

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67. To ensure that the views and interests of all project stakeholders are taken intoaccount, the borrower carried out public consultations and related activities during the periodof May 2009 to June 2010-from the scoping stage through the preparation of the ESIA andending with a workshop that discussed the draft report. Consultations included interviews,survey questionnaires, and focus group discussions with various stakeholder groups. Adetailed description of these meetings as well as other consultation activities is presented inSection 8 and Annexes 1-4 of the ESIA. The English version of the full ESIA and RPF andthe Arabic version of their Executive Summaries were disclosed at the World Bank Infoshopon June 13, 2011. In-country disclosure of both documents took place on May 15, 2011 at thePMU office and PEC website (www.pec.com.ye).As project processing was postponed dueto the 2011 sociopolitical situation in Yemen, the English and Arabic version of the full RPFas well as the English version of the full ESIA and the Arabic version of the Executivesummary, including the Bird Migration Risk Assessment, were re-disclosed locally on July15, 2013 in country and at the World Bank's Infoshop on August 12, 2013.

Main impacts and proposed mitigation measures

68. The ESIA presents an analysis of the potential positive and negative impacts of theproposed wind farm and related activities. It is expected that construction and operationphases of the wind farm and associated structures will have some negative impacts. Duringthe construction phase, potential negative impacts expected are from construction relatedwastes, emissions of dust and pollutants to the air from construction vehicles and activity,construction noise and vibrations, effects of construction traffic on normal traffic flow in thearea, risk of accidents to workers and inconvenience to normal freedom of movement of localinhabitants. However, any potential negative environmental impacts are expected to beminor, localized and temporary in nature, if the contractor does not comply at all times withthe relevant health and safety guidelines. Adequate mitigation measures and monitoringactivities are included in the ESMP, and these will be imposed as contractual obligations forthe supply and installation contractor. The ESMP also includes procedures for chance finds,monitoring indicators for environmental and social impacts as well as reporting procedures.

69. During the operation phase, potential impacts include the effects of noise and impactsof shadow flickering from wind turbines on local residents, scrap and maintenance waste,and other impacts of minor significance including stability risks of the wind turbines, impactsof dust generation, electro-magnetic field impacts and visual impacts. The operation phase isexpected to generate positive environmental and social impacts including a reduction in airemissions, job opportunities and household gains. Adequate mitigation measures tocounteract the potential negative impacts are proposed in the ESMP. An additional concernduring the operation of the wind turbines is the potential risk to birds. In this regard, 2ornithological field investigations were carried out during autumn and fall seasons over 50days of field observation. This was combined with literature review and consultations withlocals and scientists to augment information collected in the field, and the results aresummarized in the ESIA. As a result of the field investigations, a detailed report entitled,'Assessment of Risk to Birds from Planned Wind Energy Development at Mocha' wasprepared by the Client during July 2010, to serve as a complement to the ESIA. Theassessment concluded that, 'the current proposed wind energy development at Mocha is

19

unlikely to have impacts on birds of catastrophic nature, and that the level of risk tomigratory and local birds is within a 'tolerable' or 'acceptable' range; i.e. that the level ofdamage that could affect birds is expected to be limited and would not have significantconservation consequences to their populations if prescribed mitigation and precautionarymeasures are taken.' This conclusion assumes that the size of proposed development remainslimited in scale, and does not deviate from the current proposal without further assessment;that existing man-made risk factors (solid waste dumps and cultivations) will be relocated toa safe distance from the proposed wind farm; and that the recommended mitigation measuresare implemented. Accordingly, the Project will include as an activity, the closing down of theexisting dumpsite and relocating it to a safe distance (at least 5kms) from the project site as amitigation measure to reduce risk on birds, the cost of which is included in the overall costfor ESMP implementation.

Environmental and Social Management Plan

70. Detailed tables outlining the ESMP are included in Table 7.6 of the ESIA. Within theproject's context, while the PMU manager will have the overall responsibility forimplementing and reporting on the ESMP, an environment specialist (Health, Safety andEnvironment (HSE) officer) will be assigned as part of the PMU for day to dayimplementation of the ESMP measures during the tendering and construction phase. Detailedtasks for the HSE officer are included in the ESMP. The environmental specialist willmonitor the implementation of the environmental mitigation measures, monitoring plan, andtraining requirements of the ESMP, and will be responsible for environmental reportingwithin the PMU. It is recommended that the HSE officer/environmental specialist can beshifted from the PMU to the SPC, once it is established.

Environmental Capacity Building

71. Training and capacity building activities will be provided to various stakeholdersincluding the PMU, technical staff from the local councils, NGOs and community groups asoutlined in Table 7.5 of the ESIA.

Cost of ESMP Implementation

72. The estimated cost of ESMP implementation is US$465,000, which covers mitigationmeasures during the construction and operational phases, institutional aspects and trainingand the monitoring program as outlined in Table 7.6 of the ESIA.

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Annex 1: Results Framework and Monitoring

Country: Yemen, Republic

Project Name: Mocha Wind Park Project (P146055)

Results Framework

Project Development Objectives

PDO Statement

The development objective of the Project is to increase the supply of cost-effective renewable wind electricity.

These results are at Project Level

Project Development Objective Indicators

.Data ResponsibilityCumulative Target Values Sore fo

Source/ for

Unit of .End Methodolog Data CollectionIndicator Name Core Measure Baseline YR1 YR2 YR3 YR4 Et FrequencyMeasure Target y

Economic ElCompetitiveness Amount(US Projectof electricity 0.20 NA NA NA 0.12 0.12 N/A PMU/MOEEgenerated bywind power

Electricity L Gigawatt- Projectgenerated from hour (GWh) 0.00 0.00 0.00 0.00 10.00 180.00 Annual reports PMU/MOEEwind power

Direct project . 920000.0 Project PMU/SPC/MObeneficiaries Number 0.00 0.00 0.00 0.00 0.00 Annual reports OE

Female Percentage Project PMU/SPC/MObeneficiaries Sub-Type 0.00 0.00 0.00 0.00 50.00 50.00 Annual reports EE

Supplemental

21

GenerationCapacity ofRenewable ProjectEnergy (other Megawatt 0.00 0.00 0.00 0.00 60.00 60.00 Annual PMU/SPC

than reportsthanhydropower)constructed

GenerationCapacity of Megawatt

RenewableePrwjecRenewable Sub-Type 0.00 0.00 0.00 0.00 60.00 60.00 Annual Project PMU/SPCEnergy Bekonreportsconstructed -Wind

Intermediate Results Indicators

.Data ResponsibilityCumulative Target Values Sore fo

Source/ for

Unit of .End Methodolog Data CollectionIndicator Name Core Measure Baseline YR1 YR2 YR3 YR4 Et FrequencyMeasure Target y

Wind capacity Percentage 0.00 NA NA NA 97.00 97.00 Annual Project PMU/MOEEAvailability Report

Number of Staff Text 0.00 0.00 10.00 20.00 25.00 tAnnual PMU/MOEEtrained month reports

WindMeasurement Number 0.00 0.00 3.00 3.00 3.00 3.00 Annual rot PMU/MOEEmasts installed

Consultingservices formarket Yes/No No No Yes Yes Yes Yes Annual rot PMU/MOEEdevelopmentperformed

Progress in Yes/No Yes Yes Yes Yes Yes yes Quarterly Project PMU

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procuring reportsengineeringconsultant

Procurement L Percentage 0.00 0.00 100.00 100.00 100.00 100.00 Quarterly Project PMU/SPCProgress reports

Construction l Percentage 0.00 0.00 10.00 100.00 100.00 100.00 Quarterly Project PMU/SPCProgress reports

SPC created and Yes/No No No Yes Yes Yes Yes Quarterly Project MOEE/MOPICoperational reports

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Annex 2: Detailed Project Description

1. The project development objective is to increase the supply of cost-effective renewable windelectricity.

Component I: Physical Investment (US$121.0 million, of which IDA US$18 million)

2. The physical investment supports the construction of a 60 MW wind farm located in thecoastal area in the western part of Yemen. It is about 4 km from the port city Mocha on the redSea coast of Yemen. The altitude of the wind farm site ranges from 4 m to 14 m above sea leveldue to the location close to the coast. The average temperature recorded at the meteorologicalstation in Aden Khormaksar is 28.60 C.

3. Wind resource measurement date from a three year program as well as meteorologicaldate from 1990 was analyzed. But only the data of 2006 measurement was considered reliable.The resource assessment was done by taking data from a full year of wind measurement in 2006.Although this presents quite a bit of uncertainty on whether the wind resource data wouldrepresent the multiple year average, it is considered to be reasonable for a public project. Windresource at the site was modeled at different heights using WASP software and the results showthat there is enough wind for a wind farm at Mocha. The average wind velocity ranges from 7.5m/s at a height of 40 m to 8.54 m/s at a height of 80 m, which are considered as favorable forwind power generation. The prevailing wind is almost unidirectional from the South to South-Southeast, with no wind obstacles for more than 20 km. Wind measurements indicate thatturbines will be generating electricity for about 90 percent of the hours of the year. The expectedcapacity factor has been evaluated in the range of 35 percent to 45 percent depending on the typeof turbines used.

4. The wind turbines can be transported to Yemen by ship and unloaded at Mocha portwhich is only 8 km from the Mocha Wind Farm site. Although it is a small harbor compared toother national ports, it could be used for transport turbine, even the biggest G90 model. TheMocha port lacks proper cranes for unloading heavy parts. A suitable truck crane needs to bedeployed at the harbor, which will be procured as part of the Supply and Installation contract.Road configuration from the port to the site is suitable even for the largest turbine. There areaccess road between the port of Mocha and the wind farm site, with sufficient load carryingcapability. Road construction on site is expected to be simple in the very flat and even terrain.

5. The site is directly adjacent to the Mocha power plant with its four 132 kV power linesand its electrical substation and switchyard. The neighboring power plant is owned and operatedby the state-owned Yemeni electrical utility, the PEC. The proximity of the power station willminimize the electrical infrastructure requirements for the wind farm. Likewise, the localclimatic and electro-technical issues related to construction and operation of a power plant in thearea are well known to the PEC.

6. The Mocha wind farm will have a total installed capacity of approximately 60 MWcomprising of a number of wind turbines with unit size ranging from 1 MW to 3 MW. The windfarm will be implemented through a Supply and Installation contractor which will be selected

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through international competitive bidding process. The number and unit size of the turbines willbe determined during the procurement of the contractor. The scope of work of the Supply andInstallation contractor includes:

* Civil works: detailed soil investigations on each wind turbine location; design of sitespecific foundations for the wind turbines including soil improvement measures or waterdrainages, if necessary; construction of park- internal and external roads; foundations andcrane locations;

* Electrical works and grid connection: park- internal and external cabling, construction ofsubstation and grid connection;

* Delivery, erection, commissioning and test run of wind turbines with a total capacity of60 MW;

* Operation and Maintenance: operation and maintenance of the wind farm during the first3-5 years of operation under an operation and maintenance contract;

* Capacity building: within first 3-5 years of operation local technicians and engineers ofthe PMU/SPC shall be trained in wind farm operation and maintenance.

7. During the feasibility study, the gross Energy P50 values for a 60 MW wind farm werecalculated depending on the wind turbines. The annual energy production varies between 194GWh/year for 850 kW wind turbines and 231 GWh/year for 2 MW wind turbines.

8. The proposed wind farm will initially be implemented by the MOEE through a PMU, andlater on by a SPC to be established as a wholly government owned or through private-publicownership. A transfer tariff will be used by the SPC to sell electricity to the national utility, PEC.When the SPC is created, it will make the contract arrangements (Power Purchase Agreement(PPA), land lease, interconnection agreement) so as to simulate an Independent Power Producer(IPP) situation, which would enable the GoY to replicate part of the legal and regulatory work insubsequent wind IPP projects. The tariff is expected to be a fixed amount at about US$ 10cents/per kWh, with incremental indexation based on inflation in the Operation and Maintenance(O&M) costs only. (O&M costs are typically less than 15-20 percent of the initial tariff).

Component II: Consulting Services and Market Development (US$7.0 million, of whichIDA US$2.0 million)

9. The consulting service and market development component consists of the following sub-components: (i) an international engineering consulting firm employed to assist the PMU in theprocurement and contracting of the supply and installation contractor and in the constructionsupervision of the project throughout the construction phase and the initial operation stage; (ii)an international consulting firm employed to assist MOEE to design tendering procedures anddocuments for competitive procurement of PPP wind projects and to assist MOEE with thetendering process; (iii) advisory service for the creation of the SPC which would operatecommercially with clear contractual arrangement with the electricity off-taker; (iv) advisory

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service and instruments for the implementation of regional long-term wind measurementprogram in three to five wind development zones; (v) consulting service for preliminaryenvironmental and social impact assessments, grid connection planning for promising wind sites;and (vi) other consulting services as needed and capacity building activities.

10. Component I directly contributes to the achievement of the development objective bygenerating renewable electricity from wind through the construction and operation of the windfarm. Component II indirectly contributes to the achievement of the development objectivethrough supporting the implementation of the Mocha wind project, assisting in the preparation offuture wind program, and strengthening the institutional capacity which would be required topromote and scale up investments in wind farms so that more wind farms could be built togenerate electricity from wind.

11. The proposed IDA grant will be used to co-finance the Supply and Installation contractunder component I with other donors, and finance items (ii), (iii) and (iv) under component II,and item (i) will be financed by Arab Fund. Government resources will mainly finance taxes andduties.

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Annex 3: Implementation Arrangements

1. Project institutional and implementation arrangements

1.1 Project administration mechanisms

1. The MOEE will have the responsibility of coordinating and supervising theimplementation of the project as the Government Ministry of the power sector. For theimplementation of Component I and the associated consulting services under component II,initially a PMU created by MOEE and later on an SPC to be created will undertake all theactivities. The SPC will own and operate the wind farm according to commercial principles. Theprecise form and organizational structure of the SPC is being studied and the SPC will be createdand made operational at least three months before the wind farm is put into commercialoperation. Before the SPC is legally created and operational, a transitional arrangement has beenput in place to implement the project. MOEE has established a PMU to undertake all the day-to-day management and operations of the proposed project. The PMU, which overseas severalgeneration projects under preparation, currently has 30 staff, including a project director, anumber of technical specialists, a procurement specialist and two procurement assistants, afinancial specialist and two accountants, an environmental and social specialist, an internalauditor, and other service and support staff. Although the PMU is responsible for four generationprojects, currently only the wind power project and Marib power project are active. The PMUdirector has the overall responsibility for project management and is supported by wind powerspecialists. Other specialists provide support as needed. The number of staff and theircomposition will be assessed from time to time based on project progress. Some of the PMUstaff closely involved with Mocha Wind Power Project, including the technical specialist,financial specialist and accountant will be transferred to the SPC to be created. Once the SPC isoperational, the ownership and operation of the Wind Farm and the obligations thereunder willbe transferred to the SPC pursuant to a subsidiary loan and implementation agreement to beentered into between the MOF and SPC, under terms and conditions approved by IDA. The SPCwill operate as a legally independent company according to commercial principles with MOEE'soversight roles limited to sector policy and regulation aspects.

2. During preparation, international firms were contracted to assist in carrying out thefeasibility study, in preparing the ESIA report, and drafting the bidding documents. The MOEEis currently in the final stage of procuring an international engineering firm to assist in theprocurement, contracting and construction management and supervision of the Mocha WindPower Project. The engineering is expected to be selected and contracted well before scheduledBoard presentation of the project. A high quality contractor will be procured to Design, Supplyand Install the wind farm and will provide full services for the wind farm for at least 3 years aftercommissioning. The staff of the PMU and future SPC will be trained on site and take over theoperation and maintenance of the wind farm thereafter. Other independent consultants will beemployed to provide independent monitoring and evaluation of the implementation of theenvironment management plan and any land acquisition and resettlement work, if needed.

3. Financially, the wind farm project will be ring-fenced with other activities MOEE hasand the SPC, once created and operational, will have a PPA signed with the PEC.

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4. For implementation of the studies, consulting services and capacity building activitiesassociated with the national wind policies and programs under Component II, MOEE will havedirect responsibility. MOEE will be assisted by specia