Nepal: Business Models for Private Sector-led Mini-grid Energy Access Project Preparation Consultations October 8-18, 2017 and November 20, 2017

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1 Nepal: Business Models for Private Sector-led Mini-grid Energy Access Project Preparation Consultations October 8-18, 2017 and November 20, 2017 Aide Memoire 1. During October 8-18, 2017 and on November 20, 2017, a Bank Team 1 led by Subodh Adhikari carried out Preparation Consultations of the Nepal: Business Models for Private Sector-led Mini-grid Energy Access Project ( Nepal Mini-grid Project or the Project ). This Aide Memoire (AM) summarizes the findings on the readiness of the project preparation, project scope and costs, implementation arrangement, and fiduciary and safeguards arrangements for the Project. The AM was discussed at the wrap-up meeting on October 18, 2017 chaired by Mr. Ram Prasad Dhital, Executive Director, Alternative Energy Promotion Centre (AEPC) and participated by Mr. Shiva Sharma, Under Secretary, Ministry of Finance (MoF). As agreed during this meeting, this AM will be classified as a public document under the Bank s Access to Information Policy. 2. Proposed Project Scope: The proposed Project Development Objective (PDO) is to increase electricity delivery from renewable energy mini-grids in selected areas by mobilizing private energy service companies (ESCOs). The Project has two components: a. Component A: Credit Facility to Support Renewable Mini-grids Subprojects. This component will support the renewable energy (RE) mini-grid subprojects be intermediated by AEPC through on-lending to Partner Banks (PBs), the financial intermediaries. AEPC will on-lend funds through PBs to ESCOs to finance micro-hydro and solar hybrid mini-grids sub-projects. AEPC will select PBs according to criteria agreed upon with the World Bank. The PBs will assume the credit risk of the sub-project beneficiaries that will be selected based on agreed upon eligibility criteria. AEPC will have exposure only to the selected PBs and will assume the credit risk for on-lending funds to PBs. On-lending will take place on an open door and first come first serve model for interested and qualifying financial intermediaries. The credit facility will be intermediated by AEPC, which will be the implementing agency for this Project. Subprojects for deploying new micro-hydro, wind, and solar hybrid mini-grids and for upgrading and interconnecting existing mini-grids will be supported. Subprojects meeting the eligibility criteria established for this Project can apply for loans from the PBs. The credit facility will provide long term source of funds to PBs to lend at a cost that is financially viable to the prospective subprojects. The credit facility will incentivize financial intermediaries to invest in Renewable Energy (RE) mini-grids and help in closing the financing gap. The model will crowd in the private sector in line with the Government strategy to move away from reliance on subsidies. AEPC, is working with stakeholders to clarify institutional and regulatory provisions/requirements for financial intermediation. A term-sheet for operationalizing the financial intermediation involving AEPC and PBs was extensively discussed during the preparation consultations. AEPC will formerly confirm its jurisdiction to lend to the PBs through a legal opinion from Ministry of Law and Justice (MoLJ) before the appraisal. AEPC will also hire a lawyer to prepare the Subsidiary Loan Agreement (between AEPC and PBs). b. Component B: Technical Assistance to the Mini-grid Sector, ESCOs and Partner Banks and Project Management Support. This component will provide required Technical Assistance (TA) to open-up the commercial mini-grid market. Component B will finance costs of developing and appraising subprojects, environmental and social assessments, sector capacity building, and 1 Subodh Adhikari (Task Team Leader and Energy Specialist); Gunjan Gautam (Operations Officer); Rabin Shrestha (Senior Energy Specialist); Xiaoping Wang (Senior Energy Specialist); Krishnan Raghunathan (Consultant Energy); Rekha Shreesh (Social Development Specialist); Jaya Sharma (Senior Social Development Specialist); Drona Ghimire (Senior Environment Specialist), Prakash Awasthi (Consultant - Environment) ; Francesca Lo Re (Senior Financial Sector Specialist); Shambhu Prasad Uprety (Senior Procurement Specialist), Chandra Kishore Mishra (Procurement Specialist); Timila Shrestha (Financial Management Specialist); Satish Kumar Shivakumar (Finance Officer); and Alina Thapa (Team Assistant). 1

2 promotional activities. The component will also provide technical support to participating local banks to help them develop capacity to assess the associated risks, conduct credit due-diligence, and monitor loan performance, including possible cost sharing for lenders engineer to monitor the project during construction. Additionally, this component will fund Project Implementation Unit (PIU) and its incremental operating costs. 3. Proposed Project Cost and financing: The Project will request approximately US$7.61 million from the Scaling-up Renewable Energy Program Trust Fund. Of this, it is envisaged that, US$5.61 million will be a grant to the Government of Nepal (GON); and US$2 million will be a concessional loan to GoN. MoF and AEPC will agree on the terms of transfer from GON to AEPC which will be the part of the subsidiary agreements. 4. Readiness filter: a. Detailed Feasibility Study (DFS) of mini-grid subprojects. Four ESCOs have submitted Expression of Interests to AEPC showing their commitment to undertake the Detailed Feasibility Study (DFS) and applicable environmental and social (E&S) assessments. Expression of Interests (EOIs) were submitted in response to AEPC s call for proposal published on November 2, Table 1 shows the status of potential mini-grid subprojects under preparation. It is envisaged that at least two subprojects would complete the bankable DFS by end of March S.N Project Ghami Khola Mini Hydro Subproject 999 Baitadi Solar Mini Grid Subproject 374 Darchula Solar Mini Grid Subproject 200 Jumla Solar Mini Grid Subproject 200 Capacity (kw) Location ESCO Current Status ESCO s technical team is Mustang at site from Mountain November 21, Ghami, Home Pvt for revised Mustang Ltd. DFS. Rudreshor Dilasaini Gokuleshwor, Baitadi Marma, Darchula Chandannath, Jumla Surya Power Company Pvt. Ltd. Wind Power Nepal Pv. Ltd. Saral Urja Pvt. Ltd. ESCO s technical team is on site from November 10, 2017 for DFS. ESCO s technical team will be at site in December 2017 for DFS. ESCO will complete the DFS in next 3 months. b. Project Procurement Strategy for Development (PPSD): AEPC submitted a draft PPSD for Bank s review and to inform project appraisal for Component B. Draft General Procurement Notice and draft Procurement Plan for 18 months has also been submitted by AEPC for Bank s review. Afternote: The Bank has provided its feedback on the PPSD on Jan 10, c. Project Operations Manual (POM): AEPC has shared the draft POM with the World Bank. However, the POM will need to change following finalization of financial intermediation mechanism. 2

3 5. Financing Instrument: The Project is an Investment Project Financing (IPF) operation with Financial Intermediaries (FIs). IPF FI enables the Project to mobilize PBs to issue mini-grid subproject loans to ESCO. While GON provides subsidies to RE mini-grids, there is still a financing gap due to dearth of debt financing. The Project will encourage PBs to provide debt to ESCOs for viable mini-grids. PBs will be encouraged to take the credit risk. The Project will build sector capacity in preparing and appraising mini-grid subprojects to increase ESCO s and PB s confidence. AEPC will organize a market-sounding event to get feedback from PBs and ESCOs on the terms of financial intermediation mechanism. 6. Implementation Arrangement: AEPC will be the project implementing agency and house the PIU. PIU will implement Component B. For Component A, subject to confirmation by the Ministry of Law, Justice and Parliamentary Affairs, AEPC is expected to execute appropriate subsidiary finance agreements with PBs to operationalize financial intermediation. PBs, in coordination with AEPC and with technical assistance from AEPC as and when required, will appraise ESCOs subproject and make credit decisions. The steps that will be undertaken will be as follows: a. ESCOs for their subprojects will make a commercial loan application to the PBs. If the PBs intend to take up the subproject for due diligence, they will present a subproject brief and obtain approval from the PIU to ascertain eligibility of subproject (SREP sub-loan). b. PIU will evaluate the subprojects based on the eligibility criteria and inform the PBs of whether the proposed subproject by ESCO is eligible for support from Credit Facility and at PIU option, any other additional support programs that subproject is eligible for APEC. c. PBs will conduct their own credit appraisal and follow their internal credit approval process for the loan evaluation and processing. d. PBs may request technical assistance from PIU to assist their evaluation. e. ESCO subprojects if approved by PBs credit committee will be notified to PIU for inclusion under Component A. 7. Fiduciary Arrangement: a) Procurement Arrangement: i. Component A. The World Bank s Procurement Regulation is not applicable to activities under Component A. PBs participating in Component A will be appraised based on World Bank s Guidance Note on IPF - Financial Intermediary Financing. Credit appraisal by PBs will determine selection of ESCOs and their mini-grid subprojects. An eligibility criteria agreed between AEPC and the World Bank will help in screening out risky ESCOs and subprojects. AEPC is preparing an internal AEPC guideline, which will be compliant with Nepal s Pubic Procurement Act (2007) and Public Procurement Regulation (2007), to enable it to select private-sector ESCOs and their mini-grid subprojects which may receive government subsidies. ii. Component B. The World Bank s Procurement Regulation will apply to Component B. b) Financial Management (FM) Arrangement: i. General: A Financial Management (FM) consultant dedicated for the Project will support the PIU for ensuring effective project financial management including financial monitoring of project expenditures. For sub-project loans, the Bank will make payment to AEPC/ PBs in line with the World Bank guidelines on Financial Intermediary (FI). The involvement of the PBs throughout the process will ensure quality assessment of the financial viability as well as effective monitoring of the sub-projects implementation. The financial statements (preferably audited for annual) will be obtained by the PBs which will reflect expenditures incurred by the sub-projects. The details of implementation arrangements and required internal controls will be included in the Project Operations Manual (POM). 3

4 ii. Disbursement: An advance up to a ceiling specified in the Disbursement Letter will be provided in a segregated Designated Account (DA) established for the Project. Disbursement for sub-projects will be detailed in Project Operations Manual. 8. Safeguard Arrangement: AEPC is finalizing the Environmental and Social Framework (ESMF), which also includes Resettlement Policy Framework (RPF), Vulnerable Community Development Framework (VCDP), and Gender Development Framework (GDF) for the Project. On November 2, 2017, AEPC disclosed a draft ESMF for stakeholder consultation. AEPC organized the consultation on November 9, About 50 attendees representing civil society organizations, ESCOs, industry associations, PBs, and public sector agencies participated in the consultations. The key comments and suggestion from the stakeholder consultation has been incorporated into the final ESMF. AEPC submitted the final ESMF for Bank s review and clearance. 9. Financial Intermediary Assessment: AEPC and PBs participating in this Project will be assessed based on World Bank s Investment Project Financing Policy and Directive. This assessment is expected to be completed before the start of project appraisal. AEPC will select PBs (subject to the World Bank s no objection) based on their financial health, as well as their capacity to implement sub-projects. AEPC takes the credit risk of PBs and therefore has a strong incentive to carefully assess their financial health and operational capabilities. The PB selection is also subject to a no-objection process by the World Bank. Subsidiary Finance Agreement covenants between AECP and PBs also require compliance with local regulations. 10. World Bank s Corporate Requirements: a. Climate Co-Benefits 2 : The Project is required to report its climate co-benefits. Climate change mitigation co-benefits is estimated to be at least 60 percent corresponding to funding allocated in Component A, which enables debt financing of RE mini-grid subprojects. b. Gender: Gender tagging is not a corporate requirement for this Project. Nonetheless for improving social impacts and sustainability of the Project, gender analysis has been carried out by the World Bank team with support from AEPC. Gender actions and indicators to monitor their progress are under discussion. c. Citizen Engagement: Citizen engagement is not a corporate requirement for this Project. However, as mini-grid subprojects require extensive engagement with beneficiary communities, approaches to engage with beneficiaries and stakeholders as well as indicators to monitor such engagements have been incorporated in the Project. 11. Check-list for Appraisal: Following activities will need to be completed prior to scheduling appraisal: a. Disclosure of final Environmental and Social Management Framework (ESMF) and Resettlement Policy Framework (RPF) b. Finalization of financial intermediation mechanism c. Legal opinion on AEPC s capacity to on-lend. 12. Proposed Key Timeline for Processing (tentative): Appraisal: April 15, 2018 Negotiations: May 15, 2018 Bank Approval: July 1, The World Bank uses the term climate co-benefits for development finance that promotes climate mitigation and/or adaptation according to the Multi-lateral Development Bank climate finance methodology. 4

5 Annex 1: Summary of Agreed Actions S.N. Actions Responsibility Agreed Timeline (tentative) 1 Disclosure of ESMF AEPC February 28, AEPC internal procurement guideline related to the AEPC February 28, 2018 Project, for Component A 3 AEPC and PBs assessment based on World Bank s WB February 28, 2018 Investment Project Financing Policy and Directive 4 Legal opinion on AEPC capacity to on-lend AEPC March 15, Determination of terms and condition of subsidiary AEPC/GoN March 15, 2018 agreement between the GoN and AEPC 6 Detailed Feasibility of two sub-projects AEPC March 31,

6 Annex 2: List of persons met Ministry of Finance Dr. Baikuntha Aryal, Former Joint Secretary, IECCD Mr. Shiva Sharma, Under Secretary, IECCD Ministry of Population and Environment Dr. Bishwa Nath Oli, Former Secretary Mr. Ram Prasad Lamsal, Ph.D, Joint Secretary, Climate Change Management Division Alternative Energy Promotion Center Mr. Ram Prasad Dhital, Executive Director Mr. Nawa Raj Dhakal, Director Mr. Rudra Prasad Khanal, Director Mr. Surya Kumar Sapkota, Director Dr. Narayan Adhikari, Assistant Director Mr. Mukesh Ghimire, Senior Officer Mr. Prakash Aryal, Senior Officer (Technical) Mr. Santosh Rai, Project Manager Mr. Madan KC, Senior Officer Mr. Chandra Kishor Chaudhary, Former Senior Officer (Account) Mr. Rana Bahadur Thapa, Senior Officer Mr. Chaitanya Prakash Chaudhary, Engineer Mr. Jiwan Kumar Mallik, Solar Power Expert Mr. British Singh, Mini Hydro Expert Mr. Sushrut Dhakal, FM Expert Ms. Aruna Awale, GIS Expert Dr. Anusuya Joshi, E&S Expert Ms. Sunita Khatiwoda, Environmental Officer Mr. Shiva Hari Budhathoki, GESI and Social Safeguard Officer Mr. Keshab Babu Aryal, Procurement Expert Mr. Khem Raj Bhandari, Renewable Energy Expert Mr. Nagesh Singh, Civil Engineer Mr. Manu Binod Aryal, CREF Secretariat Mr. Umesh Prasad Acharya, Energy Finance Expert, RERL/CREF Mr. Satish Gautam, Program Manager, AEPC/RERL Nepal Investment Bank Limited Mr. Jyoti P. Pandey, CEO Mr. Rabin Pudasaini, Manager, Corporate Bank Ms. Shobha Shrestha, Branch Manager, Lagankhel Branch NMB Bank Mr. Sunil KC, CEO Mr. Dinesh Dulal, Business Head Renewable Energy & Micro Finance Mr. Govind Ghimire, Chief Business Officer Civil Bank Limited Mr. Govinda Gurung, CEO Nepal Micro Hydropower Developers Association Mr. Krishna Prasad Devkota, President Mr. Bir Bahadur Ghale, Micro hydro project developer 6

7 Yeti Airlines Mr. Ang Tshiring Sherpa, Managing Director Mr. Umesh Rai, CEO Gham Power Mr. Anjal Niraula, General Manager 7

8 Annex 3: Proposed Results Framework Indicator Name Unit of measurement Baseline End target Generation capacity of Megawatt (MW) energy constructed or rehabilitated People provided with Number new or improved electricity service Annual electricity output from renewable energy Gigawatt-hour (GWh)