Papua New Guinea: Implementation of the Electricity Industry Policy

Technical Assistance Report Project Number: 46012 December 2012 Papua New Guinea: Implementation of the Electricity Industry Policy The views expressed herein are those of the consultant and do not necessarily represent those of ADB s members, Board of Directors, Management, or staff, and may be preliminary in nature.

CURRENCY EQUIVALENTS (as of 27 November 2012) Currency unit kina (K) K1.00 = $0.49 $1.00 = K2.03 ABBREVIATIONS ADB Asian Development Bank CSO community service obligation DPE Department of Petroleum and Energy EIP EMC EROP Electricity Industry Policy electricity management committee electrification roll-out plan MW megawatt PNG Papua New Guinea PPL PNG Power Limited TA technical assistance TECHNICAL ASSISTANCE CLASSIFICATION Type Policy and advisory technical assistance (PATA) Targeting General intervention classification Sector (subsector) Energy (energy sector development) Themes (subthemes) Economic growth (widening access to markets and economic opportunities), private sector development (policy reforms), governance (economic and financial governance), capacity development (institutional development) Location (impact) Rural (medium), urban (medium), national (medium) NOTE In this report, "$" refers to US dollars. Vice-President S. Groff, Operations 2 Director General X. Yao, Pacific Department (PARD) Director R. Guild, Transport, Energy and Natural Resources Division, PARD Team leader Team member A. Maxwell, Senior Energy Specialist, PARD F. Ramos, Energy Specialist, Papua New Guinea Resident Mission, PARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

I. INTRODUCTION 1. The proposed technical assistance (TA) will assist the Government of Papua New Guinea in implementing its Electricity Industry Policy (EIP) 1 by supporting the preparation of the national electrification roll-out plan (EROP), establishing implementation capacity within the Energy Division of the Department of Petroleum and Energy (DPE), and assisting in identifying and implementing initial pilot projects. The government requested support for the project through inclusion of the project in the Papua New Guinea (PNG) country partnership strategy, 2011 2015 of the Asian Development Bank (ADB). 2 The project impact, outcome, outputs, implementation arrangements, cost, financing arrangements, and terms of reference were agreed with the government during the fact finding mission of 3 14 September 2012 and included in the mission memorandum of understanding. The design and monitoring framework is in Appendix 1. 3 II. ISSUES 2. In PNG, grid-connected power is largely restricted to the main urban areas, giving approximately 10% of the population access to electricity. Distributed power is rarely available outside urban centers. The supply of power in the main urban centers is often unreliable, with regular power outages and demand at times exceeding generation capacity. On the main grids, power outages are becoming increasingly frequent because of insufficient generation and poorly maintained transmission and distribution systems. Because of the unreliable power supply, there is considerable self-generation and back-up generation capacity in urban areas, which is maintained and operated at high cost and low efficiencies. Demand is expected to rise significantly, fuelled by high economic growth, partially associated with the proposed liquefied natural gas plant near Port Moresby, as well as continued growth in the mining sector and associated industry. Lack of access to affordable, reliable power is limiting economic growth in provincial areas and lack of capacity and poor quality supply is constraining economic growth in the main urban areas. 3. PNG has a total of 580 megawatts (MW) of installed generation capacity. PNG Power Limited (PPL), the national state-owned corporatized power utility, manages generation of about 300 MW, including the two main grids (Port Moresby and Ramu) and 19 geographically isolated independent power grids servicing provincial centers. The remaining 280 MW is self-generated by industrial facilities, mines, and private sector generators. Power tariffs are independently regulated by the Independent Consumer and Competition Commission and allow for full costrecovery for PPL. The power tariff is uniform across PPL s customers countrywide, regardless of local generation costs. This creates a disincentive for investment in high-cost rural and provincial centers. Increased access to and improved quality of supply is hindered by lack of sector planning and insufficient allocation of community service obligations (CSOs) in unprofitable areas. Sector policy formulation is managed by the Energy Division of the DPE. 4. To address the range of sector issues, the government passed the EIP in 2011. The policy is designed to address three strategic objectives of the government: (i) improving access in the provision of electricity services, (ii) improving reliability of electricity supply, and (iii) ensuring that power is affordable for consumers. 1 Papua New Guinea. 2011. Electricity Industry Policy. Port Moresby (November). 2 ADB. 2010. Country Partnership Strategy: Papua New Guinea, 2011 2015. Manila. 3 The TA first appeared in the business opportunities section of ADB s website on 21 November 2012.

2 5. The EIP supports (i) delivery of additional CSOs through the national budget to increase access to energy; (ii) engagement of the private sector for delivery of CSOs; (iii) allowance for variable tariff structures depending on generation costs; (iv) retaining transmission within government ownership but encouraging private sector ownership of generation, distribution, and retail assets; and (v) transfer of technical regulation from PPL to the DPE. 6. To implement the EIP, the following measures are proposed: establishment of a highlevel electricity management committee to oversee implementation of the EIP, development of a national EROP to advise on priority investments, and establishment of an electricity trust fund to channel allocation of funding from the national budget. 7. The government has recognized that implementation of the EIP is an ambitious undertaking and that significant support is required for successful implementation. Implementation of the EIP is the responsibility of the DPE, however the department has insufficient capacity for this mandate. The government has a structured plan for expanding the DPE in order to implement the EIP, however it recognizes the significant capacity building required. As a result, the government has requested TA from ADB to support implementation. The government has also requested World Bank assistance in implementing the EIP, and ADB is coordinating closely with the World Bank. The government has requested that ADB support implementation of the EIP through (i) support for preparing the EROP, including developing transparent procedures for prioritization of projects identified under the roll-out plan, and calculation of CSO requirements; (ii) developing capacity within the DPE, including procurement capacity and project management capacity (including project identification, implementation management, monitoring, and reporting procedures); and (iii) support for identification and preparation of the first pilot project to trial the project implementation mechanism envisaged under the EIP. 8. The TA is in line with the PNG country partnership strategy, 2011 2015 (footnote 2), which prioritizes energy as a key area of support; and the PNG Development Strategic Plan, 2010 2030 priority of extending electricity access and improving power supply. 4 The TA directly supports implementation of key components of the EIP. Effective implementation of the EIP will support ADB s ongoing energy sector lending and grant program to PNG, consisting of the Town Electrification Investment Program, 5 and the proposed Port Moresby Grid Development Project. 9. There are a number of initiatives supporting policy reform in the PNG power sector. ADB supported the preparation of a sector plan in 2009, 6 which the government intends to use as the technical basis of the EROP. The World Bank is proposing TA loan support (for Board consideration in 2012) to draft a rural electrification policy and a renewable energy policy. These 4 Government of PNG, Department of National Planning and Monitoring. 2010. Papua New Guinea Development Strategic Plan, 2010 2030. Port Moresby (March). 5 ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility to Papua New Guinea for the Town Electrification Investment Program. Manila (Loan 2713/2714- PNG, for $57.3 million, approved on 6 December). 6 ADB. 2007. Technical Assistance to Papua New Guinea for the Power Sector Development Plan. Manila (TA 4932- PNG for $500,000, approved on 25 May).

3 documents will support implementation of the EIP. ADB and the World Bank are holding coordinated discussions with government about providing parallel and complementary support for implementation of the EIP. III. THE TECHNICAL ASSISTANCE A. Impact and Outcome 10. The impact of the TA will be improved quality of and increased access to electricity services. The outcome will be that the DPE implements the EROP. B. Methodology and Key Activities 11. The TA will support the planning for implementation of the EIP through preparation of the EROP, capacity building within the DPE, and assistance with identifying and implementing pilot projects. The outputs of the project are as follows: (i) DPE prepares the electrification roll-out plan. The TA will assist the DPE with preparation of the EROP. This will include assistance to prepare targeted technical sections of the plan. This activity will follow the development of an implementation strategy to be coordinated by the DPE with the joint support of ADB and the World Bank. The TA will also assist in developing transparent procedures for prioritizing projects identified under the EROP, including calculating CSO requirements. (ii) DPE has capacity to implement the electrification roll-out plan. The TA will build capacity within the DPE to implement the EIP, 7 including procurement capacity and project management capacity. This will include provision of international technical experts who will provide one-on-one training, workshop training, and assistance with preparing operational guidelines such as procurement guidelines and procedures for project identification, implementation management, and monitoring and reporting. (iii) DPE implements one pilot project. The TA will help identify and prepare the first project for trialing the proposed project implementation mechanism envisaged under the EIP. 8 12. Major assumptions are that (i) the government commitment to the process outlined in the approved EIP will continue, including allocation of sufficient CSO for implementation of the EIP; (ii) CSO budget is available in a timely manner; and (iii) sufficient staff are transferred to the DPE to implement the EROP. A major risk with implementation of the EIP is that the private sector will be unwilling to undertake significant investment in the sector. C. Cost and Financing 13. The TA is estimated to cost $1,000,000, which will be financed on a grant basis by ADB s Technical Assistance Special Fund (TASF-IV). The government will provide counterpart support in the form of staff, office space, and other in-kind contributions. The cost estimates and financing plan are in Appendix 2. 7 Not including transfer of technical regulation from PPL. 8 This output will trial the project selection and implementation mechanism designed under the project. The actual project for selection will depend on the process of project prioritization which will be developed under the technical assistance. The trial project will include private sector involvement with a rural-based renewable energy project.

4 D. Implementation Arrangements 14. The DPE will be the executing agency for the TA. The TA will finance consulting services, equipment, and office furnishings to support DPE implementation of the outputs. A total of 21 person-months of international consultants and 12 person-months of national consultants will be required, to be hired through a consulting firm. The following expertise will be required: a governance specialist, a power infrastructure specialist (international and national), a procurement specialist, and a private sector specialist. Consultants will be engaged by ADB in accordance with its Guidelines on the Use of Consultants (2010, as amended from time to time) through quality- and cost-based selection (quality cost ratio of 90:10) 9 using simplified technical proposal. Consultants may also be recruited through individual consultant selection (considered justified due to difficulties in finding consulting companies with the broad technical spread of required specialists on staff, and the limited pool of consultants with required technical and country expertise). A project steering committee will oversee implementation. The committee will meet at least quarterly and will be chaired by the DPE. The TA will commence on 21 December 2012 and will be completed on 24 December 2015. 15. Equipment under the TA will be procured following ADB s Procurement Guidelines (2010, as amended from time to time). Training and workshops will be implemented with the assistance of consultants. The proceeds of the TA will be disbursed in line with ADB s Technical Assistance Disbursement Handbook (2010, as amended from time to time). The equipment procured under the TA will be turned over to the executing agency upon TA completion. The government will provide in-kind counterpart costs and services including counterpart staff, office space, administrative support costs, and local city transport and logistics costs. The DPE, supported by the consulting company, will provide quarterly reports to ADB. Twice-yearly review missions will be undertaken by ADB. Additional monitoring will be undertaken by national ADB staff based in the Papua New Guinea Resident Mission. IV. THE PRESIDENT'S DECISION 16. The President, acting under the authority delegated by the Board, has approved the provision of technical assistance not exceeding the equivalent of $1,000,000 on a grant basis to the Government of Papua New Guinea for Implementation of the Electricity Industry Policy, and hereby reports this action to the Board. 9 The quality cost ratio of 90:10 is justified because of the technical complexity of substation design and power grid design.

Appendix 1 5 DESIGN AND MONITORING FRAMEWORK Design Summary Impact Improved quality and increased access to electricity services Outcome DPE implements the EROP Performance Targets and Indicators a with Baselines b Access to electricity increases by 5% of total population in target province by January 2016 compared to January 2013 c Increased private sector investment in at least one additional power generation asset between January 2013 and January 2016 Data Sources and Reporting Mechanisms National Economic Report Quarterly electricity management committee (EMC) board reports Assumptions and Risks Assumption Government allocates sufficient CSO budget Risk Private sector unwilling to invest in PNG power sector Assumptions CSO funds become available in a timely manner Sufficient staff are assigned to DPE to implement the EROP Pilot projects are implemented in a timely manner Outputs Disbursement of $2 million CSO financing to electrification projects by January 2016 Risk Political pressure influences site selection Risks 1. DPE prepares the EROP 2. DPE has capacity to implement the EROP EROP adopted by the EMC by December 2013 DPE Energy Unit increases staffing levels from 4 in January 2013 to 30 in January 2016 Quarterly EMC board reports Quarterly EMC board reports An economic downturn may result in inadequate allocation of CSOs Lack of ownership of EROP by major stakeholders Ten technical workshops held by January 2016 to increase capacity within DPE 3. DPE identifies and prepares the first pilot projects One pilot electrification project implemented by January 2016 Quarterly EMC board reports

6 Appendix 1 Activities with Milestones 1. DPE prepares EROP 1.1. EROP consultation workshops held by month 6 1.2. EROP drafted by month 8 1.3. EROP adopted by the National Executive Council by month 12 2. DPE has capacity to implement the EROP 2.1. Management structure established by month 2 2.2. International consultants engaged by month 4 2.3. Additional national staff engaged by month 4 2.4.Ten capacity building workshops conducted by month 6 3. DPE identifies and prepares first pilot project 3.1. First pilot project advertised, screened, and selected by month 4 after approval of EROP 3.2. Design documents prepared by month 6 after approval of EROP 3.3. Project tendered by month 7 3.4. Equipment and civil works contracts awarded by month 8 Inputs A. ADB: $1,000,000 Cost Item Amount ($ million) Consultants 0.89 Equipment 0.02 Workshops and trainings 0.03 Surveys 0.03 Contingencies 0.03 TOTAL 1.00 The government will provide counterpart support in the form of staff, office space, and other inkind contributions. ADB = Asian Development Bank, CSO = community service obligation, DPE = Department of Petroleum and Energy, EMC = electricity management committee, EROP = electrification roll-out plan, PNG = Papua New Guinea. a By the end of the program unless otherwise noted. b Baseline data are drawn from published sources or are the best estimates of ADB based on available information. c Baseline data to be determined in January 2013. Source: Asian Development Bank.

Appendix 2 7 COST ESTIMATES AND FINANCING PLAN ($'000) Item Total Cost Asian Development Bank a 1. Consultants a. Remuneration and per diem i. International consultants (21 person-months) 780.00 ii. National consultants (12 person-months) 60.00 b. International and local travel 50.00 2. Equipment b 20.00 3. Workshops, training, seminars, and conferences 30.00 4. Surveys 30.00 5. Contingencies 30.00 Total 1,000.00 Note: The technical assistance (TA) is estimated to cost $1,200,000, of which contributions from the Asian Development Bank (ADB) are presented in the table above. The government will provide counterpart support in the form of counterpart staff, office space, and other in-kind contributions. The value of government contribution is estimated to account for 20% of the total TA cost. a Financed by ADB's Technical Assistance Special Fund (TASF-IV). b Includes computers and printers. Sources: Asian Development Bank and Government of Papua New Guinea.

8 Appendix 3 OUTLINE TERMS OF REFERENCE FOR CONSULTANTS 1. A summary of the consulting services required is in Table A3. Table A3: Summary of Consulting Services Item Person-Months A. International Specialists Team leader and governance specialist 9 Power infrastructure specialist 5 Procurement specialist 3 Private sector specialist 4 Subtotal (A) 21 B. National Specialists Power sector specialist Source: Asian Development Bank. 12 Subtotal (B) 12 Total 33 2. Team leader/governance specialist (international, 9 person-months). The specialist will act as team lead and will be responsible for managing and coordinating the overall project implementation as well as all reporting activities, and liaison with stakeholders. The specialist will have at least 15 years experience in work related to a government policy advisory role in the context of Pacific developing member countries of the Asian Development Bank (ADB), preferably related to the energy sector. The specialist will have work experience in developing countries, and will preferably have experience working on ADB or other international development agency projects, preferably as team lead. The specialist will spend a minimum of 80% of the allocated time in-country. The specialist s work will consist of the following: (i) Collect and review existing background data. (ii) Liaise closely with main stakeholders including the Department of Petroleum and Energy (DPE), PNG Power Limited, and PNG Sustainable Energy Limited. (iii) Prepare a consultation and participation plan, summarizing proposed stakeholder consultation activities. Coordinate and undertake consultation activities according to the consultation and participation plan. (iv) Prepare the detailed work program and implementation schedule for the project. Coordinate the work of the consultants on the team. (v) Review legislation and advise on required amendments related to transfer of technical regulation to the DPE. (vi) Assist in the preparation of the national electrification roll-out plan (EROP). (vii) Draft procedures for prioritization of projects identified in the EROP. (viii) Develop methodologies for calculation of community service obligations. Assist the DPE in calculating community service obligation requirements. (ix) Work with the procurement specialist to establish a transparent procurement system within the DPE. (x) Work closely with the DPE to establish project management capacity. (xi) Based on the findings of the EROP, identify target pilot projects for implementation. (xii) Work closely with the DPE to trial the implementation of the pilot projects, including project identification and selection, project financing, and project monitoring and evaluation. (xiii) Coordinate team members to prepare reporting deliverables, including inception report, midterm report, and draft and final report. (xiv) Coordinate, facilitate, and assist in delivering training courses.

Appendix 3 9 (xv) (xvi) (xvii) Prepare a procurement plan in accordance with ADB s Procurement Guidelines (2010, as amended from time to time) and prepare necessary bid documents for early procurement Prepare the project implementation schedule, a Gantt chart showing the schedule, and a procurement schedule. Assess the plan s technical risks and carry out sensitivity analysis to check project viability under these risks. Prepare terms of reference, expertise and person-month requirements, and cost estimates for implementation consulting services. For project monitoring purposes, develop a set of performance indicators (in coordination with other technical experts) that can be verified and monitored (including operating, financial, environmental, socioeconomic, and poverty reduction parameters). 3. Power infrastructure specialist (international, 5 person-months). The power infrastructure specialist will have at least 15 years experience in developing power sector infrastructure, including design and construction, preferably in developing countries. The consultant will spend 80% of the time in-country. The consultant s work will consist of the following: (i) (ii) (iii) Prepare relevant technical sections of the EROP. Develop project management capacity within the DPE, including project identification, implementation management, and monitoring and reporting procedures. Work closely with the DPE to identify, select, and implement the pilot projects. 4. Procurement specialist (international, 3 person-months). The procurement specialist will have at least 15 years experience in engineering procurement. The specialist will spend at least 80% of the time allocated in-country. The specialist s work will consist of the following: (i) Collate and review all available background procurement data. (ii) Work closely with the DPE to assist in establishing a transparent procurement system. (iii) Prepare procurement guidelines, including bidding procedures, standard bidding documents, guidelines for bid evaluation, and contract award guidelines. (iv) Conduct procurement training courses. (v) Work closely with the DPE during procurement and implementation of the initial pilot projects. (vi) Consult with stakeholders. 5. Private sector specialist (international, 4 person-months). The specialist will have at least 15 years of experience in development of private sector projects in the power sector, including in developing countries. The specialist will spend a minimum 80% of the allocated time in-country. The specialist's work will consist of the following: (i) (ii) (iii) (iv) Prepare relevant sections of the EROP related to private sector development. Provide outreach private sector engagement workshops to encourage private sector input to the EROP and encourage involvement in investment in the pilot projects. Conduct capacity building for DPE staff in identification and engagement of the private sector, including transparency training. Work closely with the DPE to identify, select, and implement the pilot projects. 6. Power sector specialist (national, 12 person-months). The national power sector specialist will assist the project team in (i) arranging travel logistics; (ii) arranging meetings and

10 Appendix 3 workshops; (iii) liaising closely with stakeholders, including government officials; (iv) obtaining country background data for initial assessments; (v) obtaining follow-up technical data as required; (vi) undertaking technical analysis; and (vii) undertaking other project-related activities as requested by the team leader.