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Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 74445-PG

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 4.8 MILLION(US$ 7.3 MILLION EQUIVALENT)

TO THE

INDEPENDENT STATE OF PAPUA NEW GUINEA

FOR A

PNG ENERGY SECTOR DEVELOPMENT PROJECT

January 22, 2013

SUSTAINABLE DEVELOPMENTPAPUA NEW GUINEA, TIMOR-LESTE AND THE PACIFIC ISLANDSEAST ASIA AND PACIFIC REGION

This document is being made publicly available prior to Board consideration. This does notimply a presumed outcome. This document may be updated following Board consideration andthe updated document will be made publicly available in accordance with the Bank's policy onAccess to Information.

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CURRENCY EQUIVALENTS(Exchange Rate Effective Oct 31, 2012)

Currency Unit = Kina2.05 Kina = US$1

1.5400 US$ = SDR 1

FISCAL YEARJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMS

BOOT Build, Own Operate, TransferCAS Country Assistance StrategyCPS Country Partnership StrategyDEC Department of Environment and ConservationDNPM Department of National Planning and MonitoringDPE Department of Petroleum and EnergyDPEnt Department of Public EnterprisesED-DPE Energy Division, Department of Petroleum and EnergyEIP Electricity Industry PolicyEMP Environmental Management PlanESIA Environment and Social Impact AssessmentESMAP Energy Sector Management Assistance ProgrammeESMF Environment and Social Management FrameworkGDP Gross Domestic ProductGEF Global Environment FacilityGIS Geographic Information SystemGoPNG Government of Papua New GuineaICCC Independent Consumer and Competition CommissionIPBC Independent Public Business CorporationIPP Independent Power ProducerIPZ Interim Protection ZoneKI Kokoda InitiativeLNG Liquefied Natural GasLTDS Long Term Development StrategyM&E Monitoring and EvaluationNB Naoro BrownNEC National Executive CouncilOCCD Office of Climate Change and DevelopmentOTML Ok Tedi MinePAP Project-affected People

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PDO Project Development ObjectivesPMU Project Management UnitPNG Papua New GuineaPNGEDL Papua New Guinea Energy Development LimitedPNGSDP Papua New Guinea Sustainable Development ProgramPPA Power Purchase AgreementPPIAF Public Private Infrastructure Advisory FacilityPPL PNG Power LimitedPPP Public Private PartnershipRAP Resettlement Action PlanRC Regulatory ContractREDD Reduction in Emissions from Deforestation and Forest DegradationRPF Resettlement Policy FrameworkSESA Strategic Environmental and Social AssessmentTOR Terms of ReferenceWB World BankWPPL Western Province Power Limited

Regional Vice President: Ulrich ZachauCountry Director: Franz Drees-Gross

Sector Director: John RoomeSector Manager: Michel Kerf

Task Team Leader: Wendy Hughes

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PAPUA NEW GUINEA

PNG Energy Sector Development Project

Table of Contents

I. STRATEGIC CONTEXT .................................................................................................. 1

A. Country Context............................................................1

B. Sectoral and Institutional Context.......................................... 3

C. Higher Level Objectives to which the Project Contributes ........................... 9

II. PROJECT DEVELOPMENT OBJECTIVES ............................................................. 10

A. PDO ............................................................. 10

Project Beneficiaries ................................................... 10

PDO Level Results Indicators.............................................. 10

III. PROJECT DESCRIPTION ........................................................................................... 11

A. Project components ........................................ ............... 1

B. Project Financing ................................................... 13

Lending Instrument .................................................... 13

Project Cost and Financing ...................... ................... 13

C. Lessons Learned and Reflected in the Project Design........................... 14

IV. IMPLEMENTATION .................................................................................................... 14

A. Institutional and Implementation Arrangements ..................... ......... 14

B. Results Monitoring and Evaluation ....................................... 18

C. Sustainability......................................................... 18

V. KEY RISKS AND MITIGATION MEASURES ........................................................ 19

VI. APPRAISAL SUMMARY ............................................................................................. 20

A. Economic and Financial Analysis ............................... ........ 20

B. Technical ........................................................ 21

C. Financial Management....................... ................... 21

D. Procurement ...................................................... 21

iv

E. Social (including Safeguards) .......................................... 21

F. Environment (including Safeguards) ..................................... 25

ANNEX 1: RESULTS FRAMEWORK AND MONITORING........................................... 29

ANNEX 2: DETAILED PROJECT DESCRIPTION......................................................... 34

ANNEX 3: IMPLEMENTATION ARRANGEMENTS .................................................... 41

ANNEX 4: OPERATIONAL RISK ASSESSMENT FRAMEWORK (ORAF)................ 58

ANNEX 5: IMPLEMENTATION SUPPORT PLAN......................................................... 62

ANNEX 6: NAORO BROWN HYDROPOWER PROJECT TECHNICAL ANNEX ........ 65

ANNEX 7: STRATEGY FOR COMMUNICATION AND CONSULTATION WITH

INDIGENOUS COMMUNITIES IN THE NAORO BROWN HYDROPOWER

PROJECT AREA ................................................................................................................... 76

v

PAD DATA SHEET

Independent State of Papua New Guinea

PNG Energy Sector Development Project

PROJECT APPRAISAL DOCUMENT

East Asia and Pacific Region

EASNS

Basic Information

Date: January 22, 2013 Sector: Power

Country Director: Franz Drees-Gross Themes: Infrastructure services for private sector development (70%);Rural services and infrastructure (30%)

Sector Manager/Director: Michel Kerf / John Roome EA Category: B

Project ID: P101578

Lending Instrument: TAL

Team Leader(s): Wendy Hughes

Joint IFC: No

Borrower: Independent State of Papua New Guinea

Responsible Agency: Energy Division, Department of Petroleum and Energy

Contact: Mr. Vore Veve Title: Director

Telephone No.: (675) 322-4200 Email: [email protected]

Responsible Agency: PNG Power Limited

Contact: Mr. Lawrence Solomon Title: Director, Strategy and Marketing

Telephone No.: (675) 324-3200 Email: [email protected]

Project Implementation Period: Start Date: February 2013 End Date: January 2017

Expected Effectiveness Date: August 2013

Expected Closing Date: January 2017

Project Financing Data(US$M)

Loan [ ] Grant [ X] Other: GEF Grant

[X ] Credit [ ] Guarantee

For Loans/Credits/Others

Total Project Cost: 9.25 Total Bank Financing: 8.20

Total Cofmancing: Financing Gap:

Financing Source Amount(US$M)

BORROWER/RECIPIENT 1.05

IBRD

IDA: New 7.30

Vi

IDA: Recommitted 0.00

Others: GEF 0.90

Financing Gap

Total 9.25

Expected Disbursements (in US$ Million)

FiscalYear FY13 FY14 FY15 FY16 FY17

Annual 0.3 3.1 3.1 1.3 0.4

Cumulative 0.3 3.4 6.5 7.8 8.2

Project Development Objective(s)

The proposed Project Development Objectives (PDO) are to (i) strengthen policy development and strategic framework for renewableenergy and rural electrification; and (ii) attract investors for sustainable development of new hydropower generation to supply the PortMoresby electricity grid.

Components

Component Name Cost (US$ Millions)

Institutional and Policy Development for Renewable Energy and Rural 2.0Electrification

Technical Assistance for Preparation and Planning for Port Moresby Hydropower 6.5

Supply

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[ ]

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

Vii

Legal Covenants

Name Recurrent Due Date Frequency

Article V section 5.01 Effectiveness

Description of Covenant

The Subsidiary Agreement has been executed on behalf of the Recipient and the Project Implementing Entity, in form and substancesatisfactory to the Association. The Co-financing Agreement has been executed and delivered and all conditions precedent to itseffectiveness or to the right of the Recipient to make withdrawals under it (other than the effectiveness of this Agreement) have beenfulfilled, in form and substance satisfactory to the Association.

Article V section 5.02 Effectiveness


The Subsidiary Agreement has been duly authorized or ratified by the Recipient and the Project Implementing Entity and is legally bindingupon the Recipient and the Project Implementing Entity in accordance with its terms.

Prior to DisbursementSchedule 2, Section IV B 1 under Category (1)(a)(b)

and(c)


DPE Financial Management Manual in form and substance satisfactory to the Association.

Schedule 2, Section IV B 1 Prior to Disbursementunder Category (2)


(a) the PPL Financial Management Manual; and (b) the Financial Management Action Plan; all in form and substance satisfactory to theAssociation.

Schedule 2, Section IA September 30, 2013 andthereafter On-going


Establish by September 30, 2013, and thereafter maintain until completion of the Project, an oversight committee (the ElectricityManagement Committee).

Schedule 2, Section IA July 31, 2013 andthereafter On-going


Establish by July 31, 2013, and thereafter maintain, or cause the Naoro Brown Project Developer to maintain, until completion of theProject, two expert panels (the Social and Environmental Expert Panel and the Dam Safety Expert Panel).

Schedule 2, Section IA On-going


Maintain within DPE until the completion of the Project, a project management unit (the DPE-PMU).

Schedule 2, Section IA On-going


Maintain within PPL until the completion of the Project, a project management unit (the PPL-PMU).

Team Composition

Bank Staff

Name Title Specialization Unit

Wendy Hughes Lead Energy Specialist, TTL Energy EASNS

Suman Babbar Consultant Infrastructure financing EASNS

V111

Roberto Aiello Senior Energy Specialist Energy EASNS

Tomoko Matsukawa Senior Financial Officer Finance FEUFS

Tendai Gregan Energy Specialist Energy EASNS

Barry Trembath Consultant Hydropower engineering EASNS

James Monday Senior Environmental Engineer Environmental safeguards EASTS

Rikard Liden Senior Hydropower Specialist Hydropower TWIWA

Asger Christensen Consultant Social Development EASNS

Simon Peter Gregorio Consultant Social Development EASNS

Mark Woodward Sustainable Development Leader Sustainable Development EASPS

'Ana Tu'ionuku ETC Energy EASNS

Erik Johnson Senior Operations Officer Operations EASNS

Aleta Moriarty Communications Officer Communications EAPXT

Nicole Forrester Program Assistant Operations EACNF

Margaret Ali Team Assistant Operations EACGF

Tanya Mas Team Assistant Operations EACGF

Cristiano Nunes Senior Procurement Specialist Procurement EASR1

Kylie Coulson Senior Financial Management Financial Management EAPFMSpecialist

Isabella Micali Drossos Senior Counsel Legal LEGES

Marjorie Mpundu Senior Counsel Legal LEGES

David Whitehead Financial Management Specialist Financial Management EASFM

Haiyan Wang Senior Finance Officer Disbursement CTRLN

Leiping Wang Senior Energy Specialist, Peer Energy EASINReviewer

Pravin Karki Senior Hydropower Specialist, Hydropower SASDEPeer Reviewer

Jie Tang Senior Energy Specialist, Peer Energy EASTSReviewer

Non Bank Staff

Name Title Office Phone City

Locations

Country First Administrative Location Planned Actual CommentsDivision

Papua New Guinea Port Moresby

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I. STRATEGIC CONTEXT

A. Country Context

21. The population of PNG is about 7.3 million with a land area of 463,000 km2, giving apopulation density of about 16 people/km 2 . About 15% of the population lives in urban areas.The rural areas are sparsely populated with low access to infrastructure. PNG has substantialnatural wealth, including forestry, minerals and water resources. The economy has been highlydualistic, although this is starting to break down. The "enclave-based" formal sector is focusedmainly on the large-scale export of natural resources. The informal sector is based mainly on thesubsistence and semi-subsistence activities of the majority rural population. Recent resource-sector investments are propelling the emergence of a non-resource, modem private sectorconcentrated in urban areas. The PNG population is organized in small, fragmented socialgroups, speaking over 800 distinct languages. Allegiance to local, clan-based groups isfrequently strong and more immediate than a national identity, a situation which poses achallenge to pursuit of a national vision.

2. One of the development challenges facing PNG is bridging this broad social andeconomic span: sophisticated private sector operations in mining and other sectors on the onehand and on the other, traditional, subsistence livelihoods for much of the population. Energy isa cross-cutting sector which affects all households, businesses and industries. Effectivedevelopment of a sustainable energy sector targeting both increased access to electricity andmore reliable power supply on the existing grids would have broad social development benefitsfor households including in the rural areas, as well as positive impact on the formal economy.

3. The proposed Project would help identify and set the stage to achieve the significantsocial benefits which would result from sustainable and inclusive development of the energysector. Through the support for development of the Renewable Energy Policy, RuralElectrification Policy and Rural Electrification Strategy, the proposed Project would help createthe policy framework for broad-based social benefits from an improved energy sector. Thestrong emphasis on consultation, including targeted consultation with women, both in the policyand strategy development, and in the preparation for the planned Naoro Brown hydropowerproject, would promote socially-sustainable, gender-equitable energy sector development thatexplicitly factors in the needs and concerns of both the formal and traditional elements of theeconomy and PNG society.

4. PNG has enjoyed markedly improved economic fortunes since the mid-2000s. The globalcommodity price boom and stronger macroeconomic management underlie much of the reversalfrom the declining real incomes and macroeconomic volatility of the preceding 10 years. GDPgrowth is expected to average 7.5 percent per annum between 2010 and 2012. This follows onlya mild impact from the global downturn of 2009 on PNG's economy, which expanded by5.5 percent, outperforming most other developing economies and its regional peers. This followsseveral years of 6 to 7 percent annual GDP growth. While sharply higher global commodityprices have supported incomes, the non-minerals sector has led this resurgence, benefiting fromprivate investment in the newly liberalized telecommunications and aviation sectors, forexample. Improved fiscal management did much to transform windfall gains from higher

1

commodity prices into sustained growth, particularly through fiscal rules ensuring the savings ofwindfall minerals revenues. A sovereign wealth fund framework has been enacted to stabilize thestream of revenues to the government from resource and energy production. It contains strongtransparency and governance arrangements, although much of the operational details remain tobe drafted and enacted.

5. PNG's economic outlook remains solid. The central driver is the stream of newinvestments in the country's productive capacity. The current US$ 16 billion PNG-LNG(liquefied natural gas) project appears to be on track to deliver its first cargos in late 2014, withconstruction having peaked in 2012. The Government expects the LNG project to expand GDPby as much as one-quarter in 2014 and 2015 (little of the construction activity is expected to beretained in the local economy), and national income by about 8 percent. The project is forecast tostart generating significant revenues for the government late this decade. Final investmentdecisions on a second LNG project, potentially with even larger production potential, and on anumber of other large resource projects, are expected during 2013.

6. Risks to PNG's outlook are significant, in both directions. In the short-term, they arepredominately to the downside, and focus on supply and demand volatility and fiscal pressures.Inflation has been high through recent years, and is expected to remain between 5 and 10 percentinto the medium-term. Reflecting the maturing economy and strength in demand in recent years,recent inflationary pressures are largely emerging from domestic capacity constraints. Thenormal tools of monetary policy are inhibited by the structure of the financial sector, especiallythe structural excess liquidity. The supply constraints driving inflation, particularly of skilledlabor, in the construction sector and of land for development, are also limiting the scope forhigher output growth and the efficiency of government development capital spending. Whilesupply is responding, it is doing so with a lag, creating risks of a capacity overhang as demandwanes. This is especially significant in the labor market, with large numbers gaining their firstexposure to formal employment and others attracted into specialized technical training, but withmany short-term positions set to expire as construction of the PNG-LNG project winds down.Meanwhile there are risks of ongoing political uncertainty following national elections held inJuly 2012. These elections have been no more violent or problematic than those in 2002 and2007. However there may be a return to short-lived coalition governments, following a SupremeCourt decision overturning a political integrity law that limited the ability of Members ofParliament to change affiliation between elections. Such pressures may worsen the quality ofspending, just as government revenues are compressed by volatile global commodity prices anddeclining production and profitability of existing resource projects.

7. Into the longer-term, the potential stream of resource projects following the PNG-LNGproject presents a major upside potential in terms of growth and revenue. The demand forelectricity on the Port Moresby grid has grown rapidly in the recent years and projections suggestthis will continue for several years. There are other natural gas projects under discussion, but theExxon Mobil LNG project is primarily for export. There is provision for limited domestic gasoff-take at the gas field, but there is no provision for pipeline capacity to supply gas in PortMoresby. As a result, PNG Power cannot plan near-term generation expansion based on gas-fueled generation.

2

8. In addition to natural gas, PNG has abundant, untapped hydropower resources. Availablestudies indicate a potential of at least 10,000MW, ranging from micro- to mega- project scales.A more comprehensive assessment would likely show a greater potential, considering themountainous terrain and high rainfall in many parts of the country. Just a fraction of thishydropower potential - less than 250MW - has been harnessed to date, yet about 90% of thepopulation has no access to electricity, and power supply in the urban centers is insufficient toreliably meet demand. Development of hydropower offers the prospect of clean, sustainable,cost-effective electricity supply. Socially-responsible preparation and development ofhydropower resources, in combination with efficient, complementary thermal alternatives suchas gas-fired generation, would make a significant contribution to social and economicdevelopment in PNG for decades.

B. Sectoral and Institutional Context

Key Electricity Sector Institutions

9. Key sector institutions are:* Department of Petroleum and Energy (DPE) has responsibility for policy, strategic

direction and planning in the energy sector. Under the Electricity Industry Policyapproved in December 2011, discussed below, DPE's responsibilities have expanded toinclude the position of Chair of and Secretariat to the Electricity Management Committee(EMC). It is also intended that DPE will take over the function of technical regulation ofthe sector from PNG Power (subject to approval by the Independent Consumer andCompetition Commission).

* Independent Public Business Corporation (IPBC) holds the Government's ownershipinterest in state-owned enterprises including PNG Power, and handles commercialaspects, monitoring and oversight.

* Independent Consumer and Competition Commission (ICCC) is responsible for theeconomic regulation of electricity retail tariffs. The current Regulatory Contract (RC) forPNG Power covering the period 2002-2012 has been extended until the next RC isfinalized. The next RC is expected to be in place by the end of February 2013.

* PNG Power Limited (PPL) is the state-owned, vertically-integrated electricity utility withlicenses for generation, transmission, distribution and retail covering most of the mainurban centers. PPL was created in July 2002 when the electricity assets, liabilities andundertakings of the Government-owned statutory corporation Elcom (formerly theElectricity Commission of PNG) were transferred to PNG Power Limited. PPL isincorporated under the Companies Act and 100% owned by the General Business Trustof which the IPBC is the trustee.

3

* Western Province Power Limited, a wholly-owned subsidiary of PNG SustainableDevelopment Program Limited (PNGSDP) , has a license for electricity generation,distribution and supply activities in the Western Province. Western Power's mandate isdevelopment-oriented, with a focus on small scale (<10MW) power supply that would beunlikely to be commercially viable without targeted financial support.

Power Supply in PNG

10. There is no national power grid in PNG, due in part to the country's very rugged,mountainous terrain, high population dispersion, low income level, capital constraints, and thedevelopment priorities of GoPNG. Instead, Papua New Guinea has three separate main powergrids owned and operated by PPL:

* Port Moresby;

* Ramu Valley serving Lae, Madang, and the Highlands;

* Gazelle Peninsula (Rabaul) serving East New Britain Province.

11. These three islanded networks are mixed hydro-thermal power systems. PPL also2operates 14 other small systems , all of which are thermal based with the exception of two that

have mini-hydro schemes supplemented by diesel power. Table 1 shows installed capacity andpeak demand for the three main systems and the smaller centers.

1 PNGSDP was established in 2002 as an independent entity, when BHP Billiton divested its 52 percentshareholding in the Ok Tedi Mine (OTML) following concerns about the long-term environmental impact of themine, and the social and economic repercussions of this impact. PNGSDP has the task of applying the fundscoming from OTML which are assigned for the development of PNG, and in particular the Western Province.PNGSDP's objective is to support selected sustainable development programs through projects and initiatives tobenefit PNG. Western Province Power Ltd (WPPL) is a wholly-owned subsidiary of PNGSDP. The purpose of thisentity is to drive the PNGSDP rural electrification mandate in Western Province and the rest of PNG. PNGSDPand Origin Energy (Australia) each own 50% of PNG Energy Development Ltd (PNGEDL). The purpose of thecompany is to support and participate in commercially viable, environmentally and socially sustainable energydevelopments greater than 10MW.

2 Asian Development Bank is providing financing under the "Small Towns Project" to assist PPL in converting up tosix of the smaller grids to hydropower supply. The financing agreement was signed in early 2011.

4

Table 1: Current Generation Installed Nameplate Capacity and Current Site Rating

System Type Capacity Site Rating Peak Demand Energy(MW) (MW) (MW) (GWh)

Port Moresby Hydro 68 58Thermal 107 84 98 394Total 175 142

Ramu Hydro 89 83Thermal 55 39 60 293Total 144 122

Gazelle Hydro 10 9Thermal 11 9 9 39Total 21 18

Other Centers Hydro 2 2Thermal 34 18 16 75Total 36 20

TOTAL Hydro 169 152Thermal 207 150 183 801Total 366 302

12. Included in the above is a 24MW diesel unit Independent Power Producer (IPP)supplying the Port Moresby grid under a power purchase agreement with PPL.

13. PNG Power's power systems were predominantly built in the late 1960s and early 1970s,prior to PNG's independence in 19753. Since that time, there has been relatively little expansionof the geographic coverage of the existing PNG Power networks due to the inadequacy ofresources to expand beyond the urban centers, but the loads on the networks have grown.

14. There is at least 280MW of additional capacity outside these grids belonging to otherentities. Most of this is privately-owned and operated for dedicated power supply to certainmining operations. Many of these are diesel systems, but a privately-owned 58MW hydropowersystem provides power to the Ok Tedi mine (OTML), and the Lihir Gold mine is largelypowered by privately-owned geothermal power. Gas turbine power plants in the Highlands arefuelled by natural gas from the Hides gas field. In some cases, privately-owned generators injectpower to the PPL systems under power purchase arrangements with PPL. Western ProvincePower Ltd. (WPPL) owns and operates some isolated grids in Western Province.

15. Beyond the grids operated by PPL, WPPL and major mines, power is supplied via:

* mini-grids in provincial and district administration centres under the oversight of theprovincial governments (formerly called 'C-centers');

* stand-alone diesel generators for clinics, churches and schools; and

3 Although the WB has had limited involvement in the energy sector recently, the WB has a long history ofsupporting hydropower in PNG. Most of the large scale hydropower built in PNG during the 1970s and 1980s wasfinanced by the World Bank. Investment loans helped finance the Upper Ramu (Ramu 1) and Yonki hydropowerschemes that supply the two main power grids in PNG (Ramu and Port Moresby), as well as expansion of thecountry's transmission and distribution networks.

5

* household generators (diesel, solar).

16. It is estimated that about 10 % of PNG's population has access to electricity. The GoPNGhas set a target in its Development Strategic Plan 2010-30 of achieving 7 0% access by 2030.Efforts to date have been largely ad hoc. GoPNG has recognized the need for a coordinatedapproach, beginning with developing a rural electrification policy and strategy.

PNG Power Ltd. (PPL)

17. PPL currently supplies around 91,000 customers with 800,000 MWh/yr of electricity.Sales revenue for 2011 was K625m. Net profit before tax declined in 2008 to K5.8 millionlargely because of higher fuel and maintenance costs, but PPL remains profitable. During 2007-2008 capital expenditure increased to KI 15.8m in 2007 and Kl36.8m in 2008, up from a lowlevel of Kl8m in 2004, which has been funded primarily by borrowings and a K65m equityinfusion. Gearing is currently moderate at 34% debt/equity.

18. The performance of PNG's power sector improved in the period 2002-2011, followingthe deterioration in services in the 1990s that arose from that decade's political and economicinstability and uncertainty in PNG. PPL was near bankrupt in 2002, with its generation andnetwork assets run down, and reliability poor. Between 2002 and 2011, the changes in the powersector's policy and regulatory framework, together with significant efforts on the part of PPL,helped to place the sector on a much better footing. Key changes include: a) in 2002, theestablishment of an independent regulator, the ICCC, and a Regulatory Contract covering the 10year period 2002-20114. The ICCC implements a form of revenue cap regulation in relation toPPL and sets license conditions for other electricity market participants; b) PPL improving itsfinancial performance between 2003 and 2011, with increased revenues and sustainedprofitability; c) PPL investing in new plants and rehabilitating existing plants. New investmentsinclude: the Yonki Toe of Dam hydro station and a transmission line to the Hidden Valley goldmine. The Rouna 2 hydropower station has been refurbished, thereby restoring some generationcapacity for Port Moresby. These infrastructure investments by PPL have been funded byinternally generated cash flow and through a major PGK 418 million debt facility establishedwith a syndicate of PNG financial institutions.

19. However, PNG's power sector faces a number of serious, ongoing challenges, including:

* Little generation reserve margin, and transmission and distribution networks are atcapacity or overloaded, resulting in poor reliability of the power systems in the event ofgenerator or network outages;

* Generator maintenance scheduling is challenging, given lack of spare capacity and thecost of running diesel-based generation to replace off-line hydropower. Because of this,routine maintenance tends to be done on an opportunistic basis. Hydro generators are thelast to be serviced given the opportunity cost of taking them out of service and operatingdiesel and/or the load shedding that would take place;

4 The current RC has been extended until a new RC is in place. The new RC is expected to be in place by the end ofFebruary 2013,).

6

* Significant de-rating of existing hydro-generation capacity due to inadequate servicing ofthe hydro generators over time. PPL is currently implementing a rehabilitation programfor its hydro generators to restore capacity;

* Relatively high electrical losses, which in 2011 were estimated to be around 20% onaverage, with some areas such as the Highlands experiencing significantly higher losses.PPL is currently developing a program to reduce losses;

* A growing dependence on diesel generation, in the absence of access to natural gas anddevelopment of further hydropower;

* Unpaid electricity bills, particularly those of some government departments.

20. A national uniform tariff is used (which charges the same price for customers within aspecific group, regardless of location). The cross-subsidies that arise from this are viewed asnecessary to maintain affordability of electricity access in high cost areas. Power prices areexpected to rise to fund new power sector infrastructure (including power purchase commitmentsunder-pinning new private sector development). The current RC between PPL and ICCC wasdue to expire in December 2012. PPL submitted a proposed RC for the next 5-year period andthis has been subjected to public consultation. The current RC has been extended while a newRC is being finalized. The new RC is expected to be in place by the end of February 2013,taking into account the government's recently-approved Electricity Industry Policy (EIP). Thispolicy includes a move away from the national uniform tariff towards pricing that is more cost-reflective, whilst still maintaining some cross-subsidies to ensure affordability in high-cost areas.

Demand Growth for the Port Moresby System

21. An updated demand forecast was prepared in September 2012. PNG Power is preparinga new set of load forecasts, as part of its preparations for developing a revised fifteen-year plan.The main source of uncertainty is the projected load for the Port Moresby system. PortMoresby's load is now expected to grow more rapidly because of economic growth stimulated inpart by the construction and commissioning of the LNG export terminal in Port Moresbyharbour. Currently available projections for growth in energy demand on the Port Moresby gridshow energy demand growing at about 10% for the next four years and then gradually settlingdown to an average growth of 3.8% in the next 15 year period 6 . The combination of demandgrowth and upcoming retirement of some existing thermal plants indicates that the proposedapproximately 80 MW of capacity planned for the Naoro Brown project would be essentiallyfully committed7 by 2017, the earliest expected commissioning date.

The LNG plant will have its own dedicated power supply, separate from the PPL system. However the activitylinked to the LNG export terminal will place increasing demands on the PPL grid.6 PPL projections.7 Through a combination of meeting demand growth and substituting for existing diesel-fired generation.

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Role of Natural Gas

22. PNG has large natural gas resources as well as hydropower potential. Currently there isno provision for gas to be available for domestic use in Port Moresby outside the Exxon MobilLNG project, but other natural gas projects are under discussion in PNG. Given the electricitydemand growth projections, new capacity is needed in the near-to-medium term and the unit costof hydropower would be much lower than for a non-gas thermal alternative. It is possible that inthe future natural gas might be available for domestic use in Port Moresby and would beconsidered in future planning exercises. Considerations would include: natural gas andhydropower generation can be complementary; hydropower is a clean, renewable energyresource that might otherwise not be utilized while natural gas can be exported; domestic naturalgas might be better used for cooking, heating and air conditioning with hydropower used togenerate electricity.

Electricity Industry Policy (EIP)

23. After an extensive period of consultations, the Electricity Industry Policy was approvedby the National Executive Council (NEC) in December 2011. The Policy addresses threestrategic objectives of the Government:

* Improving access in the provision of electricity services;

* Improving reliability of electricity supply; and

* Ensuring that power is affordable for consumers.

24. Key elements of the policy include attracting the private sector to new power generation,improving government management of the sector under the guidance of an ElectricityManagement Committee (EMC), moving away from uniform tariffs towards cost-reflectivepricing, and transferring the technical regulation of the sector to DPE.

Private Sector Investment Climate

25. GoPNG hosted a two-day workshop in September 2010 focusing on financing andsafeguards aspects of development of new hydropower in PNG. The event was attended byrepresentatives from the private sector and multilateral and bilateral institutions. There was clearinterest from all parties, with the private sector stressing the requirement of a clearly defined riskmitigation structure. At least two hydropower projects, larger than the Naoro Brown project, arein various stages of assessment or preparation, with some level of involvement of the privatesector expected.

Public Private Partnership (PPP) Policy, Bill and proposed PPP Center

26. A Public Private Partnership (PPP) Policy has been adopted by Government. The PPPBill is a work in progress and will provide the mechanism for establishing a PPP Centre, whichwill act as a focal point for supporting PPPs, including providing policy guidance, assessment ofthe viability of PPP schemes and direct involvement in the procurement process. The PPP Bill

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sets out a structured approach for delivering PPPs, from identification through to contractexecution.

27. The process of recruiting staff for the PPP Center cannot begin until the PPP Law is inplace and it is unlikely that the PPP Centre would be fully operational until at least a year afterthe Bill is passed. It is intended to launch the selection process for the Naoro Brown ProjectDeveloper by the third quarter of 2013, and it is likely that the Naoro Brown project would needto be subject to transitional arrangements as it would not benefit from the full support of the PPPcentre. Specifically, PPL would continue to spearhead the preparation of the Naoro Brownproject including hiring transaction advisors to help prepare the Naoro Brown project for biddingand selection of the Naoro Brown Project Developer. This would be done within the overallframework of the PPP policy and under the guidance of an oversight committee - the ElectricityManagement Committee - consisting of key ministries. As the PPP Center is established,designated staff would be involved in the Naoro Brown preparation process, as appropriate, toprovide hands-on experience and on-the-job training in a transaction.

C. Higher Level Objectives to which the Project Contributes

28. The GoPNG has recently developed three documents setting out the national long andmedium term vision and strategic direction. The Vision 2050 highlights a diversification fromminerals wealth towards broader growth, employment and improved service delivery. TheDevelopment Strategic Plan (DSP) 2010-2030 provides more guidance on national priorities, andthe Medium Term Development Plan 2011-2015 articulates specific actions and deliverables,and the strategies through which they are to be implemented. Development of a strategicapproach in the energy sector and a target of increasing access to electricity from the currentlevel of less than 10% to 70% by 2030, and specific 5-year goals with regards to increased use ofhydro and improved energy sector management capacity, are of particular relevance for theproposed Project. The GoPNG is in the process of developing a strategy toward climatecompatible development, including a focus on low carbon growth development paths. TheInterim Action Plan for Climate Compatible Development (public consultations were undertakenin 2010-2011) prioritizes readiness activities for a future Reduction in Emissions fromDeforestation and Forest Degradation (REDD) while looking for economic growth opportunitiesthat minimize future emissions. The proposed Project contributes to achieving the higher levelGoPNG objectives in the energy sector.

29. The proposed Project is fully aligned with the current WBG Country Partnership Strategy(CPS) for the period FY13-FY16, which was approved by the WB Board of Executive Directorsin December 2012. In the context of discussions on the CPS, the Government has signaled itsdesire for a continued high priority on strategic renewable energy sector work in the WBGprogram. The development of the Project has been closely coordinated with IFC. IFC and MIGAwere represented at the September 2010 Hydropower workshop in Port Moresby.

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II. PROJECT DEVELOPMENT OBJECTIVES

A. PDO

30. The proposed Project Development Objectives (PDO) are to (i) strengthen policydevelopment and strategic framework for renewable energy and rural electrification; and (ii)attract investors for sustainable development of new hydropower generation to supply the PortMoresby electricity grid.

Project Beneficiaries

31. Beneficiaries of the technical assistance supported under the Project would be theinstitutions responsible for developing energy sector policy in PNG and for preparing the NaoroBrown Hydropower project. If successful, the proposed Project would stimulate downstreaminvestment in the energy sector both for rural areas and for new supply to Port Moresby.Beneficiaries of the anticipated subsequent investment would include (i) the portion of the PNGpopulation which does not currently have access to a reliable, affordable, sustainable supply ofelectricity, since strengthening the policy environment for rural and renewable energy andpreparation of a rural electrification strategy are essential steps towards significantly increasingaccess to sustainable electricity supply; and (ii) current and potential new customers of PNGPower, in particular on the Port Moresby grid, since technical Assistance supported by theproposed Project would lead to a lower cost and better reliability of power supply on the PortMoresby grid than would be possible without the Project.

32. Climate Finance, including any carbon offset mechanism within the compliance and/orvoluntary carbon markets, is expected to be mobilized in connection with the Project activities assuch benefits are considered important for the long-term viability of the programs.

33. Global environmental benefits would result from implementation of new hydropower,rather than diesel-based generation, to supply the Port Moresby grid, and as a result of a lowcarbon growth rural electrification strategy, supported by appropriate policies.

PDO Level Results Indicators

(i) Rural and Renewable Energy policies submitted to Cabinet and rural electrificationstrategy completed following a participatory process;

(ii) Financing for the Naoro Brown hydropower project is at an advanced stage;

(iii) Planning study is completed as a key input to preparing future hydropower projects forinvestment.

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III. PROJECT DESCRIPTION

34. Three broad areas for possible World Bank-supported technical assistance were identifiedbased on GoPNG priorities:

* Technical assistance in the areas of policy and strategy in the electricity sector, with afocus on rural and renewable energy;

* Capacity building to assist the Government in preparing for its role in new hydropowerprojects;

* Technical assistance in developing the Naoro Brown hydropower project to supply thePort Moresby grid, and setting the stage for further hydropower developments in the PortMoresby area.

35. The Project description and scope are based on these priority areas. A socialdevelopment approach is embodied in the proposed project design. As PNG develops itsapproaches and strategies in the energy sector and, in particular, the approach to the preparationof the Naoro Brown Hydropower project, GoPNG recognizes the importance of serious attentionto both social development aspects and to social and environmental safeguards. Thus the workof developing appropriate instruments and doing appropriate consultation is built into thetechnical assistance. The proposed Project would fund technical assistance activities, includingsome drilling activities required to complete the feasibility study, and would not fundinvestment. The rationale for funding technical assistance is to provide timely resources to assistin guiding the preparation necessary for subsequent, key investments, including in social andenvironmental aspects. As the implementation proceeds and if the GoPNG were to requestfinancing support for investments following on from this technical assistance, the World Bankwould be pleased to consider such requests.

A. Project components

36. The Project would consist of two components:

37. Component 1: Institutional and Policy Development for Renewable Energy and RuralElectrification, to be implemented by the Department of Petroleum and Energy, the EnergyDivision.

(a) Energy Policy Development

(i) Development of a renewable energy policy for the GoPNG.

(ii) Development of a rural electrification policy for the GoPNG.

(b) Institutional and Strategy Development

(i) Strategic environmental and social assessment of the policies to be developed;

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(ii) Development of a rural electrification strategy for the Recipient, including interalia (A) initial data to define resources and demand for rural electrification; (B)an analysis of alternative models of community and rural electrificationinitiatives, including cost structure, as input to the process for developing tariffsfor electricity supply; and (C) a methodology for screening social andenvironmental aspects of rural electrification initiatives.

(c) Capacity Building

(i) Strengthening the capacity of GoPNG's institutions, for their role in oversight ofthe preparation and the development of electricity projects in the medium termincluding the Naoro Brown Hydropower Project, with inter alia theenvironmental and social safeguard aspects.

(ii) Strengthening Project management through effective and efficient operationalmanagement, procurement and financial management, including through initialoperation of DPE regional offices and training.

38. Component 2: Technical Assistance for Preparation and Planning for Port MoresbyHydropower Supply to be implemented by PNG Power Ltd.

(a) Preparation of the Naoro Brown Hydropower Project for Port Moresby

Strengthening the institutional capacity of the Project Implementing Entity in the areas oftechnical, financial, legal, economic, social, environmental (including the Social andEnvironmental Expert Panel, the Dam Safety Expert Panel and the Environmental and SocialManagement Framework, further feasibility study work including drilling and grouting trials,preparation of a geological baseline assessment), communications, procurement, and Projectmanagement as required to: (i) prepare the Naoro Brown Hydropower Project; (ii) select aNaoro Brown Project Developer; and (iii) provide support through financial close andtechnical assistance required for additional assessments and feasibility studies and economicanalysis.

(b) Improved Planning Related to Hydropower Supply for Port Moresby

(i) A three-basin inventory study of the Brown, Vanapa and Angabanga Basins;

(ii) Institutional strengthening and capacity building for the Project ImplementingEntity, the Electricity Management Committee and supporting staff, in areascritical for implementation of improved performance and implementation ofhydropower projects, such as planning capacity, project evaluation, preparationand negotiation of power purchase agreements, procurement, financialmanagement, social and environmental aspects and communications.

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B. Project Financing

Lending Instrument

39. The International Development Association (IDA) and the Global Environment Facility(GEF) would provide co-financing for the proposed Project. The lending instrument would bean IDA credit. The GEF financing would be a grant to GoPNG and would not finance any of theComponent 2 activities. The PNG Energy Sector Development Project would be implementedover four years, February 2013 to January 2017.

40. For Component 1 activities, approximately US$ 1 million of the IDA credit plus the US$0.9 million GEF grant would be available for the Component 1 implementing agency, EnergyDivision of the Department of Petroleum and Energy, to undertake agreed activities.

41. The remaining IDA credit - approximately US$ 6.3 million would be made availablefrom GoPNG to PNG Power to undertake Component 2 activities. This amount represents thecost estimate plus contingencies. Consistent with the GoPNG's draft on-lending policy, sincethe technical assistance activities to be financed under Component 2 of the Project focus onpreparation and planning, the activities are considered upstream of a commercial investment andhence the GoPNG intends to provide these funds as a grant to PPL based on a SubsidiaryAgreement.

42. Retroactive financing from the IDA Credit would be available up to US$650,000 andfrom the GEF grant up to US$100,000 for a total retroactive financing amount of up toUS$750,000.

Project Cost and Financing

Project Components Project IDA Credit % IDA GEF % GEFcost Credit Grant Grant

1. Institutional and Policy Development 2,000,000 960,000 48% 855,000 43%for Renewable Energy and RuralElectrification

2. Preparation and Planning for Port 6,500,000 5,740,000 88% 0 0%Moresby Hydropower Supply

Total Baseline CostsPhysical contingencies 0 0 0Price contingencies 750,000 600,000 45,000

Total Project Costs 9,250,000 7,300,000 900,000Interest During Implementation 0 0 0Front-End Fees 0 0 0

Total Financing Required*4 9,250,000 7,300,000 79% 900,000 10%

Retroactive financing (up to US$750,000) would be available."The difference between Project cost and financing is made up by the counterpart funding from GoPNG (US$0.25min-kind and cash for project management, external audit, consultations and consensus-building) and PPL (US$0.80m

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in-kind for project management and cash - already paid - for the Naoro Brown Feasibility Study, consultations andrelated work).

C. Lessons Learned and Reflected in the Project Design

43. A key lesson learned from other WB-assisted projects in PNG is the importance ofinformation sharing and consultations from an early stage. Equally important is the properidentification of the stakeholder groups and their representatives, in particular with respect toland ownership and use related to infrastructure development that would be stimulated by thetechnical assistance to be provided under the proposed Project. WB experience supportingactivities in the mining sector has demonstrated the importance of including women-focusedconsultations to ensure that views from women are included in the input to the policy, strategyand social assessment processes. Another lesson is that Technical Assistance support is moreeffective when there are real plans and opportunities to put it into practice, such as the proposedsupport for preparation of the Naoro Brown project. The World Bank has learnt substantivelessons about designing sustainable hydropower projects that have the highest benefit for people,while minimizing negative social and environmental impacts. Policy and technical advice willbenefit from this experience. Moving forward with a Low Carbon or "Green growth" approachrequires a strong development rationale and perceived domestic benefits. The proposed Projectsupports a focus on low-carbon growth in the energy sector that directly addresses GoPNGdevelopment priorities.

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

44. The proposed Project would involve two implementing agencies: (i) the Energy Divisionat the Department of Petroleum and Energy (ED-DPE) and (ii) PNG Power Ltd. (PPL).

45. The Energy Division has a small staff and in the past has remained relatively low-profilein the Department, as the major focus of DPE in the past few years has been the Exxon MobilLNG project. Now that the key LNG Project implementation is underway, GoPNG and DPE arere-focusing on the energy sector. Under the Electricity Industry Policy, significant strengtheningand expansion of the Energy Division is planned for the next two years and beyond. None of thecurrent staff at the Energy Division have been involved in WB-supported projects. Capacity forundertaking WB procurement and financial management will need to be developed furtherduring implementation of the proposed Project. A DPE Project Management Unit (PMU) hasbeen set up, headed by a senior staff member in the Energy Division. Capacity strengthening inproject management, financial management and procurement would be supported under theproposed Project.

46. PNG Power Limited has strong technical staff, although lacking experience in WBprocurement and financial management procedures as PNG Power has not undertaken a WB-supported project in over a decade. Capacity for undertaking WB procurement and financialmanagement will need to be developed further during implementation of the proposed Projectand the Project includes provision for this support. A PMU has been set up at PNG Power, with

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existing staff from the utility headed by the PMU manager (a senior staff member), and includinga financial management specialist and an environmental specialist. Initially the team memberswould not be required full-time for the PMU activities. As implementation proceeds, therequirements on the PMU would increase. The need for additional PNG Power staff time and /or specialist consultant support for the PMU will be determined as implementation proceeds.Component 2 of the proposed Project includes funding to strengthen project management andhire technical specialists as required, for example in communications and safeguards aspects.

47. With respect to implementation of Component 2.1: Preparation of the Naoro Brownhydropower project for Port Moresby, PNG Power is well-placed in terms of power sectorexpertise to manage the process for preparing the Naoro Brown hydropower project. However itis recognized that ultimately the key decisions will be made by GoPNG through the ElectricityManagement Committee (EMC). The EMC is chaired by the Secretary for Petroleum andEnergy. Other permanent members include the Secretaries for Treasury and Planning and theManaging Director for IPBC and a representative from the PNG Chamber of Commerce andIndustry. Other members (for example, from Department of Environment and Conservation(DEC) or the ICCC) may be co-opted to the Committee as required. The EMC will be supportedby a secretariat housed in the Energy Division of the Department of Petroleum and Energy. Aworking-level committee has also been established that will report to the EMC and so it isexpected that, in general, recommendations on the Naoro Brown Hydro Project will first bereviewed by this working group before being submitted to the EMC for a final decision. As andwhen the PPP Center in Treasury is established, designated staff may be invited to join the EMCitself or its working group. PNG Power will report to the EMC or its working group on a regularbasis so that both the Committee and its Working Group are well-informed regarding theprogress and issues as decision points are reached. Component 1 of the proposed Projectincludes funding for Technical Assistance related to GoPNG's role in the Naoro Brownhydropower project so that specialist input can be brought in as and when DPE and / or theElectricity Management Committee requires it.

48. Submissions to the EMC regarding the Naoro Brown Hydropower Project would also beprovided for information to ICCC. This would help ensure that ICCC remains abreast of thepreparation and is able to draw attention early on to any issues which may need to be addressedwith respect to the regulatory process.

49. With respect to the safeguards aspect of the proposed Project and Component 2.1 inparticular, a clear plan of responsibilities and support required to fully address the safeguardsaspects associated with the Project has been prepared. A draft of this Environment and SocialManagement Framework (ESMF) was made publicly-available for consultations and disclosurein February 2011. Further details are provided in Section VI: Appraisal Summary and in Annex3.

50. Financial management, disbursement and procurement arrangements are discussed inSection VI and in Annex 3.

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Capacity Strengthening

51. The strategy of supporting a technical assistance project rather than waiting for aninvestment opportunity is essentially in recognition of the need for early TA and capacitystrengthening in order to set up the processes for new investment. While capacity building is notexplicitly a Project development objective, it is recognized that in order for the proposed Projectto meet the stated objectives, capacity strengthening in the energy sector will be needed.Capacity building efforts have started, and are following a two-track approach: (i) Sector widecapacity building as part of the overall energy sector dialog underpinning the proposed Project,and (ii) Project-specific capacity building focused on strengthening capacity of the implementingagencies to implement the proposed Project.

52. Sector wide capacity strengthening. This is targeted at the broader set of energy sectorstakeholders with the objective of increasing awareness of experience and lessons fromelsewhere that can be factored into development of PNG's energy sector. Examples of sectorwide capacity strengthening that have taken place or are planned are discussed below. Furtheropportunities will be identified as Project implementation gets underway and in coordinationwith DNPM, DPE and Development Partners.

* Workshop on Sharing the Benefits of New Hydropower in PNG: Environmental, Socialand Financing Aspects of Medium and Large Hydropower. A two-day Workshop on"Sharing the Benefits of New Hydropower in PNG" in September 2010 in Port Moresbywas jointly hosted by the Department of National Planning and Monitoring andDepartment of Petroleum and Energy. Government departments, international anddomestic private sector, civil society representatives and other stakeholders in PNGparticipated. The workshop was supported and attended by development partners.Speakers included government officials from PNG and representatives of countries withactive private hydropower development, namely Nepal and Laos, as well as private sectordevelopers, commercial lenders and governments' advisors. Discussion included optionsfor financing and bidding modalities, perspectives of host governments, developers andlenders, as well as financing products available from commercial sources anddonor/official institutions. DNPM has indicated that they plan to work with DevelopmentPartners to hold workshops on various topics in the energy sector on an annual or bi-annual basis.

* A study visit to Lao PDR took place in October 2011. Lao PDR has significant recentexperience in hydropower development. The purpose of the study visit was to facilitateinformation exchange and first-hand interaction with a range of key stakeholders (e.g.Government, private sector, NGOs, etc).

* Support from a PPIAF grant to assist GoPNG in formulating elements of a broad strategyfor hydropower development in PNG resulted in the paper: Options Assessment forStructuring and Financing New Hydropower in PNG. Presentation and discussionsrelated to this activity took place in 2011. The paper was finalized in early 2012.

* The GoPNG has requested support from the WB for the development of a high-levelnational electrification rollout vision and guiding principles as a precursor for detailing

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policies and strategies. Funding from the WB's Energy Sector Management AssistanceProgram (ESMAP) has been obtained to support this activity, which will complement theproposed Project. As part of the process, a workshop is planned for the first half of 2013aimed at: (i) providing power sector stakeholders in PNG with an update on internationalexperience on the guiding principles for the development of an electrification roll outplan, with a particular focus on successful models, financing structures and sources, andsocial and environmental issues; and (ii) facilitating discussion between PNG energysector stakeholders and counterparts from other countries in government, private sectorand financing organizations who have recent, hands-on experience in development ofrural electrification in other countries. The WB team will work with GoPNG to bring inadditional support from other donors, such as IFC, ADB, JICA, and others.

Meetings with NGOs and think-tanks in PNG provide an update on progress of theproposed Project and, more generally, discuss the Project in the context of stakeholders'broader energy sector objectives and goals.

53. Project-specific capacity strengthening. This targets primarily the implementingagencies, but would extend to key counterparts within Government - e.g. DEC, ElectricityManagement Committee - in technical areas as needed. WB missions will supplement thecapacity building through in-depth discussions and, especially for procurement and financialmanagement, focused Project-specific training sessions during missions. Support would beprovided in technical areas, procurement, financial management and project management.

* Technical areas. Technical specialists would be hired under the Project to provide thenecessary technical expertise (see Annex 3 for a summary of the procurement plan). Theterms of reference for the technical assistance would specifically include provision foron-the-job training and knowledge transfer to the relevant Government agencies and PPL.To the extent feasible, where international consultant expertise is required, internationalconsultants would be encouraged to partner with local experts both to gain the benefit oflocal knowledge as well as to build capacity of local experts through close interactionwith specialists from elsewhere.

* Project management. Support is included to strengthen project management. As the PMUmanagers are agency staff (not consultants), on-the-job learning would be retained withinthe agencies.

* Fiduciary. Procurement and Financial Management capacity building would includetraining for the relevant PMU staff, largely through training sessions provided by theWB. Several training events were organized during project preparation and agency staffparticipated. PMU staff would be encouraged to attend similar training sessionsthroughout Project implementation.

* Training. Funds are allocated for dedicated training activities for both DPE and PPL.The specific training requirements would be discussed as implementation proceeds andagreed on a 6-monthly basis.

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B. Results Monitoring and Evaluation

54. Annex 1 provides details of the results and monitoring framework for the project. Forresults related to Component 1, the results indicators are linked to development of policy andstrategy documents. The PDO level result indicator would be submission of the policies toCabinet and completion of the rural electrification strategy. Monitoring and Evaluation (M&E)would be straightforward, based on supervision of the progress of the development of thedocuments and the final submission to Cabinet. Arrangements for monitoring and evaluation ofthe intermediate results indicators - essentially the selection of the consultants to assist inpreparing the documents and the deliverables under the contracts and consultations of draftdocuments - would involve the DPE PMU reporting on a quarterly basis on the progressaccording to the procurement plan and contract management milestones. This M&E would beintegrated into the PMU management responsibilities. The incremental cost would be coveredby the financing under the proposed Project of an assistant PMU manager who would managethe day-to-day process of consultant selection, contract implementation monitoring, andpreparation of quarterly project reports.

55. For the PDO-level results related to Component 2, the monitoring and evaluation of thePDO level and intermediate results indicators for the Project would be the responsibility of thePNG Power PMU. Arrangements for monitoring and evaluation of the intermediate resultsindicators would involve the PNG Power PMU reporting on a quarterly basis on the progressaccording to the procurement plan and contract management milestones. This M&E would beintegrated into the PMU responsibilities. The incremental cost would be covered by PNGPower, though there is provision under Component 2 to provide additional support for the PMUif needed.

Reporting

56. The DPE PMU is required to report on the status of project implementation to theElectricity Management Committee (EMC) when required and also to the Department ofNational Planning & Monitoring as soon as this project is captured under the Public InvestmentProgram and funded through the development budget as of 2013 and onwards.

C. Sustainability

57. Over the course of preparation of the proposed Project the Borrower has undertaken anumber of actions demonstrating commitment to working with the WB and other developmentpartners to begin to address key energy sector issues. The focus on strategic thinking and carefulpreparation of new hydropower development - a major element of the proposed WB assistance -was demonstrated by DNPM and DPE jointly hosting a two-day workshop on "Sharing theBenefits of New Hydropower in PNG: Environment, Social and Financing Aspects" inSeptember, 2010 in Port Moresby which provided power sector stakeholders in PNG with anoverview of recent international experience in hydropower development, with a particular focuson financing structures and sources and safeguard issues. DNPM has indicated that it intends towork with development partners to host similar events on key energy sector topics. Planning fora 2013 workshop on Increasing Access to Electricity is underway.

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58. Another key step is the launch of a joint intra-governmental and development partnerconsultation chaired by DNPM that will take place twice a year. DNPM has stated that it intendsthe energy sector to be an example for other sectors in terms of intra-governmentalcommunication and development partner coordination. As a result of the progress incoordination within the energy sector, the scope and objectives of the proposed WB-supportedProject have been broadly discussed and endorsed by all key GoPNG stakeholders. Theformalization of this mechanism is expected to be an important factor in the sustainability of theProject's objectives.

59. PNG Power, the implementing agency for Component 2, has demonstrated strongownership of the Project through commitment of a significant amount of its own funds topreparation of the feasibility study for the Naoro Brown project.

V. KEY RISKS AND MITIGATION MEASURES

A. Risk Ratings Summary Table

Stakeholder Risk High

Implementing Agency Risk

- Capacity High

- Governance Low

Project Risk

- Design Substantial

- Social and Environmental Substantial

- Program and Donor Low

- Delivery Monitoring and Sustainability Moderate

- Other (Reputational) Low

Overall Implementation Risk High

60. Capacity Risk. Capacity constraints at both the sector and project levels pose a risk ofdelays in implementation and decision-making. The strategy of providing WB support under atechnical assistance project rather than waiting for an investment opportunity is essentially inrecognition of the value-added of up-front capacity strengthening in order to develop theenvironment and undertake preparation activities needed for new investment, including in socialand environmental aspects. Risk mitigation measures include capacity building activities carriedout during preparation of the Project, in addition to the support proposed to be provided underthe Project, as discussed in paragraphs 43-45 above. Both DPE and PNG Power haveparticipated in introductory training on WB procurement, FM and disbursement. Further trainingwill be provided throughout implementation.

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61. Risk associated with Social and Environmental Aspects of the Naoro Brown HydropowerProject. Risks would include the following: (i) Impacts from the subsequent development of theNaoro Brown project - preparation of which is supported under the proposed TA - couldnegatively affect the environment and people in the Naoro Brown (NB) project area. To addressthis risk, an Environment and Social Management Framework (ESMF) has been prepared,setting out the measures to assess, reduce, mitigate and manage potential social andenvironmental impacts and, importantly, the elements of a Naoro Brown Information andConsultation Strategy. TA to support implementation of this ESMF is included in the proposedProject. This is discussed further in Section VI. (ii) Dissatisfaction with the process ofaddressing land-owner issues could lead to delays in NB project preparation. A clear process forland-owner identification and consultation will be established and implemented under theproposed Project. Further details are included in the ESMF and in Annexes 3 and 8 of thisdocument.

62. Potential Reputational Risk associated with development of Naoro Brown Hydropowerproject after completion of the proposed TA Project. There may be a reputational risk for theWB deriving from the fact that the proposed Project provides TA for the preparation of theNaoro Brown Hydropower project. The proposed Project would end before the development ofthe Naoro Brown project. Unless the Bank is involved in the financing of the Naoro Browndevelopment (i.e. under a subsequent operation), the Bank will have no responsibility for, orability to enforce, compliance with implementation of safeguards arrangements developed andagreed during the TA Project implementation period. If the Naoro Brown Developer were not tocomply with the agreed safeguards approach, negative results could affect WB reputation due tothe WB support for preparation of the Naoro Brown Hydropower project. This risk would bemitigated by ensuring that implementation of the safeguard measures agreed duringimplementation of the proposed PNG Energy Sector Development Project are included in thebidding process and final agreement with the selected Naoro Brown Hydropower projectDeveloper, making the Naoro Brown Developer responsible for developing the Naoro BrownHydropower project in accordance with the agreed approach to addressing social andenvironmental aspects. GoPNG and PNG Power have specifically sought Bank technicalassistance support in order to benefit from WB experience on sustainable hydropowerdevelopment. Both GoPNG and WB view the proposed Project as a first step in a longer termWB engagement in the energy sector, and all parties recognize the importance of GoPNGenforcement of the Naoro Brown Hydropower Project Developer's responsibilities with respectto the social and environmental aspects.

63. Further details of risk and migration measures are included in Annex 4.

VI. APPRAISAL SUMMARY

A. Economic and Financial Analysis

64. The proposed Project would provide technical assistance and capacity strengthening forGovernment agencies and PNG Power aimed at strengthening the enabling environment in theelectricity sector and attracting investment. The proposed Project would not by itself have

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quantifiable economic and financial benefits as it supports technical assistance, not investment.However, the Project would set the stage for investment in rural electrification and the technicalassistance provided would include assessment of financial and economic aspects of variousmodels. The Project would also support the preparation of the Naoro Brown Hydropowerproject. As part of preparation, the Naoro Brown Project would be subject to the usual economicand financial viability assessments. The Naoro Brown Hydropower Project Developer andfinanciers would also fully assess these aspects. The result of the proposed WB-supportedProject would be an improved quality and likely earlier delivery of benefits than without theProject, and potentially improved economic and financial outcomes as a result of goodpreparation.

B. Technical

65. The activities supporting preparation of the Naoro Brown Hydropower included in theproposed Project include support for technical assessment, expert review and guidance on alltechnical aspects of preparation of the Naoro Brown hydropower project. Additional technicalinformation related to the Naoro Brown hydropower project is provided in Annex 7.

C. Financial Management

66. The Project proceeds for Components 1 and 2, including overseeing the DesignatedAccounts, will be managed by the Energy Division of the Department of Petroleum and Energyand PNG Power Ltd (PPL) respectively. A financial management (FM) capacity assessment hasbeen conducted by the Bank and actions to strengthen the Project's financial managementcapacity were agreed with the relevant implementing agencies at appraisal. The FM assessmentconcluded that with the implementation of these proposed actions, the financial managementarrangements will satisfy the Bank's minimum requirements under OP/BP 10.02. Annex 3provides additional information on financial management aspects.

D. Procurement

67. An assessment of the capacity of the Implementing Agencies to implement procurementactions for the Project was carried out. DPE procurement risk was rated as "high" and PPL'srisk as "substantial". The crucial issues/risks concerning the procurement component forimplementation of the Project were identified as DPE's lack of procurement expertise and PPL'slack of experience with International Financing Institutions' procurement policies. Given theProject's technical assistance nature, funds would primarily finance consulting services (firmsand individuals) with some non-consulting services and minor goods. A time-bound riskmitigation action plan, which includes actions ranging from the set-up of the ProjectManagement Units to establishment of a filing system (more details in Annex 3) has beenproposed and the overall risk is expected to be reduced to an overall rating of "substantial"during implementation.

E. Social (including Safeguards)

68. The Environment and Social Management Framework is the safeguards instrument forthe proposed Project. The ESMF sets out the approach to addressing safeguards aspects for the

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overall PNG Energy Sector Development Project. It covers both Component 1, which focuseson policy and strategy development, and Component 2 which provides technical assistance forthe preparation of the Naoro Brown Hydropower Development project and improved projectmanagement and planning related to hydropower to supply Port Moresby. The ESMF sets outthe approach to identifying and addressing potential social and environmental aspects, including-inter alia- the public consultation and communication strategy, and the institutionalarrangements.

69. Consultations on the proposed PNG Energy Sector Development Project with civilsociety organizations started in December 2010, and will continue on an ongoing basis.Consultations on the draft Environment and Social Management Framework (ESMF) with civilsociety representatives took place in Port Moresby in February 2011 and April 2012. The ESMFwas officially endorsed by the Department of Environment and Conservation in April 2012.

70. Key stakeholders for policy and strategy development under the proposed PNG EnergySector Development Project would be people living outside the main urban centers whocurrently do not have access to reliable, affordable electricity supply; local government bodiesstriving to improve service delivery in rural areas; and potential service providers, both publicand private. The process for developing the policy and strategy documents under Component Iwould include significant consultation across broad geographical areas and a wide range ofstakeholders including both women and men in the groups mentioned above.

71. The proposed Project would finance technical assistance, not investments. However,under Component 2, part of the technical assistance related to additional feasibility studyactivities for preparation of the Naoro Brown Hydropower Project would involve drilling a seriesof holes on the right abutment of the proposed dam site for grouting trials, to determine thefeasibility of a grouting solution to the seepage identified during phase 2 of the feasibility study.Consultations would be undertaken before mobilizing the drilling services, and appropriatemeasures put in place in accordance with the process set out in the Environmental and SocialManagement Framework (ESMF). Consideration will be given to transporting the drillingequipment to the site by helicopter. If this is not technically or financially feasible, PPL wouldupgrade the existing road to the site. Procedures to be followed in this instance - includingconsultations - are set out in the ESMF.

72. Activities supported under Component 2 of the proposed Project are aimed at catalyzingthe development of the Naoro Brown Hydropower Project, which would have social impacts.The technical assistance under the proposed Project includes providing technical advice andguidance to GoPNG, PNG Power and the selected Naoro Brown Hydropower Project Developeron assessing, addressing and mitigating potential social impacts. Safeguards documents andstudies financed under the proposed PNG Energy Sector Development Project would be preparedin compliance with WB standards and safeguards policies, as well as meeting PNG requirements.Any civil works related to the Naoro Brown Hydropower Project undertaken while this proposedPNG Energy Sector Development Project is under implementation would be undertaken incompliance with WB policies, even if WB is not financing the civil works. During the period ofimplementation of the proposed PNG Energy Sector Development Project, WB would providereview of all safeguard documents related to the Naoro Brown Hydropower Project. As

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explained in paragraph 62, the selected Naoro Brown Hydropower Project Developer would belegally obligated to develop the hydropower project in accordance with the approach set outduring preparation.

73. With respect to the Naoro Brown Hydropower Project, the ESMF sets out the roles andresponsibilities of the Government, PNG Power and the prospective Naoro Brown HydropowerProject Developer. PNG Power would undertake the preparatory work, including a PreliminarySocial Assessment for the Naoro Brown Hydropower project area. Once the Developer is inplace, the Developer will be responsible for the Environmental and Social Impact Assessment(ESIA) and Resettlement Action Plan in coordination with the detailed design work for theNaoro Brown Hydropower project. The Preliminary Social Assessment will be an input to theESIA.

74. The Preliminary Social Assessment for the Naoro Brown Hydropower project would befinanced under Component 2 of the proposed PNG Energy Sector Development Project. It wouldbegin soon after approval of the proposed WB credit. This would include information on socio-economic and cultural conditions including, where possible, collection of gender-disaggregateddata, a preliminary identification of land ownership and rights, as well as arrangements tomanage the possible impacts through information sharing and consultation with Naoro BrownHydropower Project project-affected people. The findings and recommendations of this studywould inform the preparation of the Naoro Brown Hydropower Project Information andConsultation Strategy. Under Component 2 of the proposed PNG Energy Sector DevelopmentProject, specialist support would be available to assist PNG Power in developing andimplementing this Naoro Brown Hydropower Project Information and Consultation Strategy.The target populations for communications would include both people expected to be affecteddirectly by the Naoro Brown Hydropower Project, and a broader stakeholder group includingNGOs and other interested parties.

75. The social safeguard policies that would be triggered by development of the NaoroBrown Hydropower project - if the WB were to be involved in financing the development of theNaoro Brown Hydropower Project - are OP4.10: Indigenous Peoples; OP4.12 InvoluntaryResettlement; and, potentially, OP 4.11: Physical Cultural Resources. The social safeguardsdocuments required to be developed once the Naoro Brown Hydropower project Developer is inplace are: the Environment and Social Impact Assessment (ESIA) including an Information andConsultation Strategy; Resettlement Policy Framework (RPF); and Resettlement Action Plan(RAP). Terms of Reference for these activities, developed to be in compliance with WBsafeguard guidelines, will be included in the bidding documents for the selection of the NaoroBrown Hydropower Project Developer, and in the legal agreement with the selected Developer.

76. The key stakeholders for the activities to support preparation of the Naoro BrownHydropower project would be project-affected people including land-owners and users. Directphysical impact by the Naoro Brown Hydropower Project on the population and landscape isexpected to be fairly modest if properly managed. The Naoro Brown Hydropower Project wouldhave land acquisition impacts deriving from the dam, reservoir, power house, access roads,transmission line as well as construction-related impacts from the construction labor camp(s),material excavation sites, and sites for dumping of spoils, which all would require land either

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temporarily or permanently. Displacement and resettlement is not anticipated, but a finaldetermination can only be made when the technical design of the Naoro Brown Hydropowerproject is more advanced.

77. The population in the Naoro Brown project area - the Mountain Koiari - exhibits the fourcharacteristics that identify indigenous peoples.8 The instrument for reaching agreement onentitlements for land acquisition and for long-term use of the area would be a Naoro BrownInformation and Consultation Strategy developed under the Preliminary Social Assessment. Theparties to the consultation process will on the one hand be PNG Power and later the privatesector Naoro Brown Hydropower Project Developer, and on the other hand the communities inthe Naoro Brown catchment area that own or have interests in the land, water, and other naturalresources to be used by the Naoro Brown Hydropower project. The consultations process wouldinclude gender-focused consultations, in particular to ensure that the views and inputs of womenare sought in an environment conducive to their participation.

78. There is currently no documentation available of archaeological or other physical culturalresource sites within the proposed Naoro Brown Hydropower project area. The nearest knownsites are located on the Sogeri Plateau and in the Laloki valley outside the Naoro BrownHydropower project area. However, the presence of these sites close to the Naoro BrownHydropower project area suggests that similar sites may exist within the Naoro BrownHydropower catchment area. In addition, the contemporary culture of the population in theNaoro Brown Hydropower project area could include structures and/or places of spiritual andreligious importance. Impacts, if any, on archaeological or contemporary sites of culturalimportance are still to be determined under the ESIA, and the EMP will include procedures tomanage chance finds occurring during construction of any artifact/site of archeologicalsignificance, or any contemporary structures and/or places of spiritual and religious importancethat would be affected by civil works under the Naoro Brown Hydropower project.

79. Since the inception of the Naoro Brown Hydropower project feasibility study, PNGPower has made a number of visits and held discussions with people living in Madilogo village(the village nearest the proposed dam site) to inform and agree with villagers and theirrepresentatives about the undertaking of the feasibility study. In early December 2010, thefeasibility study consultants presented the initial findings to PNG Power providing an indicationof the likely size and location of the Naoro Brown Hydropower project, which in turn providesan indication of the location and types of environmental and social impacts which might beexpected. In January 2011, PNG Power held consultations at Madilogo Village. People fromother villages that may potentially be affected by the civil works and / or the reservoir (includingNaoro and Ebologa) also participated. PPL provided an update to the villagers on the potentialphysical developments proposed and the scope of potential environmental and social impacts asper the initial feasibility study report. The meeting provided the villagers an early opportunity tounderstand the proposed Naoro Brown Hydropower project and have an opportunity to voicetheir questions and concerns. The feasibility study consultants and PPL undertook further

8 These characteristics are (a) self-identification as members of a distinct indigenous cultural group and recognitionof this identity by others; (b) collective attachment to geographically distinct habitats or ancestral territories in theproject area and to the natural resources in these habitats and territories; (c) distinctive customary cultural,economic, social, or political institutions, and (d) an indigenous language.

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consultation and information dissemination during continued preparation of the feasibility studyin 2011. Most recently, in April 2012, PPL coordinated another consultation at MadilogoVillage.

80. WB OP 4.10 stipulates that when indigenous peoples are the sole or overwhelmingmajority of direct project beneficiaries, the elements of an Indigenous Peoples Plan should beincluded in the project design, and a separate plan is not required. The Mountain Koiari would bethe sole or overwhelming majority of direct beneficiaries of the benefit stream that would flowfrom the Naoro Brown Hydropower Project to communities in the Naoro Brown HydropowerProject area, and the Naoro Brown Hydropower Project Information and Consultation Strategy isa central component of the overall design of the technical support for the preparation of theNaoro Brown Hydropower Project, under Component 2 of the proposed PNG Energy SectorDevelopment Project. The Information and Consultation Strategy would establish compliancewith OP 4.10 by defining arrangements that provide for a process of free, prior, and informedconsultation to ensure that the people in the Naoro Brown Hydropower Project area receiveculturally appropriate economic and social benefits, that adverse impacts are minimized,mitigated, and compensated, and that the Naoro Brown Hydropower Project has broadcommunity support. The main elements of the Naoro Brown Hydropower Project Informationand Consultation Strategy are outlined in the ESMF, and in Annex 8: Strategy forCommunication and Consultation with Indigenous Communities in the Naoro BrownHydropower Project Area.

F. Environment (including Safeguards)

81. The proposed PNG Energy Sector Development Project would finance technicalassistance, not investments. Under Component 2, the technical assistance related to additionalfeasibility study activities for preparation of the Naoro Brown Hydropower Project wouldinvolve drilling for grout testing and is discussed in paragraph 71. Activities supported underComponent 2 of the proposed Project are aimed at catalyzing the development of the NaoroBrown Hydropower Project9 , which would have environmental impacts. The technical assistanceunder the proposed Project includes providing technical advice and guidance to to GoPNG, PNGPower and the selected Naoro Brown Hydropower Project Developer on assessing, reducing andmitigating potential environmental issues that may arise in order to develop a sustainable project.The environmental safeguard policy that is triggered by the proposed PNG Energy SectorDevelopment Project is OP 4.01: Environmental Assessment. As discussed in Section E above,the Environment and Social Management Framework (ESMF) is the safeguards instrument forthe proposed Project.

82. The environmental safeguard policies that would be triggered by development of theNaoro Brown Hydropower Project, if the WB were to be involved in financing the development,are OP 4.01: Environmental Assessment; OP 4.04: Natural Habitats; and potentially OP 4.36:Forests (whether or not this policy is triggered would be determined during further preparation of

9 The Naoro Brown catchment area lies within the area of interest of the "Kokoda Initiative", a joint understandingbetween Papua New Guinea and Australia on the Owen Stanley Ranges, Brown River Catchment and Kokoda TrackRegion. Annex 3 provides further information on the Kokoda Initiative.

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the Naoro Brown Hydropower Project). Environmental Safeguards Documents required to bedeveloped once the Naoro Brown Hydropower project Developer is in place are the Environmentand Social Impact Assessment (ESIA), Environmental Management Plan (EMP); and DamSafety Plan. Terms of Reference for these activities, developed to be in compliance with WBsafeguard guidelines, will be included in the bidding documents for the selection of the NaoroBrown Hydropower Project Developer, and in the legal agreement with the selected Developer.

83. The Environmental and Social Management Framework (ESMF) sets out the list andbroad scope of studies and safeguards instruments to be prepared during implementation of theproposed Project; institutional arrangements defining the roles and responsibilities for safeguardscompliance, and approach to public consultation.

84. Draft Terms of Reference for the Environmental Impact Assessment (ESIA),Resettlement Policy Framework (RPF), Environmental Management Plans (EMP) andResettlement Action Plan (RAP) are expected to be ready in early 2013, and summaries wouldbe translated into Tok Pisin and disclosed in Port Moresby and at a local information center(s) inthe Naoro Brown Hydropower project area. When completed, the Resettlement PolicyFramework, Environmental Management Plans (EMP) and Resettlement Action Plan (RAP)would also be disclosed in Port Moresby and at a local information center in the Naoro BrownHydropower Project area, including summaries translated into Tok Pisin. A local informationcenter and meeting venue would be established in the Naoro Brown Hydropower Project area,and information materials would be developed, which can convey understanding of the NaoroBrown Hydropower Project to people who may be illiterate and / or may not understand mapsand engineering drawings.

85. Financing is included in the proposed PNG Energy Sector Development Project for allthe safeguard-related studies and specialist advisors which are the responsibility of GoPNG orPNG Power. For the Naoro Brown Project ESIA, EMP, RAP and implementation of the RAP,and Dam Safety Plan, all of which would be the responsibility of the to-be-selected Naoro BrownHydropower Project Developer, the Terms of Reference would be included in the biddingdocuments issued to prospective Naoro Brown Hydropower Project developers. The biddingdocuments, and subsequent legal agreements would make clear the responsibilities of the NaoroBrown Hydropower Project Developer with respect to safeguard aspects of the Naoro BrownHydropower Project, and bids would be required to budget appropriately for these activities.

86. During the period of implementation of the proposed PNG Energy Sector DevelopmentProject, WB would provide review of all safeguard documents related to the Naoro BrownHydropower Project. Safeguards documents and studies financed under the proposed PNGEnergy Sector Development Project would be prepared in compliance with WB standards andsafeguards policies, as well as meeting PNG requirements. Unless WB becomes involved in thefinancing of the Naoro Brown Hydropower Project (i.e., under a subsequent project), ensuringcompliance with WB standards and policies for documents financed by the Naoro BrownHydropower Project Developer and / or for those undertaken after the closing of the proposedPNG Energy Sector Development Project would be the responsibility of GoPNG.

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87. Any civil works related to the Naoro Brown Hydropower Project undertaken while thisproposed PNG Energy Sector Development Project is under implementation would beundertaken in compliance with WB policies, even if WB is not financing the civil works. This isstated in the Environment and Social Management Framework for the proposed PNG EnergySector Development Project.

88. For the Naoro Brown Hydropower Project, PPL intends to re-open an existing oldlogging road to Madilogo Village which would include rebuilding a bridge across the NaoroRiver near the end of the logging road, and possibly extending the road by up to 5 km to accessproposed drilling site(s), to provide access to facilitate completion of the feasibility study,including the grout testing process, possibly drilling along part of the proposed tunnel route, andfor public consultations. The work is expected to start once the funding for the preparation of theNaoro Brown Hydropower Project (i.e., the proposed PNG Energy Sector Development Project)is approved. Social and Environmental screening studies in the Naoro Brown HydropowerProject area were recently completed as part of the Naoro Brown Hydropower Project feasibilitystudy. Based on the findings of these reports and the fact that the proposed work wouldprimarily involve re-opening an existing road, it is expected that any adverse environmentalimpacts of this proposed rehabilitation work would be construction-related only. The proposedwork is planned to be completed within the existing alignment. There is only one village -Edebu - located about 9 km up the logging road, but at some distance from the road itself. Otherthan Edebu village located off the logging road, there are no habitations in the area. Landacquisition and resettlement are not anticipated in connection with the re-opening of the existingroad. Land acquisition may be needed with respect to the possible road extension of up to 5km,but resettlement is not anticipated. PPL will prepare, disclose and hold consultations on aResettlement Policy Framework. In compliance with Environment Assessment OP4.01, for thework on the existing road, PNG Power will prepare an Environmental Management Plan (EMP)that will be attached to the civil works contract. Once the details of the road extension areknown, assessments will be conducted as necessary, and consultations according to the RPF willbe undertaken.

89. PPL is also considering (though currently there are no definite plans or budget) possiblyre-opening another old logging road which leads to within 5km of the planned power house site.If this work were to proceed, it would involve an additional 5km of new road to reach the powerhouse site. The 5km of new road would require land acquisition. In this regard the above-mentioned Resettlement Policy Framework would cover any land acquisition aspects.

G. Other Safeguards Policies triggered

90. The proposed PNG Energy Sector Development Project does not trigger any other WBsafeguards policies.

91. However, activities supported under the proposed PNG Energy Sector DevelopmentProject are aimed at catalyzing the development of the Naoro Brown Hydropower Project. Hencethe Environmental and Social Management Framework (ESMF) for the proposed PNG EnergySector Development Project specifies that the Terms of Reference (TOR) for a Dam Safety Planfor the Naoro Brown Hydropower Development Project, in accordance with the WB OP 4.37:

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Dam Safety, will be included in the bidding documents issued to prospective developers, andsubsequent legal agreements. The bidding documents would make clear the responsibilities ofthe Naoro Brown Hydropower Project Developer with respect to dam safety aspects of the NaoroBrown Hydropower project, and bids would be required to budget appropriately for theseactivities. The legal agreements with the selected Developer would require development andimplementation of a Dam Safety Plan, according to the agreed Terms of Reference.

92. During preparation of the Naoro Brown Hydropower project, PNG Power would financea Dam Safety Panel of Experts (with financing under the proposed PNG Energy SectorDevelopment Project). Maintaining the Panel would become the responsibility of the NaoroBrown Hydropower Project Developer once the Developer is in place. This requirement wouldbe included in the bidding documents and the subsequent legal agreements with the NaoroBrown Hydropower project Developer.

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Annex 1: Results Framework and Monitoring

PAPUA NEW GUINEA: Energy Sector Development ProjectResults Framework

Project Development Objective (PDO):

The proposed Project Development Objectives (PDO) are to (i) strengthen policy development and strategic framework for renewable energy and rural electrification; and (ii) attract investorsfor sustainable development of new hydropower generation to supply the Port Moresby electricity grid.

Cumulative Target Values** Data Responsi DescriptionPDO Level bility for (indicator

Unit of Source/Results Measure Baseline Freq. Methodolog Data definition

Indicators* MYR YR 2 YR3 YR 4 Collectio etc.)n

Indicator One: Identified Significant Consultants Active Policies Rural As needed On-going DPE Status ofRural and policies and gaps in rural in place for consultations submitted to electrification supervision PMU documentsRenewable strategy and key studies. on draft Cabinet. strategy (drafts forenergy policies completed. renewable policies across completed. review, etc.)submitted to energy government ConsultationsCabinet and rural policy and entities and begin on Ruralelectrification strategy non-gov't Electrificationstrategy framework. partners; strategy.completed environmentalfollowing and socialparticipatory implicationsprocess. assessed.Indicator Two: Financing at No NB NB Developer Sources of Financiers' As needed On-going PNG DeliverablesFinancing for the an advanced financing. Developer selected; ESIA, financing due diligence supervision Power as per theNaoro Brown stage. selection design and identified. completed. PMU TransactionHydropower process costing Advisor'sProject is at an underway; underway. Consultations contract;advanced stage. Information Information as per agreed reports from

and and plan. consultationConsultation Consultation process.Strategy Strategy beingadopted. implemented.

Indicator Three: Study Out-dated Study (three- Based on three- As needed On-going PNG DeliverablesPlanning study is completed as studies with basin basin supervision Power as per thecompleted as a basis for insufficient inventory) inventory, and PMU consultants'key input to [] future POM- detail to launched to update on contract.selecting future based support good assess energy sectorhydropower hydropower. planning. options and growth,projects for determine determination

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investment. sequence of of nextfuture hydropowerhydropower project toto supply supply POMPOM. grid.

INTERMEDIATE RESULTS

Intermediate Result (Component One): Institutional and Policy Development for Renewable Energy and Rural Electrification

Intermediate Strategy No strategy TOR Analysis of GIS Rural As needed On-going DPE Status ofResult indicator completed discussed alternative Stocktaking electrification supervision PMU documentsone: and finalized models of and strategy (drafts forElements of Rural with input community and Development completed. review, etc.)electrification from rural of a Stage 1strategy prepared advisor. electrification "Potential

Inventory of projects Ruralavailable, including cost Electrificationrelevant GIS structure Projects"data and undertaken. Database;resources. Environmental

and SocialScreeningmethodologyfor ruralelectrificationprojects;Consultationson draftstrategyunderway.

Intermediate SESA No SESA in Draft SESA Implications of SESA As needed On-going DPE Status ofResult indicator completed. place. under draft rural and completed. supervision PMU documentstwo: preparation; renewable (drafts forStrategic mapping of energy policies review, etc.)Environmental roles and analyzed;and Social responsibiliti Plan to addressAssessment es institutional(SESA) completed. challengescompleted proposed.Intermediate Staff at DPE Lack of in- All TOR for On-the-job On-the-jobResult indicator and other house technical training takes training takesthree: GoPNG capacity and specialist place on all place on all

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Improved Departments experience support applicable TA applicable TAGoPNG with skills to in target include consultancies. consultancies.institutional take the lead areas. provision of DPE staff DPE staffcapacity in the in on-the-job effectively effectivelyenergy sector to subsequent training; present draft present draftsupport future implementati DPE assigns policy ruralinvestment in on of at least one documents at electrificationrural and policies and staff person consultation strategyrenewable strategy. to work and consensus- documents atenergy. closely with building consultation

each events. and consensus-technical buildingconsultant; events.PMU staffattendstraining inFM andconsultantselection.

Intermediate Result (Component Two): Technical Assistance for Preparation and Planning for Port Moresby Hydropower Supply

Intermediate Clear Ad hoc PPL Institutional Developer ArrangementsResult indicator process consultations continues arrangements refines and are in placeOne: Naoro defined and ; lack of information that ensure that continues forBrown in use for understandin sharing in agreements are implementation monitoringHydropower continuing, g of land potentially- honored by of the ICS. theProject meaningful ownership in affected both the NB implementatioconsultation consultations potentially- villages; project and the n ofprocess with people affected land-owner involved agreementsprogresses in a to be areas. identificatio communities; onway that results affected by n in Institutional entitlementsin decisions that the progress; arrangements and benefitsresponds to the [] development Information for handling of andinterests and of the Naoro and complaints and maintainingconcerns of both Brown Consultation grievances that records on thewomen and men Hydropower Strategy are accepted by managementin the Naoro Project. (ICS) as per the involved and resolutionBrown the ESMF communities of complaints.Hydropower developed in and thatProject area, and consultative provide foradvances the manner. timelyobjectives of the resolution;Naoro BrownHydropower

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Project.

Intermediate Developer in No Transaction Transparent Developer As needed On-going PNG DeliverablesResult indicator place Developer. Advisors in process for mobilized. supervision Power as per thetwo: Developer place; developer PMU Transactionfor Naoro Brown Electricity selection Advisor'sHydropower Management agreed; contract.Project selected Committee Electricityfollowing activated; Managementtransparent strategy for Committeeprocess. Developer meeting as

selection required; allagreed; pre- social andqualification environmentallaunched. requirements

(as per ESMF)included inbiddingdocumentsissued topotentialdevelopers.

Intermediate PPL has PPL lacks 3-basin 3-basin PPL staff As needed On-going PPL PMU Status ofResult indicator tools and planning inventory inventory interacts supervision studies (draftsthree: capacity for tools for consultants completed; effectively for review,Improved future future selected next with Electricity etc.)institutional hydropower hydropower hydropower Managementcapacity at PPL development development project Committee.related to planning. selected.preparation andplanning for PPL staff PPL lacks Selectionhydropower can experience anddevelopment, take the lead with management

effectively approach to of specialist PPL staffmanage involving consultants interactsengagement private required for effectivelywith private sector in preparation with Electricitysector. development of the Naoro Management

of Brown Committee inhydropower. Hydropower setting out

Project is on options andtime and decisionseffective. required.

Good

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management ofTransactionAdvisorsproduces on-time progressin the project.

*Please indicate whether the indicator is a Core Sector Indicator (see further http://coreindicators)**Target values should be entered for the years data will be available, not necessarily annually.

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Annex 2: Detailed Project DescriptionPAPUA NEW GUINEA: Energy Sector Development Project

1. Three broad areas for possible World Bank-supported technical assistance were identifiedbased on GoPNG priorities and areas of focus for other development partners:

* Technical assistance in the areas of policy and strategy in the electricity sector, with afocus on rural and renewable energy;

* Capacity building to assist the Government in preparing for its role in new hydropowerprojects.

* Technical assistance for developing the Naoro Brown Hydropower Project to supply thePort Moresby grid and setting the stage for further medium and large hydropowerdevelopments in the Port Moresby area;

2. The Project description and scope are based on these priority areas. The proposed Projectwould fund technical assistance activities, including some drilling activities required to completethe feasibility study, and would not fund investment. The rationale for funding technicalassistance is to provide timely resources to assist in guiding the preparation necessary forsubsequent, key investments, including in social and environmental aspects. As theimplementation proceeds and if the GoPNG were to request financing support for investmentsfollowing on from this technical assistance, the World Bank would be pleased to consider suchrequests.

A. Project components

3. The project could consist of two components:

Component 1: Institutional and Policy Development for Renewable Energy and RuralElectrification. Implementing Agency: Department of Petroleum and Energy (Energy Division).

This would focus on policy development (Renewable Energy and Rural Electrification),institutional and strategy development (Strategic Environmental and Social Assessment andRural Electrification Strategy), and capacity strengthening for the GoPNG's role in developmentof the Naoro Brown hydropower project and other hydropower projects that may be consideredin the medium term. Strong emphasis would be placed on an inclusive, gender-sensitiveconsultation process as an integral part of the policy and strategy development. DPE intends toopen regional offices in Kokopo, Mt. Hagen and Lae as part of fulfilling DPE's mandate underthe Electricity Industry Policy. These regional offices will provide a full-time presence for theEnergy Division of DPE in the regions and, among other functions, will serve as the regionalcenters for coordinating consultations on the policy and strategy development supported underthe proposed Project. Component 1 includes an allocation for operating costs which couldcontribute to the initial establishment of these three Energy Division regional offices. Keyactivities would include:

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Energy Policy Development

* Renewable Energy Policy. The GoPNG is preparing a plan for Climate-CompatibleDevelopment. An Office of Climate Change and Development (OCCD) has beencreated. An Interim Action Plan for Climate Compatible Development was prepared inJune 2010 and has been circulated for public consultation. It prioritizes readinessactivities for a future Reduction in Emissions from Deforestation and Forest Degradation(REDD) while seeking economic growth opportunities that minimize future emissions.The Renewable Energy Policy will be developed within the framework of the overallClimate-Compatible Development plan. This activity would support consultations andconsensus-building among stakeholders including the OCCD's technical working groupon Low Carbon Growth, and drafting of the policy document.

* Rural Electrification Policy. A draft policy was prepared in 2004 but never finalized.This activity would include review and updating of the draft policy, taking into accountthe many developments in the sector since the draft was prepared. It includes support forconsultations and consensus-building among stakeholders.

Institutional and Strategy Development

* A Strategic Environmental and Social Assessment (SESA) would be prepared as an inputto downstream implementation of both the Renewable Energy Policy and the RuralElectrification Policy. The SESA would assess the implications of these policies andmake recommendations regarding (i) the establishment of the requisite institutional,regulatory and decentralization framework, and (ii) integration of the management of anyenvironmental and social issues into subsequent planning decisions for the location andscale of energy investments, alternatives, mitigation measures and monitoring activities.

* Preparation of a Rural Electrification Strategy. In the GoPNG planning documents andthe Electricity Industry Policy (EIP), increasing access to affordable reliable electricitysupply is highlighted as a priority to achieve broad-based economic development andimproved standard of living. While there is room for improvement in the urban centers,the supply of electricity in rural areas is very limited. The rural electrification strategywill consider the full range of options for increasing access, including grid extension,mini-grid and off-grid approaches, and the roles of public sector, private sector and NGOand community organizations. One aspect of the strategy - in line with the EIP -wouldlikely include efforts to attract private sector to supply non-commercially viable areasthrough a competitive process based on the lowest level of subsidy required. Importantelements to be included in the rural electrification strategy include (i) a reasonabledefinition of the projects / opportunities to be offered, (ii) an assessment of the differentcost structures and levels of service provision characteristic of the range of resources andsupply models that might be appropriate across PNG, as an input to the tariff-settingprocess, and (iii) a process for screening social and environmental aspects of ruralelectrification projects.

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4. A number of entities are already involved in implementing electrification projects inareas outside the main grids. Incorporating the experience from on-going initiatives would be animportant element in developing the strategy. Input from potential participants and beneficiarieswould be critical. Elements of the strategy preparation would include:

* GIS Stocktaking and Development of a Stage 1 "Potential Rural Electrification Projects"Database. This would involve preparation of Geographic Information System (GIS)database overlays of population, infrastructure (e.g. roads, energy infrastructure,telecoms) and possible renewable energy resources (e.g. for small scale hydropower).

* Analysis of alternative models of community and rural electrification projects includingcost structure, as an input to the ICCC process of developing tariffs for electricity supplyin areas outside the PNG Power exclusive supply areas.

* Environmental and Social Screening methodology for rural electrification projects.

Consultative Process

5. Strong emphasis would be placed on an inclusive, gender-sensitive consultation processas an integral part of the policy and strategy development. DPE intends to open regional officesin Kokopo, Mt. Hagen and Lae as part of fulfilling DPE's mandate under the Electricity IndustryPolicy. These regional offices will provide a full-time presence for the Energy Division of DPEin the regions and, among other functions, will serve as the regional centers for coordinatingconsultations on the policy and strategy development supported under the proposed Project.Component 1 includes an allocation for operating costs which could contribute to the initialestablishment of these three Energy Division regional offices.

Capacity Strengthening

* Preparing for DPE / GoPNG role in new hydropower power generation developments.In the future, GoPNG as the custodian of the national water resources will likely play apivotal role in several aspects of the development of new hydropower, including theNaoro Brown Hydropower Project, which could require specialist expertise. This activitywould provide initial specialist support for targeted activities related to GoPNG role inhydropower development. Additional specific activities including training would bedefined as and when new projects move forward.

* Project Management Support, including, hiring an Assistant PMU manager, Procurementspecialist, and Financial Management specialist as needed.

Component 2: Technical Assistance for Preparation and Planning for Port Moresby HydropowerSupply. Implementing Agency: PNG Power.

6. Past studies have established the potential for hydropower development on both theBrown River the adjacent Vanapa River. As demand for electricity in Port Moresby grows, it isanticipated that a series of hydropower plants may be developed. Taking into account the longlead times in developing hydropower projects, initial activities to prepare the Naoro Brown

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Hydropower Project, assess the potential for and optimal sequencing of subsequent projects areincluded in the proposed project. Two sub-components are proposed.

Preparation of the Naoro Brown Hydropower Project for Port Moresby.

7. Generation from new hydropower will be significantly less expensive than the cost ofgenerating electricity from diesel, the only feasible alternative currently available (as there iscurrently no provision for domestic natural gas supply in Port Moresby). The GoPNG and PNGPower are interested to develop lower cost hydropower generation as soon as possible.Moreover hydropower is a clean and renewable energy resource. PNG Power has hiredinternational consultants to undertake the feasibility study of the Naoro Brown HydropowerProject to supply the Port Moresby grid with about 80 MW. The feasibility study was largelycompleted in late 2011, although some further work, including drilling to test grouting solutionsto address seepage identified in phase 2 of the feasibility study, is still required. The conceptproposed for development of the Naoro Brown Hydropower Project is a private sector-ledapproach. This is in line with the Electricity Industry Policy approved in December 2011, andreflects the fact that PNG Power does not have the resources to develop this as a public sectorproject. A properly structured IPP/PPP would additionally enable shifting of commercial risks tothe private sector and benefit from construction and operational expertise of the private sector.

8. Given the imperative to move forward with development of new hydropower to supplyPort Moresby as soon as possible, the proposed approach is as follows:

* PPL, the key state entity currently with skilled manpower and power sector-relatedexpertise, would manage the process for developing the IPP/PPP.

* The Electricity Management Committee (EMC), chaired by the Secretary for Petroleumand Energy, will be the key supervising and decision-making body. The other permanentmembers of the EMC include the Secretaries for Treasury and Planning and theManaging Director for IPBC and a representative from the PNG Chamber of Commerceand Industry. Other members (for example, from DEC or the ICCC) may be co-opted tothe Committee as required. The EMC will be supported by a secretariat housed in theEnergy Division (Department of Petroleum and Energy). A working-level committee hasalso been established that will report to the EMC and so it is likely that recommendationson the Naoro Brown Hydropower Project will first be reviewed by this working groupbefore being submitted to the EMC for a final decision. As and when the PPP Center inTreasury is established, designated staff may be invited to join the EMC itself or itsworking group. PNG Power would report to the EMC or its working group on a regularbasis so that the Committee is well-informed regarding the progress and issues asdecision points are reached.

* Consultants hired by PNG Power largely completed the feasibility study in late 2011,although some further work to assess options to address seepage is required.

* PNG Power would implement a Naoro Brown Communication and Consultation Plan forpotential Project-affected People (PAPs) and other stakeholders. With advice from theWB and input from the Electricity Management Committee and stakeholder consultation,

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PNG Power will prepare TOR for the safeguards-related aspects of the project, to beundertaken by the selected Naoro Brown Hydropower Project Developer.

* PNG Power would hire financial, technical and legal advisors ("Transaction Advisors").

* PNG Power would hire Panels of Experts (dam safety and social / environmental). Oncethe Naoro Brown Hydropower Project Developer is in place, maintaining these Expertpanels will become the Developer's responsibility (and will be included in the biddingand legal agreements).

* With the assistance of the advisors and under the oversight of the Electricity ManagementCommittee, PNG Power would undertake a transparent process to select a private sectorNaoro Brown Hydropower Project Developer.

* The Developer would be responsible for the social and environmental impact studies, asper the prepared TOR, in coordination with the detailed design work.

* Day-to-day supervision of the Developer regarding the technical, social andenvironmental aspects would be the responsibility of PNG Power (with specialistsupport). The Electricity Management Committee would provide overall guidance asappropriate. With regard to the environmental aspects, Department of Environment andConservation would have a role in reviewing and approving the EIA and EMP. As perthe EIP, the technical regulator (under the EIP this role is intended to be transferred fromPNG Power to DPE) would enforce environmental and safety regulation in the electricityindustry as an added component to its technical regulatory functions. This function wouldbe carried out in close consultation with DEC. The economic regulator, ICCC would beprovided with current information to help ensure that ICCC remains abreast of thepreparation and is able to draw attention early on to any issues which may need to beaddressed with respect to the regulatory process.

* Once the required GoPNG approvals are in place, the Developer would mobilizefinancing for the Naoro Brown Hydropower Project. It is expected that the financingwould be limited recourse on the basis of a long-term power purchase agreement (PPA)which would commit PNG Power to buy the electricity generated and/or capacity madeavailable by the project. Based on the advice from PNG Power's transaction advisorsand the decision of the GoPNG, through the Electricity Management Committee, thefinancing for the project could include some public equity. It could also include someconcessional borrowing and / or guarantees to supplement commercial lending andimprove the terms and extend the tenor of the commercial financing to achieve asustainable tariff. ICCC, responsible for economic regulation, would have a role inapproving the pass-through of PNG Power's costs under the PPA to consumers.

* Following financial close the Naoro Brown Hydropower Project would be constructedand operated by the Developer and begin commercial operation supplying electricity tothe Port Moresby grid.

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* One option to be considered is a "Build Own Operate Transfer" (BOOT) approach, inwhich ownership of the project would be transferred to GoPNG at the end of a specifiedconcession period, e.g. 25 years. The lifetime of the asset would be significantly longerthan that if properly maintained, thus providing the government with an operating assetwith considerable residual lifetime. PPL, as power purchaser, would also have a key rolein reviewing the Operation Strategy and would dispatch the power and energy from theProject. In a BOT arrangement PPL would also carefully review maintenancearrangements since the project would eventually pass to GoPNG.

9. Activities to be financed under the proposed Project related to the preparation of theNaoro Brown project to supply Port Moresby would include:

* Naoro Brown Transaction Advisors (legal, technical and financial). As part of theadvisory work, financial advisors would assist PNG Power in determining the tariffimplications of the Power Purchase Agreement;

* Additional feasibility study work (i.e. Preparation of Geological Baseline Surveyincluding additional drilling to assess options for limiting seepage from the reservoir and,subject to further review, possibly some drilling along the tunnel route, and informationdissemination with affected communities);

* Preliminary social assessment, including Information sharing and consultation strategy,land owner identification, land use mapping and consultations; Resettlement PolicyFramework;

* Project Economic Analysis;

* Dam Safety Expert panel. (Once the Developer is in place, this would become theresponsibility of the Developer);

* Social and Environmental Expert Panel. (Once the Developer is in place, this wouldbecome the responsibility of the Developer);

* Social and Environmental specialists;

* Communications consultant;

* Environmental baseline survey work;

* Other preparation activities and specialist support identified during implementation, forexample additional preparation work following the completion of the feasibility studyand as might be recommended once the transaction advisors are in place;

* Project Management support.

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Improved Planning Related to Hydropower Supply for Port Moresby

10. Proposed activities related to the improved planning and identification of subsequent

hydropower projects for supply to Port Moresby would include:

* Three-basin inventory study of the Brown, Vanapa and Angabanga basins;

* Training, institutional strengthening and capacity building in areas critical forimplementation of improved performance and implementation of the next hydropower project.This could include planning capacity, project evaluation and preparation and negotiation ofpower purchase agreements.

11. Although the three-basin inventory study may be produced in collaboration with PNGPower, it will ultimately be the property of, and submitted to, the Electricity ManagementCommittee and its secretariat in DPE. Similarly, proposed training, institutional strengtheningand capacity building will increasingly be directed towards the EMC and its secretariat as theircapability and responsibilities expand.

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Annex 3: Implementation ArrangementsPAPUA NEW GUINEA: Energy Sector Development Project

1. The International Development Association (IDA) and the Global Environment Facility(GEF) would provide co-financing for the proposed Project. The lending instrument would bean IDA credit on blend terms. The GEF financing would be a grant to GoPNG and would notfinance any of the Component 2 activities. The proposed PNG Energy Sector DevelopmentProject (PGESDP) would be implemented over four years, 2013 to 2017.

2. For Component 1 activities, approximately US$ Im IDA plus US$ 900,000 GEF grantwould be available for the implementing agency, i.e. Energy Division of the Department ofPetroleum and Energy, to undertake activities in Component 1.

3. The remaining IDA amount - approximately US$ 6.3 million would be made availablefrom GoPNG to PNG Power to undertake Component 2 activities. This amount represents thecost estimate plus contingencies for Component 2. Consistent with the GoPNG's draft on-lending policy, since the technical assistance activities to be financed under Component 2 of theProject focus on preparation and planning, the activities are considered upstream of acommercial investment and hence the GoPNG intends to provide these funds as a grant to PPLbased on a Subsidiary Agreement.

4. Retroactive financing from the IDA Credit would be available up to US$650,000 andfrom the GEF grant up to US$100,000 for a total retroactive financing amount of up toUS$750,000.

Project institutional and implementation arrangements

Project administration mechanisms

5. The project would have two components and two implementing agencies:

* Component 1: Institutional and Policy Development for Renewable Energy and RuralElectrification will be implemented by the Energy Division of the Department ofPetroleum and Energy. This would focus on policy development, institutional andstrategy development, and capacity strengthening for the GoPNG's role in developmentof the Naoro Brown hydropower project and other electricity sector projects that may beconsidered in the medium term.

* Component 2: Technical Assistance for Preparation and Planning for Port MoresbyHydropower Supply will be implemented by PNG Power Ltd. The first sub-componentfocuses on activities required to prepare the Naoro Brown Hydropower Project to supplythe Port Moresby grid, under a private sector-led approach. The second sub-componentfocuses on activities to improve planning with respect to hydropower supply to PortMoresby.

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6. The Electricity Management Committee (EMC) is an intra-departmental committeeestablished to provide oversight of the development of the electricity sector including, forexample, the Naoro Brown Hydropower Project. The EMC will provide the necessary "whole ofgovernment" input and decision making that is required to successfully plan and develop ahydropower project. The Electricity Management Committee includes: Department of Petroleumand Energy (Chair), Department of National Planning and Monitoring, Treasury, IPBC and arepresentative from the PNG Chamber of Commerce and Industry. Other members may be co-opted as required, for example, Department of Environment and Conservation, ICCC, and otherkey government stakeholders.

7. The funds from the proposed PNG Energy Sector Development Project for PPL will bemade available by the GoPNG via a Subsidiary Agreement between the government and PPL.

8. Capacity constraints that need to be addressed include:

* A lack of familiarity with World Bank procurement, financial management andsafeguards procedures in the implementing agencies;

* Capacity weaknesses in technical areas including energy policy formulation, powersystem planning, project management, communications;

* Weaknesses in co-ordination across government ministries involved in infrastructureplanning, public consultation, financing and project approval.

9. The project design addresses these capacity constraints via:

* Strengthening of the technical and planning capacity in the Energy Division, DPE andPPL.

* Training of PPL and DPE staff in World Bank procurement and financial managementpolicies, processes and procedures.

* For DPE, the appointment of an Assistant PMU Manager, who would be a full-time localconsultant to handle the day-to-day aspects of project implementation including contractmanagement.

* For DPE, financing the appointment of Renewable and Rural Energy Advisor, whowould be part time and would provide the technical expertise for definition of the Termsof Reference for the major consultancies, assist in technical evaluation of bids, assist inguiding consultants and reviewing draft reports.

* Technical assistance for specialist support for GoPNG'S role in the Naoro BrownHydropower Project and other hydropower projects expected to be developed in themedium term.

* The GoPNG convening and maintaining the Electricity Management Committee.

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* For Component 2, funding to strengthen PPL's project management and to hire technicalspecialists as required, for example in procurement, communications and safeguards.

Financial Management, Disbursements and Procurement

Financial Management

10. The FM capacity assessment identified the following principal risks: a) project financialstaff do not have experience with Bank financed projects; b) deficiencies identified with regardto internal controls; and c) lack of timely external audits. Mitigation measures to be agreedinclude: a) FM training to be provided to all project financial staff before and during projectimplementation; b) a brief financial management manual will be prepared and issued tostandardize project FM procedures and provide guidance to project financial staff on Bankrequirements; and c) the terms of reference for the required external audits are agreed with theBank.

11. The FM risk pre-mitigation has been assessed as "High" and post-mitigation has beenassessed as "Substantial".

12. FM training: FM training has been provided to the PPL PMU and the DPE PMU.Continued training opportunities will be provided on an on-going basis during Projectimplementation.

13. FM conditions: There would be three FM-related disbursement conditions: Fordisbursement on Component 1: (i) DPE will adopt a Financial Management Manual for theProject satisfactory in form and substance to the World Bank. The FM Manual will include asannexes: (a) format of Interim Financial Reports (IFRs) and (b) the TOR for external audit asdiscussed below. For disbursement on Component 2: (ii) PPL will adopt a FinancialManagement Manual for the Project satisfactory in form and substance to the World Bank. TheFM Manual will include as annexes: (a) format of IFRs and (b) the TOR for external audit asdiscussed below.

14. Budgeting. Each implementing agency develops an annual budget. Project funding andexpenditure will be subjected to quarterly budget vs. actual expenditure variance analysis as partof the IFRs.

15. Funds flow. The project proceeds (IDA and GEF) will flow from the Bank into projectdesignated accounts (DA) to be set up at and managed by DPE and PPL for their respectivecomponents. Each implementing agency will be directly responsible for the management,maintenance and reconciliation of DA activities for their component, including preparation ofwithdrawal applications and supporting documents for Bank disbursements.

16. Accounting and financial reporting. The administration, accounting and reporting of theproject finances by DPE will be set up in accordance with the provisions of the Public FinancialManagement Act and applicable World Bank financial management requirements. Funding to thePPL will be in accordance with a subsidiary agreement with the GoPNG, and the management of

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project finances in PPL will be in accordance with their existing finance procedures andapplicable World Bank financial management requirements.

17. DPE and PPL will each be responsible for managing, monitoring and maintaining projectaccounting records for their respective components. Original supporting documents will beretained by the originating implementing agency. Unaudited IFRs will be prepared by eachimplementing agency on a quarterly basis. The financial reports will include an analysis of actualand budgeted expenditure for the current period, and for the cumulative expenditure to date. Theformat will be developed and agreed by the implementing agencies and the World Bank andcompleted reports will be forwarded to the World Bank within 45 days of the end of eachcalendar quarter.

18. The PMU in each implementing agency will utilize a computerized accounting package,with PGAS used by DPE and Oracle by PPL. The task team will monitor the accountingprocess, especially during the initial stage, to ensure that complete and accurate financialinformation will be provided in a timely manner.

19. Internal control. There will be reliance on existing financial policies and procedures ineach of the implementing agencies. To assist the PMUs in managing the Bank-specificrequirements of the project, a brief FM manual will be developed to provide guidance onfinancial reporting, disbursement and audit requirements.

20. The existing internal audit functions of DPE and PPL will provide additional oversight ofthe PMUs.

21. Audit. The project finances (IDA for PPL and both IDA and GEF for DPE) will beincluded in the financial statements for each agency, and will require an annual external audit,due to the World Bank six months after the close of the financial year. For DPE, this will be aseparate audit of the project's financial statements. For PPL, this will be the normal companyaudit, which will also cover the IDA project funds, with the project's finances included as a noteto the accounts. The ToRs for the external audits will be agreed with the World Bank and beincluded in the Financial Manual as described above.

Disbursements

22. Three disbursement methods are available for the project: advance, reimbursement anddirect payment. Supporting documents required for Bank disbursement under differentdisbursement methods will be documented in the Disbursement Letter issued by the Bank.

23. Each implementing agency will open and manage a designated account (DA) in localcurrency at a commercial bank acceptable to the Bank. The ceilings of the DAs will bedetermined and documented in the Disbursement Letter.

24. The project funds will be disbursed against eligible expenditures as in the followingtable:

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25. For IDA:

Category Amount of the Credit Percentage ofAllocated Expenditures to be

(expressed in SDR) Financed(inclusive of Taxes)

(1)(a) Goods and Services for 530,000 100%Part 1 of the Project

(1)(b) Operating Costs for Part 100,000 100%1 of the Project

(1)(c) Training for Part 1 40,000 100%

(2) Goods, Services, and 4,130,000 100%Training for Part 2 of theProject

TOTAL AMOUNT 4,800,000

26. Retroactive financing will be applied for this project. The date of eligible expendituresand the amount for the retroactive financing will be determined according to the Bank's policyand specified in the financing agreement.

Procurement

27. Procurement Risk Assessment: An assessment of the capacity of the ImplementingAgencies (PPL and DPE) to implement procurement actions for the Project was carried out inDecember 2010. The assessment reviewed the organizational structure for implementing theProject and the interaction between the staff responsible for procurement and other nationalagencies. The overall Project risk for procurement is "high", consistent with the CPAR. Theagencies risks were assessed as "high" for DPE and "substantial" for PPL. Most of the issues/risks concerning the procurement component for implementation of the Project have beenidentified as: DPE's lack of procurement expertise and PPL's lack of experience withInternational Financing Institutions' procurement policies. The below action plan has beenproposed and with the implementation of the mitigation measures the overall risk is expected tobe reduced to "substantial" during implementation.

PNG Power Limited

Factor Risk Mitigation Measure Indicative TargetTimeframe**

Staffing Staff without experience with IFI's Agree and implement a training program Training program wasprocurement policies may lead to (internal/ external) to be implemented over agreed at negotiations.improper implementation of procurement the life of the project that is both relevant and Implementation will beactivities under the project (in terms of practical. This plan would focus on Project on-going.efficiency, competition, transparency) Management Unit Staff.

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Procurement Adviser for a period of time By effectivenesscommensurate with the project procurementload'o

Procurement Possible delays in project implementation Preparation of a realistic procurement plan Procurement Plan wasPlanning due to weak procurement planning and and quarterly status monitoring updates. finalized at

monitoring. negotiations. Quarterlystatus monitoringupdates will being aftereffectiveness.

Bidding Poorly prepared shortlists could lead to As to ensure that all firms on shortlist are During implementationdocuments,(pre) inefficiencies (e.g. nonresponsive qualified the agency will treat the firms'qualification, short proposals) and/or low quality services. written representations skeptically, and willlisting, and evaluation take up references from the proposed firms'criteria clients. Also, the agency will consider in

addition to the information asked for in therequest for EOJs, key factors as a consultant'sreputation of integrity and impartiality rootedin independence from third parties.

Technical specifications/TORs are vague Involve technical staff and end users in During implementationor restrictive to few bidders/firms. preparation of specifications or agree to hire

competent consultants to draft TS/TORs.

Evaluation and Lack ofunderstanding/expertise of As to ensure that all evaluators are qualified During implementationAward of contract evaluation factors resulting in improper experts, the agency will reach agreement with

evaluation and incorrect awards. the Bank on the minimum qualificationcriteria for members of the EvaluationCommittee, which is to be appointed shortlybefore proposals submission.

Review of Disincentive to participation due lack of Meticulous application of the Consultant's During implementationProcurement transparency in the procurement process. Guidelines provisions in terms ofDecisions and transparency (e.g. publication of the generalResolution of procurement notice, request for expressions ofComplaints interest or contract award notices).

Procurement Unreliable oversight of operations. Include appropriate coverage of procurement During implementationOversight aspects to meet project requirements in the

audit TOR. Need to distinguish betweencompliance and performance audits so thatauditors know what to do.

Department of Petroleum and Energy

Accountability for Delays in processing procurement within DPE to appoint assistant PMU Manager, By effectivenessProcurement the Borrower's internal structure. whose tasks will include procurementDecisions in the responsibilities.ImplementingAgency

Internal Manuals and Staff have limited practical guidance on The PMU Manager to meet with By effectivenessClarity of the the steps of the PNG internal procurement representatives of CSTB and apply theProcurement Process process, which could lead to received instructions on PNG internal

implementation delays. procurement process.

Record Keeping & Improper filing facilitates abuse. PMU to prepare and apply filing instructions By effectivenessDocument that clearly describe what records should beManagement Systems kept in the contract file and for how long.

Include auditing of filing practices in TOR for During implementationaudits.

Staffing Absence of procurement staff may lead to Agree and implement a training program Training program wasimproper implementation of procurement (internal/ external) to be implemented over agreed at negotiations.

10 Due to consistency and efficiency gains, DPE and PPL agreed to jointly select the Procurement Advisor. Eachagency would sign a separate contract and would ensure that Terms of References and other contractual conditionsare consistent.

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activities under the project (in terms of the life of the project that is both relevant and Implementation will beefficiency, competition, transparency). practical. This plan would focus on Project on-going.

Management Unit Staff.

Hiring of the following external expertise: (1) By 3 months afterAssistant PMU Manager (full-time local effectivenessconsultant to handle the projectimplementation); (2) Renewable and RuralEnergy Advisor (be part time and will providethe technical expertise); (3) ProcurementAdviser for a period of time commensurablewith the project procurement load.

Procurement Possible delays in project implementation Preparation of a realistic procurement plan Procurement Plan wasPlanning due to weak procurement planning and and quarterly status monitoring updates. finalized at

monitoring. negotiations. Quarterlystatus monitoringupdates will being aftereffectiveness.

Bidding Poorly prepared shortlists could lead to As to ensure that all firms on shortlist are During implementationdocuments,(pre) inefficiencies (e.g. nonresponsive qualified the agency will treat the firms'qualification, short proposals) and/or low quality services. written representations skeptically, and willlisting, and evaluation take up references from the proposed firms'criteria clients. Also, the agency will consider in

addition to the information asked for in therequest for EOJs, key factors as a consultant'sreputation of integrity and impartiality rootedin independence from third parties.

Technical specifications/TORs are vague Involve technical staff and end users in During implementationor restrictive to few bidders/firms. preparation of specifications or agree to hire

competent consultants to draft TS/TORs.

Advertisement, Pre- Inappropriate advertising leading to PMU to establish and implement an By effectivenessbid/proposal reduced competition, incomplete or advertising instruction note in line with theConference and defective bids. Bank Guidelines requirements (i.e. theBid/Proposal General Procurement Notice).Submission

Evaluation and Lack ofunderstanding/expertise of As to ensure that all evaluators are qualified During implementationAward of contract evaluation factors resulting in improper experts, the agency will reach agreement with

evaluation and incorrect awards. the Bank on the minimum qualificationcriteria for members of the EvaluationCommittee, which is to be appointed shortlybefore proposals submission.

Review of Disincentive to participation due lack of Meticulous application of the Consultant's During implementationProcurement transparency in the procurement process. Guidelines provisions in terms ofDecisions and transparency (e.g. publication of the generalResolution of procurement notice, request for expressions ofComplaints interest or contract award notices).

Contract Lack of control over contract Adopt as much as possible Lump-Sum type By effectivenessManagement and management could cause disputes and contracts, as type of contract is easier for theAdministration implementation delays. agency to administer because no matching of

inputs to payments is required (to be includedin the procurement plan).

DPE to appoint the Assistant PMU Manager During implementationRenewable as the counterpart projectmanager. The Assistant Manager will also beresponsible for undertaking a formalassessment of the Consultant's Performance.(through a Consultant PerformanceEvaluation Form).

** This does not reflect effectiveness conditions. Instead these are agreed actions with an indicative timeframewhich will be closely monitored and reported on.

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28. Guidelines: Procurement for the proposed Project would be carried out in accordancewith the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" datedJanuary 2011, and "Guidelines: Selection and Employment of Consultants by World BankBorrowers" dated January 2011; and the provisions stipulated in the Financing Agreement.

29. Procurement Scope: Given the project's technical-assistance nature, funds are expected tofinancing largely consulting services (firms and individuals) with some non-consulting services(geological survey and test drilling) and minor goods. To accelerate project implementation PPLwill progress with the procurement of key contracts as outlined in the procurement plan. Theprocurement will be carried out in accordance with Bank's Procurement and ConsultantGuidelines for these contracts and any other procurement that commenced before projecteffectiveness in order for the contracts to be eligible for Bank financing.

30. Thresholds: Prior-review and procurement method thresholds recommended for theproject are indicated in below. These thresholds may be revised during project implementation,based on risk assessment updates. All the prior review contracts would be stated in theProcurement Plan.

Selection Prior Review Threshold ApplicabilityMethodFIRMS

QCBSQBS > US$100,000 In accordance with the authorizing

CQS circumstances provided in the

LCS Consultant's Guidelines

SSS AllIndividuals Prior Review Threshold ApplicabilityCompetitive > US$50,000 In accordance with the authorizingSelection All TORs are subject to prior circumstances provided in the

review. Consultant's GuidelinesSole Source AllShort list comprising entirely of national consultants: The ceiling for short-lists ofconsultants composed entirely of national consultants would be US$200,000. In the event thatsufficient numbers of qualified national firms are not available for effective competition, thenthe short-list would consist of both national and international consultantsProcurement Prior Review Threshold ApplicabilityMethodGoods and Non-consultingServicesICB All Estimate >= US$100,000

Shopping First three contracts Estimate <= US$ 50,000

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31. Procurement Plan: The implementing agencies developed a Procurement Plan for projectimplementation which provides the basis for the procurement methods. This plan was finalized atnegotiations and would be available at agencies' head office. It would also be available in theProject's database and in the Bank's external website. A summary of the project procurementplan is provided the below. More than 10 major consulting services contracts are envisaged. Theplan will be updated every year to reflect project implementation needs. All retroactivefinancing would require prior review.

Summarized Procurement Plan (Key Contracts)

Ref. No. Description of Assignment Estimated Selection Contract Prior/ CommentsCost (US$) Method Signature Post

DatePPL

ESDP/PPL/C/1 Transaction Advisor 1,400,000 QCBS Mar-13 Prior Eligible forretroactivefinancing

ESDP/PPL/C/2 Social Safeguards Assessment - individual 100,000 Individual Jan-13 Prior Eligible forretroactivefinancing

ESDP/PPL/C/3 Environmental Safeguards Specialist - individual 100,000 Individual Jan-13 Prior Eligible forretroactivefinancing

ESDP/PPL/C/4 Project Economic Analysis 500,000 QCBS May-13 Prior

ESDP/PPL/C/5-7 Dam Safety Panel (3 individuals) 250,000 Individual Jan-13 Prior

ESDP/PPL/C/8-10 Social & Environmental Panel (3 individuals) 250,000 Individual Jan-13 Prior

ESDP/PPL/C/11 Naoro Brown Communications & Consultation 100,000 CQS Feb-13 Prior Eligible forretroactivefinancing

ESDP/PPL/C/12 Procurement Advisor 90,000 Individual Nov-12 Prior Eligible forConsultant retroactive

financingESDP/PPL/C/13 Specialist technical support - Individuals 100,000 Individual Feb-13 Prior

ConsultantESDP/PPL/C/14 Preliminary Social Impact Assessment and 400,000 QCBS Feb-13 Prior Eligible for

resettlement Policy Framework retroactivefinancing

ESDP/PPL/C/15 Additional Feasibility Study (including grout 700,000 SSS Feb-13 Prior Eligible fortesting and Geological Survey) retroactive

financingESDP/PPL/C/16 Environmental Baseline 350,000 QCBS Apr-13 Prior Eligible for

retroactivefinancing

ESDP/PPL/C/17 Three Basin Inventory Study 550,000 QCBS May-13 Prior(Brown, Vanapa, Angabanga)

DPE

DPE/201 1/01 Renewable and Rural Energy Advisor 180,000 Individual Feb-13 Prior Eligible forConsultant retroactive

financingDPE/2011/02 Renewable Energy and Rural Electrification 1,000,000 QCBS July-13 Prior

Policy and Rural Electrification StrategyDPE/2011/03 Strategic Institutional ESA 150,000 QCBS Oct-13 Prior

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DPE/2011/04 GIS stock-taking assignment 50,000 Individual Jul-13 Prior Eligible forConsultant retroactive

financingDPE/2011/05 Assistant PMU manager (full time local) 50,000 Individual Feb-13 Prior Eligible for

Consultant retroactivefinancing

DPE/2011/06 Specialist technical support in hydro power- 100,000 Individual Oct-13 Priorindividuals (tbd) Consultant

DPE/2011/07 Project Evaluation 25,000 Individual Jun-16 PostConsultant

DPE/2011/08 Financial Management Advisor (part-time) 30,000 Individual Feb-13 Prior Eligible forConsultant retroactive

financingDPE/2011/09 Procurement Advisor (part-time) 45,000 Individual Nov-12 Prior Eligible for

Consultant retroactivefinancing

32. Procurement Post Review: Procurement review missions will be carried out twice a yearduring the project's first year and then annually. A sample of 20% of contracts not subject toprior review will be post reviewed, but may be reduced to 15%, following satisfactory findings.

Implementation Schedule

33. Component 1 is to be completed by Feb 2016. Both the Renewable Energy Policy andRural Electrification Policy are planned to be completed and submitted to NEC by Feb 2015, andthe Rural Electrification Strategy drawn up and agreed to by Feb 2016. However the timingrequired for adequate consultation and consensus-building is uncertain and could add as much as6 months to the timeline.

34. Component 2 Key project milestones and best-case timing considering a privately leddevelopment of the Naoro Brown hydropower project would be as set out below. However,hydropower projects are complex and issues may be identified during the course of preparationwhich could delay the best-case timing. Also, financing will to some extent be dependent onfactors external to the project and unexpected developments may complicate the process ofreaching financial close. Hence the implementation may take up to 12 months longer than the"best-case" scenario.

Transaction Advisors in place Jun 2013Pre-qualification request for potential developers Nov 2013Pre-qualification Jan 2014Issuance of Bidding Documents to prequalified developers Mar 2014Receipt of proposals May 2014Selection of Developer Sep 2014Award of development rights Nov 2014Financial close Apr 2015Completion of construction 2018

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Figure 1 shows the key activities and responsibilities for taking the Naoro Brown hydropowerproject through to financial closure.

SCEMATICOR KEYAfIVITIESANDRESPONSIBILIT YMR NAORO BROWN HYDROPOWERPROJECT THROUGH FINANCIALCLOSE

[ PLwithTA under WB financing aoro Brown Project Developer - PN- TAavailable under DPE component ofWB-fibanced project

Feasbility Studycompeted Deveoper Seltd FinanCialCose

Technical Prepare detaied design and obtain license

TransactonAdvisors technical, legal, financial) TransactionAivors assist PPL in review of etanled desgnassessfinancingstructuresand cost implications prepared by Develperand assist PPL and GoPNG in deciding a strategy;prepare tender documents which will incltdTOR for ESIA and EMP); assist PPL in selection of I Negotiate Power Purchase Agreement with PPL; secure financing

Fnani nBown Projet DevelopeFLgal IjTransactionAdvisors assist PPL in negotiations of Power

Purchase Agreement with Developer

Economic Naoro Brown Project Economic Assessment I

Information dissemination to communities likely to be affected Prepare ResettementAtion Plan (RAP) inaccordance with TOR

PrelaminarySial Assessment: Land owner Identification, and use I Consutations with ProjectAfected people and agreement onSocial mapping and Consultations with Project Affected People (i}complete land owner identification; (ii) compensation and

I (El} benefitsPrepare TOR for Resettlement Action Plan [RAP) to be incldid intender dcuments forsponsor seetion I Review RAP

Prepare ESIA and Environmental Management Plan (EMP}

Environment PrepareTOR for ESIAand EMPto be included intender document RevaESIAandEMP

for selection of Naoro Brown Project Deveoper EA a nd EAo _b ania AE arrani o v.

II

Damsafety panel of experts advies PPL and GoPNG Overs gtCommitteeOversightI

Soial and Environmental panel of exp its advIses PPL and GorNGoOversight Committee

Safeguards - Environmental and Social

35. The proposed PNG Energy Sector Development Project would finance technicalassistance, not investments. However, part of the technical assistance related to additionalfeasibility study activities would involve drilling a series of holes on the right abutment of theproposed dam site for grouting trials, to determine the feasibility of a grouting solution to theseepage identified during phase 2 of the feasibility study. Consultations would be undertakenbefore mobilizing the drilling services, and appropriate measures put in place in accordance withthe process set out in the Environmental and Social Management Framework (ESMF).Consideration will be given to transporting the drilling equipment to the site by helicopter. Ifthis is not technically or financially feasible, PPL would upgrade the existing road to the site.Procedures to be followed in this instance - including consultations - are set out in the ESMF.

36. Activities supported under Component 2 of the proposed Project are aimed at catalyzingthe development of the Naoro Brown Hydropower Project, which would have social impacts.The technical assistance under the proposed Project includes providing technical advice and

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guidance to GoPNG, PNG Power and the selected Naoro Brown Hydropower Project Developeron assessing, addressing and mitigating potential social and environmental impacts.

Table A3.1 summarizes the Social and Environmental implementation arrangements forActivities related to Preparation of the Naoro Brown Hydropower Project, for which theimplementing agency is PNG Power.

Table A3.2 summarizes the Environmental and Social approach for the other components of theProject.

Further details are set out in the PNG Energy Sector Development Project Environmental andSocial Management Framework (ESMF).

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Table A3.1: Activities related to Preparation of the Naoro Brown hydropower project: Implementing Agency: PNG Power

Project Component Safeguards Approach and Activities Activities before Selection of Activities after Selection of Naoroduring Preparation and Naoro Brown Hydropower Brown Hydropower ProjectImplementation of proposed PNG Project Developer Project Developer but beforeEnergy Sector Development Project financial close.

2.1 Preparation of Naoro Brown Safeguards Approach involves the The Naoro Brown The selected Naoro BrownHydropower Project for Port following three steps: Feasibility study was largely Hydropower Project Developer willMoresby consisting of 11: completed in late 2011 (paid for and prepare ESIA, EMP, Dam Safety(i) Access Roads. Step 1: Six key safeguard documents commissioned by PNG Power) Plan and RAP, in line with the(ii) Transmission Lines are required. which includes detailed Terms of TORs(iii) 19m high Concrete gravity dam, Reference for the preparation ofintake structure, headrace tunnel, 0 Safeguards Documents ESIA and EMP.penstock, power house and tailrace required are:pipe. f Environment and Social Impact - PNG Power (with the(iv) 150ha reservoir/sto rage. Assessment (ESIA). assistance of consultants financed

- Information and Consultation under the proposed PNG EnergyStrategy. Sector Development Project) will- Environmental Management undertake the RPF. As part of thePlan (EMP). preparation of the RPF, preliminary- Resettlement Policy Framework social mapping will be undertaken.(RPF).- Resettlement Action Plan(RAP).- Dam Safety Plan.

o PNG Power assisted by the

World Bank will prepare the TORs forthe RPF, RAP and Dam Safety Plan.

0 TOR for ESIA and EMP will beprepared by Feasibility Study

eConsultants, with review from WB to

Based on preliminary findings of the feasibility study. To be updated as feasibility study is completed and design work undertaken

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ensure the TOR are in compliance withWB safeguards policies.

o The TOR for the ESIA, EMP,Dam Safety Plan and RAP will beincluded in bidding documents forselection of Project Developer, andresponsibility for implementation will beincluded in the relevant legal agreementswith the selected Developer.

Step 2: Oversight Monitoring

- Panel of Experts for Dam Safety - PNG Power assisted by the The work of both Panels of ExpertsWorld Bank will prepare detailed and the Environmental and Social

- Panel of Experts for Social and terms of reference for Panel of Advisers will continue to financialEnvironmental Safeguards Experts, and the Environmental and close.

Social advisers.Environmental and Social Advisers will - Initially the two expert Department of Environment andassist PNG Power in review of all panels will be hired by PNG Power Conservation (DEC) will review andaspects of the ESIA. RPF, RAP and (with funds from the proposed PNG clear the ESIA.entitlement plans Energy Sector Development

Proj ect). All safeguards documents will be- Electricity Management Bidding documents and shared with the World Bank forCommittee including key departments subsequent legal agreements will review based on compliance withand agencies will review and provide specify that responsibility for WB policies while the WB-oversight throughout the process. 12 maintaining these expert panels will supported project is under

be taken up by the selected Naoro preparation or active.Brown Hydropower ProjectDeveloper.

Step 3: Communication Strategy o PNG Power to conduct Project Developer as part ofconsisting of: consultations with potential PAPs developing ESIA, EMP and RAP,

and other stakeholders, mostly on and entitlement programs will

o gConsultations with Project sharing information on the project as consult with PAPs and otherAffected Peoples (PAPs), NGO's and it becomes available. stakeholders on ongoing basisother stakeholders.

12 There is provision under Component 1 for hiring specialist support to assist the oversight committee as required

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- Communication Strategy forbroader consultations.

Table A3.2 Environmental and Social approach for the other components of the Project

Project Component Safeguards Approach for each Activities During Implementation of TA Projectcomponent or relevant activity of theTA Project

Component 1 to be implemented by the Department of Petroleum and Energy

1.1 Energy Policies Preparation of a Strategic - DPE assisted by the WB will prepare the terms of reference for- Renewable Energy Policy Institutional Environmental and Social the SESA.- Rural Electrification Policy Assessment (SESA) of the Renewable - DPE will hire a consultant to prepare the SESA.

Energy Policy and the Rural - The World Bank will review the SESA and provide its commentsElectrification Policy, to provide GoPNG to the DPE.guidance on institutional and regulatoryissues to ensure environmental and socialsustainable management of theimplementation of these policies. Theassignment would include developmentof a plan to support implementation ofSESA recommendations.

1.2 Development and Implementation - No safeguards actions required. - No safeguards actions required.of Rural Electrification Strategy- GIS Stock Taking andDevelopment of "Potential RE Projects- Analysis of AlternativeModels for RE Projects- Social and EnvironmentalCapacity Building for RE- Preparation of RuralElectrification Strategy

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1.3 Technical Support for DPE related Oversight monitoring of the safeguardsto new generation projects aspects of Naoro Brown Hydropower

Project. This could include technicalsupport to the Electricity ManagementCommittee (and/or its secretariat), DPEand Department of Environment andConservation (DEC) to be determined asneeded, for example to:- Assist DPE / GoPNG inoversight monitoring of safeguardsaspects of Nauro Brown project.- Assist DEC with reviewingESIA report for Naoro Brown.

Component 2.1 Naoro Brown See Table A3.1 See Table A3.1implemented by PNG Power

Sub Component 2.2 to be implemented by PNG Power

Three basin Inventory Study (Brown Preliminary Environmental and Social TA consultant hired by PNG Power under this sub-component to undertakeVanapa, Angabanga) scoping to inform decision making this study will also include environmental and social scoping of these

process. options.

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The Kokoda Initiative

37. The Governments of Australia and PNG signed a Second Joint Understanding 2010-2015on the Owen Stanley Ranges, Brown River and Kokoda Track Region. The vision is sustainabledevelopment of this region and protection of its special natural, cultural and historic values. TheKokoda Initiative (KI) Area of Interest will be subject to a broad assessment of natural, culturaland historic values and within which a regional tourism strategy will be developed andpotentially other economic activities. The Interim Protection Zone (IPZ), which includes muchof the Naoro and Brown Rivers catchment area, represents the core area for possible legalprotection of the Brown River Catchment area and most of the Kokoda Track. The IPZincorporates the Brown, Naoro and Goldie Rivers - the priority areas in Central Province forfuture development of hydropower and water supply for Port Moresby. The KI is housed withinthe Department of Environment and Conservation. PPL and representatives of the KI havediscussed the planned development of the Naoro Brown Hydropower Project. As a result ofthese discussions, it has been agreed that the reservoir for the Naoro Brown Hydropower Projectwill be sized and designed so as not flood the Kokoda Track. This specification wasincorporated as a constraint in the feasibility study. PPL will continue to update the KI team asthe preparation of the Naoro Brown Hydropower Project progresses.

Monitoring & Evaluation

38. Annex 1 sets out the Results Framework and indicators that will be used to monitor andevaluate the project.

Role ofPartners

39. Coordination among Development Partners is good. DNPM has begun hosting semi-annual development partner consultations on the energy sector. All development partnerscurrently active in the energy sector (ADB, JICA, WB, IFC) are participating. ADB will financea Port Moresby Power System Master Plan for prioritizing investments, and development of acomputer-based power system model for assessing impacts and benefits from alternative systemdevelopment scenarios. The study started in July-20 11. Work on the transmission aspects of thePower Moresby grid will feed into definition and design of the transmission infrastructurerequired to connect the proposed Naoro Brown Hydropower Project to the Port Moresby grid.JICA is focusing assistance on the Ramu / Highlands grid, including an updated Master Plan.EIB, JICA and ADB have participated in a joint mission with the WB team and supported theSeptember 2010 workshop on Hydropower in PNG. The development of the proposed Projecthas been coordinated with IFC. IFC and MIGA were represented at the Hydropower workshopin Port Moresby in September 2010.

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Annex 4: Operational Risk Assessment Framework (ORAF)

PAPUA NEW GUINEA: Energy Sector Development Project

Negotiations and Board Package Version

Project Development Objective(s)

The proposed Project Development objectives (PDO) are to (i) strengthen policy development and strategic framework for renewable energy andrural electrification; and (ii) attract investors for sustainable development of new hydropower generation to supply the Port Moresby electricity grid.

PDO Level Results 1. Rural and Renewable energy policies submitted to Cabinet and rural electrification strategy completed following aIndicators: participatory process.

2. Financing for the Naoro Brown hydropower project is at an advanced stage.3. Planning study is completed as a key input to preparing future hydropower projects for investment.

1. Project Stakeholder Risks Rating HighDescription : Risk Management:Decisions / support from multiple entities within GoPNG will be (i) Continued broad-based discussions across range of GoPNG Departments with interests andrequired to implement the project. There is a potential risk of lack responsibilities in the energy sector.of communication or disagreement on specific issues withinGoPNG leading to delays. (ii) Support for DNPM's semi-annual stakeholder discussions on power sector.

Some NGOs may be "preemptively skeptical" about Bank Group (iii) WB outreach to NGOs to share accurate information.involvement and / or opposed to hydropower development.

(iv) Implementation arrangements for Component 2 include Electricity Management Committeewhich will facilitate coordinated information-sharing and decision-making within GoPNG relatedto the preparation of the Naoro Brown project.

(v) GoPNG has emphasized the need for exhaustive consultations with landowners with respect tothe Naoro Brown project and under Preliminary Social Assessment and ESIA, the genealogicalcensus mapping along with the Information and Consultation Strategy will furnish the informationand approach to identify all relevant groups and engage them constructively on impacts andbenefits.

Resp: Stage: Due Date: On-going Status:(i), (ii), (iii): WB (i), (ii), (iii): Preparation In progress

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(iv): GoPNG and implementation.(v): PPL (iv): Implementation.

(v): Implementation.2. Implementing Agency Risks (including fiduciary)2.1. Capacity Rating: HighDescription : Risk Management:Lack of capacity leads to delays in project preparation and (i) A PMU has been set up in each implementing agency, initially with existing staff from withinimplementation. DPE and PNG Power respectively. As the work load increases, the capacity of the PMUs could

be augmented with Project funding. DPE would hire a full-time assistant PMU manager and apart-time technical advisor to immediately supplement capacity.

(ii) Technical assistance and capacity building is the core of the proposed project.

(iii) Both DPE and PNG Power have participated in introductory training on procurement, FM anddisbursement provided by WB. Procurement training was provided during a February 2011mission. A further session will take place during Q1 CY2013 in Port Moresby and subsequentlyby VC. A procurement training action plan has been agreed at negotiations.

Resp: Stage: Preparation and D Status:WB, PPL and DPE implementation. In progress

2.2. Governance Rating: LowDescription : Risk Management:Government does not move forward with the implementation of The implementation of the Electricity Industry Policy is overseen by a multi-ministerialthe Electricity Industry Policy (EIP). committee whose composition ensures broad support from across the political spectrum in

Parliament and the executive branch, avoiding the polarized contexts where other industries andsectors have stalled. The policy implementation is also a central part of the dialogue with multipledonors, which further reduces risk and ensures a more inclusive and multi-stakeholder approach tothe sector. Under separate TA, the WBG is supporting the DPE with developing high levelprinciples for the preparation of a National Electrification Roll Out Plan, as well as withRenewable Energy resource mapping and a third party access grid code, all of which support theimplementation of the EIP. The ADB will finance TA support to DPE for the implementation ofthe EIP.

Resp: [Stage: Preparation and Du.ae O-on Status:lInDPE and PPL Iimplementation. progress

3. Project Risks3.1. Design Rating: SubstantialDescription : Risk Management:Despite general support for the concept of bringing private sector The strategy of doing a technical assistance project rather than waiting for an investmentinto new generation, there is a lack of capacity and experience on opportunity is essentially in recognition of the need for early TA and capacity strengthening inhow this is to be accomplished. There is a risk that this could slow order to set up the process for new investment both in rural electrification and in the Naoro Brown

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decision making. hydropower project.

Continued broad-based capacity-building is the key mitigation measure. Capacity building effortshave started, including a workshop on WB safeguards policy and experience with hydropower; aworkshop on Financing and Safeguards aspects of medium and large hydro; and technicalassistance to develop a third party access grid code. DNPM has launched a semi-annual intra-governmental consultation on energy sector issues involving key GoPNG departments anddevelopment partners.

Resp: Stage: Status:GoPNG, PPL, WB Preparation and Due Date : On-going In progress

implementation.3.2. Social & Environmental Rating: SubstantialDescription: RiskManagement:Electrification projects have both positive and negative social A major element of Project design is to properly address social and environmental aspects.impacts. While people in villages in the area that may beimpacted by the Naoro Brown hydropower project are generally A strategy of social and environmental mapping and impact assessment, information-sharing andpositive now, there is a risk that expectations in terms of the consultation for preparation of the Naoro Brown project is defined in the Project and in the ESMF.benefits that they expect may not be met.

Stage:Other potential risks are that possible negative social Preparation (in terms ofenvironmental impacts associated with the Naoro Brown project project design) andare not fully mitigated; and special interests could delay

A mj emn of Proec design PPL, GoPNG, WB and environmental Due Date: On-going In progressmapping andimplementation of the

ESMF).

3.3. Program & Donor Rating: LowDescription: Risk Management:Conflicting donor discussions or support cause confusion. Semi-annual energy sector meetings hosted by DNPM. Joint or over-lapping missions when

possible. ADB will fund the "Port Moresby Power Grid Development project" coveringtransmission and distribution upgrades, the development of the Kirakira Zone Substation, therefurbishment of the Rouna 1 hydro power station upgrade, and the Sirinumu hydro Toe of TheDam Rehabilitation. WB, ADB and PPL are working closely to ensure good coordination.Resp: Stage: Preparation and D Status:PPL, GoPNG, WB implementation. In progress

3.4. Delivery Monitoring & Sustainability Rating: ModerateDescription : Risk Management:Contracts management is inadequate. (i) A PMU has been set up in each implementing agency, initially with existing staff from within

DPE and PNG Power respectively. As the work load increases, the capacity of the PMUs couldbe augmented with Project funding. DPE would hire a full-time assistant PMU manager and a

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part-time technical advisor to immediately supplement capacity. As a signal of their proactivityand willingness to ensure implementation momentum, even before Board approval of the project,the DPE launched recruitment of four staff with project management experience who are notspecifically tied to the IDA credit but whose participation in the same unit will augment overallcapacity.

(ii) DPE to adopt as much as possible Lump-sum type contracts as such type of contract is easierto administer than time-based contracts.

Stage: Preparation and . Status:Resp: DPE, PPL, WB Due Date : On-going Inposs

implementation In-progress3.5. Other Rating: LowDescription: Risk Management:There may be a reputational risk for the WB deriving from the fact This risk would be mitigated by ensuring that implementation of the safeguard measures agreedthat the proposed Project provides TA for the preparation of the during implementation of the proposed PNG Energy Sector Development Project are included inNaoro Brown Hydropower project. The proposed Project would the bidding process and final agreement with the selected Naoro Brown Hydropower projectend before the development of the Naoro Brown project. Unless Developer, making the Naoro Brown Developer responsible for developing the Naoro Brownthe Bank is involved in the financing of the Naoro Brown Hydropower project in accordance with the agreed approach to addressing social anddevelopment (i.e. under a subsequent operation), the Bank will environmental aspects. GoPNG and PNG Power have specifically sought Bank technicalhave no responsibility for, or ability to enforce, compliance with assistance support in order to benefit from WB experience on sustainable hydropowerimplementation of safeguards arrangements developed and agreed development. Both GoPNG and WB view the proposed Project as a first step in a longer termduring the TA Project implementation period. If the Naoro Brown WB engagement in the energy sector, and all parties recognize the importance of GoPNGDeveloper were not to comply with the agreed safeguards enforcement of the Naoro Brown Hydropower Project Developer's responsibilities with respect toapproach, negative results could affect WB reputation due to the the social and environmental aspects.WB support for preparation of the Naoro Brown Hydropower

project. Resp: Stage: Preparation an Due Date: On-going Status:WB, GoPNG, PPL implementation. In progress

4. Overall Risk

Implementation Risk Rating High

Comments:

While there are some potentially high impact risks, on balance there is strong ownership from across government and PNG Power. The proposed Project also targets abroad-based set of beneficiaries. One risk is of delays due to inter-governmental decision making. Much progress has been made in improving the communications ofrelevant government ministries and Treasury and Department of National Planning have been involved from the early stages of preparation. A second risk is related tosocial aspects including land-owner issues related to the preparation of the Naoro Brown project. A plan for Information-sharing and Consultations beginning early andcontinuing throughout Project implementation are designed to mitigate this risk.

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Annex 5: Implementation Support PlanPAPUA NEW GUINEA: Energy Sector Development Project

Implementation Strategy

Key risk area Support Strategy1. Intra-government decisionmaking delays in the following areas:

approvals to get policies Through input in design of the relevant consultancies, regular interactionthrough the processes required prior to and follow up with DPE, and continuing the practice of meeting with asubmission to Cabinet. wide range of stakeholders during supervision missions, WB will

encourage and support the consultation process and consensus-buildingoutreach. Once the consultancies to develop the renewable energypolicy and renewable electrification policy and strategy are underway, itwould be important to have a locally-based team member who canparticipate in many of the consultation meetings both in Port Moresbyand in other locations to keep the team well-informed of the issues thatare raised so that any potential obstacles can be identified early anddiscussed with counterparts to find solutions.

- key points during Naoro Brown Analysis of the options will be presented by Advisors funded under theHydropower Project preparation e.g. Project, but decisions will be required throughout the process byfinancing structure; basis for selecting GoPNG. WB support to address this risk has already begun withDeveloper; actions needed by GoPNG to parallel capacity building activities (e.g. the September 2010 workshopmake the project viable (e.g. off-take on hydropower) and will continue through: (i) Regular, on-goingguarantee, tariff actions). involvement of technical experts from WB team, available to discuss the

options with GoPNG officials and provide an "independent soundingboard", where possible sharing relevant experience from elsewhere; (ii)coordinated efforts with other development partners, and making use offunding opportunities offered through the WB, to support activities togenerally increase the exposure of GoPNG officials to experience inprivate sector-led financing of hydropower in other countries.

2. Special or competing interests delayNaoro Brown Hydropower Projectpreparation:

Lack of communication and WB team will continue to emphasize with counterparts the importanceconsultation could be source of of good communication in building support for the project. It wouldlegitimate opposition from potentially- also be important to have a locally-based team member participating inaffected groups. many of the consultation meetings to keep the team well-informed of the

issues that are raised so that any potential obstacles can be identifiedearly and discussed with counterparts to find solutions.

- Disagreement regarding which The plan for determining the land owners, land users and theirinterested parties are legitimate representation is set out in the ESMF. WB team (particularly TTL andstakeholders, and who is mandated to social specialist) will closely monitor the adherence to the activities andrepresent these could lead to delays. seek expert input from outside experts with specific knowledge of any

difficult issues as they arise.- Anti-hydro NGOs could Involve WB communications team from initial stages and draw oninfluence communities who otherwise experience from WB experience with other hydropower projects.would be positively engaged. Support the GoPNG and PPL in emphasizing the benefits.3. Safeguards Risks Environmental and Social Management Framework sets out the

approach to identifying and addressing potential social andenvironmental aspects. WB supervision team will include both socialdevelopment and environmental specialists - who not only know theirtechnical areas well but are very familiar with WB policies and

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application of these policies. They will closely monitor the content andquality of TOR, reports, evaluations. The specialists will alsoparticipate regularly in missions as part of on-going capacity building.

4. Implementation agency risksTechnical WB supervision team will include specialists in the critical areas with

the greatest need for client support: social assessment; communications;structuring and financing hydropower projects; hydropower technology.Involvement will range from support in preparing TOR; reviewingtechnical evaluation reports for key consultant selections; review ofdraft reports. Specialists will participate in supervision missions whichwill also be used as regular capacity building opportunities.

Fiduciary In addition to regular supervision on FM and procurement, there will bea focus on strengthening the locally-based support in procurement anddisbursement. The CMU has allocated time and staff resources for twodesignated POM national staff to join the implementation support teambeginning at /decision appraisal, who will be the first 'port of call' forcounterparts (one on disbursement and one on PR). The objectivewould be to provide the implementing agencies with access to quick -sometimes informal - support and feedback. Simple issues can besorted out quickly before formal submissions are made. Implementingagency staff will "learn on the job" more effectively if they are able tobuild professional relationships with support staff in the CO. Thiswould be intended to improve the quality of formal submissions so thatthe turn-around is faster, and fewer iterations are required. Plans are inplace for regular in-country fiduciary training provided by WB stafffrom the SYD hub supplemented by colleagues from regional offices inManila and Jakarta; experience in PNG has shown a great openness tocapacity building provided by professionals from other 'successful'larger Asian economies. Support on procurement and disbursement is ahigh priority during the first 12 months as counterparts navigate the WBprocesses for the first few times.

Implementation Support Plan (ISP)

Area of Focus First 12 months Remainder of the projectTechnical inputs needed Structuring and financing private-sector led Same as first 12 month, with the

hydropower; technical aspects of addition of expert review inhydropower design; locally-based staff to renewable and rural electrificationparticipate where possible in consultation areas.meetings; communications specialist.Specialist input (hydrologist, economist)depending on issues arising.

Fiduciary Requirements High priority: consultant selection, Less support anticipated as allprocurement filing, disbursement processes will be covered in theprocedures need to be presented at project experience during the first 12launch, with more detailed training for months. FM specialist will continuePMU members immediately post-launch. to conduct quarterly reviews ofA counterpart in the CO should be able to interim financial reports (IFRs) andassist with standard disbursement annual reviews of audits, and followprocedures. Procurement specialist and FM up of issues arising.specialist to visit both PMUs at least twicein first 12 months (after launch). FMspecialist will also conduct quarterlyreviews of interim financial reports (IFRs)and annual reviews of audits, and follow upof issues arising.

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Safeguards Experienced Environmental specialist Same as for first 12 months.(knowledge of hydropower issues) andsocial development specialist. Both mustbe very familiar with WB policies.

TTL Regular presence: at least 4 visits 3-4 visits / year depending onprogress

Prospects for integration with This project will play a catalytic role in the strategic re-positioning of the WBG,other activities and thus will enjoy additional focused time and attention from senior country

management. The CMU views this project as serving as the platform for a muchbroader and strategic engagement in building "increased and more gender-equitableaccess to inclusive physical and financial infrastructure" pillar of the FY2013-2016CPS approved by the Board in December 2012. The CMU feels the renewableenergy sector should be the catalyst for discussions around possible IBRD orenclave lending under the current CPS, and together with the ResRep and Director(IFC) have agreed that this work would be the centerpiece of a more formalized andhigher-profile WBG "sustainable development and climate change" portfolio inPNG, complemented by adaptation and DRR (since mitigation and REDD arecovered at GoPNG request by other partners).

The ISP will be reviewed at least once a year to ensure that is continues to meet theimplementation support needs of the project.

Resource Requirements for First 12 Months

Trips to PNG Staff WeeksTechnical Financing 1 4-5

Hydropower engineer 1 3-4Communications 1 3Hydrologist 0/1 1Economist 0 2-3

Safeguards Social Development 2 7-8Environmental 2 4

Fiduciary Procurement 3 3-4Financial Management 2-3 2-3Disbursement 1 2

Country Office Local support for consultations 4 internal trips 5support Disbursement 0 2

Procurement 0 3-4TTL 4-5 12CMU Country Manager 0 3-5leadership

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Annex 6: Naoro Brown Hydropower Project Technical AnnexPAPUA NEW GUINEA: Energy Sector Development Project

Naoro Brown Hydropower ProjectTechnical Annex (Hydropower Aspects)

Background

1. River Systems

To the North of Port Moresby, there are four river systems all of which discharge into theGulf of Papua. They are:

* The Laloki River (immediately to the North) that has already been developed fordomestic water supply and hydroelectricity. At the upstream end is the SirinumuReservoir which provides substantial storage. Downstream, in cascade, are the Rouna 2,Rouna 1 and 3, and Rouna 4 developments which are currently in various stages ofrehabilitation.

* The Brown River (further to the North) and its tributaries, the Naoro and the Ovea. Thetotal catchment area of the Brown River Basin is 1370 km2 (taken at Brown at Karema).

* Further to the north again is the Vanapa River which at the downstream end runs west,but about 25 km from the coast it turns to the north so that the river basin generally isparallel to the coast with the western divide being about 20 km from the coast. At theupstream end of the Vanapa basin is the Guimu River basin and there are large potentialstorage sites close to the divide so that catchment diversions may be envisaged in eitherdirection (i.e. to Vanapa or towards the coast into the Angabanga Basin).

* North of the Vanapa is the Angabanga River which becomes wider towards its northernend.

2. While there are smaller potential storages there are also major potential storages at theupstream end of the Vanapa and Angabanga Basins (see later details).

Previous Studies

3. The most relevant previous studies are the Monenco February 1989 study1 3 and theAugust 1983 Gibb studyl 4 , the former effectively being an update of a 1980 feasibility study.The Gibb feasibility study was a full feasibility study which included all elements normallypresent except subsurface excavation. However, in view of the nature of the project which ismostly underground, the nature of the rock which is generally volcanic and therefore extremelyvariable along the tunnel route can be expected to be very variable, surface geological mappingwas adequate. The Monenco study incorporated additional information, primarily hydrometric

1 Brown and Vanapa River Basins - Hydro Inventory Study. Monenco Consultants Limited Montreal, Canada14 Gibb Australia in association with Mertz & McLellan & Partners and Willing and Partners Pty Ltd.

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data, which had become available since 1983. Therefore the Monenco study was effectively a"desk study". The Gibb study details the potential storages at the upstream end of the Vanapacatchment:

* The Lake Kosipe Reservoir: This is located at the extreme upstream end of the IvaniRiver, an upper tributary of the Angabanga River. There is a very shallow flat swampyarea which provides an ideal situation for storage;" the dam would be located where theIvani river leaves the broad plain area downstream of the Kosipe mission."1 5

* The Lake Guimu Water Storage: This storage would be located on the Guimu Riverwhich flows north from the reservoir storage into the Angabanga catchment. A 1980feasibility study proposed a reservoir at an elevation of 2890 m created by a rock filldam. Associated with the Guimu Project is a run-of-river diversion project called (at thattime) the Mt. Albert Edward Project. This would develop a gross head of 319m betweena tributary of the Guimu River. A diversion weir would be constructed in a narrow gorgetransferring water into the Guimu River itself via a tunnel about 4km to a surface powerstation.

4. The Monenco study concluded "that the previous studies had identified the majorconcentrations of head available in both the Brown and Vanapa River Basins. Moreover, theseprevious studies did not overlook any locations where major storage reservoirs could bedeveloped for regulation of stream flows. Based on the foregoing, the layouts documented byGibb were accepted as a sound basis for estimation of energy potentials and project costs andsubsequently selection of the most suitable sites as candidates for early development."

5. Although the report and the associated methodology are considered to be "state of theart" at the time of report preparation, some variation to the conclusions is appropriateconsidering the current status of the PNG generation system.

6. The report used various combinations of "firm" and "secondary" energy for evaluation ofthe economic viability of the various projects. Considering that the PNG Power system is now amixed hydro thermal system, the use of average energy is more appropriate.

7. The major findings to be drawn from the Monenco study are that:

8. For the Brown River Basin:* Elevation of Top of Catchment (including lora Diversion) is at about 2,200 m;

* Main head concentrations: u/s end 1,000 m and d/s end Naoro Brown 500 m;

* Overall Development Potential (assuming 60% system load factor) is about 2,400 GWhand 500 MW;

Since the report dates from 1982, it is not known whether the Kosipe mission still exists.16 This assessment is based on US Federal Energy Regulation Commission (FERC) studies in the 1970s. Usingextensive LOLE studies it was concluded that if the mixed system had a reasonable proportion of thermal generationthen average energy and average capacity (as limited by mechanical availability and head but not energy) were theappropriate criteria to be used.

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9. For the Vanapa River Basin:* Elevation of Top of Catchment (including IGuimu Diversion) 2,850 m and Albert

Edward Diversion 3,200 m;

* Main head concentration: u/s end (up to 1,400 m) and d/s Udava (200 m);

* Overall Development Potential (assuming 60% system load factor): is about 5,000 GWhand 1,000 MW.

Overall Conclusions

10. The Monenco report concluded:* "The Udava Project [which developed about 600 GWh and has cost of 3.75 Toea/kwh]

"has lowest cost by significant margin but......is large in comparison relative to thepresent load in Port Moresby. The Udava ........ will be developed as the needarises......";

* "Run of River development of the Naoro Brown [480 to 500 GWh at a cost of 4.7 to 5.0Toea/kWh] site is best choice for commencing development of the hydroelectric potentialof the Brown river basin."

11. For reasons of matching new supply to demand, because the Naoro Brown project islocated closer to Port Moresby, and the feasibility study is well underway, these conclusions areconsidered to be still valid. The main things that have changed are: (i) the Port Moresby systemis now a mixed hydro thermal system and with complementary operation of the hydro, all energyfrom the Naoro Brown project could be utilized provided there is daily storage or preferablyweekly storage; (ii) the value of thermal energy has increased dramatically while hydro capitalcosts have also increased but at a much lesser rate than fuel costs. These factors will not affectcomparative energy costs.

The Proposed Naoro Brown Project

12. The feasibility study for the Naoro Brown scheme is being carried out by Entura(consulting arm of Hydro Tasmania). The preliminary findings of the feasibility work werepresented in December 2010. The feasibility study was largely concluded in late 2011, thoughsome further work related to geological assessment, in particular regarding the identified seepageissue, is recommended.

13. The proposed project takes advantage of a gross head of about 520 m which occursacross a large loop formed as the Naoro River flows north from Madilogo village to join thewesterly-flowing Brown River.

14. Hydrology. The catchment area is about 274 km2 . The majority of hydrology data wassourced from the department of Environment and Conservation (DEC) in Port Moresby andincluded Tideda database, continuous flow and rainfall data on the Naoro River and BrownRivers in the project area; daily flows digitised back to 1955 for a downstream site on the Brown

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River; and long-term data from two neighbouring catchment sites. Monthly rainfall data wassourced from National Weather Service (NWS) at a site near the upper boundary of Naorocatchment and in Port Moresby.

15. Water Loss Investigation. Earlier studies had indicated potential water loss in the reachof the Naoro River near Madilogo Village. Conclusion of the water loss investigation indicatethat there is water loss of about 0.7 m3/S located approximately 800 m upstream of Madilogovillage, returning to the river approx. 800 m downstream of Madilogo village. The preferreddam site would be upstream of the water loss area.

16. Geology of the area. Five distinct geological units dominate the study area:

o Kagi Metamorphics - most widely distributed rocks in the area, generally high toextremely high strength with some weakness along the foliation plane and parallel to rockfabric;

o Oveia Diorite - igneous rocks that have intruded into the older Kagi Metamorphics;

o Efogi Volcanics - predominantly basalt, ranging from very high strength few vesicles tohighly vesicular which is lower in strength;

o Alluvium - upstream of Madilogo, medium dense sand to fine gravel;

o Residual Soils - veneer of soil and colluvium covers the bedrock, no more than 3m thick.

17. Possible Arrangments. The options Study considered three arrangements, shown in thefollowing figure17 :

o Upstream Option: Dam site upstream of water loss issue (i.e. just upstream of MadilogoVillage);

o Downstream Option: Dam site downstream of Madilogo village;

o Vabuiagi Option: Dam site downstream of the confluence of the Naoro River with theVabuiagi (also called Fagume) River.

17 Source: Entura presentation on initial findings of the Naoro Brown Feasibility Study, December 2010.

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General rra nVeibntagf0Option

Three Pmorhious Sits Visitedl

xentura

Coomparson of options is summarized in the fllowing table.

Aoiable Gmurn. LTA Flow E,~rg TuOmmAceStorage Head Lenigi

(dam heitOPTION 1 ood 562om 16.9 mos - 12 im average(pstrea (I9m)

OPTION2 Por 53m 169m/s 2%less [km averagedownstream (0m) fian Option

Madilogo) iOPTION 3 Needs lage 252m 26m s 30%less 7km poru(exra

(Fagaue) da (64m) (n,ly alf) 50% m,re fn Option but larger 2km)

18. The arrangement considered is essentially nm of-river though the feasibility study seeksto provide weekly storage subject to the constraint of not flooding äay part of the Kokoda Trail,to benefit from the following advantages which would increase the electricity output from theavailable head and flow, and would also yield improvements to the overall system operation ofthe Port Moresby grid. For example:

• Reduceed spill at the dam:

o Flexibility to generate efficiently since turbines can be tru at optimum efficiencyexcept when the dam is spilling, when they would operate with wicket gates fullyoptn

o System and portfolio benefits can be provided.

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* Better ability to follow system loads. Hydropower with at least daily storage has verygood load following capability in addition to other ancillary benefits such asfrequency and voltage regulation, spinning reserve and black start capability.Quick start capability also makes it excellent for cold reserve, thus capacity is oftenincreased simply to provide reserve capacity for the system. All of these factorsprovide the ability to coordinate with loads and other generation sources resulting inimproved system operational flexibility:

o Reduced lost generation potential if load is too low but inflows are too high;

o Displacement of higher cost generators is possible across a wider timeframe, notdependent on inflow.

* Ability to provide on demand support:

o Peaking capability;

o Voltage support (synchronous condenser at low load with reduced spill) andspinning reserve (frequency support);

o Increase system security as unit(s) can be started quickly in case of failure atanother station.

19. Preferred Arrangement. Based on the factors noted above and the potential for achievingsome level of storage without exceeding the flood plain and without flooding the Kokoda Trail,the preferred arrangement would be the Upstream Option.

20. Proposed Dam, Reservoir, tunnel and power station would have approximately thefollowing characteristics:

* The dam site approximately 1 km upstream of the Madilogo village, where a 20m highdam produces an 11 Mm 3 storage that provides weekly regulation.

* Approximately 234 ha reservoir surface area (approximately 3ha/MW).* An intake structure on the left bank just upstream of the dam structure.* A 10.4 km unlined headrace tunnel, with a 4.25m dia. horseshoe cross-section, from the

intake to a surge shaft.* A 400m long x 3.25m dia. vertical shaft going from the headrace tunnel to the power

tunnel.* A 1.7 km power tunnel which is steel lined for approximately 1 km and concrete lined the

remainder.* A surface power station housing 4 x 20 MW Pelton Turbines, with a gross head of 558 m

and a design discharge of 16.9 m3/s.

21. As part of this feasibility study, Entura has obtained the following input data:

* LiDAR survey for the project area.* All of the available hydrological data.

18 If the system goes down for any reason then hydropower can be used to "reboot" the system.

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* Undertaken a water loss investigation program along this reach of the Naoro River.* Undertaken geological drilling at the proposed dam site.

22. Based on the geological investigation undertaken at the dam site, it was shown that thevesicular basalt on the right abutment is highly permeable. Therefore to seal off the reservoir acut-off will be required on the left abutment. This cut-off would need to extend 300m to the NNEand extend to a depth of 40-50m. Even with this geological issue, the proposed dam site is stillthe preferred site for the Naoro Brown project. An allowance in the cost estimate has beenincluded to address this geological risk.

23. A significant length of access road totaling about 73 km is required from Edebu to thepower station site, an intermediate tunnel portal and the dam site. The proposed transmissionroute generally follows the access road from the power station site to Edebu, then generallyfollowing the Hubert Murray highway with the connection to the Port Moresby transmission gridat the Moitaka Substation.

24. Environmental flow discharges during the dry season will need to be determined basedon the environmental baseline work (to be undertaken as part on the proposed World Bank-supported TA project). During the dry season, there are low flows of around 5.8 m3/S (i.e. flowexceeded 95% of the time). The analysis was conducted using environmental flow rates fromOm3/s to 3m 3 /s. The required flow rate would be determined after the environmental baseline hasbeen completed and this would be factored into the final design and cost estimates.

25. The long term average flow of the Naoro River at the proposed dam site is estimated tobe 16.9 m3 /s. With the design discharge and storage provided, the scheme provides between68.8 % (3m 3/s environmental flow) and 81% regulation (0m 3/s environmental flow). Theestimated average annual energy produced from the scheme is between 469 and 550 GWh(including 2% transmission losses), with good operation flexibility to meet the peak loadrequirements of Port Moresby.

26. Hydraulic modeling has indicated that the proposed Naoro Brown project will not impacton the Kokoda Track during both normal and flood operation of the storage.

27. The construction program indicates a total design and construction time of 4.5 to 5 years,with the critical path going through the access road construction and tunnel construction.

28. The preliminary cost estimate for the Naoro Brown project includes an allowance for thecost of addressing the seepage, land compensation costs for the reservoir area, hydropowerinfrastructure, access roads and transmission line. The estimated unit cost of energy rangesbetween 3.0 c/kWh (low cost estimate, no environmental flow) to 4.4 c/kWh (high cost estimate,3m 3/s environmental flow.

29. Based on this feasibility study, the Naoro Brown project is economically viable comparedto alternatives.

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30. The recommended next step is to assess options for addressing the identified geologicalrisk of seepage around the right abutment of the proposed dam. The key elements that need to beundertaken to address this issue are:

* Grouting trials for the right abutment cut-off; and* Detailed seepage analysis to define the final extent of the cut-off.

Environmental and Social Considerations are covered in the main document and in Annex 3.

Need for Future Studies

31. While the Port Moresby system can accommodate a largely run-of-river development atthis stage, it is evident that the next development should include more significant energy storagefor the system. The large potential storages were referred to earlier in this annex. However, aswould have been appropriate at the time of the study, it was envisaged that development wouldproceed from the bottom to the top of the basin. It now appears that the best plan may be todevelop the storages in the north and divert the flow towards the coast. From DEM data itappears there may be a catchment area of some 3200 km2 (c.f. Brown catchment area of 1370km2) with an overall fall of about 3000m over a distance of about 25km. This could be developedin stages. At this stage, any hydrological estimates would be speculative, but at such highelevations it can be anticipated that rainfall will be high.

32. It is evident that further (beyond the Naoro Brown project) hydropower development ofthe Brown, Vanapa and Angabanga River Basins could provide hydropower for Port Moresbyfor many years to come. If a supply of natural gas becomes available to supply electricity to PortMoresby, hydropower could be a good complement. Depending on the price of natural gas in thefuture, new hydro could well be competitive. However, it is also clear that there is a need toupdate and extend the information available for these basins, not only to take account theAngabanga catchment, but also to take into account the current and projected status of the PortMoresby system and the availability of better mapping techniques and hydrological knowledge.Such studies form part of the proposed project.

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Attachment AExtract from Monenco Report

1. Additional stream-flow data collected since 1983 have provided a stronger base forestimation of stream flows at the project sites than was possible at that time. Distribution offlows within the two river basins is somewhat different from that previously envisaged. As aresult, flows available at many of the sites are either larger or smaller than those used by theGibb Report. 19

2. Energy potential for run-of-river development prospects have been based on the dailyflow duration curves developed for each site. The definition of firm energy used previously hasbeen accepted for purposed of reviewing the inventory of sites: i.e. firm energy is that whichcorresponds to the use of the flow which is equaled or exceeded 95% of the time. Secondaryenergy potential was determined on the basis of the additional water above the 95% probabilityflow, which could be used through the turbines. Turbine discharge capacities equal 50%, 75%,100% and 150% of the long-term average flow were assumed in an attempt to define theoptimum site.

3. For sites with some storage potential a simplified simulation model was used todetermine what flow regulation would be possible, before deriving comparable estimates of firmand secondary energy. Three different full supply levels were studied in an attempt to define theoptimum amount of storage. As for the run-of-river sites four turbine sizes were tested.

4. Cost estimates were based on the layouts presented by GIBB. Quantities of work wereadjusted for change in plant installations and dimensions of hydraulic conduits, resulting fromthe revised estimation of the available stream-flow. After analysis of Gibb's unit prices andsubsequent trends in construction costs in Papua New Guinea and elsewhere in the world, theGIBB unit prices were escalated by 26.5% to bring them to 1988 levels.

5. Unit costs if installed capacity and energy were calculated as a guide for economiccomparison of the various development prospects.

BROWN RIVER BASIN PROJECT RANKING

6. For the Brown River Basin the unit costs are tabulated in Table 2.3 and in Table 3.1. Theorder in which the projects are listed in Table 2.3 is from the least expensive to most expensive,based on the unit cost of the firm plus half the secondary energy from the best project alternativein each set of three alternatives. Table 3.1 presents the rankings of the schemes based on fivedifferent assumptions as to how much secondary energy will be useful. In this tabulation only thebest alternative tested for each scheme is listed under each energy assumption, even though thatchoice does not remain constant as the energy assumption is changed.

7. From examination of these tables it can be seen that the (text missing)20 river schemes,with or without the Naoro Dam and the Fagume Diversion, has the lowest unit costs once 25% or

19 Gibb Australia in association with Mertz & McLellan & Partners and Willing and Partners Pty Ltd.20 Text in the original document (only available in hard copy) is unreadable.

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more of the secondary energy can be used. Its least-attractive configuration has a margin over thenext best option ranging from about 450% at this level of secondary use to more than 310%. More-over, its initial capital cost is lower than that of its closest competitors. Thus, the run-of-riverdevelopment of the Naoro Brown project, most of the other schemes are less costly to build andwill become more attractive in comparison with thermal alternatives. After selection of the betterschemes for development of specific river reaches it appears probably that full development ofthe Brown River basin will comprise the following projects:

* Naoro Brown, with the Fagume Diversion and the Naoro Storage Dam;

* Myola-Efogi plus the lora Diversion;

* Oveia-Brown "A";

* Lower Brown Dam No3;

* Brown-Brown "A" or "B";

* Naoro-Naoro "B" (possibly including Tahu/ Inimu Diversion);

* Oveia Storage Dam;

8. The total installation might be as high as 450 MW, with a firm energy potential of some1200 GWh per year and additional secondary energy potential of about the same amount.

9. For the Vanapa River Basin sites the unit cost are tabulated in tables 2.4 and 4.1, onceagain in ascending order. From examination of these tables it can be seen that the Udava site hasthe lowest unit costs by a significant margin, regardless of the assumption made about secondaryenergy use. Because it is so large relative to the present load in Port Moresby it was deemnecessary to consider the somewhat smaller prospect at Sauwo also. Together with the optionsincluding the diversion of the Dubu to Udava intake and the diversion of the Sigufe to the Sauwointake, these projects rank in the first four places regardless of the energy assumption made. Theunit cost of energy from the fifth place scheme is higher that Udava's by over 70% when onlyfirm energy is considered and by 27% when 100% of the secondary energy is assumed usable.Comparable figures against Sauwo are 33% and 9%, respectively.

10. The construction of either the Udava or Sauwo would open up the basin, providing basicaccess and transmission facilities which would significantly lower the capital cost of many of theother schemes. Also the availability of the head and power facilities at either location wouldenable an immediate benefit to be realized by diverting water from the Irani River byconstruction of the Kosipe-Woitape Storage reservoir and power diversion. This would, in turn,allow other projects to be realized as a result of greater benefits and/ or lower costs.

11. In summary it appears probably that the Udava (with Dubu Diversion), Sauwo (withSigufe Diversion), Kito Creek plus Diversions and Vanapa Dam schemes will be developed asneed arises. If the inter-basin diversions from the Ivani and Guimu Rivers are determined to bepolitically and environmentally acceptable, development of the Kosipe-Woitape and Guimu

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schemes will add to the potentials of the Udava, Sauwo and Vanapa Dam schemes. Willprobably make the lower Vanapa scheme attractive, and might make Bori-Bori and even Onongeattractive eventually. The Basin's total power potential is given in approximate form in thefollowing tabulation:

Installed Firm Energy Secondary EnergyClassification Capacity Potential Potential

MW GWh/yearGWh/year

Probable: Udave + Dubu, Sauwo + Sigufe, 450 1350 1550Kito Creek plus Diversions,Vanapa Dam

Dependent on interbasin diversions:

(1) Kosipe-Woitape, Lower Vanapa, 250 1100 600

Benefits at Udava, Sauwo and Vanapa

Dam

(2) Bori-Bori and Ononge 80 225 270

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Annex 7: Strategy for Communication and Consultation with Indigenous Communitiesin the Naoro Brown Hydropower Project Area

PNG ENERGY SECTOR DEVELOPMENT PROJECT (P101578)

Strategy for Communication and Consultation with Indigenous Communitiesin the Naoro Brown Hydropower Project Area

1. The Naoro Brown (NB) hydropower project is located in the upper reaches of the NaoroBrown catchment area comprising 274 square km within the Kairuku-Hiri District of the CentralProvince. Within this District, the NB project area comprises five Wards of the Koiari RuralLocal-Level Government. The NB project area is characterized by a very low population densityof around 5 persons per sq.km and dispersed small settlements. There are 14 villages of which13 are inhabited by Mountain Koiari, while a cluster of settlements at Edebu at the lower end ofthe NB project area also include some Mountain Koiari, who have settled from locations outsidethe NB catchment area. According to the 2000 Census, the resident population in the projectarea is 1,415, and another 8,737 persons have migrated from the area to Port Moresby and otherlocations. Livelihoods in the Naoro Brown catchment area are based on subsistence shiftingcultivation supplemented by use of natural resources (e.g. fishing in the rivers). Theoutmigration from the area is due to lack of income opportunities together with lack of educationand health services. The migrants retain links to their villages of origin including land rights.

2. The World Bank's OP 4.10 on Indigenous Peoples would be triggered by thedevelopment of the Naoro Brown Hydropower Project since the Mountain Koiari shares the fourcharacteristics that identify indigenous peoples. 2 1 Since the land, water, and other naturalresources in the NB project area are all held under customary tenure arrangements by theMountain Koiari communities, both the land required for specific civil works components andthe access to use the area and its water resources for the NB project will require agreements onentitlements to customary land owners and settlers with permissive rights granted in the past.The basis for reaching agreement on entitlements for land acquisition and for the long-term useof the area for hydropower will be the establishment of arrangements which enable a process offree, prior, and informed consultation that starts early in the NB project preparation phase andthat results in broad community support for the NB project. The parties to this consultationprocess will on the one hand be PNG Power and later the NB Project Developer, and on the otherhand the population in the NB project area comprising the Mountain Koiari communities in theupper Naoro Brown catchment area that own or have interests in the land, water, and othernatural resources. Thus, the Mountain Koiari are the sole direct beneficiaries of the benefitstream that will flow from the Naoro Brown Hydropower project to communities in the NBproject area.

3. Little is known about the specific socio-economic and cultural conditions in the NBproject area, and a social impact assessment will be undertaken (as part of the Preliminary Social

21 These characteristics are (a) self-identification as members of a distinct indigenous cultural group and recognition of thisidentity by others; (b) collective attachment to geographically distinct habitats or ancestral territories in the project area and to thenatural resources in these habitats and territories; (c) distinctive customary cultural, economic, social, or political institutions, and(d) an indigenous language.

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Assessment and the ESIA) to furnish the information that will inform (a) the design of a NaoroBrown Information and Consultation Strategy applicable to the preparation, implementation, andoperation of the NB project, (b) the determination of the social impacts and the people impactedby the NB project, (c) the development of a Land Acquisition and Resettlement PolicyFramework that lays out the principles for management of land acquisition impacts and access touse land and water in the NB project area, and (d) the development of a Resettlement ActionPlan (or Abbreviated Resettlement Plan) to manage the land acquisition that will be needed forcivil works and any resettlement if that will be required.

4. The approach described above complies with the requirements for project preparationlaid out in para 6 of World Bank OP 4.10 (Indigenous Peoples) which involve (a) a screening toestablish whether indigenous peoples are present in the project area, (b) a social assessment, and(c) a process of free, prior, and informed consultation to ascertain broad community support forthe project and determine the specifics of the benefit stream it will provide to the communities inthe project area, and the entitlements for compensation and assistance that will be provided tothose affected by land acquisition for project civil works (and in the event of any displacementand resettlement).

5. OP 4.10 (para 12) stipulates that when indigenous peoples are the sole or overwhelmingmajority of direct project beneficiaries, the elements of an Indigenous Peoples Plan should beincluded in the project design, and a separate plan is not required. As described above, this is thecase with the Naoro Brown hydropower project, and the Naoro Brown Information andConsultation Strategy, which is a central component of the overall design of WB-financedassistance for the preparation of the Naoro Brown Hydropower Project under the proposed PNGEnergy Sector Development Project, will establish compliance with the policy by definingarrangements that provide for a process of free, prior, and informed consultation to ascertainbroad community support for the NB project so that the people in the NB project area receiveculturally appropriate economic and social benefits, and that adverse impacts are minimized,mitigated, and compensated. The key elements of the Naoro Brown Information andConsultation Strategy will include:

a. An approach to information dissemination and consultation on the NB projectacross the affected area that ensures (i) that both men and women receive timely andadequate information to make informed decisions, (ii) that the consultations areundertaken at locations and with groups of people that are meaningful in terms of therights and interests in the project area, (iii) that the approach itself is accepted by theinvolved social groups and their representatives, and (iv) that it results in decisions thatresponds to the interests and concerns of both women and men in the NB project area,and advance the objectives of the NB project.

b. Institutional arrangements and staffing (including identifying and addressingcapacity building needs) to enable ongoing consultation during NB project preparation,implementation, and operation;

c. Institutional arrangements that ensure that agreements are honored by both (i) theNB project (e.g. timely, transparent, and equitable provision of agreed entitlementsinvolving compensation for losses, and lease or benefit sharing entitlements), and (ii) the

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involved communities (e.g. access to land for civil works or restrictions on logging toensure catchment area sustainability).

d. Institutional arrangements for handling of complaints and grievances that areaccepted by the involved communities and that provide for timely resolution.

e. Arrangements that ensure documentation comprising (i) records on consultations,(ii) monitoring of the implementation of agreements on entitlements and benefits, and(iii) records on the management and resolution of complaints.

6. This Strategy for Communication and Consultation with Indigenous Communities will betranslated into Tok Pisin and disclosed in Port Moresby and at a local information center in theNB project area, as will the Naoro Brown Information and Consultation Strategy and a summaryof the RAP when accepted by the involved social groups and their representatives and finalized.The strategy will then be disseminated to the communities in the NB project area, anddocumentation on consultations, on provision of entitlements and benefits, and on managementand resolution of complaints will also be made available in Tok Pisin to communities in the NBproject area.

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