Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 37605-FJ

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$34.88 MILLION

TO THE

FIJI ELECTRICITY AUTHORITY,

WITH THE GUARANTEE OF THE REPUBLIC OF FIJI

FOR A

RENEWABLE POWER DEVELOPMENT PROJECT

November 2,2006

Energy and Mining Sector Unit Infrastructure Department East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS (Exchange Rate Effective November 1, 2006)

Currency Unit = Fijian dollar F$ 1.7 = US$1

US$1.4688100 = SDRl

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank IFRS International Financial Reporting Standards APL Adaptable Program Loan IPP Independent power producer AusAID Australian Agency for International Development CAIDI Customer Average Interruption Duration Index IT Information technology CAS Country Assistance Strategy- kV Kilovolt CDM Clean Development Mechanism kW Kilowatt CIDA Coconut Industry Development Authority kWh Kilowatt-hour CEMP Construction Environmental Management Plan MDE Maximum design earthquake CQS Selection Based on Consultants’ Qualifications MEMR Ministry o f Energy and Mineral Resources DS Dam Specialists MoFF Ministry of Fisheries and Forests DSCR Debt Service Coverage Ratio MTR Midterm review EBITDA Earnings before interest, tax, depreciation & MW Megawatt

EIA Environmental Impact Assessment Measure EIB European Investment Bank NGO Nongovernmental organization EMP Environment Management Plan NPV Net present value ERB Economic Restructuring Program PPA Power Purchase Agreement ERR Economic rate of return PGA Peak ground acceleration ESD Energy Services Delivery Project Sr i Lanka PLC Power line carrier ESP Electrostatic precipitator PMP Probable maximum precipitation FEA Fiji Electricity Authority QBS Quality-Based Selection FHC Fiji Hardwood Corporation QCBS Quality- and Cost-Based Selection FJD Fijian dollar RERED Renewable Energy for Rural Development Project FM Financial management RPD Renewable Power Development FMIS Financial Management Information System SAID1 System Average Interruption Duration Index FMR Financial Monitoring Report SAIFI System Average Interruption Frequency Index FRR Financial rate o f return SBD Standard Bidding Documents FSC Fiji Sugar Corporation / Forestry Stewardship Council SCADA Supervisory Control and Data Acquisition GDP Gross domestic product SCMD Supply Chain Management Department GEF Global Environment Facility SIM Sector Investment and Maintenance GOF Government of Fi j i SOE Statement o f Expenditures GTZ German Agency for Technical Cooperation SPC Secretariat o f the Pacific Community GWh Gigawatt-hour T&D Transmission and distribution HFO Heavy fuel oil TF Trust Fund IBRD International Bank for Reconstruction and TOR Terms o f Reference

Development Tropik Tropik Wood Industries Limited ICB International Competitive Bidding TTL Task Team Leader ICT Information and Communication Technology VLIS Viti Levu Intercofmected System IDA International Development Association WTP Willingness to pay IDC Interest during construction ID0 Industrial diesel o i l IF1 International financial institution

IREDA Indian Renewable Energy Development Agency

amortization NEPM (Australian) National Environmental Protection

Vice President: James W. Adams Country ManagedDirector: Xian Zhu

Sector Manager: Junhui Wu Task Team Leader: Antonie De Wilde

* . 11

FIJI FEA Renewable Power Development (RPD) Project

CONTENTS

Page

A . STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 Country and Sector Issues ................................................................................................... 1 Rationale for Bank Involvement ......................................................................................... 6 Higher-Level Objectives to Which the Project Contributes ............................................... 6

PROJECT DESCRIPTION ................................................................................................. 6 1. Lending Instrument ............................................................................................................. 6

Project Development Objective and Key Indicators ........................................................... 6

Lessons Learned and Reflected in the Project Design ........................................................ 8 Alternatives Considered and Reasons for Rejection ........................................................... 8

C . IMPLEMENTATION .......................................................................................................... 9 Partnership Arrangements ................................................................................................... 9 Institutional and Implementation Arrangements ................................................................ 9 Monitoring and Evaluation o f Outcomes and Results ........................................................ 9

Critical Risks and Possible Controversial Aspects ........................................................... 10 Loadcredi t Conditions and Covenants ............................................................................ 11

APPRAISAL SUMMARY ................................................................................................. 12

1 . 2 . 3 .

B .

2 . 3 . 4 . 5.

Project Components ............................................................................................................ 7

1 . 2 . 3 . 4 . Sustainability ....................................................................................................................... 9 5 . 6 .

. . .

D . 1 . 2 . 3 . 4 . 5 . 6 . 7 .

Economic and Financial Analyses .................................................................................... 12 Technical., ......................................................................................................................... 13 Fiduciary ........................................................................................................................... 13 Social ................................................................................................................................. 13 Environment ...................................................................................................................... 14 Safeguard Policies., ........................................................................................................... 15 Policy Exceptions and Readiness ...................................................................................... 15

... 111

Annex 1: Country and Sector o r Program Background ......................................................... 16 Annex 2: Ma jo r Related Projects Financed by the Bank and/or Other Agencies ................ 23 Annex 3: Results Framework and Monitor ing ........................................................................ 25 Annex 4: Detailed Project Description ...................................................................................... 27 Annex 5: Project Costs ............................................................................................................... 33 Annex 6: Implementation Arrangements ................................................................................. 34 Annex 7: Financial Management and Disbursement Arrangements ..................................... 36 Annex 8: Procurement Arrangements ...................................................................................... 48 Annex 9: Economic and Financial Analysis ............................................................................. 53 Annex 10: Safeguard Policy Issues ............................................................................................ 78 Annex 11: Project Preparation and Supervision ................................................................... 110 Annex 12: Documents in the Project F i l e ............................................................................... 112 Annex 13: Statement o f Loans and Credits ............................................................................ 113 Annex 14: Country at a Glance ............................................................................................... 114 Map: IBRD 35125

iv

FIJI FEA RENEWABLE POWER DEVELOPMENT (RPD) PROJECT

PROJECT APPRAISAL DOCUMENT EAST ASIA AND PACIFIC

EASEG

Date: November 1,2006 Country Director: X ian Zhu Sector ManagerIDirector: Junhui Wu

Project I D : PO99308

Lending Instrument: Specific Investment Loan

[XI Loan [ ] Credit [ X 3 Grant [ ] Guarantee [ ] Other:

For LoansiCreditsiOthers: Total Bank financing (US$m.): 34.88 Proposed terms: IBRD, Fixed Spread Loan (FSL) Grace Period: 6 years Commitment Fee: 0.25% for 2007’ Annuity repayment l inked to commitment

Team Leader: Antonie de Wilde Sectors: Renewable energy (1 00%) Themes: Climate change (P); Rural services and infrastructure (S) Environmental screening category: B Safeguard screening category: S2

Project Financing Data

Years to Maturity: 14.5 Front End Fee: Waived2

Recipient and Responsible Agency: Fiji Electricity Authority (FEA), 2 Marlow Street, Private M a i l Bag, Suva, Fiji

I Estimated disbursements IBRD (Bank FY/US%m) I

’ The Commitment Charge payable by the Borrower i s 0.75% per annum on the unwithdrawn loan balance, subject to any waiver o f a portion o f such charge as may be determined by the Bank from time to time. For FY2007 the Bank waived 50 basis points. On August 10, 2006, the World Bank’s Board o f Executive Directors approved the following loan charge waivers for IBRD loans for Fiscal Year (FY) 07: “100 basis points o f the front-end fee wil l be waived for all loans (other than Special Development Policy Loans) approved by the Executive Directors o f the IBRD from August 11, 2006 to the date on which the Executive Directors decide upon any front-end fee waiver in connection with the Allocation o f IBRD FY07 Net Income and Waivers of Loan Charges for FY08.”

V

Project implementation period: February 28,2007 - June 30,201 1 Expected effectiveness date: February 28,2007 Expected closing date: December 31,201 1

[ ]Yes [x ] N o Does the project depart f rom the Country Assistance Strategy (CAS) in content or other significant respects? Ref: PAD A.3 Does the project require any exceptions from Bank policies? Ref: PAD D. 7

I s approval for any policy exception sought from the Board? Does the project include any critical risks rated “substantial” or “high”? Ref: PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D. 7 Project development objective Ref: PAD B.2, Technical Annex 3 .

[ ]Yes [x 3 N o

[ ]Yes [ ] N o [x ]Yes [ ] N o

[x ]Yes [ ] N o

Have these been approved by Bank management? [ ]Yes [ IN0

The objective o f the Project i s to help the Borrower continue to meet the growing demand for electricity in the Republic o f Fiji at lower cost by further developing a reliable diversified sustainable energy portfolio.

Expansion o f the Wailoa Power house wi th a duplicate penstock and the installation o f an additional hydro generation unit o f 21 MW; Construction o f 3 MW thermal biomass generating plant in Deuba on the island o f Viti Levu; Construction o f up to 3 MW thermal biomass generating plant in Savusavu o n the island o f Vanua Levu.

Project description Re$ PAD B.3.a, Technical Annex 4 . . . Which safeguard policies are triggered, if any? Ref: PAD 0.6, Technical Annex 10 . Environmental AssessmendIssues (OP4.01) . Safety o f Dams (OP4.37) Significant, nonstandard conditions, if any, for: Ref: PAD C. 6 Board presentation: None . Loadcredit effectiveness: None

v i

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and Sector Issues

The Economy

1. Fiji has the largest economy among World Bank Pacific Island member countries, and i s the least dependent on foreign aid. Expansionary fiscal policies stimulated a rapid economic recovery from the political crisis o f 2000 with real gross domestic product (GDP) growth averaging 3.8 percent from 2001 through 2004, led by increased sugar and garment exports, tourism, and construction activity. However, the real rate o f economic growth slowed in 2005 (to 1.7 percent) and i s expected to hover between 2.0 and 2.4 percent through 2008. This decline reflects the loss o f preferential trade arrangements in the sugar and garment industries, and the impact o f high oi l prices. Government efforts to stimulate economic growth have resulted in annual budget deficits and rising public debt. The deficit rose to 7.0 percent o f GDP in 2001/02, and at the time o f appraisal remains at approximately 4.0 percent o f GDP. Outstanding government debt i s expected to increase from 50 percent o f GDP in 2004 to an estimated 55 percent in 2008. As o f 2005, 93 percent o f this debt i s domestically held; the government has concentrated i t s borrowings locally due to ample liquidity in the banking system.

Electricity Sector

2. The Fiji Electricity Authority (FEA) was established, incorporated, and constituted under the provisions o f the Electricity Act o f 1966, and i s responsible for generating, transmitting, and retailing electricity in Fiji. Members o f FEA are appointed by the Minister for Energy and Mineral Resources (MEMR). FEA has to operate in a financially viable and economically sound manner. FEA i s also governed by the requirements under the Public Enterprises Act. FEA’s system has an installed capacity o f 193 MW, and i t generated 685 GWh o f electricity in 2005. I t has a staff o f 545 and serves about 135,000 consumers throughout Fiji. In 2005, commercial sector and government users accounted for 44 percent o f total sales, followed by domestic (29 percent) and industrial (26 percent) users. About 60 percent o f the population has direct access to FEA power. The FEA i s currently also entrusted with enforcing the Electricity Act and regulations, setting standards, and examining and registering electricians, and i s empowered to approve and license electricity suppliers to serve certain areas. Electricity tariffs are currently determined and approved by the Commerce Commission. The Asian Development Bank (ADB) has recently started a feasibility study to establish a separate, independent multisectoral regulatory body.

The Fiji Electricity System

3. Fiji consists o f more than 330 islands, although only a few are permanently inhabited. The largest island, often referred to as Fiji, i s officially called Viti Levu, and the FEA has the exclusive mandate to supply commercial electricity on the island. The FEA also provides service to two separate areas on the second largest island, Vanua L e v u which i s about 80 km north o f Viti Levu, and to the island o f Ovalau o f f the east coast o f Viti Levu. Figures 1 and 2 in Annex 1 show the main features o f the systems on each o f the islands. All major electric load centers are close to the coast. The existing generating system serving the 132kV Viti Levu Interconnected System (VLIS)

1

i s a m ix o f hydroelectric and diesel plants as listed in Table 1 in Annex 1. A single circuit 132 kV l ine brings the output from the major hydroelectric plant, Wailoa, located near the center o f Viti Levu, to each region. This plant, financed by the World Bank with cofinancing from the European Investment Bank (EIB), was commissioned in 1984 and i s a high-head plant with four Pelton turbines having a nominal capacity o f 20 MW each. Water i s supplied to the plant via a tunnel from the Monasavu reservoir. However, Wailoa can only deliver a total o f 72.6 MW at maximum reservoir level because o f high head losses along the tunnel.

4. A two-unit, 6.6 MW run-of-river hydroelectric plant, Wainikasou, near the Wailoa Plant, began operation in 2005. I t i s expected to deliver an average o f 18 GWh annually. The Vaturu mini- hydroelectric plant has a single 2.8 MW unit and was completed in late 2005, but did not begin operating until early in 2006. This plant makes use o f the water that i s released from a water supply reservoir in the Western Region, and the plant i s expected to deliver 19 GWh annually. The majority o f the thermal energy i s supplied from two diesel power stations: Kinoya near Suva and Vuda between Laukota in the Western Region. The FEA has several smaller diesel plant strategically located to support the network. All oil-fired plants in Fiji currently use industrial diesel o i l (IDO), although new diesels at Kinoya are capable o f burning vegetable oil, and the FEA i s converting 2 x 10 MW Wartsila units at the Kinoya plant to burn heavy fuel o i l (HFO). Both the Fiji Sugar Corporation (FSC) and the Tropik Wood Industries Limited (Tropik) operate cogeneration plants that provide surplus energy at times to the V L I S under a power purchase agreement (PPA) with FEA. Tropik supplies about 2.7 GWh annually, and FSC supplies about 20 GWh. Neither plant provides predictable power and energy to FEA.

Production Costs and Tariffs

5. With fuel price increases over the last few years, the variable generation cost from diesel generating units has increased to over US$O.18 per kWh, in comparison with the average tari f f o f less than US$O. 12. W h i l e the debt free hydropower component o f the generation m ix enabled FEA to maintain financial viability (see Financial Performance hereinafter), i t became clear that with continued load growth which was increasingly being met by diesel generation, FEA would need both to increase tariffs and substitute diesel generation with lower cost new generation options. Building a generation portfolio that i s largely concentrated on cheaper renewable energy sources has been a key FEA strategy to mitigate the adverse financial impact o f high diesel fue l prices.

6. Tariff increase. Because o f the high percentage o f electricity generated from hydro resources, FEA did not have to increase i t s tar i f f for many years. However, as FEA had to increase i t s use o f diesel o i l to meet the growing energy demand, FEA requested for a tari f f increase in 2004. On November 26,2004, the Commerce Commission approved increases in electricity tariff rates for domestic users by 3.3 percent in 2005, 3.2 percent in 2006, and 3.1 percent in 2007, amounting to a cumulative 9.9 percent increase over the three years (excluding the lifeline tariff, which was not increased). The Commission also approved increases in electricity tari f f rates by 6.9 percent in 2005, 6.45 percent in 2006, and 5.7 percent in 2007, amounting to a cumulative 20 percent over the three years, for commercial and industrial customers, and maximum demand tari f f customers. These tari f f increases have been effective since January 1, 2005. While FEA has been able to satisfy reliably most o f the electricity demand by buying new diesel fuelled generation capacity, the rapid increase in the price o f o i l recently forced FEA to request the Commerce Commission for a fuel

2

surcharge. After much heated public debate, the Commission very recently (September 28, 2006) approved a temporary fuel surcharge o f F6.51 cents/kWh to be levied on al l FEA customers, with the exception o f domestic l i fel ine customers and institutions (such as schools and churches), effective October 5,2006.

FEA Efficiency and Expansion Program

7 . In October 2001, FEA, under the direction o f a new board and management, began an ambitious efficiency and expansion program aiming to transform FEA into one o f the most efficient and commercially sound power utilities in the Pacific. The strategic objective o f the new FEA i s to meet existing and new demand with sustainable energy solutions, based on least cost analysis, to help ensure that Fiji has a secure, continuous, and reliable power supply. These solutions should minimize their dependency on diesel through the diversification o f their renewable energy generating capacity beyond hydropower. FEA has realized that this aim can only be achieved through a substantial increase in new capital investments and the introduction o f new renewable energy technologies to the country (including wind power, solar, and geothermal power). Although FEA has to mobilize the financing to meet the investment requirements in the short term, their medium- and long-term aim i s to achieve the required level o f investment needed through increased private sector investments.

8. FEA’s expansion program over the period until 2010 wil l total some US$294 mi l l ion for new generation capacity, o f which about US$@ mil l ion i s expected to be provided by independent power producers (IPPs). O f the remaining US$206 million, up to US$71 mi l l ion wi l l be funded by internal cash flows generated by FEA. The remaining US$135 mi l l ion wi l l be funded through borrowings, both domestic and international. The government has provided a guarantee for the US$135 mi l l ion o f FEA’s potential borrowings. The first investment package has been identified. The ADB wil l finance the required transmission and distribution investment for approximately US$20 million, the EIB wil l finance FEA’s 50 percent share o f approximately US$30 mi l l ion in a joint venture, Sustainable Energy Limited (SEL), with a private developer, which wil l develop a 38.6 MW run-of-river hydro project, while the Bank wil l finance the improvement and expansion o f the existing Wailoa hydro power station and two new biomass-fueled power stations for US$34.88 million. I t i s expected that in the coming year, FEA wil l consider further investments in new hydro generation capacity downstream from the existing Wailoa Power station. The Bank i s in discussion with Government o f Fiji (GOF) and FEA to provide financing for a second loan, which would provide long-term finance for this project, as wel l as for IPPs through a financial intermediary. Once the investment plan i s realized, Fiji wi l l be the first country in the world that will obtain 100 percent o f i t s electricity from renewable sources on a least cost basis.

FEA Performance Indicators

9. The new management resolved in 2002 that FEA:

0

0

0

be a customer-focused, lean, and adaptive organization, while not compromising security and reliability o f the power system and the quality o f i t s I C T systems; maximize productivity and achieve target return to the shareholder; provide excellent and reliable service to al l its customers;

3

0

0

0

0

focus on renewable energy sources for f i ture power generation, reaching 100 percent by 2012; ensure safety o f the public, employees, and environment at al l times; operate as a f i l ly commercial entity; and move forward with leading-edge technology and human resources development.

Country Employees per 1000

Fi j i (2004) 4.6 Mauritius (2004) 5 Samoa (2004) 17 Vietnam (2003) 7

connections

10. Despite the difficulties faced by FEA because o f extraordinary increases in fuel prices and lower-than-usual rainfall in the catchment area o f the Monasavu reservoir, i t has made some major achievements during the five-year period in the fol lowing areas (see Table 1).

System Losses YO 8.6 10.6 22.1 13.0

11. Customer Focus. FEA has established a 24/7 customer call center; customer care centers and units in department stores in the 3 major population centers, in 8 regional centers; and bill- paying centers in 22 Morr is Hedstrom (MH) department stores throughout Fiji. An independent survey done by Tebbutt Research for FEA’s services. found that FEA’s overall customer survey rating improved to 83 percent in 2004, a significant improvement from the 73 percent it achieved in 2003.

Thailand (2003)

12. Human Resources. Overall staff numbers have been reduced from 1,050 in 2002 to 545 by mid-2006 through the outsourcing o f noncore activities, natural attrition, terminations, and resignations. At the same time, the ski l ls m ix has been improved through employment o f local private sector staff. Also, five expatriate managers were recruited to fill key positions on a short- term basis. Concurrently local staff were identified and are being trained to take over expatriate staff roles.

4.8 7.0

13. Collection of Electricity Accounts. FEA maintains very strong control over collection o f electricity accounts. Unpaid bills at the end o f 2005 amounted to only F$13.8 million. This was equivalent to about 37 days’ sales. Only F$1.1 million, or about 8.5 percent, was overdue more than 30 days. This low level o f overdue accounts performance puts FEA close to industry best practice.

14. Power System Reliability. FEA measures system reliability by three internationally accepted performance indicators: System Average Interruption Duration Index (SAIDI), System Average In tempt ion Frequency Index (SAIFI), and Customer Average Interruption Duration Index (CAIDI). When the new management took over in 2001, all three performance measures were wel l below accepted international standards. Today FEA has achieved major improvements in these performance measures: the average number o f service interruptions (SAIFI) decreased from 35 in 2004 to 26 in 2005, and the average service interruption duration (CAIDI) decreased from 62 minutes in 2004 to 53 minutes in 2005. This compares well with, for example, N e w Zealand where

4

the mean C A I D I coefficient was 79 minutes in 2005, or even with the average o f five utilities operating in N e w York state, United States, which operate within a range o f 60-108 minutes.

15. Financial Performance. FEA has been operating profitably for many years largely because o f the success o f the Monasavu hydro project. The loans used to finance Monasavu from EIB, ADB, and the Bank have been fully repaid, although a portion was refinanced locally. FEA’s gearing (total debt to equity) o f 25 percent in 2005 i s low by international industry standards. As mentioned earlier, FEA has maintained strong controls over both collection o f electricity bills and i t s administrative overheads, while at the same time achieving significant system expansion, enhancing system reliability, and improving customer service delivery. Despite these achievements, FEA’s financial performance has been adversely affected over the last three years (2003-05) by low rainfall in these years, which forced FEA to reduce generation from Monasavu. With reduced output from Monasavu and rising electricity demand, FEA had to rely much more on diesel generation at a time when diesel prices were rising at a rapid pace from an average price o f F$579/ton in 2003 to F$944/ton in 2005 and at more than F$1,300 per ton currently. As tari f f levels have remained largely unchanged, FEA has been unable to pass through the increased operating cost from rising diesel costs to i t s customers. Consequently, FEA’s profitability has suffered with operating income margin declining from 38 percent in 2003 to 18 percent in 2005 and net income turning from a positive F$2.6 mi l l ion in 2003 to a negative F$1.5 mi l l ion in 2005. The deterioration in FEA’s financial performance would have been even greater over the last two years but for an accounting change in i t s depreciation rates for long-lived assets which reduced annual depreciation expenses in 2004 and 2005 by about F$23 million. FEA has been able to manage i t s difficult financial situation through strict enforcement o f cost controls and with the help o f the tari f f increases approved in 2004 and the recent decision to levy a fuel surcharge. However, longer-term sustainability needs to be supported by cheaper generation alternatives and hence FEA’s large capital investment program in least-cost renewable energy i s very timely.

16. Progress with Renewable Energy Development. FEA has a major commitment, embedded in i t s mission statement, to the development o f renewable energy. I t has embarked on an ambitious program to provide 100 percent o f energy through sustainable renewable resources by 2012 on a least cost basis. As part o f i t s renewable energy commitment, FEA has completed the following actions since late 200 1 :

0

0

0

Commissioned the 6 MW Wainikasoua and the 2.8 MW Vaturu hydropower stations; Prepared studies and called bids for the 38 MW Nadarivatu hydropower plant; Constructed a 10 MW wind farm at Butoni to be commissioned in early 2007; Carried out wind monitoring studies at Tavua in Viti Levu, and in Vanua Levu and Ovalau; Carried out a full basin study o f the Wailoa River Basin (adjacent to the Monasavu basin), which appears to have a large potential for both small and large hydropower schemes. This study wil l be completed shortly; and Carried out investigations into the use o f biofuels to replace diesel in i ts current diesel engines and i s in the process o f designing a trial program utilizing seven different biofuels.

5

2. Rationale for Bank Involvement

17. The project i s a good model for the Bank’s Clean Energy and Sustainable Development Initiative. The GOF aims to generate 100 percent o f its electricity from renewable energy sources on a least cost basis by 2012-the f i rst country in the world to do so. This project i s a major milestone along the road to achieving this objective.

18. The IBRD has provided two loans to FEA-approved in 1978 and 1980 and in the amount o f US$15 mi l l ion and US$15.5 million, respectively. The loans financed the f i rst and second phases o f the Monasavu-Wailoa Hydroelectric Project, wi th a total installed capacity o f 83 MW. Both phases o f the project were implemented satisfactorily.

19. Fiji i s covered by the Regional Engagement Framework (FY 2006-09) dated M a y 3, 2005. Under this framework, the Bank undertook to strengthen i t s engagement with Fiji by identifying, in consultation wi th the government, a number o f specific areas where it can make a contribution using i ts comparative advantages. Through a number o f dialogues between Bank management, and senior GOF officials i t was agreed that the power sector, particularly in light o f the Bank’s earlier engagement in this sector, would be one o f these strategic areas. Fol lowing a reconnaissance mission in early November 2005, the GOF formally asked the Bank to undertake due diligence for a loan to help finance FEA’s renewable energy development program.

3. Higher-Level Objectives to Which the Project Contributes

20. poverty alleviation through the supply o f reliable sustainable energy, at least costs.

The project aims to contribute to Fiji’s economic and social development, and thus to

B. PROJECT DESCRIPTION

1. Lending Instrument

21. During identification, i t was found that the increasing price o f fossil h e 1 might endanger the financial viability o f FEA and the investment priority should be renewable energy which w i l l replace diesel generation. Although other instruments have been considered, the Bank wil l finance the project through a Specific Investment Loan, providing loan finance for three discrete investment subprojects and grant finance for a fourth component for human capacity development. The borrower selected a Fixed Single Currency Loan (FSCL) with automatic rate fixing. FEA’s rationale for the loan choice i s that the FSL with automatic rate f ixing provides certainty in interest payments and therefore makes projecting future cash f low easier and transparent.

2. Project Development Objective and Key Indicators

22. The development objective o f this project i s to help the Borrower continue to meet the growing demand for electricity in the Republic o f Fiji at least cost by further developing a reliable diversified sustainable energy portfolio. In particular, the Bank wil l assist FEA in diversifying i t s energy portfolio to reduce i ts dependence on diesel oil. K e y indicators include (a) the renewable energy capacity (MW) added to the grid; (b) amount o f actual generation added to the grid (GWh);

6

(c) increased reliability measured by the increased number o f hours that the VLIS and Savusavu systems are available; and (iv) the reduction in greenhouse gas emissions.

3. Project Components

23. This project i s part o f a larger FEA investment program for a total o f F$350 mi l l ion (US$206 million). A recent power sector analysis (see Annex 9 for more details) has shown that the proposed investments in renewable energy generating capacity are the least cost solution for the expansion o f the energy sector. Three international financial institutions (IFIs) wil l provide financing for the f i rst investment package. ADB wil l be financing the required expansion in transmission and distribution facilities for a total o f approximately US$20 million, while the EIB will finance FEA’s equity contribution o f US$30 mi l l ion in a joint venture with Pacific Hydro Limited, which wil l develop the Nadarivatu run-of-river hydro facility with a capacity o f 38.6 MW. The Bank wil l finance the expansion o f the Wailoa Power Station and the development by FEA o f two generation units utilizing biomass. The Bank financed project components are described below. More details are provided in Annex 4.

a. Wailoa Expansion

24. The Wailoa Power Station, commissioned in 1983, i s the main generation element o f the Monasavu Hydroelectric development. The power station comprises 4 x 20.8 MW generators driven by Pelton turbines with a nominal static head o f around 618 m. The proposed expansion comprises (a) duplication o f the Penstock, which would provide an additional 8 MW and 20 GWh, and (b) the installation o f a fifth unit wi th 21 MW capacity. The total cost o f duplication o f the penstock and expansion o f the power house i s estimated at US$29 million. The foreign exchange component to be financed by IBRD i s US$20 million.

b, Deuba Biomass Power Plant Viti Levu

25. The proposed site for the 3 MW Deuba biomass power station i s located within the existing FEA Deuba power station compound. This i s near the Waidradra settlement in the Deuba region approximately 50 km to the west o f Suva. The Deuba biomass power plant i s expected to operate as base load generation to augment the electricity generation for the Viti Levu grid. The power plant requires 26,000 tons o f feedstock with a moisture content o f 25 percent per year. This i s to be supplied, among others by Fiji Hardwoods Corporation (FHC), which i s in the process o f being certified by the Forestry Stewardship Council.

c. Savusavu Biomass Power Plant Vanua Levu

26. o f the lumber processing sawmill in the Valaga Bay area. The site i s approximately 7.5 km north from the Savusavu town center along the Savusavu West Coast Road. The plant wi l l require 22,000 tons o f timber mill waste wi th a moisture content o f 25 percent. The main supply o f wood waste w i l l come from coconut trees and wil l be supplied by road truck transport from the lumber processing mill located next to the proposed powerhouse site. The total cost o f the two biomass

The proposed Savusavu power station o f up to 3 MW wil l be located adjacent to and north

7

power plants i s US$19 million. The foreign exchange component that IBRD will finance i s US$14 million.

d. Human Capacity Development Plan

27. The B a n k i s working together with FEA and A u s A I D to develop a Capacity Development Plan, with a part icular focus o n the areas ident i f ied b e l o w where FEA current ly lacks in technical capacity. This component i s budgeted to cost up to US$3.6 m i l l i o n over a per iod o f four years and i s intended to b e f inanced through a grant from A u s A I D . T h e P lan includes the hiring and training o f staff, exchanging o f s taf f with other uti l i t ies, consul t ing services to develop systems and databases, and development o f partnerships both loca l l y in Fiji and abroad to share skills, knowledge, and informat ion, such as meteorological data, w h i c h wi l l also benef i t other institutions and the F i j i a n economy in general. FEA has agreed to undertake the Capaci ty Development P lan from other f inancing sources (wh ich m a y include i ts own funds) in the event an agreement i s not entered into with A u s A I D .

4. Lessons Learned and Reflected in the Project Design

28. The m a i n B a n k experience in renewable energy projects i s in Asia. One o f the most successful projects was the Sr i Lanka Energy Service D e l i v e r y Project (ESD). Lessons learned f r o m this and other projects are (a) the need for r igorous qual i f icat ion criteria for contractors and suppliers; (b) the need fo r strong technical design capabil it ies to ensure that designs are cost- ef fect ive but safe, and that geological uncertainties are adequately reflected in designs, cost estimates, and implementat ion schedules; (c) the need for strong project management capabi l i ty preferably exercised by the supervising engineer rather than the owner (small hydro in Chinese projects); and (d) the need to focus o n the k e y environmental impacts (al l projects) and to carry out adequate baseline studies ( Indian Renewable Energy Development Agency (IREDA), the Sr i Lanka Energy Services De l ivery project (ESD), and the Sr i L a n k a Renewable Energy for Rura l Development Project (RERED). The Bank’s invo lvement in biomass has been l imi ted. T h e BanWGEF f inanced a project in Maur i t ius in the 1990s to improve the collection, transport, and use o f bagasse. Several carbon finance projects with biomass use, inc lud ing with sugarcane bagasse (Brazil-Alta Mogiana) and w o o d residues (Bulgaria-Svilosa), have prov ided insight in the need for wel l -developed biomass supply plans. M o s t o f the lessons learned are documented o n the Bank’s RE T o o l k i t (www.worldbank,org;/retoolkit) and have been incorporated in the project design.

5. Alternatives Considered and Reasons for Rejection

29. In the ear ly stage o f project development, consideration was g iven to developing the project as a Sector Investment and Maintenance L o a n (SIM) o r a n Adaptable Program L o a n (APL), with j o i n t f inancing by ADB and EIB. However, w h e n the issue o f joint procurement came up during the identif ication, i t became clear that, despite good intentions, the harmonizat ion o f procurement procedures and safeguard approval procedures between IBRD and ADB has no t progressed to a leve l where either one or the other can delegate these procedures t o the other institution. Th is would have l e d to considerable delays in procurement and conf l ic t with best practices learned from other RE projects. Both FEA and the banks agreed t o a m o r e ef f ic ient paral le l f inancing.

8

C. IMPLEMENTATION

1. Partnership Arrangements

30. The project i s part o f a larger investment plan in which ADB i s financing the expansion o f transmission and distribution facilities and EIB will be financing FEA’s equity in a joint venture with the Pacific Hydro for the development o f the 38.6 MW Nadarivatu run-of-river hydro facility. Coordination among the IFIs has been strong, with the Bank and EIB negotiating their respective projects together in the Bank’s Sydney office at the same dates and with the Bank and ADB joint ly financing a number o f studies (power sector analysis, demand forecast, and initial financial analysis).

2. Institutional and Implementation Arrangements

3 1. FEA will be the sole implementing agency for al l four components under the project. I t has been responsible for project preparation, and wil l be responsible for procurement and project management, as wel l as monitoring and evaluation. FEA has extensive experience implementing renewable energy (small hydro and wind farm) projects, but not wi th biomass projects, and not wi th the Bank as a partner in recent times. FEA has both the in-house technical capacity, as well as a strong and disciplined management culture that makes it an effective implementation partner.

3. Monitoring and Evaluation o f Outcomes and Results

32. Performance monitoring o f the proposed project would include (a) the monitoring o f performance indicators as included in Annex 3 and (b) biannual progress reports and a midterm review (MTR) on the preparation and implementation o f the investment components, project management, development o f hydrology data base, load forecasts, implementation, and monitoring o f safeguards issues identified during appraisal. Primary responsibility for data collection, analysis, and dissemination for project monitoring and evaluation wil l rest with FEA, which, having carried out several similar projects in recent years, i s capable o f undertaking the monitoring exercise in a reliable and cost-effective manner. Additionally, the monitoring o f project implementation activities wi l l also be conducted through the normal Bank review procedures for procurement, regular supervision missions, the Financial Monitoring Reports (FMRs), independent financial audits o f FEA, and the Implementation Completion Report (ICR).

4. Sustainability

33. The subprojects to be financed under this project are part o f FEA’s investment plan, which aims to provide 100 percent o f i t s electricity from renewable sources on a least cost basis. Low-cost generation wil l assist in significantly improving FEA’s financial position, which in turn wil l make available adequate resources to ensure project sustainability. The government and FEA both understand that these low-cost generation options are critical if they are to maintain cost-reflective tariffs that are not burdensome to the population and the macroeconomy. Furthermore, FEA has sought broad stakeholder support, including from the government, consumers, and private sector

9

participants, such as the biomass suppliers. During appraisal the Bank also verified that the proposed generation projects using biomass as the fuel input obtain the biomass on a sustainable basis. FEA has undertaken to only sign biomass resource contracts with sawmills or other suppliers that obtain their raw materials from certified plantations (and forests). The GOF plans to present the required draft legislation for discussion and approval by Fiji’s parliament in December 2006, requiring al l native forest and plantations to be licensed. The draft license criteria closely follow those o f the International Stewardship Council and were published in 2005.

5. Critical Risks and Possible Controversial Aspects

34. The project does not include any controversial aspects. However, the project does have some significant risks (see Table 2). Fiji has a record o f macroeconomic and political instability and has experienced natural disasters, which could recur. FEA, which in the last years has shown strong capacity in delivering new projects in time, might experience negative changes in management and staffing and could become less effective.

Risks

Political risk.

FEA’s top management may be changed due to political interference, which could affect the project’s implementation. Natural disasters such as drought, cyclone or tsunami cause widespread damage to schemes. Closure o f the saw mills andlor suppliers o f biomass and natural disasters which may cause temporary delays and undermine the reliability o f the supply o f electricity Adverse geological conditions in Wailoa Monasavu tunnels result in cost and schedule overruns.

Lack o f knowledge with management o f biomass fueled power systems, including supply management. Overall Rating

Table 2: Project Risk Assessment Risk Mitigation Measures

The recent tariff increase has created a less positive opinion about FEA. This project w i l l help reduce cost o f supply and enable FEA to maintain, or even decrease their tariffs. FEA w i l l implement a communication plan informing the general public o f the economic and social benefits o f the project. The project includes a human capacity development plan, which focuses on deepening and strengthening FEA’s overall management capacity in all areas.

Project technical and construction standards w i l l ensure that the proposed installations address these risks.

FEA has contracts in place, wi th penalties for non-delivery o f biomass resources to the plants. Alternative suppliers o f biomass are also available. FEA has an emergency plan and shall maintain the existing diesel generating capacity as standby.

Strict qualification criteria for contractor. Tunnel alignment follows alignment o f tunnel in earlier project; records from earlier project w i l l provide contractors with excellent basis on which to bid. Nonetheless the turn-key contract w i l l carefully apportion the geological risks to the contractor and to the owner. The Contractor as part o f the design w i l l be required to develop the biomass supply system, with professional management tools and train FEA staff, among others through exchange visits wi th operators o f biomass plants locally and abroad.

-

10

Risk Rating

S

M

S

M

S

M

S

6. Loadcredit Conditions and Covenants

35. The major conditions o f the loan for this project are:

a

Financial Projections; FEA to prepare and furnish to the Bank updated financial projections (Rolling Long-Term Financial Plan) for the next 10 years by April 30 each year commencing April 30, 2007. Debt Limitation Covenant: Commencing in fiscal year 2007, FEA shall not incur any additional indebtedness, unless a reasonable forecast shows that i t s net revenues exceeds i t s debt service obligations by at least 1.1 times in 2007 and 2008, and 1.2 times in years beyond 2008 during the term o f the debt. Financial Performance Covenants; Commencing in fiscal year 2007, FEA shall produce funds from internal sources (after meeting debt service obligations) equivalent to not less than 10 percent in 2007 and 2008, not less than 20 percent in 2009, and not less than 25 percent in each year beyond 2009, o f the annual average o f capital expenditures (including interest during construction) incurred or expected to be incurred in the previous year, current year and one forecast year. Cash Availability; FEA shall also maintain a ratio o f cash availability to meet debt service requirements o f 1.25, taking into account cash available from previous years throughout the loan period. External Audit; FEA to submit audited financial statements (income statements, balance sheets, and sources and uses o f funds statements) and the auditors’ report for the project and FEA within six months o f the end o f each fiscal year. International Financial Reporting Standards; FEA to fully implement IFRS from January 1, 2008. Transmission lines; FEA shall construct any required transmission lines for the evacuation o f the power from the generating units financed under this project and connect this to, respectively, VLIS and the Savusavu grid at least one month before commissioning of the generating units i s scheduled. Darn Safety; FEA shall, within one year o f the loan effectiveness date, implement the recommendation o f the dam safety report to replace and upgrade the identified safety monitoring instruments and within 18 months o f the loan effectiveness date implement the other recommendations o f the dam safety report, while continuing to implement i t s dam safety programs throughout project implementation. Resource Agreements; FEA shall enter into Resource Agreements with each sawmill or other seller o f biomass waste to the Deuba Biomass Power Plant and the Savusavu Biomass Power Plant on terms and conditions satisfactory to the Bank prior to the commissioning o f each such power plant. Except as the Bank may otherwise agree, the terms and conditions o f each Resource Agreement shall include those set out in the loan agreement, including a clause that states that the seller o f the biomass waste to the FEA shall obtain i t s raw material from nationally or internationally certified forest resources, whether plantations or native. The certification must be recognized by either the Ministry o f Fisheries and Forests (MOFF) or the Forest Stewardship Council, or such other sustainable forest certification mechanism acceptable to the Bank. FEA shall undertake at least annually an inspection and resource audit o f each seller o f biomass waste under each Resource Agreement to verify that the

11

seller continues to obtain i t s raw materials from nationally or internatio,nally certified forest resources, and shall provide the Bank with a copy o f the results o f each such inspection and resource audit for discussion and follow-up actions as may be agreed.

NPV o f Least Cost Development Discount Rate

D. APPRAISAL SUMMARY

NPV o f All Diesel Difference Development

1. Economic and Financial Analyses

36. The Bank and ADB have joint ly fbnded a study o f power system expansion options in Fiji,3 and FEA has identified a number o f generation projects that are expected to contribute to the orderly expansion o f the Viti Levu power system. The Power Sector Analysis assessed these projects via (a) a screening analysis, and (b) a multiyear operating cost simulation study. The screening analysis identified the group o f renewable energy projects with the lowest energy costs, and compared their costs against the least cost oil-fired options. Alternatives were compared with ' data from recent bids on 10 and 20 MW diesel units, fired by H F O because o f i t s cost advantage over ID0 fuel, and with the newest and largest diesel units currently serving the grid (Kinoya, 29.8 MW installed in 2005). In order to confirm the results o f the screening analysis and assess whether the scheduling o f these plants wil l affect system operating costs, the Power Sector Analysis employed a spreadsheet model to simulate the operation o f the system (assuming historical water availability) for the period 2006-20. The study estimated that the net present value o f savings (at 10 percent discount rate) that would accrue from adopting the renewable based least cost development strategy (including renewable IPP purchases) rather than an expansion plan dominated by HFO- fired diesel units would be about F$14 mi l l ion over the 2006-20 planning horizon. Results at other discount rates are summarized in Table 3.

Table 3: Net Present Value of Least Cost vs. All Nonrenewable Expansion Plan

I 8 Yo I 960 I 982 I 22 I I 10% I 859 I 873 I 14 I I 12% I 775 I 782 I 7 I

37. As explained in Annex 9, the results in Table 3 are based on conservative assumptions, using the World Bank's o i l price indicators with regards to future o i l prices. At higher o i l prices, the project would be much more favorable.

38. Each o f the project investments (Wailoa expansion, Deuba and Savusavu biomass plants) was also separately analyzed to determine their economic and financial benefits. The results o f the analysis are summarized in Table 4 below, with detailed description presented in Annex 9.

Power Sector Analysis, September 2006.

12

Wailoa expansion Deuba biomass Savusavu biomass

2. Technical

Levelized Project Cost Economic NPV Project ERR Project after-tax ( F $ / K W h) (F$ millions) (%) FRR (Yo)

0.225 7.9 12.3 7.0 0.167 15.9 24.0 8.6 0.223 4.1 14.7 5.6

39. Each investment subproject has been designed in accordance with international standards and best practice, which have been reviewed and verified by the Bank. In the case o f the biomass projects a thermal option rather than a gasification process was chosen as worldwide experience with thermal biomass i s more solid than gasification. The thermal option also accommodates a less rigorous supply management system and can accept waste with different shape and forms, eliminating an additional processing step.

3. Fiduciary

a. Financial Management

40. FEA’s financial management capacity was assessed during project preparation and found to be satisfactory with no specific follow-up actions required prior to project implementation. Financial management issues are straightforward, since implementation wil l be through a small number o f contracts that wi l l be easy to manage and generate a small number o f transactions. U s e o f direct payments to contractors for the I C B contracts as a preferred mechanism for disbursement, although not necessary from a risk mitigation point o f view, lessens the reliance on the designated account and provides FEA with an efficient payment mechanism that i s subject to additional checks and balances.

b. Procurement

41. Although FEA has been engaging in international procurement for many years, i t has no experience with Bank procurement procedures. FEA i s in the process o f adapting some o f their procurement guidelines, policies, and practices to comply with Bank procurement procedures. Training o f the procurement team in understanding and practicing Bank procurement procedures started in September 2006 and w i l l continue throughout the project. An early procurement capacity assessment took place during identification in February 2006 and was updated in August 2006 (see Annex 8). The overall project risk for procurement i s rated as “high.”

4. Social

42. The main objective o f FEA’s investment plan i s to assist the government in meeting the current and future demand for electricity in Fiji, thereby stimulating sustainable economic growth and investments in Fiji. The overall social impacts-improving energy supply, mitigating environmental impacts o f the energy sector, and supporting growth, investment and employment- are positive. Access to reliable electricity i s a key driver o f economic growth and a direct means o f

13

reducing poverty by improving the productivity o f households and industry, enhancing the delivery o f social services. Two minor land acquisitions are planned: one for an additional access road to the Deuba Power station (this land i s freehold land and can be bought from the adjacent sawmill), and the other for the proposed Savusavu Power Station (which can either be leased or bought, since this, too, i s freehold land from the neighboring sawmill). No people are l iving or squatting in these plots, and no one wil l be displaced. Although most o f the land for the track for the duplication o f the penstock i s already leased by FEA, a small area exists where FEA wil l also need to lease some additional land. This i s native land and the f i rst community consultations with the owners have taken place and wil l continue until a settlement between parties has been reached. No people are presently living on this land, and here, too, no one wil l be displaced.

5. Environment

43. These investments wi l l result in two positive environmental outcomes, which in turn w i l l significantly contribute to environmentally sustainable economic growth in Fiji. First, the GOF’s and FEA’s strategic decision to shift electric power generation from fossil fuel based sources to renewable sources, as demonstrated through this project’s proposed investments, wi l l directly lead to improved ambient air quality as a result o f reduction in pollutant sulphur and nitrous gases. However, although the Environmental Impact Assessment indicated that the projects have only very minor long lasting environmental impacts, possible impacts during construction, particularly the required drilling and blasting required for the tunnel construction and the concrete batching plant operations for the expansion o f the Wailoa Power station, wi l l need to be carefully managed.

a. Wailoa Expansion

o Environmental impacts as a result o f operating the scheme are minor. However, during construction, negative environmental and social impacts could occur. An Environmental Management Plan Framework (EMP) and a Construction Environmental Management Plan (CEMP) has been proposed and was accepted by FEA.

o The Safety o f Dams (OP 4.37) i s triggered because the investments being financed in Wailoa depend for their function on the use o f water stored and provided for by the existing Monasavu Dam. The most recent dam inspection, carried out in August 2006, identified that there are no significant physical safety issues. However, in the Dam Safety Report, i t was recommended that attention be given to several issues, including replacing the instruments for monitoring dam safety characteristics. FEA has committed to implementing the recommendations with respect to the replacement o f instruments for monitoring dam safety within one year o f loan effectiveness and the other recommendations within 18 months o f loan effectiveness.

b. Deuba and Savusavu Biomass Power Plants

44. As with the Wailoa Expansion, the EIA was more concerned with impacts from construction because the impact from operations i s minimal. An EMP Framework and a CEMP has been proposed and was accepted by FEA. Minor environmental issues as a result o f the plant’s operations were identified, and mitigating actions have been proposed, which are discussed in detail in Annex 10. The two most important issues are as follows:

14

0

0

45.

Both at Deuba and in Savusavu, the supply and more importantly discharge o f cooling water from the plants need to be carefi l ly managed. Characteristics o f the discharge water should be measured continuously. FEA w i l l sign biomass resource agreements with sawmills, which need to assure that their timber originates from certified plantations andor forests. MOFF, FEA, and the Bank wil l work closely together to assure that the sawmills obtain their timber from certified areas, and FEA has agreed to an annual inspection and resource audit o f each seller under each biomass resource agreement.

In compliance with the Bank’s Environmental Assessment (OP 4.01), the EA category assigned to this project i s Category B. FEA has prepared full EIAs for each component to ensure the associated environmental issues are adequately analyzed and understood, and that all associated adverse impacts are captured. The EIAs (in documents on fi le) were prepared to meet standards as mandated by both the Bank’s OP 4.01 and Fiji’s Environment Management Act o f 2005. Stakeholders’ meetings were conducted on September 6, 2006. The Ministry o f Environment in Fiji published the EIA during the period o f September 14 to October 9,2006, and approved the EIAs on October 19,2006. The reports have also been published in the Bank’s Infoshop.

6. Safeguard Policies

Safeguard Policies Triggered by the Project Yes N o Enviroiimental Assessment (OPIBP 4.01) [XI [I Natural Habitats (OPIBP 4.04) [ I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 1 1.03, being revised as OP 4.1 1) [I [XI Involuntary Resettlement (OPIBP 4.12) [I [XI Indigenous Peoples (OP/BP 4.10) [ I [XI Forests (OPBP 4.36) [ I [XI Safety o f Dams (OPIBP 4.37) [XI [ I

Projects on International Waterways (OPIBP 7.50) [I [XI Projects in Disputed Areas (OPIBP 7.60)* [I [XI

7. Policy Exceptions and Readiness

46. This project complies wi th al l applicable Bank policies, requires no pol icy exceptions.

47. The feasibility studies for the three components have been finalized. Following agreement with the Bank on the Procurement Plan FEA has posted requests for Expressions o f Interest for the three project components before negotiations and i s ready to issue RFPs for the three projects. Community consultations to acquire the land lease for the duplicate penstock started in August and are well underway, with a lease to be signed not later than January 2007.

48. The project i s ready for implementation.

* By supporting the proposed project, the Bank does not intend to prejudice the final determination o f the parties’ claims on the disputed areas.

15

Annex 1: Country and Sector or Program Background FIJI: FEA Renewable Power Development (RPD) Project

The Economy

1. Fiji has the largest economy among World Bank Pacific Island member countries, and i s the least dependent on foreign aid. Expansionary fiscal policies stimulated a rapid economic recovery from the political crisis o f 2000 with real GDP growth averaging 3.8 percent from 2001 through 2004, led by increased sugar and garment exports, tourism and construction activity. However, real growth fe l l dramatically in 2005 (1.7 percent), and i s expected to remain between 2 to 2.4 percent through 2008. This decline reflects the loss o f preferential trade arrangements in the sugar and garment industries, and the impact o f high oi l prices. The sugar industry, which accounts for 30 percent o f agricultural GDP and employs more than 10 percent o f the labor force, lost i t s European Union preferences in 2005, and faces other problems due to the effects o f drought, non-renewal o f land leases, and uncertain world market trends. The garment industry also lost preferential access to the U.S. market and some preferences in the Australian market, while confronting increasing international competition. Fiji’s tourism industry, however, i s booming; there has been a significant increase in tourist arrivals, attributable, inter alia, to the decline in visits to the once-popular destination o f Bali, Indonesia following recent incidents.

2. Government efforts to stimulate economic growth have resulted in annual budget deficits and rising public debt. The deficit rose to 7 percent o f GDP in 2001/02, and remains at approximately 4.0 percent o f GDP. Public debt has risen even more rapidly. Outstanding government debt i s forecasted to expand at an average growth rate o f 8 percent, from 50 percent o f GDP in 2004 to an estimated 55 percent in 2008. As o f 2005, 93 percent o f this debt i s domestically held; the government has concentrated i t s borrowings locally due to ample liquidity in the banking system. The government has set medium-term targets for reducing the budget deficit to 3 percent o f GDP, and public debt to 50 percent o f GDP, within five years; however, the rising trends o f these indicators are a matter o f concern which should be monitored closely.

3. While the tourism and construction sectors can be expected to continue to make a strong contribution to the economy, growth in exports are expected to hold the key to sustained economic expansion. Total investment accounted for 17 percent o f GDP in 2004, significantly less than the government target o f 25 percent. Prospects for more rapid economic growth depend, to a large extent, on government efforts at fiscal control and structural reforms designed to stimulate investment from the private sector.

Electricity Sector

4. The Fiji Electricity Authority (FEA) was established, incorporated and constituted under the provisions o f the Electricity Ac t o f 1966, and i s responsible for generating, transmitting and retailing electricity in Fiji. I t is a wholly Government-owned authority operating on a commercial basis, and reporting to a board o f directors appointed by the Minister o f Works and Energy. FEA has installed capacity o f 193 MW and it generated 685 GWh o f electricity in 2005. I t has a staff o f 545 and served 133,972 consumers throughout Fiji in 2005 (a 7 percent increase over 2004). FEA

16

currently has approximately 135,000 customers. In 2005, commercial users (including the Government) accounted for 44 percent o f total sales, followed by domestic (29 percent) and industrial (26 percent) users. About 60 percent o f the population has direct access to FEA power. The FEA i s currently also entrusted with enforcing the Electricity Act and regulations, setting standards, examining and registering electricians, and i s empowered to approve and license suppliers to serve certain areas. In order to perform this task, FEA has established a power sector regulatory hnct ion in-house, which reports to the Chief Executive. Electricity tariffs, however, are currently determined and approved by the Commerce Commission. The establishment o f a more independent and stable regulatory framework and strengthened capacity i s now being addressed. In September 2006, ADB made US$700,000 available for a feasibility study for a multi-sector regulator.

The Fiji Electricity System

5. Fiji consists o f over 330 islands, although relatively few have permanent habitation. The largest island, often referred to as Fiji, i s officially called Viti Levu and the FEA has the exclusive mandate to supply commercial electricity on the island. The FEA also provides service to two separate areas on the second largest island, Vanua Levu, which i s about 80 km north o f Viti Levu, and to the island o f Ovalau o f f the east cost o f Viti Levu. Figure 1 shows the main features o f the systems on each o f the islands.

Figure 1: The Fiji Electricity Authority Systems (VLIS)

VKlLEW tElTERCaNNECTE0 POWER NETWOW

17

6. The FEA system on Viti Levu i s in two parts: the Central Region, serving the capital region o f Suva and loads part way along the south coast to beyond Deuba and loads east and north o f Suva, and the Western Region radiating north and south o f Vuda where the I 3 2 k V line from Wailoa feeds into the western grid. The two regions are interconnected via the 132kV l ine across the centre o f the island and the system i s known as the Viti Levu Interconnected System (VLIS). All major electric loads are close to the coast.

7. as listed in Table 1 below.

The existing generating system serving the VLIS i s a m ix o f hydroelectric and diesel plants

Sub Total Diesell Source: FEA

8. There i s a single circuit 132 kV line which brings the output from the major hydroelectric plant, Wailoa, located near the centre o f Viti Levu, to each region. This plant was financed*by the Bank, with co-financing from the EIB. I t was commissioned in 1984 and i s a high-head plant wi th four Pelton turbines having a nominal capacity o f 20.8 MW each; however, i t can only deliver a total o f 72.6 MW at maximum reservoir level due to high head losses along the tunnel carrying the water from the Monasavu reservoir to the power plant (due to a narrowing o f the tunnel at the penstock). As recently as 1997, this plant supplied over 93 percent o f the total electric demand on the main island.

18

9. Wainikasou, a two-unit, 6.6 MW run-of-river hydroelectric plant near the Wailoa Plant, began operation in 2005. I t i s expected to deliver an average o f 18 GWh annually. The Vaturu mini- hydroelectric plant has a single 2.8 MW unit and was completed in late 2005, but did not begin operating until early in 2006. This plant makes use o f the water that i s released from a water supply reservoir in the Western Region, and the plant i s expected to deliver 19 GWh annually.

10. The majority o f the thermal energy i s supplied from two diesel power stations: Kinoya near Suva and Vuda between Laukota and Nadi in the Western Region. The FEA has several smaller diesel plants strategically located to support the network. Some o f these are operated regularly for voltage control. All diesel power stations in Fiji currently use diesel fbel, although the FEA i s considering converting two 10 MW Wartsila units at the Kinoya plant to burn either HFO or vegetable oil.

11. Both the Fiji Sugar Corporation (FSC) and the Tropik Wood Industries Limited (Tropik) operate cogeneration plants that provide surplus energy at times to the VLIS under a power purchase agreement with FEA. Tropik supplies about 2.7 GWh annually and FSC supplies about 20 GWh. Neither plant provides predictable power and energy to FEA. FSC also supplies energy to the Labasa system at Vanua Levu during the cane crushing season.

Figure 2: The Fiji Electricity Authority System at Vanua Levu VANUA LEYU POWER SYSTEM

The Vanua Levu and Ovalau Systems

12. The FEA systems on Vanua L e v u serve Savusavu on the south coast and Labasa in the north. As noted, FSC has a cogeneration plant near Labasa that presently supplies a part o f the Labasa system energy requirements for about hal f o f the year. The Savusavu and Labasa systems

19

are not interconnected. On the island o f Ovalau, a system serves the Pacific Fish Company and the associated town. Table 2 summarizes the generation installed in each system as o f July 2006.

Source: FEA

Production Costs and Tariffs

13. With fue l price increases over the last few years, the variable generation cost from diesels has increased to over US$O.lS cents per kWh, in comparison with the average tari f f o f less than US$O. 12. While the nearly debt free hydropower component o f the generation m ix enabled FEA to maintain financial viability (see Financial Performance in Annex 9), i t became clear that with continued load growth FEA would need to increase tariffs and substitute diesel generation wi th lower cost new generation. Building a generation portfolio that i s largely concentrated around cheaper renewable energy sources has been a key FEA strategy to mitigate the adverse financial impact o f high diesel fue l prices.

14. Tariffincrease. FEA investigated various options to enable i t to fund the capital investment required to build new power capacity. Ultimately, i t made a submission to the Commerce Commission seeking an increase in electricity tari f f rates. On 26 November 2004, the Commerce Commission approved increases in electricity tari f f rates o f 3.3 percent in 2005, 3.2 per cent in 2006 and 3.1 per cent in 2007-amounting to a cumulative 9.9 percent increase over the three years for domestic customers (excluding life-line tar i f f which was not increased). The Commission also approved increases in electricity tari f f rates o f 6.9 per cent in 2005, 6.45 per cent in 2006 and 5.7 per cent in 2007-amounting to a cumulative 20 percent increase over the three years for commercial and industrial customers and maximum demand tari f f customers4. These tari f f increases have been effective since 1 January 2005. The Commission very recently approved a temporary fue l surcharge o f F6.51 cents/kWh to be levied on al l FEA customers, with the exception o f domestic lifeline customers and institutions (schools, churches, etc.), effective October 5, 2006. The fuel surcharge raises tariff levels for FEA’s non-lifeline and non-institution customers by roughly thirty

Consumers using more than 250kWh per month.

20

percent and, on aggregate, i t increases the weighted average 2006 tari f f o f F21.87 centslkwh by 24 percent to F27.10 cents/kWh. Table 3 below provides the tari f f schedule for 2006.

Tariff (Fiji Tariff (US Categories Domestic lifeline Domestic other Commercial I Commercial I1 Industrial

FEA Efficiency and Expansion Program

Consumption Range CentdkWh) Cents)* 250Kwh/month 21.95 12.91

Up to 14,999 kWh 23.57 13.86 >14,999 K W h 22.76 13.39 >14,999 K W h 20.53 12.08

15. In October 2001, FEA-under the direction o f a new Board and Management-began an ambitious Efficiency and Expansion program aiming to transform it into one o f the most efficient and commercially sound power utilities in the Pacific. Despite the difficulties faced by FEA in the face o f extraordinary increases in he1 prices, it has made some major achievements (see Table 4) over the three-year period, such as those in the following areas:

Country

Fiii (2004’1

16. Customer Focus. FEA has established: a 24/7 customer call center; customer care centers or care comers in department stores in the three major population centers and eight regional centers; and bill paying centers in 22 Morris Hedstrom department stores throughout Fiji. An independent survey done by Tebbutt Research for FEA’s services found that FEA’s overall customer survey rating improved to 83 percent in 2004, a significant improvement from the 73 percent i t achieved in 2003.

Employees per 1000 System Losses connections YO

4.6 8.6

17. Human Resources. Since the new Board and management took over in 2001, overall staff numbers have dropped from 1050 in 2001 to 545 by mid-2006 through outsourcing o f non-core activities, natural attrition, terminations and resignations. At the same time, the employee ski l ls m i x has improved through employment o f local private sector staff. Also, several expatriate managers were recruited to fill key positions on a short-term basis. Concurrently, local staf f were identified and are being trained to take over expatriate staff roles. A localization plan and pol icy was approved by the Board that w i l l result in the replacement o f the expatriates with local managers at the end o f their term o f contract.

Mauritius (2004)

Vietnam (2003) Thailand (2003)

Samoa (2004) 5 10.6 17 22.1 7 13.0

4.8 7.0

21

1 8, Power System Reliability. FEA measures system reliability by three internationally accepted performance indicators: System Average Interruption Duration Index (SAIDI); System Average Interruption Frequency index (SAIFI); Average Interruption Duration Index (CAIDI). These indicators deteriorated in the late 1990s due to increased demand and reduced hydropower availability such that reserve capacity was virtually reduced to zero. As a result, when the new management took over in 2001, al l three performance measures were wel l below accepted international standards. In response, FEA’s current management has taken steps to improve i ts power system reliability to meet international standards. Consequently, while the average number o f service interruptions (SAIFI), decreased from 35 in 2004 to 26 in 2005, the average service interruption duration (CAIDI) decreased from 62 minutes in 2004 to 53 minutes in 2005. This compares wel l with for example New Zealand, were the mean C A I D I coefficient was 79 minutes in 2005, or even with the average o f five utilities operating in New York State USA, which operate within a range o f 60 to 108 minutes.

Collection of Electricity Accounts

19. FEA maintains very strong control over collection o f electricity accounts. Unpaid bills at the end o f 2005 amounted to only F$13.8 million. This was equivalent to about 37 days’ sales. Only F$1,117,000 (or about 8.5 percent) was overdue more than 30 days. This low level o f overdue accounts performance puts FEA close to industry best practice.

22

Annex 2: Ma jor Related Projects Financed by the Bank and/or Other Agencies FIJI: FEA Renewable Power Development (RPD) Project

1. This Annex summarizes the major projects, related to the FEA Renewable Power Development RPD project, which has been developed by the World Bank and other development agencies.

1. Renewable Energy Projects

2. The main Bank experience in renewable energy projects i s in the Asian region. One o f the best projects was the Sr i Lanka Energy Service Delivery project (ESD). Lessons learned from this and other less successfhl projects are: (i) the need for rigorous qualification criteria for contractors and suppliers, (ii) the need for strong technical design capabilities to ensure that designs are cost effective but safe, and that geological uncertainties are adequately reflected in designs, cost estimates and schedules; (iii) the need for strong project management capability preferably exercised by the supervising engineer rather than owner (small hydro projects in China); and (iv) the need to focus on the key environmental impacts (all projects) and to carry out adequate baseline studies (Indian Renewable Energy Development Authority (IREDA), Energy Service Delivery Project (ESD in Sr i Lanka) and Renewable Energy for Rural Development Project (RERED in Sr i Lanka). The Bank’s involvement in biomass has been limited. The Bank/GEF financed a project in Mauritius in the 1990s to improve the collection, transport, and use o f bagasse. Several carbon finance projects with biomass use, including with sugarcane bagasse (Brazil - Alta Mogiana) and wood residues (Bulgaria - Svilosa), have provided insight into the need for well developed biomass supply plans. Lessons learned are documented in the Bank’s RE Toolkit (www.worldbank.org/retoolkit) and have been incorporated in the project design.

2. Energy-related Programs in the Pacific Relevant to the RPD project:

World Bank

3. In the last fifteen years, the Bank has undertaken only one energy sector project in the Pacific Islands region. The Teachers Solar Lighting Project (Project P088940), which became effective in September 2005, was undertaken in PNG and not Fiji. This project aims to improve the lives o f teachers and health workers by making available affordable, environmentally sound, basic electricity services from renewable energy. This wil l help improve their retention by reducing isolation (through access to radio and other communications), and providing safer and better living conditions (through access to lower-cost, better quality lighting). The main global environmental objective i s to create early markets for solar P V household electrification and build the capacity on the part o f al l market participants (e.g., providers, purchasers, lenders, and regulators) needed to rapidly scale up renewable energy applications. While the project was programmed only for 3,000 teachers over a period of five years, once the full package o f materials and finance was offered to teachers, over 7,000 applications were received in the first six months o f the project.

23

3. Non-Energy Projects Developed by Other Agencies but Relevant to the RPD project

Asian Development Bank

4. The ADB has three active lending operations with commitments totaling US$103.8 million, (Suva-Nausori Water Supply and Sewerage project, Fourth Road Upgrading, and Fiji Ports Development) in Fiji. Four new lending operations are scheduled: Airports Rehabilitation and Upgrading, Road Upgrading, Urban Sector Development, and Rural and Outer Islands Development. ADB i s also preparing an Economic Restructuring Program (ERP). The ERP would provide resources for effective implementation o f Government’s development policy, specifically promoting increased levels o f public and private investment with the support o f concurrent technical assistance for capacity building. The ERP aims to foster change in the role o f the public and the private sectors; developing the business environment in favor o f private sector investment, enhancing governance practices in management o f public resources, and enhancing competitiveness o f the economy. ERP includes a three year resource plan, starting in 2007, and wil l be disbursed in two annual tranches to improve balance o f payments conditions and augment fiscal resources.

5 . Suva-Nausori Water Supply and Sewerage project. The objective o f the project was to assist human and economic development in Fiji through the development o f water supply and sewerage services in the Suva and Nausori urban areas. New water sources wil l be developed, water treatment plants wi l l be extended and rehabilitated, and pipelines and distribution systems wil l be developed; sewerage pluming stations and trunk services wil l be rehabilitated, and sewerage networks wi l l be extended. The project wi l l provide water and sewerage services o f a standard that i s suitable for commercialized operations, and w i l l complement institutional developments that are also being assisted by the ADB.

6. The fourth road up grading. The project wi l l finance a six-year time-slice o f the Government’s 20-year road upgrading, rehabilitation, and safety improvement program; and establish an effective road asset management system with sustainable funding to secure the benefits o f past and planned investments to road users and affected communities. The Project will: (i) upgrade about 100 kms and rehabilitate about 100 kms o f national roads; (ii) improve road safety through physical works and institutional strengthening; and (iii) strengthen asset management organization, optimizing private sector participation and upgrading sector performance.

7. Fiji Ports Development. The Project aims to improve regional competitiveness o f the port system by: (i) extending the l i fe o f King’s Wharf by an additional 15 years; (ii) ensuring that the wharf complies with the required seismic standards; (iii) improving the wharf deck and container yard to efficiently handle the increasing cargo loads; and (iv) extending Lautoka Port facilities to facilitate trade opportunities with reduced time and cost impact o f port and cargo handling operations. The Project wi l l : (i) arrest the deterioration o f the ports in Suva and Lautoka; (ii) strengthen critical sections o f King’s Wharf, enabling it to comply with internationally recognized seismic standards assessed for Fiji and the site; (iii) improve King’s Wharf deck and container yard capacity to efficiently handle the increasing cargo loads; (iv) increase berthage space by a total o f 300 meters at the Lautoka port; and (v) increase container storage area at the Lautoka port by six hectares.

24

Annex 3: Results Framework and Monitoring FIJI: FEA Renewable Power Development (RPD) Project

Results Framework -

PDO The objective o f the Project i s to assist the Borrower to continue to meet the growing demand for electricity in the Republic o f Fiji at lower cost by further developing a reliable diversified sustainable energy portfolio.

To contribute to mitigating climate change through the reduction o f greenhouse gas emissions in line with the United Nations Framework Convention on Climate Change.

Intermediate Results One Der ComDonent

Component One: Improved output and efficiency o f the Wailoa Power station

Component Two:

Expanded capacity to develop, finance, construct and operate biomass power generation project, and increased renewable energy installed capacity in V i t i Levu Component Three:

Expanded capacity to develop, finance, construct and operate biomass power generation projects, and increased renewable energy installed capacity in Savusavu, Vanua Levu

Outcome Indicators Increased renewable electricity over baseline (GWh) and increased renewable capacity over baseline (GW)

Cost reductions compared to baseline diesel generation costs

Maintain or increase the number o f hours that the Wailoa Power station and Deuba and Savusavu Power Stations are available.

Reduced emissions o f carbon

Results Indicators for Each ComDonent

Increased capacity o f the Wailoa Power station wi th 8 Mw and 20 GWh. As a result o f the duplication o f the existing penstock. Additional peaking capacity due to the expansion o f the existing Power House and the installation o f a fifth generating unit wi th a 21 MW capacity to be commissioned before December 3 1,20 10

3 MW wood-fired biomass power generation plant in Deuba, V i t i Levu selling 22 GWWyear into the FEA grid by 2009

Up to 3 M W wood-fired biomass power generation plants in Vanua Levu selling > 14 GWhiyear into the FEA grid by 2009

Use of Outcome-information Gauge progress towards reaching project objective.

Use o f Results Monitoring

Six monthly progress reports for supervision

Six monthly progress reports for supervision

Six monthly progress reports for supervision

25

U 4 & E

d d d e! Y Y Y Y

U 4 L w Lr

Annex 4: Detailed Project Description FIJI: FEA Renewable Power Development (RPD) Project

1. This project i s part o f a larger FEA investment program for a total o f F$350 mi l l ion (US$206 million). Most o f o f the project components wil l be financed through domestic borrowing. However, ADB wil l be financing the required expansion in transmission and distribution facilities for a total o f US$20 million, while EIB wil l finance FEA’s equity contribution o f US$30 mi l l ion in a joint venture with Pacific Hydro, which wil l develop a run-of- the-river hydro facility wi th a capacity o f 38 MW. The World Bank wil l finance the development by FEA o f the duplication o f the existing penstock between the Monasavu reservoir and the Wailoa Power house, an expansion o f the Power house and installation o f a fifth 21 MW generating unit and two small power plants utilizing biomass.

1. Wailoa expansion

2. The Wailoa Power Station, commissioned in 1984, i s the main generation element of the Monasavu Hydro-electric development. The power station comprises four 20.8 MW generators driven by Pelton turbines with a nominal static head o f around 618 m. The four generator transformers (1 1/132 kV) are located in a transformer yard adjacent to the power station and connect to the 132 kV sub station at the Wailoa switchyard via two transmission lines that are approximately 400 m long. From the switchyard, 132 kV transmission lines extend to Vuda (in the west, 90km) and Cunningham Road (in Suva, 63km). The proposed expansion comprises duplication o f the Penstock, which would provide an additional 8 MW and 20 GWh. I t also involves the installation o f a fifth unit. Due to improved technologies, this unit can be 21 MW. Total cost o f duplication o f the penstock and expansion o f the power house i s estimated at US$29 million. The foreign exchange component to be financed by IBRD i s US$20 mil l ion.

Duplication of the penstock.

Figure 1: Existing route of Tunnel and Penstock from Monasavu to Wailoa

3. Water from the Monasavu Reservoir i s piped underground to the Wailoa Power Station on the Wailoa River, first through a 3 meter (m) diameter concrete tunnel, then through a 1.8m diameter steel tunnel, the penstock.

Currently, the maximum output fkom the power station i s closer to 72 MW than the 83 MW installed capacity, due to energy losses in th