Document of The World Bank Report No:T-7388-KE TECHNICAL ANNEX FOR A PROPOSED CREDIT OF SDR 55.1 MILLION (US$72 MILLION EQUIVALENT) TO THE REPUBLIC OF KENYA FOR AN EMERGENCY POWER SUPPLY PROJECT September 14, 2000 CURRENCY EQUIVALENTS US$1.00 = KES 77.50 As of July 1, 2000 FISCAL YEAR July 1 to June 30 WEIGHTS AND MEASURES Kilowatt (kW) =1,000 watts Megawatt (MW) =1,000 kilowatt (kW) Kilowatt hour (kWh) =1 million kilowatt hour (kWh) ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy EECC Emergency Electricity Coordinating Committee ESRPP Energy Sector Reform and Power Development Project ERB Electricity Regulatory Board EPTT Emergency Power Technical Team GDP Gross Domestic Product GoK Government of Kenya IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund IPPs Independent Power Producers IPRSP Interim Poverty Reduction Strategy Paper ISG Implementation Support Group KenGen Kenya Electricity Generating Company Limited KPLC Kenya Power and Lighting Company Limited LTA Long-Term Average MoE Ministry of Energy MoF Ministry of Finance and Planning MIGA Multilateral Guarantee Investment Agency MW Megawatt OP Office of the President PPA Power Purchase Agreement SDR Special Drawing Rights Vice President: Callisto Madavo, AFRVP Country Director: Harold E. Wackman, AFC05 Team Leader: Joel J. Maweni, AFTEG TABLE OF CONTENTS Page I. STATUS OF THE POWER SECTOR 5 Physical Characteristics of the Power System ..................................................5 Hydropower Plants ....................................................5 Thermal Plants ....................................................6 Status of Power Sector Reforms ....................................................7 II. THE DROUGHT ....................................................9 Impact of Drought on the Power Sector ................................................... 11 Power Production ................................................... 11 Energy and Demand Balances ................................................... 11 Program of Load Shedding ................................................... 12 Economic Costs of Unserved Energy ................................................... 12 Sector's Financial Performance ................................................... 12 Impact of Drought on Other Sectors ................................................... 13 Agriculture ................................................... 13 Manufacturing ................................................... 13 Petroleum Fuels ................................................... 13 Others ................................................... 13 lII. THE GOVERNMENT'S RESPONSE TO THE DROUGHT ........................ 14 IV. IDA'S RESPONSE TO THE DROUGHT ................................................... 15 Lessons Learned ................................................... 15 Mitigation Measures ................................................... 16 Rationale for IDA Involvement ................................................... 16 V. THE PROPOSED EMERGENCY POWER SUPPLY PROJECT ............... 17 Project Objectives ................................................... 17 Project Description ................................................... 17 Project Cost and Financing ................................................... 18 Project Implementation and Contractual Framework ................................... 19 Project Organization ................................................... 20 Project Contractual Framework ................................................... 20 Procurement and Disbursement Arrangements .............................................. 21 Procurement ................................................... 21 Disbursement ................................................... 21 Special Accounts ................................................... 21 Escrow Accounts ................................................... 22 Financial Management ................................................... 22 Financial Audit ................................................... 23. Retroactive Financing ................................................... 23 Agreements Reached During Negotiations ................................................... 23 Fiscal Impact of the Project ................................................... 23 VI. BENEFITS AND RISKS .................. 24 Project Benefits .................. 24 Project Risks .................. 24 3 Attachment 1: Energy Balance ......................................................... 26 Attachment 2: Emergency Capacity Charges ......................................................... 27 Attachment 3: Escrow and Special Accounts Financial Estimates ............ ............. 28 Attachment 4: Project Organization and Contractual Framework ........................ 29 Attachment 5: Scope of Services for the Emergency Electricity Coordinating Committee and the Emergency Power Technical Team . .......................................... 30 Attachment 6: Terms of Reference for Audit Services ............................................ 32 Attachment 7: Financial Flows .......................................................... 37 4 I. STATUS OF THE POWER SECTOR Physical Characteristics of the Power System 1. Hydropower Plants. Kenya's interconnected power system has an installed generation capacity of 1,03 1MW of which 705 MW is hydro, 327MW is thermal, and 0.4MW is wind. A further 30MW is imported from Uganda. In addition to the interconnected system there are several isolated diesel power stations with an installed capacity of 9.2MW. Table 1 below shows system's installed and effective generation capacity. Table 1: Kenya's Installed and Effective Generation Capacity Power Station Capacity (MW) as at March 31, 2000 Installed Effective HYDRO Tana 14.40 12.40 Wanji 7.40 7.40 Kamburu 91.50 84.00 Gitaru 225.00 200.00 Kindaruma 40.00 40.00 Small Stations 6.20 5.40 UEB Imports 30.00 0.00 Masinga 40.00 40.00 Kiambere 144.00 144.00 Turkwell 106.00 106.00 Total Hydro (Including Imports) 704.50 639.20 THERMAL Kipevu Steam 45.50 36.00 Kipevu I Diesel 75.00 70.00 Kipevu GT 1 &2 60.0 60.0 Mombassa Barge Mounted GT (IPP) 43.0 43.0 Nairobi South -Fiat 13.5 10.0 Nairobi South Diesel (IPP) 44.50 44.50 Olkaria I Geothermal 45.00 45.00 TOTAL THERMAL 326.50 308.50 WIND Ngong -turbine 0.40 0.40 TOTAL INTERCONNECTED 1031.40 948.10 SYSTEM ISOLATED DIESEL STATIONS KENGEN Stations 3.80 3.50 REF Stations 5.40 4.60 TOTAL ISOLATED DIESEL 9.20 8.10 STATIONS TOTAL SYSTEM CAPACITY 1040.60 956.20 2. As is evident from the above statistics, the generation system is characterized by a high level of dependence on hydro. Much of this generation is based on the Seven Forks Hydro Stations which are located on the Tana River. These hydro plants operate in cascade. Details of the plants (in order going down river) are shown below. All the 5 hydropower plants are owned and operated by the Kenya Electricity Generating Company (KenGen)--a 100 percent government owned company. Table 2: The Main Hydropower Plants Name Capacity (MW) Masinga 2 x 20 MW Kamburu 3 x 31.4 MW Gitaru. 2 x 72.4 MW 1 x 80.25 MW Kindaruma 2 x 20 MW Kiambere 2 x 72 MW 3. Thermal Plants. With the exception of two plants accounting for 87.5MW of total installed capacity, the rest of the thermal power plants are also owned and operated by KenGen. The steam power plant at Kipevu is unreliable, mainly due to the vintage of the equipment. Unit 4 produces approximately 4MW at an efficiency of around 16%. Turbine 7 is currently being fed by boiler 6. Turbine 6 has a crack in the casing, and boiler 7 is not operational following an explosion in the boiler in April. This explosion caused considerable damage to the side walls and the superheater tubing. It is proposed to rehabilitate this unit as part of the Government of Kenya's (GoK) emergency power supply plan. 4. Power transmission and distribution is currently the sole responsibility of the Kenya Power and Lighting Company (KPLC), a publicly listed company which is nevertheless effectively under the control of the Government as majority shareholder. Although the Electric Power Act (1997) does not preclude generators from selling to other parties, until now, KPLC remains the sole purchaser of electricity from KenGen and all independent power producers (IPPs) operating in the country. KPLC's probem areas include high system losses (about 19 percent), and a customer staff ratio of 75:1 which is considered low in relation to the company's level of operations. The system losses are high in relation to past years (about 15.2 percent in 1993/94, 15.6 percent in 1994/95, etc) and in relation to system characteristics. The increases in recent years can be attributed to natural load growth, the need to transport power from the Coast over longer distances to Western Kenya in the current drought conditions, and to a possible sharp rise in non-technical losses partly because of falling consumer incomes. The high system losses, and overstaffing combined with reduced sales revenues arising from the drought-induced power rationing have adversely affected KPLC's overall liquidity position. This in turn has affected KenGen's liquidity as KPLC honors its obligations under PPAs with IPPs. This has made it difficult for KenGen to afford fuel purchases for its power plants under the current drought conditions. Therefore, prior to disbursement of this credit, agreement will be required between the Bank and the Governemnt on an action plan for restructuring of KPLC within 6-9 months. 6 Status of Power Sector Reforms 5. Since the mid-I 990s, Kenya has made significant progress in raising energy prices, restructuring the power sector, opening the power generation market to private investment, and reforming the sector's legal and regulatory environment. The sector reform program was developed under the ongoing multi-donor funded Energy Sector Reform and Power Development Project (ESRPP) -- Cr. 2966-KE. Specific progress achieved under the reform program includes: (i) unbundling of power generation activities on one hand, and transmission and distribution activities on the other hand and their placement in separate commercially-operated businesses; (ii) elimination of government subsidies to the sector, with the exception of those to the rural electrification program; (iii) enactment in 1998 of enabling legislation for private sector participation and for the establishment of the Electricity Regulatory Board (ERB); and (iv) increase in the private sector's share of the generation market from zero to the current 10 percent, with a further increase to about 25 percent expected in 2001 when about 130MW in new installed capacity will be commissioned and operated by the private sector. The World Bank Group has coordinated its support for private sector development in Kenya's power market; IDA through support for policy reforms and preparation of the projects under the ESRPP; IFC through financing of the Kipevu II Power Plant; and MIGA through insurance for the Olkaria III Power Plant. In addition to these reforms, the GoK has confirmed, under the recently approved Economic and Public Sector Reform Credit, its intention to restructure KPLC into a competitive power transmission and distribution market prior to privatization of its distribution activities in 18-24 months. 6. The progress in implementing the reform program came only after several years of protracted dialogue between the Government and donors. Thus, between the late 1 980s and the mid 1 990s, donors could not agree to finance new investments in the absence of a move toward economic pricing of electricity and petroleum products, and without opening the sector to private sector participation and improvements in the governance framework for the sector. At the same time the low pricing for electricity meant that the sector could not generate adequate resources for investment. Such funding as was available from the sector, or was provided from the central government budget was used ineffectively. Most donors suspended aid to the sector. In early 1994, the GoK agreed with the Bank on a comprehensive reform program. Subsequently, implementation of the various measures, some of which were important triggers for the Bank's processing of the ESRPP lagged considerably behind schedule with the result that it was only three years later (1997) that IDA was able to present the ESRPP to its Board. Soon thereafter, the GoK failed to meet IMF conditions for an ESAP leading to delays in processing of co-financing, and modifications to the negotiated agreement for the Bank Credit. The Credit agreements were subsequently signed about a year after Board presentation and became effective on June 23, 1998. 7. At the time of Board Presentation of the ESRPP in 1997, seven power plants for a total capacity of 460MW were expected to be commissioned during the period 1998- 2000. Table 3 shows that only 147MW of this capacity has been commissioned and gives the revised dates for the rest. 7 Table 3: Investment Program-Implementation Performance Power Plant Planned Original Revised Commissioning Capacity Commissioning Date Date (MW) mo/yr mo/yr Kipevu I Diesel 75 12/99 10/99 A Kipevu II Diesel (IPP) 75 12/99 07/01 Unidentified LS 50 08/01 Diesel' (IPP) Olkaria II Geothermal 64 06/99 11/02 Olkaria III (IPP) 64 06/99 07/03 Sondu Miriu2 60 08/00 11/03 Gitaru Hydro (3" 72 11/99 12/99 A unit) A =Actual 8. The considerable delays in the implementation of the above plants are due to a combination of factors, the most important of which are: (i) protracted negotiations between KPLC, IPPs, financiers and GOK; (ii) delayed credit effectiveness; and (iii) slow pace of restructuring in the sector. For the private sector funded projects, considerable time was spent negotiating the power purchase agreements and related security arrangements for payments and on reaching financial closure. Similar delays are being experienced in the negotiations of the 11 OMW (now expected to be reduced to 55MW) fast track units which are scheduled for commissioning by mid next year. 9. Thus, the delays in reaching agreement with donors on a reform program for the sector and the slow implementation of the sector investment program once agreement had been reached with donors combined with the drought in the last three rain seasons has led to the current power supply crisis. Had the investment program been implemented as scheduled the 67 percent in hydropower production could have been compensated for through thermal production. 10. An extensive load shedding program has had to be introduced such that domestic consumers receive power supply for about 15 hours/day and industrial consumers for eight hours on alternate days. The economic costs of unmet demand are estimated at US$400-630 million for the next nine months (until the long rains in April 2001), or equivalent to 3.8 - 6.5 percent of GDP. 11. Apart from drastically reduced power production, the drought has also caused serious shortages of water, substantial decreases in crop production, and livestock losses. Secondary effects are being felt in the poor performance of the manufacturing, ' The capacity was subsequently revised to I I OMW on the basis of an update of the least-cost expansion plan carried out by ACRES. When the decision was taken in 1998 to proceed with implementation of this capacity, the expected commissioning date was mid 1999, but the revised commissioning date in now August 2001. 2 This project is being financed under parallel arrangements by JIBIC and KenGen and is not part of the ESRPP. 8 construction and service industries, and of the informal sector. Most vulnerable are the pastoral and small-scale agriculture-dependent populations in the country's arid and semi-arid areas. Before the extent of the failure of the March-May, 2000 long rain season was fully recognized, GDP growth was expected to grow by about 2.5 percent in 2000 rising to 5 percent in 2003. This gradual pace of economic recovery was predicated on maintenance of fiscal and financial stability, structural reforms and rehabilitation of infrastructure. However, the severe drought in early 2000 is expected to result in negative output growth in most key sectors of the economy, particularly agriculture, power, and manufacturing. Thus, preliminary revised estimates now indicate that the GDP growth rate for 2000 would be a negative 0.4 percent, down from 2.5 percent. II. THE DROUGHT 12. Kenya has experienced severe droughts in four out of the last ten years (1991/92, 1996/97, 1998/99 and 1999/00) and heavy flooding in 1997/98. Kenya normally receives concentrated rain falls during March-May (long rains) and October-December (short rains), and intermittent rains at other times. The long rains for 1999 were sporadic, poorly distributed and averaged less than the mean at most of the monitoring stations in the eastern, central, coastal and Rift Valley areas. The short rains which were expected at the beginning of October 1999 were delayed by approximately three weeks, and poorly distributed during much of November. The drought hit hardest during the March-May 2000 long rain season. With the exception of Western and Nyanza provinces which received significant amounts of rainfall, the rest of the country received between 30 and 50 percent of the long-term average precipitation. 13. Rainfall data (Table 4a) collected at the power stations indicate that while the 1999 rains were generally below long-term averages, in year 2000 the long rains were below 50% in almost all cases, and were sometimes as low as 13%. Table 4(b) provides data on river inflows at the Masinga Reservoir, the uppermost and largest of the reservoirs on the Tana River. It can be seen that the substantially lower inflows during the past three rain seasons mirror the low rainfall data (Table 4(a)) during the same period. 9 Table 4(a): Rainfall Data at Several Power Stations During 1999-2000 Power Station Mar.-May 1999 Percent Oct.-Dec. 1999 Percent Mar.-May, 2000 Percent of Mean of Mean of Mean Masinga Rainfall (mm) 243.80 86 275.40 99 139.90 49 L-T Mean (mm) 283.50 279.00 283.50 Kamburu Rainfall (mm) 305.30 105 347.40 102 95.40 33 L-T mean (mm) 291.00 341.50 291.00 Gitaru Rainfall (mm) 233.70 68 576.20 148 135.00 39 L-T mean (mm) 344.30 390.60 344.30 Kindaruma Rainfall (mm) 127.70 50 230.00 76 I23.00 48 L-T mean (mm) 254.70 302.00 254.70 Kiambere Rainfall (mm) 153.70 48 224.40 52 215.00 68 L-T mean (mm) 318.00 431.50 318.00 Sagana Rainfall (mm) 415.00 83 175 52 192 38 L-T mean (mm) 500.0 339 500 Mesco Rainfall (mm) 295.20 59 395.90 100 69.50 14 L-T mean (mm) 497.80 394.60 497.80 Wanji Rainfall (mm) 516.70 92 344.70 90 102.00 18 L-T mean (mm) 559.00 382.40 559.00 Tana Rainfall (mm) 604.00 120 483.30 135 67.00 13 L-T mean (mm) 505.00 355.30 505.00 Ndula Rainfall (mm) 321.00 108 599.90 169 103.50 35 L-T mean (mm) 297.10 355.50 297.10 10 Table 4(b): Masinga Reservoir Test Flows in Cumecs YEAR JULY AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN TOTAL MEAN % AVE 1982-83 57.6 43.9 37 129.2 196.5 151.4 57.8 43.1 23.2 96.9 168.2 72 1076.8 89.73333 117 1983-84 61.5 45 35.3 61.8 66.3 52.5 28.6 6.1 9.2 30.1 13.2 3.2 412.8 34.4 45 1984-85 6.1 4.7 3.3 96.8 119.9 74.6 18.3 32.3 39.3 240 283.9 89.9 1009.1 84.09167 110 1985-86 58.6 30.9 21.4 38.8 68.8 40.2 8.2 5.1 13.9 114.3 250.7 124 774.9 64.575 84 1986-87 67.3 29.9 23.8 27.2 89.9 96 27 8 4.9 72.4 96 111.1 653.5 54.45833 7 1 1987-88 161.2 29.8 9.2 5 102.8 29.3 15.4 3.9 21.8 295.8 261.6 92.2 1028 85.66667 112 1988-89 59.3 51.4 53.9 61.8 112.9 95.4 75 62.2 40.2 119.2 182.8 85.2 999.3 83.275 109 1989-90 54.6 47.5 47.5 66 145.6 156.1 160.2 67.8 141.9 313.8 249.3 114.6 1564.9 130.4083 170 1990-91 69.5 46.5 34 50.3 99.4 94.3 48 16.1 24.9 54.5 216.5 115.4 869.4 72.45 95 1991-92 67.6 36 19.2 28.4 46 31.8 14.9 11.1 7.4 84.6 173.6 61.7 582.3 48.525 63 1992-93 42.1 22.9 16.3 35.2 91.3 106.7 116.9 112.7 32 41.1 127.6 88.1 832.9 69.40833 91 1993-94 49 22.4 14.3 11.9 27 54.3 16 10.9 15.3 133.8 183.2 6B.8 606.9 50.575 66 1994-95 37.4 34.8 22.9 54.6 297.3 129.2 52.2 31.2 35.3 88.6 232.5 100.8 1116.8 93.06667 121 1995-96 58.3 46.5 36.3 85.6 166.8 127.6 62.2 28.3 36.2 57.6 72.6 102.8 880.8 73.4 96 1996-97 48.7 30.5 22.1 15.3 43.6 37.4 14.8 7.8 8 178.3 171.6 40.6 618.7 51.55833 67 1997-98 28.2 20.3 9.4 91.6 487.3 283.3 380.3 221.8 117.5 224.2 431.9 204.1 2499.9 208.325 272 1998-99 86.4 60.34 40.33 32.38 57.7 33.1 20.56 11.54 32.1 57.7 83.5 36.3 551.95 45.99583 60 1999-20 23.3 18.5 15.9 15.4 74.4 188.2 50.2 18.9 8.8 15.7 32.6 14.9 476.8 39.73333 52 2000-01 11.7 11.2 MEAN 55.2 33.3 25.7 50.4 127.4 99 64.8 38.8 34 123.2 179.5 84.8 916.1 76.6 100 MAX 161.21 60.3 53.9 129.21 487.3 283.31 380.3 8 141.9 313.8 431.9 204.1 2499.9 208.3 272 MIN 6.11 4.71 3.3 51 27 29.31 8.21 3.91 4.9 15.7 13.2 3.2 412.8 34.4 45 Impact of Drought on the Power Sector 14. Power Production. As noted earlier, under average hydrological conditions, Kenya depends on hydro for about 70% of power supply. Power plants accounting for almost all the hydro capacity are on the Tana river which flows from the Aberdare Range through Central, Eastern, North Eastern and Coastal districts of Muranga, Embu/Mbeere, Kirinyaga, Meru, Garissa, Tana River and Lamu to the Indian Ocean. By November 1999, the drought conditions had resulted in low water levels in the main reservoirs on the Tana river and KPLC initiated a program of load shedding in consultation with the key stakeholders. A decision to procure emergency equipment was shelved in anticipation of good rains during the March-May 2000 rain season. When the expected rains failed, to optimize on the available water until the next rains (October-December 2000), hydropower production was reduced by about 30% by April 2000 and by 70% in June 2000. 15. Energy and Demand Balances. The projected energy and capacity balances for fiscal year 2000/01 are shown in Attachments 1 and 2 respectively. Energy shortfalls amounted to 114GWh and 148 GWh in July and August 2000 respectively. These shortfalls corresponded to capacity deficits of 264MW and 272MW respectively. When the Government's emergency power plan is taken into account (paras 26-27) the shortfalls decline to 82GWh in September, and 22GWh in October, before demand/supply balance is achieved in December 2000. The energy balances incorporate increases in power imports from Uganda from 12GWh in May to 25 GWh in July and 33GWh in August. For the rest of the fiscal year to June 30, 200 1,the critical assumptions are (i) the reduction in imports from Uganda to about 9 GWh; (ii) river inflows of about 11 15 percent of the long-term average (LTA) during June-October 2000, 50 percent during November 2000-March 2001 and 100 percent from April 2001 and thereafter; (iii) hydro resources management would be optimized through full utilization of thermal generation in the short term, and operating only "run of river" hydro plants during the night; and (iv) improvement in coordination between KenGen and KPLC to avoid the current sub- optimal dispatch of the hydro plants. 16. The assumption that river inflows will be about 50 percent of LTA during November 2000-March 2001 is predicated on adequate short rains being received in the October-December 2000 short rains season. Similarly the assumption that river inflows will be 100 percent of LTA from April 2001 onwards is based on at least average long- term rains being received during March-May 2001. If either or both of these assumptions do not apply, the energy shortfalls will continue. However, even if the rains are not adequate, the expected commissioning in July/August 2001, of 130MW in additional private sector generation capacity would ease the shortages. 17. Program of Load Shedding. At present, the energy deficits are being managed through a program of load shedding under which domestic consumers are receiving supply for an average of 15 hours/day and industrial consumers for eight hours on alternate days. The impact of the load shedding on industries, commercial activities including tourism, hospitals and water supply as well as on domestic customers is severe. The vibrant informal sector which provides substantial employment is being decimated and poverty is increasing. Confidence in the power sector's performance is being eroded and opportunities for foreign investment flows are being lost. 18. Economic Costs of Unserved Energy. The economic costs of unmet demand3 are estimated at US$68 million per month. This is based on the projected monthly energy deficit of 136GWh and on a unit cost of unserved energy of US$0.50/KWh. Without emergency facilities the losses to the economy over the next nine months until the long rains in April 2001 would amount to about US$400 million or about 3.8% of GDP. If the estimated unit cost of unserved energy in Kenya of about US$0.79/KWh, according to the 1993 Electricity Tariff Study is used, the total losses to the economy would be about US$630 million, equivalent to about 6% of GDP. Implementation of the GoK's planned emergency measures would reduce the costs of unserved energy from US$400 million to US$120 million at US$0.50/kWh or from US$630 million to US$188 million at US$0.79/kWh. The emergency measures are estimated to cost US$110 million. Therefore, it is preferable for the Government to imrplement its proposed emergency measures and avoid much higher costs of unserved energy. 19. Sector's Financial Performance. Whereas power sales to final consumers were estimated to increase by about 7.3% in FY1999/00 compared to FY1998/99, preliminary figures indicate a decline of about 8.1% in relation to FY1998/99 or 14.4% below budgeted level. The decline in sales is due primarily to the production constraints caused by drought. The decrease in sales has led to a substantial reduction in KPLC's sales 3 The cost of unmet demand or unserved energy represents the incremental cost of using substitutes ( e.g kerosene, LPG) and/or the cost of lost production as a result of failure to meet demand through the provision of electricity or its substitutes. 12 revenue. The power shortages also have meant that a higher proportion of domestic consumption is now taking place in the lower tariff block, again leading to loss of revenues for KPLC. These revenue losses have been compounded by the shifting of consumption to off-peak periods by large customers following the introduction last year of peak and off-peak pricing. Also, the need to transport power from the Coast over longer distances to Western Kenya has meant higher transmission losses, further contributing to KPLC's financial losses. The reduced revenues have worsened KPLC's liquidity position, which in turn affects that of KenGen as KPLC is the only purchaser of KenGen's output. Impact of Drought on Other Sectors 20. With the exception of transport, most sectors are expected to register negative growth rates in year 2000 because of the drought. As noted earlier, this contraction is expected to reduce the overall GDP growth rate to a negative 0.4 percent compared to the previous estimate of 2.5 percent. 21. Agriculture. Production of most crops, livestock and livestock products is expected to decline below the 1999 levels. Year 2000 long rains maize production is forecast at 19 million bags, which is 26 percent less than the 1999 long rains harvest, and 37 percent below the normal average. Among the principal crops, only coffee-a crop that normally performs well in less precipitation--is expected to fare better. Prolonged drought has also resulted in cumulative livestock losses, falling livestock prices and sharply rising cereal prices. 22. Manufacturing. Overall manufacturing output is expected to shrink further from the one percent growth recorded in 1999 to negative growth in 2000. The sector will be adversely affected by the power and water shortages, and food processing in particular will be affected by grain shortages. The impact of grain shortages may, to some extent, be offset by the imports of grains and other raw materials, if millers take advantage of the recent reduction in maize import tariffs. Nevertheless, production costs are likely to rise significantly as firms struggle to meet their fixed overheads and to maintain profit margins. This will translate into higher consumer prices, which may lead to less demand. 23. Petroleum Fuels. The consumption of petroleum fuels by the agriculture sector decreased by about 12 percent in the first half of year 2000, but increased by about 6 percent in the Industrial and Commercial sectors and by 32 percent in the power sector. The large increases were due to the substantial switch, by both KenGen and private generators, to thermal power production as hydropower supplies declined. 24. Others. Electric power rationing has also aggravated the water supply situation, because of the lack of electrical power for water pumping. The sector is expected to record a drop of 3% in real value added. The shortage of clean water may, in the long run, lead to serious outbreaks of water-borne epidemics like cholera. The building and construction sector is also showing signs of stress due to the overall economic situation. On the other hand, the transport sector has received a boost because of the need to transport increased imports of food, fuel and power supply equipment. The sector is expected to grow by 1.5 percent. 13 III. THE GOVERNMENT'S RESPONSE TO THE DROUGHT 25. In May 2000, the GoK issued a paper entitled: "Kenya Government Appeal for Local and Intemational Assistance to Combat the Current Drought Stress." The document describes the effects of the drought on the social sectors (food, health and nutrition and education), infrastructure (water and sanitation) and agriculture, and summarizes the financial requirements to implement the Government's proposed recovery plan. The plan comprises: (i) food assistance for about 3.34 million affected people in the north-eastern, eastem and Rift Valley areas; (ii) repairs and maintenance of boreholes and supply of tank water to affected communities; (iii) preventive and curative health care, particularly for the most vulnerable groups (pregnant women and children); (iv) provision of essential agricultural inputs to about 103,000 affected small scale agricultural households, and (v) rehabilitation of water supply points. Table 5 below shows the estimated financial requirements for implementation of these drought recovery measures. 26. In June, the Government asked the Bank for support in addressing the impact of the drought on the power crisis, water supply and agriculture. A specific plan for addressing the power crisis which had been approved by Cabinet was presented to the Bank. It comprised the following package of measures: (i) mobilizing privately-owned generating capacity in the country, and providing, as incentives, tax exemptions on fuel consumption and compensation for the excess of auto-generation costs over grid-based costs of power; (ii) negotiating expansion of the generation facilities of independent power producers already operating in the sector; (iii) rehabilitation of the retired 30MW Kipevu Steam Power Plant at an estimated cost of about US$3.0 million; (iv) procuring emergency diesel/gas turbine capacity of 99MW capacity for installation, operation and maintenance by independent power producers on short-term contract basis (6 months); (v) procurement of a 45MW capacity diesel plant at a cost of about US$19 million; and duties and taxes exemptions for power generation equipment and fuel purchased under the power supply emergency program. Table 5: Estimates of Drought-Related Financial Requirements Estimates of Drought-Related Financial Requirements US$ Mllion (June-December 2000, except for energy5) Requested Indicative Pledges Financing Gap Food Aid 134.23 66.30 67.93 Health & Nutrition 4.63 1.12 3.51 Education 5.30 0 5.30 Total Social Sectors 144.16 67.42 76.74 Water & Sanitation 4.00 1.15 2.85 Energy 78.00 78.00 0 Total Infrastructure 82.00 79.15 2.85 Agriculture 1.11 0.02 1.09 Livestock 10.57 0.08 10.49 Total Productive Sectors 11.68 0.10 11.58 Capacity Building 0.60 0 0.60 GRAND TOTAL 238.44 146.67 91.77 The number of people at risk has since been revised to 4.7 million based on the poor harvests in the most affected regions. Energy financing requirements are estimated to the end of the fiscal year, i.e. June 30, 2001. 14 27. The Government's emergency program was reviewed during the preparation/pre- appraisal/appraisal mission for the project. After taking into account the revised river inflow data and opportunities for maximizing utilization of water resource, the additional capacity requirement was revised from 196MW to 17 1MW. Table 6 below shows the revised emergency power supply plan. The plan which has been agreed with the Government excludes acquisition of new public sector units. Under the plan the Government will also exempt fuel for emergency generation capacity (i.e. autogenerators, expanded private sector generation capacity, the rehabilitated Kipevu Steam Power Plant and the IPP facilities ) from all taxes and duties except for the petroleum development and road maintenance levies. Table 6: GoK's Revised Emergency Power Supply Plan Developer Description Capacity KenGen Rehabilitation of Kipevu Steam 30 Power Station IPPs Installation of Temporary Units 105 Expansion of Nairobi South (IPP) Additional diesel units 12 Autogenerators Use of existing units 20 Acceleration of Olkaria III Additional units 4 Geothermal (IPP) rTOTAL ' 171 IV. IDA'S RESPONSE TO THE DROUGHT 28. After reviewing its existing portfolio of projects in Kenya, the Bank concluded that the Government's request for assistance to the agricultural sector could be met through amendments to the ongoing Arid Lands Resources Management Project (Cr. 2797-KE). Thus, the amendment to the Development Credit Agreement will allow for establishment and maintenance of a Drought Contingency Fund to be used for financing immediate drought mitigation interventions detailed in district drought contingency plans, such as emergency livestock offtake, food for work programs, support to schools, and repairs and maintenance of water supplies. 29. A review of the ongoing ESRPP (Cr. 2966-KE) indicated that, with the recent award of the two large contracts for Olkaria Geothermal Power Plant, the credit has become substantially fully committed. Only a small amount (US$2 million) will be used from the Credit to finance consultants services for preparation of this project and to finance transformers and other equipment needed for connection of the proposed IPPs' generation units to KPLC's system. It was therefore decided to prepare a stand alone operation, on an emergency basis, to help co-finance the GoK's plan for addressing the crisis. A preparation/pre-appraisal mission visited Kenya during June 21-July 6, 2000. The mission was subsequently upgraded to appraisal status. Lessons Learned 30. In designing this operation, the team reviewed recent Bank experience in the preparation of emergency projects in other countries, particularly, the region's recent experience in Mozambique and Madagascar. The team also noted the following relevant 15 recommendations from recent internal publications: (i) speed of both preparation/appraisal and implementation is crucial for success; (ii) the simpler the design the better; (iii) the institutional framework, and strategic management of an emergency is crucial for project success; (iv) mitigation measures should always be included against repeat disasters; and (v) procurement needs to be flexible, and procurement management needs to start early. These lessons have been fully incorporated through a simple project design with a few contracts, rapid preparation/appraisal, completion of the contracting from advertising for bids to contract award within about 4 weeks, and strategic program oversight from the highest levels of government. The team also consulted widely within and outside the Africa region to benefit from the best available expertise on design of emergency operations. 31. Mitigation Measures. To avoid repeat disasters, the project design includes several features. First, the project includes fast-tracking of the planned restructuring and privatization of KPLC so as to create an efficient transmission and distribution business-- a financially strong power sector will be better able to withstand future droughts without recourse to government subsidies. Apart from strengthening the financial soundness of the sector, the restructuring will seek to improve the sector's technical and managerial competencies for implementation of the sector investment programs, slow implementation of which has substantially contributed to the current power crisis (para.6). Second, to cushion the country from prolonged power shortages, careful monitoring of planned private sector generation capacity additions due to be delivered by mid-next year will be required. Of the 130MW involved, financial closure has been reached for 75MW while negotiations are still in progress for the balance of 55MW. Given the slow pace of past negotiations with the private sector, the GoK is considering possible options for speeding up the negotiations. Third, in parallel with the proposed operation, the Government has indicated its intention to seek Bank support for strengthening links of its power systems with other regional economies (Uganda, Tanzania, SADC) so as to diversify its sources of power. Rationale for IDA Involvement 32. The last Bank Group's CAS was presented to the Board in September 1998. The CAS is aimed at reducing poverty through sustainable broad-based growth. It focuses on removal of systemic bottlenecks to economic growth, delivery of services and poverty reduction, such as the malfunctioning of public institutions, poor public expenditure management, and portfolio management. The Government's recent success (1998/99 and 1999/00) in achieving fiscal and financial stabilization and its renewed focus on civil service reforms, improved public expenditure management, combating corruption, public sector reform and privatization provides hope for improved economic growth rates in 2001-2003. However, as noted earlier, these prospects for growth have been endangered by the severe drought. In this context shortages of power have emerged as a major constraint to economic growth. In order to minimize the reduction in Kenya's growth prospects, it is important that the country should have access to resources to enable adequate supply of electricity to its key sectors of production. The proposed Emergency Power Supply Project will contribute to this objective. The operation will provide resources for the country to afford purchases of power supplies from IPPs without raising tariffs to unaffordable levels. On average, the current power tariffs are above the long 16 run marginal cost of supply, and collection of trade receivables has become a major problem, partly because of non-affordability reasons in the present difficult economic conditions. The project will also provide incremental working capital requirements needed to manage the shift from hydro towards more thermal power production brought about by the drought. 33. A further justification for the proposed project is that, by enabling the recently restructured sector to fully utilize its thermal generation, and its transmission and distribution assets, it will help to maintain the benefits of the reforms. The drought and the dialogue during the course of the project preparation has sensitized senior government officials on the need for speedier reforms of KPLC and for increasing regional links to facilitate exchange of power. The operation has been prepared in accordance with the Bank's Operational Policies/Bank Procedures No. 8.50 on Emergency Recovery Assistance. V. THE PROPOSED EMERGENCY POWER SUPPLY PROJECT Project Objectives 34. The proposed project would assist the Government in implementing its emergency measures to address the ongoing power supply crisis which is crippling economic activities and hindering the delivery of social services. Specifically the project would finance: (i) the Government's purchases of power and associated fuel from short- term independent power producers and fuel suppliers respectively for the projected period of the power supply crisis; and (ii) working capital requirements for fuel purchases arising from the drought-induced changes in generation mix between hydro and thermal sources and from reduced revenues caused by load shedding. Project Description 35. The Emergency Power Supply Project will provide quick disbursing support to finance a positive list of goods and services needed to urgently restore normal levels of power supply to industrial, commercial and residential consumers, and to sustain macroeconomic objectives. Specifically the project will provide assistance for financing: (i) power purchases from facilities to be installed by IPPs at Embakasi (75MW) and Ruaraka (30MW) in Nairobi6; (ii) fuel costs for operating the independent power producers' plants for 6-7 months; and (iii) incremental fuel requirements for increased operation of KenGen's thermal generation plants for a period of about three months which is about the average time KPLC takes to recover the fuel costs from consumers. 6 Connection of the private sector plants to the power grid will be the responsibility of KPLC and the required ancillary equipment, such as transformers and expansion of an existing substation at Kipevu will be financed under the Energy Sector Reform and Power Development Project (Cr. 2966-KE) through a reallocation of the Credit. 17 Project Cost and Financing 36. The total cost of the project is estimated at US$120.57 million excluding taxes, duties and interest during construction, broken down by component as shown in Table 7 below. The size of the proposed credit, US$72 million, has been determined on the basis of the crisis period ending in March-April 2001 when the long rains will be expected7. About mid-2001, 130MW of private sector capacity will be added to the system provided that implementation proceeds speedily for the Kipevu II Diesel Power Plant and financing agreements are reached for fast track Eldoret plant (55MW). The total cost of the electricity from the IPP plants over the crisis period is estimated at US$95.57 million of which US$35.15 million will be payments for power to the IPPs and the balance of US$60.42 million will be payments for the associated fuel to fuel suppliers. The net revenues from the sale of power from these plants to the final consumers is estimated at about US$48.57 millions. The IDA credit for the IPP component is calculated as the difference between the total cost of the electricity to be supplied from the emergency plants and the net revenue collections from final consumers, i.e. US$47 million, of which costs US$30 million will be the credit's contribution to the cost of power and the balance of US$17 million will be IDA financing for fuel costs. The Government's contribution towards the financing of the power purchases and the associated fuel will be met from the net revenue collections from final consumers. These net revenues will be deposited on a monthly basis into an escrow account to be managed by the Emergency Power Technical Team (EPTT). Attachment 3 provides estimates of the net revenues, payments to IPPs and the balances of the escrow accounts. The revenue estimates include substantial allowances for KPLC's transmission and distribution costs (US$0.03/KWh) and for bad debts (5%). They also take into account KPLC's current weak collection performance. They are therefore very conservative and should be realizable to provide the counterpart funding required for the project. Nevertheless, it will be important for the EPTT to carefully monitor KPLC collections and banking of the net revenues into the project's escrow account. Table 7: Costs and Financing Estimates Component Cost Financing Plan (US$ million) (US$ million IDA GoK Capacity Purchases 35.15 30.00 5.16 Fuel Purchases-IPP Plants 60.42 17.00 43.42 Fuel Purchases-Existing Plants 25.00 25.00 0 Total Financing Requirement 120.57 72.00 48.58 7A provision has been made for two months additional financing for theIPPs to cover the risk of below average rains during the April-May 2001 season, pending commissioning of the Kipevu II Diesel Power Plant in July 2001 8 The net revenues were calculated on the basis of the existing tariffs approved by the ERB, including the indexation of the fuel tariff for changes in fuel prices and exchange rates. The net revenue equals gross billings less KPLC's T&D costs less provision for doubtful debts. 18 37. The balance of the proposed credit, US$25 million, is the fuel costs requirement for three months for KenGen's existing thermal power plants. About two months after billing is KPLC's current collection period for revenues from consumers. Although the target collection period is 60 days or less, KPLC is experiencing collection delays, mainly because of the current macroeconomic stress, but also due to customer management problems. 38. The IPPs were selected on the basis of a competitive bidding process. Following an advertisement, fifteen bids were received, of which four were found responsive. The capacity costs offered by the four bidders ranged from US$0.056/kWh to US$0.112/kWh. The Govemment invited for negotiation three of the bidders with the lowest evaluated prices and whose cumulative offered capacity amounted to the required 105MW. Thus the capacity costs for the three IPPs with whom the GoK has signed capacity purchase agreements range from US$0.056/kWh to US$0.088/kWh. 39. Fuel costs are estimated at US$0.108/kWh for two of the IPPs and US$0.098/kWh for the third IPP. The average overall cost of the power from IPPs is thus estimated at about US$0.17/kWh which compares to the average retail tariff of US$0.092/kWh, hence the need to provide the differential between the net revenue collections from consumers and the costs of the power as a Government subsidy. The fuel costs used to determine the cost per kWh of electricity are high because they include: (i) inland transportation costs to the project sites; and (ii) costs of on-site storage facilities to be installed by the fuel suppliers. It is important to note, however, that the fuel component of the cost of power from the IPP plants will be based on actual costs incurred by the Government through a competitive bidding process(para.50). 40. The high cost of the fuel component of the cost of power from the IPP plants and the reasons for that has been noted above. With regard to the capacity costs, it is likely that the short duration of the contracts (six months), and negative investor perception of Kenya's power sector contributed to the high prices. 41. Schedule A'in the MOP shows a positive list of items to be financed from the proposed credit. The project would finance 100 percent of the electric power purchases from IPPs and of the petroleum and petroleum products costs, excluding import duties, taxes and levies. A summary of the proposed procurement and disbursement arrangements is shown in Schedule B of the MOP. Consistent with the emergency nature of the proposed support, these arrangements have been simplified to the maximum extent feasible, while seeking to ensure that overall concerns about due diligence and transparency are addressed. Project Implementation and Contractual Framework 42. Project implementation arrangements have been designed to address specific concerns about transparency, ensure safeguarding of the fiduciary responsibilities of the Bank, while simultaneously ensuring that the project would be implemented speedily in line with the requirements. Further, the project implementation design is intended to ensure that the credit proceeds would be used solely to finance the costs of the goods and services on the positive list that are required to address the problem of critical power 19 shortages; that required procurement, accounting and auditing procedures are followed; and that appropriate retention of documents is provided to allow for IDA supervision and for independent audits. 43. Project Organization. The project is being implemented by the Office of the President (OP) with the assistance of the Ministries of Energy and Finance and Planning, KenGen, KPLC and IPPs. A project organization and contractual framework chart is shown in Attachment 4. The chart outlines the relationships between the parties and the agreements that are needed to define the duties and responsibilities of each party. 44. The OP, through the Emergency Electricity Coordinating Committee (EECC), chaired by Minister for Finance and co-chaired by the Permanent Secretary, Secretary to the Cabinet and Head of the Public Service has oversight responsibility over the implementation of the project; approves decisions on selection of IPPs on the basis of recommendations from an Emergency Power Technical Team (EPTT); and takes decisions on any issues that may impede or threaten to impede project implementation. 45. The Government has appointed an eminent Kenyan with an extensive and successful track record in management, to chair the EPTT. This is a part-time position. The Permanent Secretary, Ministry of Energy, has appointed a deputy chairman from the Implementation Support Group (ISG) for the ESRPP to manage the EPTT on a day-to- day basis. The EPTT also includes the following experts: (i) technical and legal consultants financed under the ESRPP; (ii) one expert selected by MoE from each of KPLC and KenGen and assigned to the EPTT on a secondment basis; (iii) two staff seconded from the Electricity Regulatory Board and from the Ministry of Finance and Planning; and (iv) two ISG consultants (Economist, Technical Adviser- engineering and procurement), who are providing the secretariat to the EPTT. 46. The terms of reference for the EPTT are shown in Attachment 5. The principal functions of the EPTT are as follows: (i) invitation and evaluation of proposals from prospective IPPs; (ii) submission of recommendation for selection of developers to the EECC; (iii) negotiation of contracts and preparation of final contracts; (iv) monitoring installation of the connection facilities for temporary private power, metering and billing arrangements; (v) authorizing and processing requests for payments to IPPs to be made through the Project and Escrow Accounts; (vi) organization of monthly audits of the Special and Escrow Accounts and reports, preparation and submission of project status reports to the EECC, MoF, MoE and IDA. 47. The external consultants to the EPTT will be retained until completion of negotiations for award of contracts to IPPs. The seconded staff from KPLC, KenGen and ERB will remain in place, until the completion of the project. A legal notice was issued on August 2, 2000 by the Minister for Energy spelling out the composition, responsibilities and duties of the EECC and the EPTT. 48. Project Contractual Framework. In addition to the Development Credit Agreement between the International Development Association and the GoK, and the Project Agreement between IDA, the GoK, KPLC and KenGen, the contractual framework for the project comprises, the following other agreements: (i) Capacity 20 Purchase (Power Purchase) Agreement between the GoK and each of the IPPs, (ii) Capacity Lease Agreement between the GoK and KenGen; (iii) Support Services Agreement between KenGen, KPLC and IPP; (iv) Supplemental Agreement to the Interim PPA between KPLC and KenGen; and (v) a Revenue and Escrow Account Agreement between the GoK and KPLC. 49. The contractual framework recognizes that the GoK will borrow from IDA under the DCA, purchase capacity from IPPs, but since the GoK is not a licensed generator, it will lease the capacity to KenGen; KenGen will enter into a tripartite support services agreement with the IPP and KPLC so as to allow the IPP to operate, maintain and feed the electricity into KPLC's grid. Outlines of the capacity (power) purchase, capacity lease and support services agreements are given in the draft project implementation manual. Procurement and Disbursement Arrangements 50. Procurement: The project will finance power purchases from IPPs and the associated fuel for running these plants as well as incremental fuel requirements for increased operation of KenGen's thermal generation plants for a period of about three months. The IPPs have been selected on a competitive basis using procedures agreed with the Bank (i.e. simplified international competitive bidding procedures under clauses 2.63 and 2.64 of IDA's Procurement Guidelines). These procedures consisted of public advertisement of a request for proposals/bids, evaluation of bids by a special private sector-led tearn assisted by independent consultants. The request for proposals/bids, bid evaluation reports and draft negotiated contracts were cleared by the Bank as part of the prior review procedures. 51. Procedures for procurement of fuel have been agreed with the Government taking into account the need to ensure that fuel deliveries to the emergency power plants will take place no later than the commissioning dates for those plants. Thus, limited international bidding procedures (LIB) will be used to procure fuel requirements for the first six weeks. The project team is satisfied that there are enough local oil marketing companies to ensure a competitive procurement process. ICB procedures will be used for (i) the balance of the fuel requirements for the emergency plants (allowing fifteen days bidding period with publication in the local newspapers and distribution of the Notice of Invitation to Bid to the Embassies and Trade Representatives); and (ii) the incremental fuel requirements for increased operation of KenGen's thermal generation plants in Mombasa (with the required publication in the UNDB and local newspapers, but with a 4 week bidding period). 52. The IDA credit will finance the cost of fuel at the delivery points (project sites for the emergency plants and CIF Mombassa for KenGen's thernal generation plants in Mombasa) excluding any applicable duties, taxes and levies. Disbursements 53. Special Accounts. The portion of the credit to be used for financing the costs of power purchases from IPP plants will be disbursed over about six months through Special Account A on a replenishment basis. The Authorized Allocation to Special account A will be US$10 million. To expedite processing of replenishment withdrawal 21 applications and to ensure timely payments to IPPs, IDA has agreed on an exceptional basis, to process these replenishment applications on the basis of a faxed copy of the application, upon confirmation by the Country Director for Kenya of his receipt of the original copy of the application which will be sent by Pouch to the Loan Department. The payments for fuel estimated at US$42 million would be disbursed through Special account B. The Authorized Allocation to Special Account B would also be US$10 million. Expenditures qualifying for retroactive financing would be released upon receipt of a withdrawal application following credit effectiveness. 54. Payments for power purchases from IPPs will be made out of Special Account A. The payments from this account to the IPPs will be made on a monthly basis for about four (4) months, the estimated period during which the IDA funds earmarked for the purchase of electricity will be exhausted and after which escrowed net revenues will be disbursed to pay the IPPs. 55. The procurement of the fuel for existing thermal power plants will be carried out by KenGen under the supervision of the EPTT so as to ensure use of agreed procurement procedures. KenGen will process invoices and effect payments for fuel supplies to the power plants. 56. Escrow Accounts: A separate escrow account will be established and maintained by the Ministry for Finance and Planning in Kenya shillings in a local commercial bank. All net revenue collections from consumers by KPLC from the sales of energy supplied by the IPPs during the emergency period will be deposited in the escrow account within sixty days of billing. Once the credit proceeds in the special account A are exhausted, after about four (4) months of electricity generation by the IPPs, the escrow account is then used to pay the costs of power purchases from the IPPs until the expiration of the contracts period. The escrow account will also be used to finance the fuel for the IPP plants. The Ministry of Finance and Planning will authorize the EPTT to process and effect payments through the escrow account. The account will also be subjected to the monthly audits as required for the project and special accounts. Financial Management 57. The EPTT will be responsible for financial management and procurement responsibilities under the project. Accordingly, the management of the Special Accounts (A and B), the Project accounts, and the Escrow account will be carried out by the EPTT in accordance with sound and standard guidelines acceptable to the IDA. The EPTT will thus be responsible for overseeing these Accounts, and verifying invoices and approving payments. The EPTT will also prepare all financial management reports, financial statements, payments requests and any other relevant financial documentation as required by the Emergency Electricity Coordinating Committee and IDA. The EPTT will ensure that the special accounts (initial deposits, subsequent transfer and payments therefrom), and the escrow account are audited as required. The EPTT will also ensure that contracting, procurement, disbursement and financial management functions required under this project are carried out efficiently. All necessary documentation supporting Project related disbursement and financial transactions will be maintained by the EPTT for inspection by IDA supervision missions, Governrment, and the independent auditors. 22 58. Financial Audit. It has been agreed that the proposed project financial statements (including the Escrow and Special Accounts) will be audited on a monthly basis by an independent public accounting firm with relevant experience and competence acceptable to IDA. Project accounts will be maintained by the EPTT which will provide the EECC, MOE, MOF, and the IDA with timely management information on the execution of the project and help ensure accountability and transparency. The monthly audit reports will be sent to the IDA not later than 30 days after the end of the month. Draft terms of reference for the monthly audits are included in Attachment 6. Retroactive Financing 59. The credit will provide for retroactive financing in the amount of US$14.4 million equivalent, 20% of the proposed credit amount, to finance expenditures incurred before credit signing, but not earlier than May 15, 2000. Agreements Reached During Negotiations 60. During negotiations, agreements were reached that: (i) special and escrow accounts audits would be carried out on a monthly basis by an independent auditor acceptable to the Bank (para. 58); (ii) a project management structure, including an Emergency Power Technical Team headed by an independent executive with a successful management track record from outside Government would be retained (paras. 44-47); and (iii) the flow of project funds, including the operation of special accounts A and B and a project escrow account would take place as indicated in Attachment 7. 61. The following will be conditions for Credit effectiveness: (i) the GoK will have provided a legal opinion on the project's contractual framework documentation (paras. 47 and 48 ); (ii) the GoK will have opened the special, and escrow accounts indicated in para. 55; (iii) the Subsidiary Financing Agreement between the Borrower and KenGen will have been executed; and (iv) the GoK will have appointed auditors, acceptable to the Association for the audit of the project accounts and the special and escrow accounts (para. 58 ). 62. As a condition for disbursement, the GOK will (i) submit an action plan, satisfactory to the Association for restructuring KPLC; and (ii) issue a statement to the public, consistent with the agreed action plan for restructuring KPLC. Fiscal Impact of the Project 63. On the expenditure side, the project's impacts arises from the net subsidy to the consumers that will result from the differential between the net revenue collections and the GoK payments to the IPPs (para. 3 5). The extent of this impact is equivalent to the amount of the IDA credit for the financing of capacity and energy costs for the short-term IPPs; i.e. US$47 million. Since the net revenue collections have been conservatively estimated to cover the risks of below average rains, and KPLC's collection problems, it is likely that some balances may remain after project completion. Any such balances which would revert to the Treasury would in fact reduce the the level of GoK subsisdy to 23 consumers involved in this operation. On the revenue side, the project's impacts are: (i) tax and duties exemptions for power generation equipment imported for the emergency program; (ii) tax exemptions on fuel to be used for the expansion of existing IPP plants; for the rehabilitated Kipevu Steam Power Plant and for the short-term IPPs. The duty and tax exemptions on equipment will not result in revenue losses to the GOK in relation to the current budget. More importantly, the project by providing needed power to industrial and commercial enterprises, thereby allowing them to operate at normal/near normal levels, will prevent substantial looses of tax revenues that would otherwise occur. VI. BENEFITS AND RISKS Project Benefits 64. The project has several benefits. First, by providing required power supplies to industrial and commercial enterprises and to the informal operators, the project will help to prevent loss of jobs. It will provide a check on the increases in poverty that would otherwise take place. This is in addition to the fiscal impact mentioned above. The drought has brought more awareness of the role of the sector in the economy and the need to improve its the efficiency. The project will help Kenya to reform its transmission and distribution system as a first step towards creating a more competitive and private sector led system as agreed under the IPRSP and the Economic and Public Sector Reform Credit. The drought and the dialogue during preparation of the project has also increased Kenya's awareness of the vulnerability that arises from over-dependency on a single source of power (hydro) and the benefits that could arise from interconnecting its power system with the rest of the region, particularly with SADC countries. Project Risks 65. The project has the following principal risks: (i) the power shortages may continue beyond April 2001, if the long rains fail to materialize on a required scale; (ii) KPLC may fail to either fully collect revenues related to sale of power from emergency power plants or to bank all such revenues into the project's escrow account (paras. 36 and 37); (iii) the possibility for misappropriation of funds is a typical concern for emergency operations; and (iv) possible coordination difficulties between KenGen, KPLC and IPPs leading to delays in the installation of connection equipment for the emergency plants. 66. The risk of prolonged power shortages in the event of continued drought would be reduced through installation of 75MW private sector generation capacity for which financing agreements have been completed, careful monitoring of the ongoing negotiations between KPLC and IPPs for another 55MW expected to be commissioned by mid next year at Eldoret; and expeditious restructuring of KPLC to make it more efficient. As the negotiations for the 55MW, have taken a considerable time to conclude, the GoK is considering options for speeding up the negotiations with the IPPs. 67. Since the power purchases and fuel contracts will be partly financed from the net revenue collections from final consumers, if KPLC is unable to collect the full projected net 24 revenues required, the project would not be fully funded. An escrow account arrangement is proposed together with careful independent monitoring of KPLC's collection and deposit of revenues into the account. Further, the escrow account flows have been conservatively estimated in order this and other risks, and any residual balances remaining at the end of the project life would revert to the Treasury. 68. Even with the drought, the power shortages would not have occurred had there been more efficient management of the sector investment program and of transmission and distribution business. Therefore, agreement has been reached with the GOK that as a condition for disbursement, the GOK will submit to IDA a satisfactory action plan for fast tracking the restructuring and privatization of KPLC. Also, as a condition for disbursement, the GoK will issue a public statement, satisfactory to the Association, outlining its plan to restructure KPLC. 69. The risks related to possible misappropriation of funds will be managed through involvement of private sector leadership in the tendering process, monthly independent audits of special project and escrow accounts and through third party verification of power sales into the grid. 70. Coordination between the KenGen, the IPPs and KPLC to ensure timely connection of IPP units to the grid will be assured through IDA financing, under the ESRPP, of the required equipment. KPLC will utilize equipment in stock and replace it with IDA financing. 25 Attachment 1: Energy Balances TABLE I ENERGY BALANCE PROJECTED 'ENERGY PURCHASED FOR 2000101 TSJu 01 _ SeOp: Oct-OO No-0 Dec-00 Jarno. FhOb1 Mar-01 A Mr-O 0 _ k,01 TOTAL eStrtONS THE INTERCONNECTED SYSTEM ____ ___ S Inttow essnooares Kandon nt.rconnooto0 __ __. tl J9 - OctoCor-CO = 15% LTA Masina 0 00 0 00 0 00 0 00 300 4 60 6 20 6 60 6 20 9 00 9 30 9 00 52 90 trc1 ApnlI-. Jat0 _1I00% LTA Karv,ui1 1015 1085 900 1550 150 16 80 2170 27 00 40 30 42 00 229 11 KlbeU 190O 1817 1963 20 29 18 00 3100 3100 3360 4340 55 30 8260 810 458t14 . 2 Earorgency loPor Pft IOoOorLolla ~~~~ ~~~~~3 50 3 42 383 375 4 50 7.70 7.70 8 40 1080o 14 40 21.50 22 40 111.70 1 (a) AqQoCo- 128.fVanoist Sep200 K,Gftero 2359 2290 15 00 15.50 24.00 24.80 240 28.00 37 20 45 00 52.70 69 00 3829 49 en25MW0an th o060 TLFI" ~~~~~~15.84 12 73 56 00 37.20 6 00 6.20- 620 5 60 8.20 12 00 12 40 12 00 168 37 -MW On 20WS6c,200 Tans 2 80 2 29 3 50 5 00 7 00 850 5 50 4 00 350 50 750 750 6159 From 20thn SepO tWJne200i d 100% Load Febr War*ii 2 75 2 62 2 50 -3 00 4 50 4 50 4 00 2 50 3 00 4.50 4 50 4 50 42 87 ... Smal Hyciros ~~1.19 134 150o 2.00 2 50 2 50 2 00 2 00 2 00 250o 2 49 2 49 24 51 ()Clio3f8l6Ot20 Tetli Hydra G9h 78.87 74.28 92.26 97.89 78.80 103.30 102.80 10680 134.0 124.67 166.03 179t.82 t 33.6 2 Fromn - h Oct 2000 I 2O * 1OOt Lod Far Geothermal: OltLa .2224 29 1 i 28 25 31 71 30.69 31.71 31.71 26.20 31.71 30.69 31.71 30 69 363.90 Ic) Dto FEnargy - 10k4W on 1St ocr'0 _~ ~ ~ ~~~~~~~~~~__ ___ __ -20tMWe osn18 Oct2000 ChVeonalbt Thern tmt tGr.4 CWh _W an _A _0_ __ Fromn 16n ocr20.00 b JVIr 2001 at 8% Load Factr KlG>ui 08 Steamr is 60 iS 40 20 73 2t 42 20.73 21 42 2t 42 19 35 tS 42 IT 27 15 14 1t 42 From3 .6 cm.i oia 0 o w I938 40 13 61 42 84 44.27 42.84 44 27 44.27 39.98 41.27 42 84 33.20 29 93 467.71 (d) OrPoWr 4 - IW an 2 lt AW2000 lpu GT I ._19.14 . 1265 18 36 18.97 18.36 13 04 18 97 17.14 16 58 14 92 4.16 3 06 186.36 - 394 on 21St Dec000 Kip GT 2 2103 11.75 . 0. 18.97 18 36 12.6 18 97 17.14 16 57 13 77 13.16 3 06 179.52 Nairo6A Fid GT 6 31 3 31 81 2 6 32 6 12 0.92 6 32 5 71 6.82 0 89 5 92 0 77 49.S4 (eo tberatnce - I2lw on ltloctr2l0 Total Cowertlanal Thermal GWh 103.48 69.72 102.13 109.96 106.41 82.31 109.96 98.31 90.76 09.70 81.69 48.23 1 083.6 N tonstWkdmatteorGWh 002 0.03 0 23 0 23 0 23 0.23 0 23 0 2 6 0.23 0 23 0 23 0.23 2.33 .1) K#pm 6 30MW on ttnOcr2o00 Tto t K*nGn frnt rconnactda GWh 304.61 160.63 222.86 238.49 21t.82 227.55 244.60 232.23 286.70 246.18 268.66 288.97 2i778.40 lnde .P_ e Power Produer_ fberatnca iee 26 22 25 65 23 80 24 59 23 80 24 59 24 59 1944 23 09 21 90 20 50 21 88 20 06 WO t uBarge Motted GT 22 38 26 09 24 48 25.30 24 48 23 72 22 40 17 42 23 62 18 39 21.38 21 85 27151 OtWiai1 5 686 5 93 5 30 5 48 5 30 5 48 5.48 4 95 5 48 530 5 48 5 30 65 31 K1pr0u 8Dieswl 0 00 000 00 0 00 I 00 b00 000 000 000 000 000 A 9 08 Total Purchased ftm IPP GWh 64.46 67.87 83.688 66.37 82.66 03.78 62.47 41.80 Q2.19 46.89 47.35 68.11 tt 6396 mrmncv Power PlaIts Oroe4 (ad9b0nal 4MW) 0 00 0 00 066 0 24 0274 1 41 2.74 2 47 2 74 2 65 2 74 2 65 19856 0 (12MW Sep 25MW 165erJ 8MW 0 00 000 19.75 33.30 32.40 3330 33 30 30.24 32 30 32 40 33.30 32 40 31360 I tO1NW 23Oct 2OMW 300cl 000 000 000 14 82 21 17 21 76 21 76 19 76 21 78 21 17 21 76 21 17 186.10 Ctmi4ns 3OMW 130c1 0 00 000 000 9 36 2160 22 20 22.20 20 16 22 20 21 60 22.20 21 60 1837J2 (Adrefric AdObondl 12MWt 0 00 0.00 0.00 4 90 1.34 7.59 7.59 6 85 7.59 7.34 8t11 1 53 66.06 6RohaOlthlton 0 00 ~ 0 0 0 00 8 00 12806 13 39 13 39 12 10 1339 12896 4 46 216 82862 tel t Piactised Eett EPPs GWh 0O.6 0.00 2041 70.82 86.71 89.66 100.97 91.68 100.97 _8.12 8067 81 61 88012 mprU.LEO GWh 26.03 3;3.70 7.76 9.30 S.0W 9.3t 9.350 9.40 9.30 S.OO 9.3tt 9.W0 148189 Motul s Il Wh 0.21 0..3 1.64 0 1.0 0 . 1.70 1.70 1 1.00 . . 7.14 Total O nterc Ynnected System GWh 284.31 253.93 305.21 375.77 375.76 392.9 408.54 375.02 419.16 3997.9 418.78 407.5S 4,410.04 THE ISOLATED SYSTEM1 Toltl K.nG.nIbolded0i*s.l. GWh 0.86 _0 71 0.8 t4 0.86 0.84 0.86 0.86 0.78 0 8S_ 0.64 0.86 O.S 4 10.17 Tota REF Isolatd rDies GWh 0.84 0.82 0 81 0.84 O.S1 O.S4 0 84 0.76 0.84 0.81 0.84 OJt1 S.85 Total Isohted Syste GWh 1.70 t 53 t.66 t.70 1.65 1.710 t .70 t .S4- 1.70 1.tNS 1.70- t.61S 20.03 OTAL ENERGY PURCHASED GWI 286 01 254.46 3D7.2S 377.A7 376.76 392.99 410.24 376.55 420.87 3S9.54 418.48 409.23 4,430.04 TOTAL ENERGY REQUIRED GWh 414.28 418.28 405.68 415.02 407.78 402.64 415.39 380.36 48 87 399.64 418.48 409.23 4,807.74 SHORTFALLISURPLUS -120.27 -163.82 .80.63 -37.86 -31.02 -.466 -6.14 -.60 0.00 0 00 0.00 0.00 *477.70 Private Generation 14.60 1t.80 16.00 16.00 1S.00 9.65 5.14 380 _ _ e11008 -t113 87 -148.02 -82.63 -21.55 -102 0 00 0.00 0 0 00 000 000 00 -477.70 ittema Loese. 186%) 52 98 1 7 07 56 84 6983 88.70 72 70 7589 6966 7780 73 92 7742 757t 858 NtET ENERGY FOR SALE GWh 232.10 307.38 260.41 307.64 907.00 324.28 334.6 306.68 t3401 32s.6 34t1.06 32362 38 10.48 Attachment 2: Capacity Balances TABLE 2 FPOWER BALANCE PROJECTED POWER DEMAND BALANCE FOR 2000/01 Insalled Capacity (MW) Jul-0 Aug-00 Sep-00 Oct-40 Nov-00 Dec400 Jan-01 Feb-01 Mar-O1 THE INTERCONNECTED SYSTEM aisG*n Interconnected Hydro YMa's°iega 40 0.00 0.00 0 00 0.00 28.00 2B.00 26.00 28.00 28.00 Kitilburui 84 20.00 20.00 20.00 20.00 59.00 59.00 59.00 59.00 59.00 Gutau 145 66.00 66.00 66.00 66.00 102.00 102.00 102.00 102.00 102.00 Kiednruma 40 14.00 14.00 14.00 14 00 2. 00 28 00 28.00 28.00 28.00 Kiambere 144 58.00 58.0O 58.00 5. OO 101.00 101.00 101.00 101.00 101.00 Tu&kw.l 106 42.00 42.00 106.00 106.00 74.00 74.00 74.00 74 00 74.00 Tans 12 4 6 00 6.00 6.00 6.00 9.00 9.00 9.00 9.00 9.00 Wanjsi 7 4 4.00 4.00 4.00 4.00 . OO SO SAOO S OO S.OO Small Hydros 5.4 3.00 3.00 3.00 3.00 4.00 4.00 4.00 4.00 4.0o Tobl Hydro MW 584.2 213.00 213.00 277.00 277.00 410.00 410.00 410.00 410.00 410.00 Geothenmal Olkaua I 45 45.00 45.00 45.00 45.00 45.00 45.00 45.00 45.00 45.00 Conventional Thermal Plant MW Kipewu Oil Steam 45 34.00 34.00 34.00 34.00 34.00 34.00 34.00 34.00 34.00 Kipavu I Diesel 1 75 70.00 70.00 70.00 70.00 7.00 9 .00 3.00 3.0 000 29.00 Wipewo GT 1 30 30.00 30.00 30.00 30.00 30.00 30.00 30.00 30.00 40.00 Kie GT 2 30 30.00 30.00 30.00 30.00 30.00 80.00 8.0000 .00 30.00 Ki so Fi T 13D5 0 0.00 i0.00 0.00 0.00 i000 0.00 i0.00 t0.00 0.00 Total PuConetoale from IPP MW 195.5 174.00 874.0 870 70 70 70 70 70 70 Tot lr4 Con dditioosl Th4rmzMW) 493 0.t7400 0.4 00 174.00 1.7400 174.00 174.00 174.00 174.00 174.00 Ngpng Wlindmastr M lW a o.oo o.oo o oo o.oo o.oo o.oo o0 oo Do oo.oo Total K WnGen IntepMonrWeeted MW W22 70 432.00 432.00 496.00 495.00 529.00 429.00 629.00 624.00 425.00 Independent Powear Producers Dbeuf nea Diesel 44 5 39000 39.00 39.00 39.00 39.00 39.00 39.00 39.00 39.00 Westront Barge Mountd GT 43 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 Olkar is III.oao 6 00 B.0 OO 0 B. OO BOO 800 8 00 8 00 i 00 Kipow II Diesel a 0.0 0 00 0.00 0.00 0.00 0.00 0 00 0 00 0 00 Io Purchased fromn IPPs MW SS 5 87.00 97.00 ii7.00 87.00 87.00 $7.00 87.00 87.00 87 00- Etrgency Power Plants OPve4~ (addilioal1 4M"W 4 0.00 0.00 1.00 1 00 t OO 4.00 4.00 4.00 _4.00 A9reko (t2MW1tSap,25MW 1GSep BMW 20Sep) 45 _ .oo o oo 45 00 45.00 45.00 45.00 45 00 45.00 45 00 3utz Energy (10iMW hst Oct, 20MW 161h Oct) 30 0 °0 °°0 =0 °-° ° ° 30-00 30.00 30-00 30.00 30-00 30.00 Cummins (30MWv lgth Oct; 30 | O .00 I e.oo o oo 30.00 30.00 30.00 30.00 30.00 30.00 berafic: Additional 12MW (111h Odc) 12 0.00 0.00 0.00 12.00 12.00 12.00 12.00 12.00 12.00 Kipevu 6 Rehabifitbon (30 MW 5ttb Oct) 30 0.00 0.00 0.00 30.00 30.00 30.00_ 30.00 30 00 30.O2 Total Purchased from EPPs MW 151 0.00 0.00 46.00 14it 00 14U 00 151.00 151.00 151.00 151.00 Imports UEB MW O 10.00 10.00 10 00 10.00 10.00 10 00 10.00 10.00 10.00 Mumibs 2 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 Tota lIntbrconnect i Gonr tion Available (MW) 1,071.20 531.00 531 00 641.00 743.00 576.00 879.00 879.00 879.00 8T9 00 ,Maximurn Demand (MW) 1795.00 8 03.00 1805.00 79700 809.00 773.00 798.00 809 00 I808 00 IShorfall/Surpolus (MW) 1-264.00 J.-272.00 1 164.00 -54.00 67.00 106.00 81,00 70.00 171.00 27 Attachment 3: Escrow and Special Accounts Financial Estimates E t RSId E iUS _ iSD V o Aw l iS_001 oftd N>oo0 o F I M 1 boI i 01 I * mm-oil 18.0 33 3 22.4 23.3 33.3 20.2 Xt.3 32.4 X2. 32A 3 0.C 14. 21.2 21.u 21t NJ.5 21i 21.2 2tJ 21.2 s4 0o e.4 21.l 22.2 2.2 2 e 222L 21.8 22.2 21.8 1532 rat~ mX 11.1 6t7.i 5.L2 17.2 171 72 77.2 ?LJ 7. 5.2 -6 to tt2 ) *tiW-L Wf$ e X, 2.7 10S 13.5 14.M3 14U 13 o 4 j, 13.8 14 13 0 00 1o 2 1_.1 S 1 a o . 57. 2 6io. 0 1. . a 0 5P 4t TYW udvAnat IL . . . e0 LISTz .dM L van . et7 z12 ztZ t4 L1.13 Otis Ut$Yt ZIt .12 13 2.0 rall _ I.0 tt 5.47 *.03 @.Xt tl5 7.tS OUls 752 7-7 T.S _ 70. 8 T=o J 0 Dtt _ 0.4tt 1J35 1|e t.8 tI'l 1.05 Ul5 T 76 t 81 t 7s llt a P.M i. amt "b tt% to.o 0.20 0.43 O 0.3 0.ao4o . 1 O 30 0.38 ._ 0 3.0 t trder - - ~~~~~~~~~~~~~~0.40 0.40 0. __0 _~~~~~~~~~~~~~~~~~~~~~~~~! 0. .1: .9.| 3.4 5.74 5.#5 6.i4 552t 5150 S.3 S So X404 C_h h tw_A alwt _ OJ~~~~~~~~~~~0.0 OJt8 O.13 3.iT0 ff. lto1 zt2t.7tt42 - 5.52 6 -9 8.70 51 4X 0.71 9 a S t t |~~~~~~~~~~~~~~00 I O.W (821l (9.22)1 is "|° 17.281 *3.97 1 455X1 7-21li 4.031l 0,65 hrP-: | | *.tr21 2.40; 0.981 2.521 0.011 o.Xll X~3.30 3t8 30.181 03II-..s _ > ao Clslt0t1||w 1 1_ { .@211 t92211 li.ttOI 17.2ttl 10.97l ~~~~~~~10.59 1 7.211 4. .0OM51 .0 lbchmill-^(U$lir | | i | §:0Q| *0.43| 3.x0| ,49g 1 144~:1 4., 1 0.01| 0.0l| 0.0l| O.Ot| 0.0 0 ;-iVWPld | i 1 1 1f I 4.79l 6.tel~~~~~~~~0.0 4a 43 | | 1 1 0. OI .. sUb:Bl _l .................... l l 1~~~~~~~~~~~~~~~~G. 1 7.41.al6.4 oe - 1 24.99 *-** r Z S .0^,l ~~~~~~~~~~~~ ~~~~~ ~~~28.50 14.91 4.32 0.011 0.oll 0.011 0.0 i a 0lI 0.01 0011 1= :" r 1- 1 1 (OtOl eu j .X.~~~~~~~~M.01 003 3 5 ,. .Xs l 5.74 i .f2159 .Mt|sa 154 49.7I l ~ ~ ~ ~~~~~ l 1 ttO 0.0 13t1 7.17 | 7.3tt 7.10 1'1" 3| 7 AS2 -e 33 .1 28 Attachment 4 KENYA Proposed Emergency Power Supply Project Technical Annex Project Organization and Contractual Framework Project Organization and Contractual Framework _l I ~OP EPTT: Membership is composed of a Chairman, who is on the EECC, and representatives from MOE, MOF, KenGen, KPLC, ERB, Advisors, and ISG, who provides the Secretariat. CPA: Capacity Purchase Agreement CLA: Capacity Lease Agreement 29 Attachment 5 KENYA Proposed Emergency Power Supply Project Technical Annex Scope of Services for the Emergency Electricity Coordinating Committee and the Emergency Power Technical Team Emergency Electricity Coordinating Committee 1. For the purposes of overseeing the measures being taken for the emergency power supply, and resolve any constraints, an inter-ministerial committee has been set up under the chairmanship of the Head of Civil Service called "Emergency Electricity Coordinating Committee" (EECC) comprising of: * Head of Public Service - Chairman • PS, Ministry of Energy * PS, Ministry of Information, Transport and Communication 3 PS, Provincial Administration * Technical Support Personnel * Chairman of EPTT. 2. The EEEC is also responsible for taking decisions on contract awards on the basis of recommendation submitted to it by its technical wing, the Emergency Power technical Team (EPTT). Emergency Power Technical Team 3. The EPTT will carry out day to day management of emergency power supply project and report to the EPTT for decision on contract awards. They will also refer to the EECC any difficult decisions with policy implications, if any. This team comprises: * Team Leader/Chairman from private sector * P.M. Nyoike, Chief Economist, ISG, Ministry of Energy * H.S. Jabbal, Technical Advisor, ISG, Ministry of Energy * C. Shakaba, Deputy Secretary, Ministry of Finance * C. Omondi, Legal Counsel, ERB * M.A. Gupta, Chief Project Development Manager, KPLC * L. Kariuki, Corporate Planning Manager, KPLC * Independent Consultants 4. Specifically the EPPT will undertake the following pre-contract and project management activities: 30 Pre-Award Activities * Preparation of Project Implementation Plan (completed) * Invitation of Bids (completed) * Appointment of outside consultants (completed) * Preparation of project contractual framework documents * Preparation of Fuel Bidding Documents * Evaluation of Bids and Recommendation to EECC on successful Bidders * Contract Negotiations. * Preparation Project Implementation Manual Project Management * Discuss and agree with IPPs on Detailed Program and Project Activities * Facilitate Import clearance and other licensing on an emergency basis * Monitor the progress on site preparation, plant supply, and commissioning * Oversee hook-up facilities for KPLC system * Oversee metering arrangements * Monitor and endorse fuel tender prices * Draw up procedures for receiving, verification and payment of invoices on timely basis * Verification of invoices and process payments * Manage special and escrow accounts on behalf of the GOK * Undertake any other activities related to the Project Management and Financial Control. 31 Attachment 6 KENYA Proposed Emergency-Power Supply Project Technical Annex Terms of Reference for Audit Services Background 1. Monthly audits will be performed to verify that project objectives are being accomplished while relevant procedures are being followed. The Controller and Auditor General will, on behalf of GOK, employ an auditor suitable to GOK and IDA to carry out the audits, with audit reports to be submitted to IDA and GOK not later than two weeks after the end of each calendar month. 2. The project implementing agency, The Emergency Power Technical Team (EPTT) has been newly created, operating under a specially appointed Emergency Electricity Coordination Committee of senior GOK representatives. 3. All procurement of Works, Goods and Services is to be in accordance with IDA guidelines in the Development Credit Agreement. 4. The project implementation commenced in June 2000 and is expected to be completed by June 2001. Overall Objectives 5. To carry out audits in a cost effective and transparent manner as necessary to independently verify the proper use of the Project funds (including the IDA and collections from electric power sales from the short term IPPs) in accordance with the principles, procedures and requirements of the IDA /GOK Development Credit Agreement (DCA) and good working practice; and to produce the audit findings and recommendations in general as monthly audit reports to IDA and GOK. 6. In meeting the overall general objectives the Auditor shall: a. perform a diagnosis of the set of procedures and mechanisms used in implementation and supervision as specified in the Operational of Guidelines; b. verify whether works performed by the EPTTs fulfil the concerns of quality, economy and efficiency; and c. identify implementation constraints or shortcomings and propose recommendations as necessary to improve the existing arrangements that would be compatible with the principles and procedures described in the Operational Guidelines. 32 Specific Objectives of the Audit 7. The objectives of the audit is that the Auditor shall: a) express his professional opinion on the financial and accounting procedures, the financial status, the accounts and financial statements of The Emergency Power Supply Project. The auditors professional opinion will also cover the financial position of the IDA funds and collections from the sale of electric power from the short term suppliers and expenditures of the Credit each month throughout the project; and their compliance with the DCAs and good working practice. b) Investigate and review all management aspects of the Emergency Power Supply Project, to identify and express a separate opinion on the management status, management constraints, and management's compliance with the DCA and the Operational Procedures; and make recommendations as necessary to render the project management compliant, more efficient, cost effective and transparent. Detailed Scope of the Audit Services 8. The Auditor shall carry out all the audit services from the time of establishment of the EPTT as necessary to meet the above overall and specific objectives, which shall include all necessary audit tasks in respect of the execution of the Works, Goods and Services contracts to their completion and Project completion, with the final settlement of all payments due to the respective contractors, suppliers and consultants, and the closing of the Credit. 9. The audit shall be carried out in accordance with International Standards for Audits and shall include such tests and controls as the Auditor considers necessary under the circumstances. 10. The opinion of the Auditor shall include not less than the following specific references as to whether: a. the proceeds of the Credit and collections from sale of electric power generated by the short term IPPs have been used in accordance with the conditions of the Credit Agreement, with due attention to economy and efficiency and only for the purposes for which the financing was provided; b. the Works, Goods and Services financed under the Credit and collections from sale of electric power generated have been procured in accordance with the respective Credit Agreement; c. all necessary supporting documents, records and accounts have been kept in respect of all expenditures, including Special Account payments and expenditures made from the project and escrow accounts; d. the Special, Project and Escrow Accounts have been maintained in accordance with the provisions of the respective Credit Agreements; and 33 e. the accounts and financial statements audited, including the Special, project and escrow accounts have been prepared in accordance with consistently applied International Accounting Standards (IASs) and give a true and fair view of the financial situation of the Project as a whole. 11. The opinion of the Auditor shall also include separate opinions in respect of not less than the following tasks: a. identify and review the extent of the establishment of the EECC and the EPTT - as compared with that stipulated in the Operational Guidelines; and identify any deficiencies or areas of non-compliance; b. identify and review the systems, procedures and controls utilised by the EPTT and the EECC in comparison with those defined in the Operational Guidelines; identify any specific deficiencies or areas of weaknesses therein; c. identify and review the overall performance of the EPTT, including but not limited to fulfilling the stipulated General Principles Applicable to the EPTT's activities in accordance with the Operational Guidelines and, in particular, their compliance and effectiveness in satisfying the stated: (a) general objectives; (b) institutional arrangements for project implementation; (c) application of the procedures for awarding contracts; (d) selection and use of consultants; (e) procurement of goods; (f) monitoring of consultants; (g) application of the procedures for accounting and management of project funds; (h) operation of the Special, Project and Escrow Accounts; (i) filing of supporting documentation; (j) timely monthly reporting to the EECC regarding the status of: implementation of the project; awarding of contracts; signing of contracts; progress against program; disbursements; IPPs' performance in accordance with the contractual agreements; and consultants' performance; (k) adherence to the contractual agreements (DCA; Capacity Purchase Agreement; Capacity Lease Agreement; Joint Operation Agreement; and Supplemental Agreement to the Interim PPA between KPLC and KenGen); and (1) identify any specific deficiencies or areas of weaknesses therein; and make recommendations for their improvement. d. identify and review the performance of the EECC regarding its' responsibilities for providing overall policy and ensuring that the project's objectives are achieved in accordance with the Operational Guidelines; and identify any specific deficiencies or areas of weaknesses therein; e. identify and review the monthly results for the Key Performance Indicators such as duration of payment and procurement processing and comment on the EPTTs' management efficiency and effectiveness as reflected by these measurements; and identify any specific deficiencies or areas of weaknesses therein; f. identify and review the performance of any other management elements or aspects as necessary; and identify any specific deficiencies or areas of weaknesses therein; and 34 g. Submit reports of the audit findings and recommendations, as detailed below. Reporting 12. The reporting of the audit findings and recommendations shall be in the form of: an inception report, monthly and final reports, if necessary, additional special communications as and when any significant irregularities or concerns have been discovered and warrant earlier reporting. 13. The inception report shall be submitted within 2 weeks of contract effectiveness. The report shall detail: the extent of Auditor's mobilization; any preliminary findings; the Auditor's proposed work program; and any constraints that require resolution for the successful implementation of the Services. 14. The Monthly reports shall be submitted within 7 days of the end of the respective calendar month reporting period. The reports shall include an executive summary, plus details under separate sections of the findings and recommendation in respect of each audit task as stipulated herein, with key substantiating data included as annexes. 15. The final report shall be submitted within one month of Project completion. The report shall consolidate the findings and recommendations of the respective monthly reports; and shall follow the same format as the monthly reports. 16. The individual additional special communications shall take whatever form the Auditor deems appropriate and expedient. 17. Each report shall 'stand alone', such that it can be fully understood without reference to other documents. 18. Each report or additional special communication shall be submitted in final form only, by hand or courier, simultaneously to IDA and the Controller and Auditor General (for the EECC). Three (3) copies of each report or special communication shall be submitted to the IDA Resident Mission in Nairobi, three(3) copies to EEC and a further three copies to EPTT. In addition, a 3.5" diskette copy of each report shall be submitted to the IDA Resident Mission in Nairobi, the Controller and Auditor General (for the EECC and the EPTT). 19. In addition, three copies of confirmed monthly bank balances shall be submitted monthly. 20. All reports shall be produced in A4 size, single sided format; and shall be suitable for reproducing by monochrome photocopying. Duration Of The Services. 21. The Services shall be carried out over a period of 9 months from the issuing of the instruction to commence these Services. The approximate person-days envisaged for the Services are 40. 35 Resources And Facilities To Be Provided 22. Excepting only for occasional use office space within the EPTT offices (which will be provided by GOK for the use of the Auditor), the Auditor shall, entirely at his own cost, provide all facilities, resources, equipment, vehicles, staff, accommodation, offices, laboratories, stationery, utilities, communications and everything else necessary for the satisfactory execution and completion of the Services. 23. The Auditor shall provide all the staff with requisite skills and experience to achieve satisfactory and timely execution and completion of the Services. 36 Attachment 7 KENYA: Proposed Emergency Power Supply Project Technical Annex Financial Flows CentraBak of KPLC :enaCollecfi:oof Receiaibles S~~~~~~~~~~~~~~~~~~~~~~~~~ F Payrnent~ to IPPs Pa ments to I Ps Feb. - Apr. 1/ (downp yment an capacity charges Oct. - Ieb.) I/ IPP IPP IPP KENGEN IPP IPP IPP 1 2 3 ~~~Fuel 1 2 3 Supplies Payments Payments 1/ Periods are indicative only. Oct. -Dec. 1/ Dec.-Apr. 1/