Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 4 1 899-DO

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$42.0 MILLION EQUIVALENT

TO THE

DOMINICAN REPUBLIC

FOR AN

ELECTRICITY DISTRIBUTION REHABILITATION PROJECT

April 18, 2008

Sustainable Development Department Caribbean Country Management Unit Latin America and the Caribbean Region

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

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CURRENCY EQUIVALENTS (Exchange Rate Effective December 3 1,2007)

CAS CDE CDEEE CNE C RI

EDEs EGEHID EdeEste EdeNorte EdeSur ETED FDI FONPER GDP IDB IFR IMF IPP LAC oc OFID PAEF PRA PPA PROTECOM SEH SEMARN SIE TA UERS

Currency Unit = Dominican Republic Peso (RD$) 33.75RD$ = U S $ l

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

Country Assistance Strategy Corporacion Dominicana de Electricidad (the former Dominican Electricity Corporation) Corporacion Dominicana de Empresas ElCctricas Estatales (state-owned utility holding company) Cornision Nacional de Energia (National Energy Commission - in charge o f policy making) Cash Recovery Index =(kWh billed by EDEskWh purchased by EDEs)*(RD$ paid by consumers to EDEs/RD$ billed by EDEs to consumers) Empresas Distribuidoras de Electricidad ( the three regional distribution companies) Empresa de Generacion Hidroelectrica Dominicana (state-owned hydgrogeneration company) Empresa Distribuidora de Electricidad del Este S.A. (privately-owned EDE for eastern DR) Empresa Distribuidora de Electricidad del Norte S.A.(state-owned EDE for northern DR) Empresa Distribuidora de Electricidad del Sur S.A. (state-owned EDE for southern DR) Empresa de Transmision del Estado Dominicano (state-owned transmission company) Foreign Direct Investment Fondo Patrimonial de las Empresas Reformadas (Equity Fund for Companies) Gross Domestic Product Inter-American Development Bank Interim Financial Reports International Monetary Fund Independent Power Producer Latin America and Caribbean Organism0 Coordinador del Sistema ElBctrico Interconectado (responsible for load dispatch) OPEC Fund for International Development Programa Nacional de Apoyo a la Elimination del Fraude ElBctrico (anti-fraud program) Programa Nacional de Reduccibn de Apagones (National Program for Reduction o f Blackouts) Power Purchase Agreement Oficina de Proteccion a1 Consumidor de Energia E16ctrica (Consumer Protection Agency for Power) Secretaria de Estado de Hacienda Secretaria de Estado de Medio Ambiente y Recursos Naturales (Secy. o f State for Environment) Superintendencia de Electricidad (Office o f the Superintendent o f Electricity) Technical Assistance Unidad de Electrification Rural y Suburbana (Rural and Suburban Electrification Unit)

V ice President: Pamela Cox Country Director: Yvonne M. Tsikata Country Manager Christina Malmberg Calvo Sector Manager: Philippe Benoit

Task Team Leader: Lucio Monari

FOR OFFICIAL USE ONLY

DOMINICAN REPUBLIC Electricity Distribution Rehabilitation Project

CONTENTS

Page

I. STRATEGIC CONTEXT AND RATIONALE .............................................................. 1 . A.

B. C.

11. A. B.

C. D. E.

111. A.

B. C.

D. E.

F.

IV. A. B.

C.

D.

E.

F.

G.

Country and sector issues ................................................................................................ - 1 - Rationale for Bank involvement ..................................................................................... - 6 - Higher level objectives to which the project contributes .............................

PROJECT DESCRIPTION .................................................................................. .......- 7 - Lending instrument ......................................................................................................... - 7 - Project development objective and key indicators .......................................................... - 7 - Project components ......................................................................................................... - 8 - Lessons learned and reflected in the project design ........................................................ - 8 - Alternatives considered and reasons for rejection .......................................................... - 9 - IMPLEMENTATION ..................................................................................... .............- 9 - Partnership arrangements ................................................................................................ - 9 - Institutional and implementation arrangements ............................................................ - 10 - Monitoring and evaluation o f outcomeshesults ............................................................ - 10 - Sustainability ................................................................................................................. - 10 - Critical risks and possible controversial aspects ........................................................... - 11 - Loadcredit conditions and covenants ........................................................................... - 1 1 - APPRAISAL SUMMARY ......................................................................................... - 12 - Economic and financial analyses .................................................................................. - 12 - Technical ....................................................................................................................... - 13 - Fiduciary ................................. .................................................................................. 14 - Social ............................................................................................................................. - 14 - Environment ................................................................................................................ ..- 15 - Safeguard Policies ......................................................................................................... - 15 - Policy Exceptions and Readiness .................................................................................. - 15 -

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

Annex 1: Sector Background .................................................................................................. 16 .

Annex 2: M a j o r Related Projects Financed by the B a n k and/or other Agencies .............. 22 .

Annex 3: Results Framework and Moni tor ing ..................................................................... 23 . Annex 4: Detailed Project Description ................................................................................... 30 .

Annex 5: Project Costs ............................................................................................................ 36 .

Annex 6: Implementation Arrangements .............................................................................. 37 .

Annex 7: Financial Management and Disbursement Arrangements .................................. 42 . Annex 8: Procurement Arrangements ................................................................................... 55 .

Annex 9: Economic and Financial Analysis .......................................................................... 62 . Annex 10: Safeguard Policy Issues ......................................................................................... 80 . Annex 11: Project Preparation and Supervision .................................................................. 83 .

Annex 12: Documents in the Project F i l e .............................................................................. 84 . Annex 13: Statement o f Loans and Credits............................. .............................................. 85 .

Annex 14: Country a t a Glance .............................................................................................. 86 .

Annex 15: M a p IBRD 35856 ................................................................................................... 88 .

DOMINICAN REPUBLIC

Borrower International Bank for Reconstruction and

ELECTRICITY DISTRIBUTION REHABILITATION PROJECT

4.90 6.40 10.50 16.50 25.50 42.00

PROJECT APPRAISAL DOCUMENT

Development Other Financiers Total:

LATIN AMERICA AND CARIBBEAN

37.30 61.50 99.60 58.70 93.40 152.10

LCSEG

Date: April 18,2008 Team Leader: Lucio Monari Country Director: Yvonne M. Tsikata Sectors: Power (1 00%) Sector ManagedDirector: Philippe Charles Themes: Infrastructure services for private Benoit sector development (P) Project ID: PO89866 Environmental screening category: Partial

Assessment Lending Instrument: Specific Investment Loan

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

For Loans/Credits/Others: Total Bank financing (US$m.): 42.00 Proposed terms: Commitment-linked payable in 30 years, including 5 years o f grace and level DrinciDal reDavment: at six-month LIBOR Dlus fixed mead.

Borrower: CDEEE, Dominican Republic

Responsible Agency: EdeNorte, Dominican Republic EdeSur, Dominican Republic EdeEste, Dominican Republic

4nnual Cumula Live

Project implementation period: Start May 31,2008 End: May 31,2012 Expected effectiveness date: July 1,2008 Expected closing date: December 3 1,20 12 Does the project depart from the CAS in content or other significant respects? Ref: PAD A.3 Does the project require any exceptions from Bank policies? Ref: PAD D. 7

[ ]Yes [XI N o

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

5.00 10.50 10.50 10.50 5.50 0.00 0.00 0.00 0.00 5.00 15.50 26.00 36.50 42.00 0.00 0.00 0.00 0.00

I s approval for any policy exception sought from the Board? [ ]Yes [ IN0 [x]Yes [ ] N o

[xlYes [ No

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? Ref: PAD D. 7 Project development objective Ref: PAD B.2, Technical Annex 3 The Project development objective i s to: (a) increase the Cash Recovery Index o f the three electricity distribution companies in selected areas and (b) improve the quality o f electricity service.

Project description [one-sentence summary of each component] Ref: PAD B.3.a, Technical Annex 4

contingencies) in selected areas o f EdeNorte, EdeSur and EdeEste. This would be a time slice o f the three EDEs investment program in rehabilitation and upgrading o f medium and low voltage circuits by: (i) replacing existing run-down and aged medium and l o w voltage overhead lines; (ii) expanding distribution substations and feeders; (iii) replacing and installing meters, cables and transformers, and new connections for those customers who have irregular connections; (iv) for large consumers, installing remote meters; and (v) in areas difficult to manage, installing theft-proof equipment.

Component 2 - Outreach to Consumer Communities (US$9.2 mi l l ion excluding contingencies)) receiving Component 1 investments, in order to re-establish trust and define clear rules between them and the EDEs, in the context o f the “24-Hours o f Light Program” o f improving power supply in areas where the CRI i s rising. Component 3 - Technical Assistance (US$2.5 million) for consultants to: (a) confirm the

amounts and legal status o f the EDEs’ debts, define options for i t s restructuring, and prepare a plan of execution; (b) carry out audits on the performance o f the contractors on the project works, the achievement o f project performance indicators, and the f low o f funds provided by the Government to the sector; (c) survey customer satisfaction with the quality o f electricity service in the rehabilitated circuits; and (d) help administer, monitor and evaluate the project.

Which safeguard policies are triggered, if any? Ref: PAD D.6, Technical Annex 10

Component 1 - Rehabilitation o f Distribution Networks (US$121.8 mi l l ion excluding

Environmental Assessment (OP/BP 4.0 1)

Significant, non-standard conditions, if any, for: Re$ PAD C. 7 Board presentation:

None. Loadcredit effectiveness:

Loan effectiveness contingent upon the execution o f the subsidiary agreement between Government and CDEEE, and the agreements between CDEEE and each o f the three EDEs.

Covenants applicable to project implementation:

Specific target levels for the CRI and for controll ing increases in operating costs have been agreed with the EDEs (see table page 12). The EDEs agreed to limit the increase in their annual operating costs (excluding taxes depreciation, fees to CNE, OC and SIE, and allowances for uncollectible bills) to half the percentage o f the increase o f the total energy bills (in GWh) issued, adjusted for inflation. In case any o f the EDEs are unable to achieve these targets, they will, jo in t l y with UERS, submit a plan to the Bank to improve the indicator in the fo l lowing six months. In case such improvement does not materialize, the Bank would have the right to suspend disbursement.

0 Standard Financial Management covenants.

... - 111-

I. STRATEGIC CONTEXT AND RATIONALE

A. Country and sector issues

Country Economic Overview

1. In the aftermath o f the banking and macroeconomic crises o f 2003 and 2004, the Dominican economy experienced a booming recovery in 2005 and 2006, with real GDP growth reaching 9.3 percent and 10.7 percent, respectively. Economic growth continued i t s strong pace in 2007, averaging 8.2 percent in the f i rst nine months. Macroeconomic stability improved markedly following the crisis period. Inflation was brought under control, from 51 percent in 2004 to single digits in 2005 and 2006 despite rising world o i l prices. With the implementation o f the Government’s macro stabilization program supported by the IMF Stand by Arrangement, the exchange rate stabilized at RD$33/US$ in 2006 (close to where it remains today), compared to the depreciated value o f RD$49/US$ in early 2004.

2. As the Dominican Republic looks forward, the resolution o f the prolonged electricity crisis i s very important for improving the competitiveness o f the country and ensuring sustained economic growth and poverty reduction. The large fiscal burden imposed by the sector through direct and indirect subsidies crowds out much needed social expenditures, while blackouts and high consumer outlays for alternative self-generated electricity’ raise production costs, ultimately dissuading investments and reducing competitiveness. In a sector troubled by large theft o f electricity, often with official connivance, mitigating this problem would also improve accountability and governance in the country.

Electricity Sector Background

3 . For decades, the electricity sector has provided substandard service, with inadequate generation capacity (until recently) and frequent power cuts. The historical roots were a combination o f politics, corruption and the inefficiencies o f a state-owned monopoly. At times, the problems have boiled over into national crises. Over the past decade, the Government has restructured the sector and made major progress in most areas. Reducing the high level of technical and commercial losses in the distribution system and improving the poor quality o f power supply are the most urgent issues that s t i l l need to be addressed to put the sector on a sound financial and technical footing. These issues are locked in a vicious circle, as poor quality o f service, customer dissatisfaction and high tariffs2 have induced theft through illegal connections and non-payment o f electricity bills by businesses and households, at times with the connivance o f staff o f the distribution companies. This, in turn, has le f t the distribution companies without the resources to make the necessary improvements. The problem has been compounded by the difficulty o f cutting o f f supplies for overdue bills, together with the impunity with which consumers reconnect to the grid illegally. The result i s known somewhat facetiously as “ l a cultura de no pago”. A major objective o f this project i s to help change this culture.

In 2004, the total economic cost was estimated at over US$1 billion or 3.4 percent o f GDP. I

* Average tari f f i s US$O.ZO/kWh, with average residential rate at US$O. 16/kWh, industrial rate at US$0.23/kWh, and commercial at US$0.29/kWh. A major reason for needing high tariffs i s the wide-scale theft o f electricity.

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4. Sector reform started in the early 1990s with the opening up o f generation to private investors. A central step was the 1997 unbundling o f Corporacidn Dominicana de Electricidad (CDE), the vertically integrated power utility, into two generation companies (Itabo and Haina) and three regional electricity distribution companies (EDEs): EdeNorte, EdeSur and EdeEste. These companies were subsequently privatized through the sale o f 50 percent shareholding (including control), with the remaining shares held by the Fondo Patrimonial de las Empresas Reformadas (FONPER), to be managed as an investment rather than a potential sector policy instrument. The July 2001 Electricity Law created a modern legal and regulatory framework along with new institutions to formulate energy policy and regulate the sector. Nevertheless, as in many other countries, the path o f reform has not been smooth.

5. Generation and Transmission. Today there are 12 private thermal generators3 with a nominal installed capacity o f 2,695 MW (85 percent o f the total). Almost half o f this total power capacity is, however, old and inefficient, mainly based on diesel oil. The remaining capacity (468.4 MW) i s mainly hydropower owned by EGEHID, a newly-established subsidiary o f the Corporacidn Dominicana de Empresas Ele'ctricas Estatales (CDEEE), the state-owned utility holding company; another subsidiary (ETED) owns the transmission assets4. The establishment o f EGEHID and ETED was important to promote a level playing field in the sector and ensure transparency o f accounts. Within CDEEE, the Unidad de Electrificacidn Rural y Suburbana (UERS) i s responsible for carrying out rural electrification projects that are handed over to the EDEs; i t would be the implementing unit for the proposed project. Two independent power producers (Smith and Enron, and CESPM) sel l electricity directly to CDEEE through long-term power purchase agreements (PPAs), while the other generation companies se l l about 80 percent o f their electricity to the EDEs under bilateral contracts, and the remainder on the spot market. The country peak demand met in 2006 was 1,760 MW5.

6. Distribution. The three EDEs supply electricity to al l regulated customers and to a fraction o f the 40-50 non-regulated (demand higher than 2 MW) consumers. EdeEste has remained in the private sector6, while EdeNorte and EdeSur were sold back to the Government by Unidn Fenosa o f Spain in 2003. The companies each have about one-third o f the market, but EdeSur has the most industrial and commercial users, followed by EdeEste, as they divide the Santo Domingo market. All have been unprofitable and are deeply in debt.

7. The Comisidn Nacional de Energia (CNE), composed o f the Secretary o f Industry and Commerce, Secretary o f Finance, Technical Secretary o f the Presidency, Director o f the Central Bank, and Secretary o f Agriculture, i s in charge o f energy policy. The sector regulator i s the Superintendencia de Electricidad (SIE), headed by a council o f three members (one o f whom i s the Superintendent) appointed by the President and ratified by Congress. There i s also an OJcina de Proteccidn a1 Consumidor (PROTECOM) under SIE. The Organism0 Coordinador (OC) i s responsible for load dispatch.

Policy and Regulatory Institutions.

AES Andres, CEPP, DPP, GPLV, HAINA, ITABO, METALDOM, Monte Rio, SEABOARD, CESPM, MAXON,

The transmission company ETED owns 2144 km at 138 kV, 1528 km at 69 kV, 19 transforming substations and Smith Enron.

138/69 kV, total transforming capacity 2305 MVA Given that demand has been constrained for a long time, the unconstrained peak load i s almost certainly greater. EdeEste, originally owned by AES, was sold to TCW (an equity fund) in November 2004, with AES maintaining

5

6

the operatorship under a management contract.

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Current Electricity Sector Issues and Strategy

8. The most serious and urgent issue s t i l l facing the sector i s the unsustainable financial condition o f the EDEs, which are expected to require an additional cash infusion o f over US$SOO million just to meet their 2008 deficit. As usual, a problem this severe has a number o f adverse effects as well several causes, all o f which need to be addressed.

9. The estimated availability o f power supply increased from below 70 percent o f demand in 2004 to over 80 percent by 2006, before falling back a bit in 2007. While there are occasional shortages o f generation capacity and, in some places, bottlenecks in transmission, the main constraint i s the shortage o f funds by the EDEs to purchase enough energy to meet the total demand. The EDEs ration supply on commercial principles, providing more to those areas where they get the highest returns.

10. The Government has provided large subsidies (about US$600 mi l l ion in both 2005 and 2006, and US$720 mi l l ion in 20077), as loans from CDEEE with no specified terms, to ensure stability o f power supply, and has remained current on the payment o f electricity bills by Government agencies. While this has enabled the EDEs to return to relatively normal operation after the crisis o f 2003-04, it has exacerbated the Government’s fiscal problems and has also le f t the EDEs with a combined debt overhang o f some US$2.1 billion, and a negative net worth o f some US$1.2 billion, which o f course makes them unable to raise funds from commercial sources. Resolution o f the situation has been complicated by the fact that one o f the EDEs i s private (and i s engaged in a legal action against the Government related to i t s financial situation) while two are public. The project will include technical assistance to clarify the exact amount and legal status o f different debt components, and to study the options for resolving the debt problem through some combination o f capitalization, cancellation and re-financing.

11. The shortage o f funds has also led to underinvestment and consequently deteriorating networks. In 2005 and 2006, the Government provided some US$63 mi l l ion and US$38 million, respectively, that was supposed to go for investment; however, much o f this went instead into working capital that was essential for continuing operations. In 2007, it provided some US$53 million that was spent on investments by the EDEs, which enabled them to begin some rehabilitation under the “24 Hours o f Light Program” (see below). Government has agreed to increase this to US$75 mi l l ion in 2008 and US$80-100 mi l l ion in each o f 2009 and 2010, including financing from Bank and other donors under the project.

12. In 2003, when the Government took back the operation o f EdeNorte and EdeSur from the private sector, there were substantial disruptions due to the change in management and some ill-advised appointments. In 2006, the Government appointed more experienced local and international managers in these two companies, with contracts linked to performance. All three EDEs have also reorganized their internal structures and laid o f f obstructive employees. The benefits are starting to show in improved collection performance. This has required increased operating costs, but these will also now need to be kept under control in the effort to return to profitability. Operating costs will be monitored under the project.

Subsidies were larger than originally envisaged due to a combination o f higher o i l prices and unsatisfactory 7

performance o f the EDEs, particularly in 2005.

13. With the help o f the police forces under the Anti-Fraud Program (PAEF)', an anti-theft campaign focused o n large consumers has been launched. The number o f inspection teams has increased and EdeNorte and EdeSur have acquired new technology in the fo rm o f remote meter reading equipment to monitor continuously the consumption o f large industrial consumers, so as to easily detect manipulation and theft. Experience with these devices has been positive so far. The proposed project wou ld expand the program to install remote meter reading by EdeEste and to large commercial and residential users by a l l three EDEs. In August 2007, the Congress approved amendments to the Electricity Law, to criminalize electricity theft.

14. Electricity tariffs in the Dominican Republic (currently averaging US$ l8 /MWh) are among the highest in Lat in America, due to the (a) reliance o n imported o i l for power generation, (b) high prices originally negotiated in the PPAs, (c) l imi ted amount o f competition, in this small, island economy, (d) high commercial risks facing operators, especially given the repeated sector financial crises, and (e) l o w CRI, wh ich requires higher tariffs o n those who pay to help offset the losses due to theft o f electricity. Over the next few years, the Government hopes to lower generation costs by converting an existing power complex f rom diesel to natural gas, contracting new plants based o n coal, and renegotiating the PPAs.

15. In late-2007, the Government decided to freeze retail tariffs, despite the increase in o i l prices (fuel o i l rose f rom US$40/bbl in May 2007 to US$56/bbl in September 2007) which would have required an average adjustment by about 15 percent. It feared that a further increase would result in larger non-payment o f electricity bills, thereby counteracting the ongoing efforts to increase the CRI. But financial projections show that unless the indexed tariffs called for in the regulations are restored, i t will be impossible for the EDEs to achieve financial self-sufficiency, even if the project and other measures being taken and planned achieve fully their objectives. An improvement in the quality o f power supply, wh ich i s an objective o f the project, would create more favorable conditions for the Government to adjust tariffs in line with fuel prices.

16. The Cash Recovery Index (CRI) i s the key indicator o f the percentage o f power purchased by the EDEs that i s paid for by consumers9. I t i s monitored closely by the Government, and targets are set under the project as well . The CRI in the Dominican Republic i s one o f the lowest in the world; technical losses are high due to obsolete equipment, commercial losses are even higher due to i l legal connections, and many customers do not even pay the bills they receive. The CRI improved f rom 45 percent in 2004 to 52.8 percent in 2005, then stagnated until mid-2006, when i t resumed rising. I t i s n o w around 60 percent, with much o f the improvement due to factors mentioned above (better management; PAEF; resumption o f investments). This is, however, s t i l l we l l below the level o f operational breakeven o f 70-75 percent (assuming indexed tariffs are restored), and even farther f rom the 80-90 percent reached in a number o f other La t in American countries, the achievement o f wh ich wou ld al low a reduction in tar i f f s .

The Programa Nacional de Apoyo a la Eliminacidn del Fraude Ele'ctrico i s a joint Government-EDEs program to

The formula is : (kWh billed by EDEs /kWh purchased by EDEs) multiplied by (RD$ paid to EDEs by consumers

8

detect and prevent electricity fraud.

/RD$ billed by EDEs to consumers). 9

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17. Additional significant progress will require the combination o f investments and community outreach that have begun under the “24 Hours o f Light Program” and will be expanded and improved under the project. Since 2006, the EDEs have offered to increase the hours o f electricity delivered to various circuits as the CRI in those areas rise. The low voltage circuits are divided into four categories (A, By C and D), according to their CRI levels (above 90percent, 65 to 90 percent, 52 to 65 percent, and less than 52 percent), which receive decreasing number o f hours per day o f service (24, 21, 18 and less than 18, respectively). At present, about 210 circuits out o f 492 in the country are classified as category A, 50 as B, 90 as C and 142 as D. As the CRI in a circuit rises, the applicable category and therefore the hours o f service are increased progressively. The EDEs’ goal i s to upgrade al l distribution circuits to category A over the next decade. This involves regularizing the connections to illegal users and rehabilitating the network through replacement o f old equipment (which will improve the quality o f power supply by reducing voltage fluctuation, and reduce technical losses). Given the overall poor status o f the network, and the underinvestment in the past, virtually the entire distribution system need to be rehabilitated.

18. A key to the success o f this program i s outreach to local communities. For this, the EDEs have created Social Units, comprised o f social experts, working closely with NGOs and universities. A Sectoral Social Management Committee composed by representatives o f CNE, PROTECOM, UERS and the EDEs, has also been created, to share experiences and homogenize criteria and methodologies for implementation o f social programs. The Social Units have developed community participatory methodologies to engage civ i l society in the solution o f the energy crisis. These revolve around Social Action Plans which include campaigns o f information and communication about the electricity services, educational activities and signing o f Social Agreements (Pactos Sociales) with communities.

19. The “24 Hours o f Light Program” i s proving to be a win-win solution for EDEs and consumers. For example, in the 26 circuits where EdeNorte implemented i t during the first hal f o f 2007, the number o f regularized consumers increased from 45,000 to 160,000. Some case studies by EdeEste found that the cost for alternative sources o f energy has been reduced for consumers by between 15 and 56 percent, with small businesses the greatest beneficiaries. A survey by EdeEste, which has so far signed 49 Social Agreements, found consumer satisfaction with electricity service rose from 60 percent to 80 percent in the areas covered, with important improvements in fields as diverse as neighborhood security, household income, and family time together. EdeSur i s only starting to implement this approach.

20. The project represents a major acceleration o f this effort. I t will also reduce the costs and improve the performance o f the program by (a) achieving economies o f scale and more competition in procurement, (b) introducing “supply and installation” contracts, (c) incorporating the best practices o f the three EDEs in terms o f both investments and community outreach, and (d) having robust monitoring and evaluation so that lessons are learned and mistakes corrected faster.

21. The Government published a comprehensive sector plan for 2006-12, which aims to ensure the provision o f reliable electricity services at reasonable prices to the entire population, by improving the financial viability o f the sector while continuing i t s expansion to meet the rapidly increasing demand fueled by robust economic growth. In the short term, the plan seeks

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to stabilize power supply by providing an adequate level o f subsidy to the sector (particularly the EDEs), improving distribution infrastructure, and controlling operating costs. Investments would be made in transmission to remove major supply bottlenecks. A Law for Renewable Energy has been approved to provide incentives for renewable projects and facilitate their implementation by the private sector.

22. In the medium term, the plan aims to ensure financial sustainability and address the structural problems o f the sector. Actions would include restructuring o f the EDEs’ debts and better targeting o f subsidies, including revision o f the Blackout Reduction Program (Prograrna de Reduccidn de Apagones -- PR4) lo. Investments in generation, transmission and distribution would continue in order to meet growing demand at least cost. Rural electrification would be expanded to achieve universal accessll. A second generation o f reforms to ensure more competition at the generation level i s also being contemplated. In terms o f institutions, the plan calls for strengthening and further clarifying the roles o f the Government and i t s agencies, including CNE, SIE, and the OC.

23. Implementation o f this plan, supported by the Bank through the US$l50 mil l ion Programmatic Power Sector Reform Loan (PPSRL) and the US$7.3 mi l l ion Energy Sector Technical Assistance Loan (ESTAL), has not been without difficulties. An initial emphasis by the Government on generation delayed some o f the key actions to improve the distribution function. Implementation o f the ongoing Bank-supported projects has gained momentum since the 2006 Congressional election, reflecting the Government’s success in implementing i t s strategy.

B. Rationale for Bank involvement

24. Through this project, the Bank would continue to support the improvement in the performance o f the sector and in particular o f the EDEs. While commercial banks and other donors are providing some funds for generation and renewable-energy projects, no private financing i s available for distribution because o f the EDEs’ financial problems. Such support i s essential to reduce the large fiscal cost o f the sector and enhance the competitiveness o f the economy. The project i s part o f the program indicated in the Country Assistance Strategy (CAS) approved in 2005 and the CAS Progress Report o f July 2007. The Bank has significant experience worldwide in loss-reduction projects. This experience, together with our ongoing policy dialogue in the country, will facilitate the project, lower investment costs through more efficient procurement, and catalyze co-financing from the IDB and the OPEC Fund for International Development (OFID).

25. The Bank has a well established and solid relationship with the Government through the ongoing PPSRL and ESTAL. Under these projects, the Bank i s assisting in formulating and implementing the strategy for the financial recovery o f the sector, and i s in a unique position to expand i t s assistance by focusing on distribution investments. These investments aimed a

The PRA was created in 2001 to provide limited electricity service for a minimum flat tariff to poor urban areas, to address the social unrest caused by widespread blackouts The program now accounts for about 10 percent o f the electricity sold and serves about half a million families. Pilot programs to rehabilitate the distribution system in the PRA areas and target subsidies are ongoing in EdeEste and EdeSur.

10

It i s estimated that 88 percent o f the population now has access to electricity. I1

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reducing the cost o f supply wou ld complement the other efforts targeted at ensuring the financial viabil ity o f the energy sector and strengthening i t s institutions. This project will be supplemented by a second Development Pol icy Loan fo r the power sector planned for the next few years, fo l lowing the PPSRL, to ensure consistency o f strategy and focus by the Government towards achieving financial sustainability.

C. Higher level objectives to which the project contributes

26. The long-term competitiveness o f the Dominican economy depends o n improving the electricity supply. The unreliabil ity and high cost o f electricity supplies has been a major disincentive for investments in the country, and has forced many existing companies to resort to much more expensive and inefficient sources o f energy.

27. The project will also contribute to improve the efficiency and cash recovery in the sector, and therefore reduce a major drain on the budget. In both 2005 and 2006, overall subsidies to sector operators topped US$600 mi l l ion (1.7 percent o f GDP), in 2007 were US$720 mill ion, and for 2008 are forecast at over US$800 mil l ion. As a result, the energy sector deficit severely exacerbates the country’s fiscal pressures.

11. PROJECT DESCRIPTION

A. Lending instrument

28. The Bank will provide finance thru Specific Investment Loan to support a t ime slice o f the rehabilitation investments in the medium and l o w voltage circuits o f the EDEs. The project will cover about 100 individual circuits which provide about 35 percent o f the energy the EDEs supply (excluding the 10 percent that goes to PRA areas). The individual sub-projects will be started over two years, with implementation continuing for an additional one to two years. The loan will be borrowed by the Dominican Republic which will on-lend it to CDEEE, through a subsidiary agreement. A project agreement between the Bank and CDEEE will spell out the latter’s responsibilities. CDEEE will then on-lend the loan to the EDEs under three individual subsidiary agreements, whose terms will be intermediary between those o f commercial borrowings and the Bank loan.

B. Project development objective and key indicators

29. the three EDEs and (b) improve the quality o f electricity service.

The project development objectives are to (a) increase the Cash Recovery Index (CRI) o f

30. Achievement o f these objectives would be monitored through the fo l lowing indicators:

Increase in the C R I in circuits with project investments and in each EDE as a whole.

Control o f operating costs o f the EDEs.

Increase in consumers’ perception o f the quality o f electricity services.

Increased hours/day availability o f power in the circuits with project investments and in each EDE as a whole.

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C. Project components

31. Component 1 - Rehabilitation and Upgrading of Medium and Low Voltage Circuits (US$121.8 million, excluding contingencies - US37 million finance by IBRD) in selected areas o f EdeNorte, EdeSur and EdeEste. This will be a time slice o f the three EDEs’ investment program in this activity by: (a) replacing existing run-down and aged medium and low voltage overhead lines; (b) expanding distribution substations and feeders; (c) replacing and installing meters, cables and transformers, and new connections for those customers who have irregular connections; (d) for large consumers, installing remote meters; and (e) in areas difficult to manage, installing theft-proof equipment. The specific sub-proj ects have already been selected by the EDEs, based primarily on the contribution they would make to improve the CRI. The allocation o f funds among the three EDEs was proposed to the Bank by CDEEE. The project would finance about 100 circuits - some 20 percent o f the circuits by number but carrying about 35 percent o f the total energy, as the greatest increase in the overall CRI i s expected to come from the circuits with a high density o f consumers, including commercial and industrial ones.

32. Component 2 - Outreach to Communities (US$9.2 million - US$3 millionfinance by IBRD) targeted to receive Component 1 investments, in the context o f the “24-Hours o f Light Program” in order to establish trust between the EDEs and consumers, and thereby increase consumers’ willingness to pay by regularizing illegal connections. This component wil l employ participatory methodologies comprising (a) diagnosis o f the socioeconomic characteristics o f the neighborhoods and their use o f electricity, (b) census o f users o f electricity service, differentiating regular clients, customers in default and illegal users, (c) design o f the “24 Hours o f Light Program” for that community, based on the social and technical diagnoses, (d) information dissemination about the costs o f power generation, transmission and distribution; the rights and obligations o f consumers and EDEs; payment o f bills, meter reliability, and consequences o f electricity theft, (e) education about rational, efficient and safe use o f energy, (f) signing o f a “Social Agreement” (Pacto Social) between the EDEs and the communities, and (g) monitoring and evaluation. Through the Social Agreement, the EDEs commit to provide electricity for additional hours, aiming as soon as feasible for 24 hours per day, and the communities commit to pay for electricity and to regularize illegal connections.

33. Component 3 - Technical Assistance and Training (US$2.5 million - US$2 million finance by IBRD) for consultants to: (a) confirm the amounts and legal status o f the EDEs’ debts, define options for i t s restructuring, and prepare a plan o f execution; (b) carry out audits on the performance o f the contractors on the project works, the achievement o f project performance indicators, and the f low o f funds provided by the Government to the sector; (c) survey customer satisfaction wi th the quality o f electricity service in the rehabilitated circuits; and (d) help administer, monitor and evaluate the project.

D. Lessons learned and reflected in the project design

34. Project design has benefited both from the Bank’s extensive project and analytical work in infrastructure investment, and from i t s experience with the power sector in the Dominican Republic: (a) Project implementation should be based on Supply and Installation Contracts: Given the large scale o f the program, this approach would minimize the risks due to any lack o f coordination and implementation capacity o f the EDEs, and would be less subject to the risk o f

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abuse because responsibility wou ld be focused o n the contractors; (b) Increasing the CRI requires a broad approach linked to applying better technology, improving quality of supply and reaching out to local communities. The Government has already taken the legal and regulatory steps necessary for reducing losses and increasing payment o f electricity bills, but these need to be complemented by both physical improvements through investments in the distribution network and outreach to the local communities. The design and implementation o f the community participation programs have required the EDEs to hire social scientists and create social teams, and to mobil ize support f rom both the local governments and community-based NGOs. (c) Privatization has better prospects if it follows rather than precedes establishing conditions for financial sustainability. The Dominican Republic has already gone through a round o f unsuccessful privatization o f the EDEs, and must therefore increase the CRI to at least the breakeven level before trying to privatize again.

E. Alternatives considered and reasons for rejection

35. (a) Lending directly t o the EDEs was rejected because they do not have the financial independence or sustainability to be borrowers o f the Wor ld Bank loan; furthermore, there are economies o f scale in procurement f rom having CDEEE be the coordinating agency. (b) Approving individual ly a l l o f the sub-projects to be financed wou ld be unfeasible given that there would be about 100 such circuits, and the priorities might change during the course o f project implementation; instead, the Bank has reviewed the documentation o n a l l o f the proposed investments and visited a sample o f them, to evaluate the EDEs’ capacity to design their own programs, and assess whether the sound criteria adopted to select sub-projects have been consistently applied. (c) Insisting that the EDEs be re-privatized f i rst wou ld be unfeasible given their history and current lack o f financial solvency. (d) Financing equipment to be installed by the EDEs themselves throughout their concession areas, as has been done to date with Government funds, wou ld provide more f lexibi l i ty to the EDEs’ management, but would be more dif f icult to monitor and evaluate, be more vulnerable to the risk o f abuse, and require good implementation capacity by the EDEs to avoid delay. (e) Broadening the project to include a l l o f the investments by the EDEs, including new substations and other expansions as we l l as improved corporate systems, wou ld have required considerably more Bank t ime and resources, and diluted the project’s focus.

111. IMPLEMENTATION

A. Partnership arrangements

36. The project i s expected to be co-financed with the IDB and OFID, so as to enable more resources to be provided than the Bank could lend for the project o n i t s own. Because o f the complexity in co-financing individual contracts (more countries are eligible to bid under Bank than IDB procedures, for example), and the fact that the Bank i s much more advanced in processing the project, the Bank, the IDB and OFID will finance separate procurement packages, using parallel (rather than joint) financing. However, economies o f scale will be realized by having a single management, reporting and evaluation system for the project. Joint supervision missions will reduce the burden o n the implementing agencies, and help ensure that the advice i s consistent. During appraisal, the Government formally requested financing f rom the IDB and

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OFID. Government.

The contracts to be financed by the Bank will be co-financed 25 percent by the

B. Institutional and implementation arrangements

37. The project will be implemented by the Unidad de Electrijkacidn Rural y Suburbana (UERS), a unit within CDEEE, and the three EDEs. UERS will coordinate, monitor and report on implementation, and serve as the Bank’s main point o f contact. UERS has so far been responsible mainly for programs to improve service in rural and poor urban areas, so it wil l need strengthening to undertake this new task. An experienced procurement specialist has been appointed by UERS and qualified consultants will be recruited by UERS under the project, to assist in supervision and monitoring functions as detailed in Annex 6. Each EDE will be responsible for the design, technical specifications and construction supervision o f the investments in i t s own network.

38. UERS will carry out i t s responsibilities using i t s existing organizational structure, with a strong participation o f technical and procurement staff assigned by the three EDEs. The UERS Director General, who reports directly to CDEEE’s Executive Vice President, will coordinate al l project activities between CDEEE and the EDEs and will be the direct liaison with the Bank and other financiers. Administrative, procurement and financial activities will be handled by the Administrative Directorate, using existing monitoring, procurement, financial, budget, and filing systems, which are satisfactory to the Bank. Technical aspects will be handled by the procurement and technical staff o f the EDEs, supported by UERS as required. UERS will be responsible for completing procurement bidding documents packages and managing the overall procurement process, including the preparation o f supply and installation contracts for signature by the EDEs. The EDEs and UERS will joint ly be responsible for the evaluation o f proposals and recommendations for award.

C. Monitoring and evaluation o f outcomeshesults

39. UERS and the EDEs, with the assistance o f the consultants and auditors, will monitor progress against the agreed performance indicators specified in Annex 3. CDEEE and the EDEs have already implemented systems for providing timely information on the CRI. UERS will provide, on a quarterly basis, 45 days after the end o f each quarter, consolidated reports on project implementation progress in the Bank’s IFR format. I t will prepare a detailed mid-term report to serve as the basis for a project mid-term review, and will also help prepare the Borrower’s contribution to the Implementation Completion Report (ICR).

D. Sustainability

40. The Government has recognized for several years the critical importance o f improving the quality o f electricity supply and reducing the fiscal burden o f the sector, and has implemented a series o f reforms towards these ends. However, the long-term sustainability of the project also requires that the EDEs be restored to a sound financial footing, by not only improving the CRI but also controlling operating costs, improving relations with customers, reducing sharply their large debt overhang, and being able to collect tariffs commensurate with their costs. Accordingly, the project will monitor the CRI, the EDEs’ operating costs, the hours

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o f electricity service provided, and consumer satisfaction. In addition, the project includes consultancy on how to handle the existing debt o f the EDEs. Government’s political ability to raise tariffs will be greatly enhanced by improvements in the quality o f service that should result from the project.

E. Critical risks and possible controversial aspects

Risk

No resolution of debt overhang problem o f the EDEs

Uncertainties regarding raising power tariffs in line with petroleum price hike

Shared implementation arrangements between CDEEE and EDEs may prove unwieldy

EDEs lack capacity to implement the project satisfactorily

The new administration (election in May 2008) may not support the project.

Difficulties in the implementation o f the community outreach component

Rating Risk Mitigating Measures Rating

H Comprehensive plan for addressing debt S overhang problem

H Government to provide budgetary S support to compensate EDEs

S Clear division o f responsibilities defined M in Subsidiary Agreements and the Operations Manual

M Experience of EDEs i s improving; L furthermore turnkey contracts will be used

M Although one cannot fully discount this L risk, there appears to be a strong political consensus in support o f the sector reforms supported by the project.

M Initial experience has been very positive. L TA and support wi l l be provided.

Overall Risk

H: High; S: Substantial; M: Moderate; L: Low

M

F. Loadcredi t conditions and covenants

4 1. We do not expect any significant, non-standard conditions for Board presentation. Loan effectiveness will be contingent upon the execution o f the subsidiary agreement between Government and CDEEE, and the agreements between CDEEE and each o f the three EDEs. For the project implementation period, specific target levels for the CRI and for controlling increases in operating costs have been agreed with the EDEs.

42. basis, to smooth out seasonal fluctuations):

The EDEs have agreed to achieve the following CRI levels (calculated on a six-month

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I I EdeNorte I EdeSur I EdeEste I June 2008

December 2008

June 2009

57 62 62

59 63 63

60 64 64

1 December 2009 I 61 I 65 I 65 I June 20 10

December 20 10

63.5 67.5 67.5

66 70 70

I June 201 1 I 68.5 I 72.5 I 72.5 I December 20 1 1

June 2012

December 20 12

71 75 75

73.5 77.5 77.5

75.0 80.0 80.0

43. The EDEs also agreed to limit the increase in their annual operating costs (excluding taxes, depreciation, fees to CNE, OC and SIE, and allowances for uncollectible bills) to half the percentage o f the increase o f the total energy bills (in GWh) issued, adjusted for inflation.

44. In case any o f the EDEs are unable to achieve these targets, they will, joint ly with UERS, submit a plan to the Bank to improve the indicator in the following six months. In case such improvement does not materialize, the Bank would have the right to suspend disbursement.

IV. APPRAISAL SUMMARY

A. Economic and financial analyses

45. The project wil l upgrade the circuits that deliver about 35 percent o f the total energy in the interconnected system (excluding PRA). Because the CRI i s expected to increase by 20 percent in the circuits, the project would raise the nationwide CRI by about 7 percent. This would yield about US$125 mi l l ion per year o f additional gross revenue for the EDEs, and US$ 1 00 mil l ion per year o f net income after deducting their increased purchase o f energy.

46. Economic analysis. The f i rst economic benefit wil l be the reduction in technical losses in the circuits being rehabilitated from an average o f around 15 percent o f power supplied to about 7 percent. These losses are valued at the cost o f power purchased by the EDEs (US$l3O/MWh).

47. A second benefit i s the result o f the reduction in electricity theft and wastage -- through both illegal and un-metered connections, and by not paying bills. These are being addressed through (a) greatly expanded metering, (b) tamper-proof meters and other technical measures to make theft more difficult, and (c) improved service quality and the community outreach component, both o f which are expected to make consumers more willing to pay for their electricity. While much o f the resultant benefit to the EDEs will be only a transfer payment (in economic terms) from consumers, there wil l be a reduction in demand by those users who now

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do not pay for electricity at al l or pay only a flat fee. Based on experience, the EDEs have estimated this reduction in demand to be at least 20 percent o f consumption. Because consumers value this consumption at between zero and the tariff, we have used (the other) half o f the US$200/MWh tari f f as the estimated economic saving.

48. A third benefit would result from increased hours o f power availability, as distribution circuits are upgraded from categories D and C (up to 18 houdday) to categories B (21 hourdday) or A (24 hour/day availability). The electricity would substitute for far more expensive and inefficient types o f energy (e.g. back-up generators; bottled gas; propane). Based on a sample o f users analyzed by the EDEs, we estimate the economic cost o f the energy replaced as being twice as much as the cost o f power from the grid.

49. The resultant economic rate o f return (ERR) for the project i s 73 percent and the net present value US$428 million. Counting only the reduced technical losses yields an ERR of 17 percent, and adding the second benefit o f electricity not wasted raises this to 25 percent.

50. Financial analysis. The financial rate o f return o f the project i s estimated at 59 percent. This high estimate i s typical o f distribution projects, because o f the short implementation period for individual sub-projects, the high returns in general to network rehabilitation, and the selection o f sub-projects based on their expected contribution to the CRI improvement.

5 1. Financial models were constructed for both CDEEE and the three EDEs, to assess their projected financial soundness. CDEEE i s expected to become profitable by 2010 because o f the earnings o f its subsidiaries EGEHID and, to a much lesser extent, ETED, which will offset CDEEE’s own losses (US$258 mi l l ion in 2008, growing to US$287 mi l l ion by 2013) from administration o f the PPAs. O n the other hand, in order for the EDEs to become profitable, they will have to both substantially increase the CRI and obtain a considerably larger margin between the average tariff they receive and the power-purchase price they pay - through some combination o f tari f f increases (mainly to offset fuel price increases over the past year) and reduction o f generation costs (by new investments and/or renegotiation o f the PPAs). In the base case scenario, which include the CRI rising to 78.5 percent by 2013 (largely but not entirely as a result o f the project), tariffs being raised to the indexed level, and generation costs reduced by both conversion o f one plant to natural gas and construction o f new coal-based facilities (but not by renegotiation o f the PPAs, because o f the uncertainties surrounding that), the EDEs would break even by 201 1 and be profitable thereafter, permitting tariffs to start to come down. If the tariff were to remain frozen at the current level, the EDEs would continue to require at least US$600 mil l iodyear in financial support throughout the period.

B. Technical

52. CDEEE and the EDEs have implemented investment projects o f a similar nature with acceptable standards o f quality. They have well-qualified staff to do the design engineering, planning and implementation o f the investment components under the project. The project will employ modern technological practices in rehabilitating the distribution networks. The Bank team reviewed the feasibility reports for the identified investments, and made field visits, and was satisfied with the technical standards and criteria proposed.

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C. Fiduciary

53. A procurement capacity assessment carried out by the Bank found that while UERS and EDE staff are competent at procurement in general, they have limited experience o f the Bank’s procurement rules. A full time procurement specialist was hired by CDEEE to strengthen the ability o f UERS to apply the Bank’s procurement guidelines. Bank staff and consultants worked intensively with UERS in the preparation o f the procurement plan, the Operations Manual, and in general training them in Bank procurement.

54. The Bank’s review o f CDEEEKJERS financial management arrangements found them to be generally satisfactory. The annual audited project and entity financial statements wil l be provided to the Bank within four months o f the end o f each fiscal year, and project financial statements will be provided also at the closing o f the project. Financial statements for CDEEE and the EDEs will be audited by an auditor acceptable to the Bank, in accordance with International Standards on Auditing.

D. Social

55. Experiences in various countries have demonstrated that poor populations are those most affected by the lack o f electricity; the same holds true in the Dominican Republic. Extrapolating the results o f a 2004 survey’*, the Dominican people spent US$37 mi l l iodmonth on alternative energy sources (candles, kerosene, o i l lamps, emergency generators, etc.) to compensate for the unreliability o f the electricity service. For the poorest people, the cost amounted to 6-1 0 percent o f their income. Furthermore, small businesses have been forced to close, provision o f social services such as education and health was disrupted, and the lack o f public lighting increased the risk o f crime. Other studies have shown that the social and economic benefits o f reliable electricity for the urban poor are numerous. Some o f the main benefits identified in the Bahia Workshop13 on “Meeting the Energy Needs o f the Urban Poor: the Case o f Electrification” were (a) increased local income-generating activities, (b) less indoor air pollution, (c) lower risk o f fires, (d) reduced violence against women and greater security from street lighting, and (e) better educational performance by children who can read and study for longer periods o f time;

56. Based on this international experience, as well as the results o f the “24 Hours o f Light Program” the project seeks to address both the lack o f reliable quality service and the low level o f cash collections, through improvements in the distribution network and through the community outreach component. This latter component would bring the EDEs and residential consumers together, so that the companies can better learn their customers’ needs and complaints, and the consumers can better appreciate the constraints facing the companies, including how theft o f power ultimately harms consumers in general.

I* NRECA International Ltda. “Analysis o f Tariffs and Subsidies in the Electrical Sector o f the Dominican Republic”, 2004 l3 The Bahia workshop was designed and financed by the Energy Sector Management Assistance Program (ESMAP)/World Bank, the United States Agency for International Development (USAID), Cities Alliance, Electricite de France (Edf’), the Inter-American Development Bank (IADB) and COELBA, the Electricity Company o f Bahia. The workshop was held in Bahia, Brazil in September 2005. Case studies form India, Colombia, Brazil, Venezuela, Morocco, South Africa, Argentina, Philippines and Georgia were presented and analyzed. Rojas, Juan Manuel and Lallement, Dominique. “Meeting the energy needs o f the urban poor: the case o f electrification.” ESMAP Technical Paper 1 18/07.

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E. Environment

57. The environmental benefits from removing a large number o f the illegal wires on city streets, which are unsightly and lead to accidents, and from reducing the use o f kerosene and other household alternatives to reliable electricity supply, outweigh the potential negative environmental impacts identified. The Project i s classified as an Environment Category B, because o f i t s limited environmental impact.

5 8. The environmental guidelines for electric energy distribution works prepared for the project were developed following an open, inclusive participation process. All stakeholders were invited to participate in the guidelines discussion process. Once the f i rs t draft was finalized (with the consensus o f the EDEs), i t was sent to the Secretary o f State for Environment and Natural Resources (SEMARN) for further review and made public through the internet website o f the EDEs. SEMARN has reviewed the draft document and requested minor adjustments that are being incorporated. SEMARN has convened an open meeting (open to the public in general, as required by law) with the participation o f the three EDEs, as part o f the process required for the final enactment o f the guidelines as an official regulation. Once enacted, the guidelines will become mandatory. In addition, the Boards o f Directors o f the EDEs will also enact the guidelines for further compliance assurance. The process followed to enact environmental regulations through direct involvement o f the stakeholders i s a first in the DR and an example that might be followed for future regulations.

F. Safeguard Policies

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP 4.01) [ XI [I Natural Habitats (OP/BP 4.04) [I [X 1 Pest Management (OP 4.09) [I [ XI Physical Cultural Resources (OP/BP 4.1 1) [I [ XI Involuntary Resettlement (OP/BP 4.12) [I [ XI Indigenous Peoples (OP/BP 4.10) [I [ XI Forests (OP/BP 4.36) [I [ XI Safety o f Dams (OP/BP 4.37) [I [ XI Projects in Disputed Areas (OP/BP 7.60)* [I [ XI Projects on International Waterways (OP/BP 7.50) [I [ XI

G. Policy Exceptions and Readiness

59. N o policy exceptions are sought for the project.

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Annex 1: Sector Background DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project

The Electricity Sector

1. For decades, the electricity sector has provided substandard service, with inadequate generation capacity (until recently) and frequent power cuts. Reducing the high level o f financial losses in the distribution system and improving the poor quality o f power supply are the main issues that need to be addressed to resolve the electricity crisis. These two issues are locked in a vicious circle, as poor quality o f service, permanent customer dissatisfaction, and high t a r i f f ~ ’ ~ have induced theft through il legal connections and nonpayment o f electricity bills by businesses and households, at times with the connivance o f staff o f the distribution companies. The problem has been compounded by the inabi l i ty to cut o f f supplies for overdue bills together with the impunity with which consumers reconnect to the grid il legally. The result i s known somewhat facetiously as “ la cultura de no pugo” (“the culture o f not paying”).

2. The Annex focuses o n three important aspects o f the sector. The first i s the history o f the reforms, and the diff iculties that have been encountered, t o help understand h o w the country arrived at the present situation. The second i s tariffs, which, along with improving cash recovery, i s key to the financial sustainability of the sector. And the third i s the social aspects - or how to change “ la cultura de nopago. ”

History of the Reforms

3. In the mid- 1990s, the Government addressed the generation shortages by encouraging independent power producers (IPPs), which entered in to Power Purchase Agreements (PPAs) to supply Corporacidn Dominicana de Electricidad (CDE), the vertically integrated power utility. The new capacity significantly reduced power shortages; however, as elsewhere, this approach led to high electricity prices. Deals were worked out through negotiations (only one was tendered competitively), which raised issues o f transparency and corruption. Furthermore, the PPAs soon became inconsistent with the revised sector structure, and had to be renegotiated.

4. Sector reform accelerated in 1997, with the Public Sector Enterprise Reform Law. CDE was unbundled into t w o generation companies (Itabo and Haina) and three electricity distribution enterprises (EDEs), EdeNorte, EdeSur and EdeEste, covering the north, south and east o f the country, respectively. These companies were successfully privatized in 1999 through the sale o f 50 percent shareholding with management control, for a combined price o f US$644 mil l ion, divided almost equally between generation and distribution. The remaining shares were transferred to the Fondo Patrimonial de Las Empresas (FONPER), to be managed as an investment rather than a sector po l icy instrument.

5. The Electricity L a w o f July 2001, and supporting regulations one year later, created the legal and regulatory framework along with new institutions to formulate energy pol icy and

l 4 Average tariff i s US$0.20/kWh, with average residential rate at US$O.l6/kWh, industrial rate at US$0.23/kWh, and commercial at US$0.29/kWh.

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regulate the sector. The National Energy Commission (Comisidn Nacional de Energia, CNE), composed o f the Secretary o f Industry and Commerce, Secretary o f Finance, Technical Secretary o f the Presidency, Director o f the Central Bank, and Secretary o f Agriculture, i s in charge o f energy policy. The sector regulator i s the Office o f the Superintendent o f Electricity (Superintendencia de Electricidad, SIE), headed by a council o f three members (one o f whom i s the Superintendent) appointed by the President and ratified by Congress. There i s also a Consumer Protection Office (Oficina de Proteccibn a1 Consumidor de Energia Ele’ctrica, PROTECOM) established under SIE. A Coordinating Body (Organismo Coordinador, OC), i s responsible for load dispatch; i t s 5 directors are the Superintendent and representatives o f the state hydro generator EGEHID, private generators, the state distribution company ETED and the EDEs, so that it reflects the interests o f al l parts o f the sector.

6. Crisis of 2002. Soon after the sector restructuring, the international increase in fuel prices o f 2000-01 affected the country. Retail tariffs required a substantial increase, as fuel cost represents almost 50 percent o f the total electricity cost. Instead, the Government froze them, and took on the responsibility o f compensating tar i f fs for al l customers for the fuel price increase, general inflation and exchange rate components, through a “generalized subsidy.” The relentless increase in fuel prices obliged the Government to inject up to US$20 mi l l iodmonth into the sector, which quickly became unsustainable.

7. The PPAs also imposed a financial drain on the sector. In 2001 they were renegotiated (the “Madrid Agreement”), and the Government significantly reduced i t s role as a single buyer. However, the trade o f f included the extension o f validity o f the PPAs for several years, which limited the extent o f competition in the generation market. Some IPPs were to be compensated for the ensuing “stranded costs” resulting from negotiated prices below the original PPAs. But the Government lacked the funds for this, and i ts accumulated debt with the IPPs reached US$179 mi l l ion by September 2002. Although the privatized EDEs were able to improve the CRI, the increase in fuel prices eroded their income (despite Government subsidies), which led them to cut power in predominantly poor neighborhoods where losses were more acute, and suspend payments to energy suppliers. Non-payment by both the Government and the EDEs led the IPPs to suspend production.

8. The result was the worst crisis ever to affect the power sector. From mid-2002, power cuts curtailed supplies by over 20 hourdday in vast areas, particularly the poor neighborhoods. B y September 13, 2002, over 50 percent o f al l circuits in EdeSur were out o f service. The resulting riots claimed 15 lives.

9. September 2002 Reforms. On September 17, 2002, the Government announced urgent measures to deal with the crisis and seek a longer-term solution. The measures included (a) payment o f i t s arrears to the IPPs, (b) elimination o f the “generalized subsidy,” while maintaining subsidies for the urban poor, (c) payment o f i t s electricity bills, and (d) an effort to fight electricity theft, through establishment o f the Anti-Fraud Program (PAEF). But these measures provided only a brief respite, and the sector once more plunged into disarray in 2003.

10. The Crisis of 2003-04. When fuel prices rose again in March 2003 due to the Iraq war, the Government did not adjust the tariff for residential customers’ f i rst blocks (up to 700 kWWmonth), and created a Stabilization Fund to cover the difference. Later, it introduced

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cross subsidies from other tari f f categories, so as to limit the growth o f the Stabilization Fund; this, however, rendered price setting increasingly ad hoc. The EDEs also lost out financially due to payment lags and depreciation (the Stabilization Fund was denominated in RD$). The macroeconomic crisis exacerbated the problem o f non-payment o f bills. “Financial blackouts” reappeared, as generators declared themselves unable to finance fue l purchases because EDEs were lagging in their payments. Growing antagonism towards the EDEs, due the extensive rationing o f service, made the position o f Unidn Fenosa in EdeSur and EdeNorte difficult. Under growing political pressure, instead o f working with Unidn Fenosa to resolve the issues, the Government repurchased the shares in these two companies in September 2003, and returned their operation to CDEEE. In November 2004, AES sold i t s shares in EdeEste to TCW, while remaining as the operator.

11. In October 2003, an International Panel o f Experts, joint ly financed by the Bank, IMF and IDB, reviewed the sector issues in the context o f this nationalization. I t s recommendations included (a) tari f f increases to US$lS/MWh, (b) better targeting o f subsidies to the poor, (c) normalizing payments from EDEs to generators, (d) institutional reforms, and (e) in dues course, incorporating new private participation in EdeSur and EdeNorte. It called for negotiation o f a “national pact” among the political parties, consumers and the private sector, as a means o f addressing the cultura de no pago and making reforms politically feasible and sustainable. These recommendations had l i t t le impact, and instead, there was further deterioration, as the Government, in the period around the May 2004 elections, failed to address the sector issues. However, with the ending o f the macroeconomic crisis and the subsequent appreciation o f the RD$, plus the resumption o f tari f f increases, the situation began to improve, and there were further improvements after the M a y 2006 legislative elections put the same party in control o f both the Presidency and the legislature.

Tariffs

12. In addition to the CRI, the other critical issue for the financial viability o f the sector i s tariffs. Average prices for electricity in the Dominican Republic are among the highest in Latin America, due to the a) reliance on imported o i l for electricity generation, b) high prices originally negotiated in the PPAs, c) limited amount o f competition, in this small, island economy, d) high commercial risks facing operators, especially given the repeated sector financial crises, and e) l o w CRI, which requires higher tariffs on those who pay to help offset the losses due to theft o f electricity.

13. Retail prices are based on voltage delivery levels, including a multi-block residential tariff based on the consumption level. There i s a formula for the automatic adjustment o f retail tariffs for variations in o i l prices, inflation and the exchange rate. At critical times, however, the Government has been unwilling to le t the EDEs raise consumer tar i f fs rapidly in accordance with the formula, and has instead agreed to make up the difference from a Stabilization Fund. This happened during the economic crisis o f 2003-04, and i s occurring again now because o f the dramatic increase in international o i l prices. The applied tari f f was generally in l ine with the indexed tariff from late-2004 until M a y 2007, but a gap o f about 15 percent has opened since. This added about U S $ l O mi l l ion per month to the fiscal gap during August - November, 2007 (see graph below), and will be somewhat more (assuming that o i l prices remain at current levels)

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during the coming months because o f lags in the system (electricity bills reflect fue l imported a few months earlier).

Average Indexed and Applied Electricity Retail Tariffs (2005-2007)

. .. . . - .. . .. ._._ - __I__. ... ” .. ... . .. ..... .... . . - .. - . . 0.25 7

0 1 5

__ 005 1 -

/+Indexed tariffs +Applied tariffs I

Social Aspects

14. Community outreach i s essential for changing “ la cultura de no pago. ” For the implementation o f community outreach activities, the EDEs have created Social Units at the management level, comprised o f social experts, and with the involvement o f NGOs and Universities. The Social Units have developed community participatory methodologies to engage civi l society in the solution o f the energy crises. Through these activities, the EDEs design and implement Social Action Plans which include campaigns o f information and communication about the electricity services, educational activities and signing o f Social Agreements (Pactos Sociales) with communities. These Social Agreements have already been very successful in the areas where the Program has been developed. For instance, EdeNorte implemented the “24 Hours o f Light Program” in 26 circuits o f 11 Provinces during the f i rs t hal f o f 2007. In these circuits, the number o f legal clients increased from 45,101 to 161,350 (358 per cent). In one o f the circuits rehabilitated, the commercial losses decreased from 55 percent to 11 percent, and the collection losses decreased from 61 per cent to 23 percent. EdeEste has also signed 49 Social Agreements since 2006.

15. The “24 Hours o f Light Program” has also had positive impact on the consumers due to several reasons. First, the cost for alternative sources o f energy has been reduced for consumers; the cost o f ice to refrigerate food; and saving the expense o f replacing food spoiled because o f the lack o f electricity. These monthly costs have been reduced between 15 to 56 percent per

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month as it was showed in some cases studied by EdeEste. Some o f the most benefited have been the owners o f small businesses and industries. In al l the sectors where the Program has been implemented, the satisfaction o f consumers has also increased f rom 60 percent to 80 percent. EdeEste conducted a survey in a representative sample o f female headed households after one year o f the implementation o f the Program. Some 98 percent assessed the Program as good or excellent, 97 percent perceived that security had increased in the neighborhood, 71 percent were sharing more time with the family at night, watching television or listening to the radio, 86 percent responded that their husband was spending more t ime at home, 93 percent stated that they feel better because o f the availabil ity o f energy, 30 percent stated that their income has improved, 67 percent aff irmed that their relationship with their husband has improved, and 100 percent reported a positive image o f EdeEste.

1 6. Several experiences in different countries have demonstrated that poor populations are those most affected because o f the lack o f electricity. The consequences o f a lack o f reliable electricity service for the poor populations in Dominican Republic are not different. A study conducted in 200415 demonstrated the impact o f the energy crisis o n the Domin ican population. The extrapolation o f the results o f a survey applied to a representative sample o f the Santo Domingo population showed that people spent US$3 7 m i l l i odmon th in alternative energy sources (Le. candles, kerosene, o i l lamps, emergency plants, etc.) given the lack o f reliabil i ty o f the electricity service. Since the poor populations do not have resources to access reliable sources o f alternative energy (such as self generators), they are the most affected. Six to ten percent o f the monthly income o f the poorest i s spent o n alternative sources o f energy, small businesses are forced to close, provision o f social services such as education and health are disrupted, and the lack o f publ ic lighting has increased the risk o f crime.

17. Additionally, studies about the impact o f provision o f reliable electricity for poor populations have shown that the social and economic benefits o f electrification for the urban poor are numerous. Some o f the main benefits identif ied in the Bahia Workshop16 o n “Meeting the energy needs o f the urban poor: the case o f electrification” were the fol lowing:

0 Improved household disposable income f rom paying less for the utility service compared to the services provided through il legal distribution, and increased income opportunities generated by the reliabil i ty o f service;

Increased local income-generating activities when power and lighting i s available;

Health benefits: reduce risk o f indoor air pol lut ion and lower incidence o f related diseases;

Improved household safety, particularly f rom lower risk o f fires; 0

’’ NRECA International Ltda. “Analysis o f Tariffs and Subsidies in the Electrical Sector o f the Dominican Republic”, 2004

The Bahia workshop was designed and financed by the Energy Sector Management Assistance Program (ESMAP)/World Bank, the United States Agency for International Development (USAID), Cities Alliance, Electricite de France (Edf), the Inter-American Development Bank (IADB) and COELBA, the Electricity Company o f Bahia. The workshop was held in Bahia, Brazil in September 2005. Case studies form India, Colombia, Brazil, Venezuela, Morocco, South Africa, Argentina, Philippines and Georgia were presented and analyzed. Rojas, Juan Manuel and Lallement, Dominique. “Meeting the energy needs o f the urban poor: the case of electrification.” ESMAP Technical Paper 1 18/07.

16

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Reduced violence on women;

Increase in educational levels o f the household, particularly for children who can read and study for longer periods o f time;

Boost in social status, from social exclusion to social inclusion;

More efficient use o f electricity when programs include adequate training components;

Security from street lighting;

More investments in housing improvements; and

Inclusion and reinsertion into society o f formerly illegal consumers and illegal electricity suppliers (former illegal electricity suppliers are helped to create real businesses as electricians once consumers are legalized).

18. Another important conclusion o f the case studies analyzed in the Bahia workshop was the pivotal role o f community participation for the success o f electrification programs. Partnership with local communities also includes close cooperation with community-based organizations to better understand the technical, financial and socioeconomic conditions o f the neighborhoods involved in the electrification programs. These organizations play a key role to mobilize the community to understand their rights and obligations. Partnering with communities has been demonstrated to be the best bridge among users, distribution companies and governments, and the best way to build understanding and trust with consumers. Additionally, community-based mechanisms have been useful against infrastructure vandalism and electricity pilferage. The design and implementation o f the community participation programs have required the electric companies to hire social scientists and create social teams, which have demonstrated to be the most effective approach for distribution companies in the implementation o f electrification programs. As the report o f the Bahia Workshop said, this i s the “need for engineering with sociology.”

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Annex 2: Major Related Projects Financed by the Bank and/or other Agencies

DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project

1. The Bank’s portfolio in the energy sector includes a US$ l50 million Programmatic Power Sector Reform Loan (PPSRL) approved in May 2005 and declared effective in December 2006, and an ongoing US$7.3 mi l l ion Energy Sector Technical Assistance Loan (ESTAL) which was signed in March 2004 and became effective in August 2005. (The main reason for the delays in effectiveness was the time taken to obtain the necessary ratification by the Dominican legislature.) The PPSRL supports the initial phase o f the financial recovery o f the power sector to stabilize power supply, by improving cash recovery, controlling costs and dealing with arrears. The loan i s designed to be disbursed into three tranches. The f i rst and second tranches have been disbursed The conditions for disbursement o f the third tranche include (a) the CRI for the three EDEs combined averaging above 60 percent for a six-month period, (b) resumed application o f the tariff adjustment formula, especially incorporating the price o f fuel, and (c) selection and public announcement o f the option for private participation in the state-owned EDEs. The current closing date i s June 30, 2008; any extension will require a formal request from the Secretaria de Hacienda.

2. The ESTAL i s assisting the Government to achieve the fol lowing objectives: (a) reinforce i t s transmission network and restore the financial sustainability o f the power sector; (b) strengthen i t s power sector institutions in charge o f consumer protection, policy making and portfolio management; (c) increase the supply o f affordable energy to the poor; and (d) reduce potential negative environmental impacts. Assistance i s being provided to the various institutions in the sector such as SIE, CNE, OC, PAEF, UERS, PRA, ETED, EGEHID, and SEMARN. Implementation o f the project i s now proceeding satisfactorily, after the initial delays.

3. The Bank’s pipeline in the energy sector, in addition to the proposed Electricity Distribution Rehabilitation Project, includes a future Development Policy Loan that would continue providing budgetary support to the Government linking disbursement to progress on power sector reforms.

4. Other donors which are supporting the Government in the energy sector include USAID, mainly via technical assistance and several rural electrification projects in collaboration with the National Rural Electric Cooperative Association (NRECA). The European Union i s providing assistance through i t s Energy Facility to UNDP for small projects in rural electrification with renewables and to EdeEste for a pi lot project on community participation in the PRA area. The IDB i s providing technical assistance for the development o f bio-fuels.

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Annex 3: Results Framework and Monitoring DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project

1. The financial success o f the project will be measured by the increase in the Cash Recovery Index, which depends upon both the amount o f electricity loss reduction in each o f the circuits, and the increase in the rate at which electricity bills are collected. Improv ing the availability o f power around-the-clock i s both an end in itself and a means o f inducing consumers to pay. While the project i tself wil l upgrade only selected circuits, it i s important that these improvements not be offset by deterioration elsewhere; therefore, the Project Development Objectives are nationwide, whi le the Intermediate Outcomes refer to the circuits with project investments. An improved financial situation will a l low the EDEs to finance further investments that improve the quality o f electricity service.

Project Development Objectives

a) Increase the Cash Recovery Index CRI” o f the three distribution companies (EDEs) b) Improve the quality o f electricity service

Intermediate Outcomes

a) Rehabilitation o f selected circuits

b) CRIs o f rehabilitated circuits

c) Increased power availability by circuit

d) Controlling operating costs o f the EDEs

Project Outcome Indicators

a) Increase the CRI in each EDE as a whole. b) ASAI: Average Service Availability Index (Indice de Disponibilidad Promedio del Servicio), per circuits with project investments and in each EDE as a whole. c) Increase percentage of people satisfied with electricity service by distribution companies.

Intermediate Outcome Indicators

a) Number o f Social Agreements signed andor completion o f physical works in each selected circuit b) Increased CRIs by circuit intervened c) Increase average availability index ASAI 18:

d) Increase percentage of people satisfied with electricity service in the circuit intervened. e) Operating costs increase less than the rate o f supply expansion and inflation

Use of Project Outcome Information

Government, UERS and EDEs, will monitor and assess progress o f performance indicators. For EdeNorte and EdeSur, this could result in specific steps to strengthen their management.

Review commercial practice and customer services.

Use of Intermediate Outcome Monitoring

Identify changes needed in project management, design, or implementation o f all three project components

The CRI formula is : (energy billed by distribution companies / energy purchased by distribution companies) multiplied by (electricity billings paid by consumers / total electricity billings issued to consumers).

The Average Service Availability Index (ASAI) i s the ratio o f the total number o f customer hours that service was available during a given time period to the total customer hours demanded. This i s sometimes called the service reliability index. The ASAI i s usually calculated on either a monthly basis (730 hours) or a yearly basis (8,760 hours) but can be calculated for any time period.

17

I 8

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2 . The UERS (a part o f CDEEE) and key staff from the EDEs, with the assistance of project-financed consultants, will monitor progress against the agreed performance indicators. CDEEE and the EDEs have already implemented systems for providing timely information on losses, collections and CRI calculations. UERS will provide, 45 days after the end o f each quarter, consolidated reports on project implementation progress in the Bank’s FMR format. I t will prepare a detailed mid-term report to serve as the basis for a project mid-term review, and will also help prepare the Borrower’s contribution to an Implementation Completion Report (ICR).

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Annex 4: Detailed Project Description DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project

The Electricity Distribution Rehabilitation Project envisages the rehabilitation of distribution networks in selected areas to reduce electricity losses and improve the quality of power supply. The project also includes outreach to consumer communities to improve their relations with distribution companies, thereby hopefully reducing vandalism and electricity theft. The rehabilitation works would include medium and low voltage (34.5kV, 0.4kV) line replacements and extensions, substation upgrades, and installationlexpansion of metering systems. The project will also finance consultants to assist CDEEE in procurement, management, supervision and monitoring.

Proiect Description

Component 1 - Rehabilitation of Medium and Low Voltage Circuits (US$121.8 million, excluding contingenciesl

1. The Bank would finance a time slice o f the three EDEs investment programs in rehabilitation and upgrading o f medium and low voltage circuits by: (i) replacing existing run- down and aged medium and l o w voltage overhead lines; (ii) expanding distribution substations and feeders; (iii) replacing and installing meters, cables and transformers, and new connections for those customers who have irregular connections; (iv) for larger consumers, installing remote meters; and (v) in areas difficult to manage, installing theft-proof equipment. A procurement plan for the first two years o f investment with Bank funds has been prepared.

2 . The three EDEs have prepared medium-term plans for the rehabilitation of their networks. The investment priorities are circuits with prospects for the greatest improvements in the CRI, which means that they have a combination of:

High demand growth; and

High failure rates.

High customer density and/or high levels o f consumption per customer;

High losses (technical and commercial);

3. For each distribution circuit selected, the activity starts with:

Identifying each customer and updating the commercial database.

Inspecting the connections o f al l consumers that subscribe to electricity service, so as to be able to detect eventual cases o f fraud.

Identifying illegal consumers that do not subscribe to the service. 0

4. The rehabilitation o f the medium and low voltage circuits involves:

Replacing overloaded transformers.

Replacing cables that are overloaded or run-down.

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Removing illegal connections.

Rehabilitating bad connections.

Installing meters for all customers who lack them. In areas where it i s more difficult to manage fraud, these would be tamper-proof meters.

Installing theft resistant connections, by, for example, increasing the height o f overhead cables and connecting households directly to transformers, minimizing the use o f vulnerable l o w voltage cables.

Installing remote metering and remote disconnection and reconnection for larger customers connected to the low voltage network. This i s economically attractive because the one-time cost o f the remote module (meter, communications equipment, and disconnection and reconnection devices) i s less than US$50, while the electricity bills o f those customers are over US$lOO per month.

Installing real-time remote metering o f the electricity consumed by all large customers (those connected to the medium voltage networks). These are less than two percent o f the total number o f customers, but represent over 30 percent o f total consumption. In this market segment, power theft involving sophisticated fraud, sometimes with the help o f EDE employees, has been detected. The installation o f remote metering systems i s effective in curbing fraud because the consumer knows that his consumption i s measured in real time and that the distribution company will detect and investigate any unusual changes in consumption patterns. As EdeSur and EdeNorte have already installed most o f these meters, the project would mainly finance this investment in EdeEste.

5. For each circuit proposed for inclusion in the project, the EDE provided the Bank with the necessary information for assessing the investment -- the energy injected, billed and paid for, the number o f consumers, a detailed description o f the rehabilitation works and related unit and total costs, and a forecast o f the energy injected, billed and paid for, and the number o f consumers after the completion o f the project. This information i s available in the project files.

6. The paragraphs below summarize the more salient points o f the plans o f each EDE. In general, the actual rehabilitation work on any circuit, once started, should be completed in about one year.

EdeNorte

7 . This company has already installed remote metering equipment for most o f their large customers connected to the medium voltage grid (about 3,500). I t i s now installing modules for remote metering, disconnection and reconnection for the larger customers o f the low voltage grid.

8. Project investments. EdeNorte’s distribution grid i s in poor conditions and i t s hardware i s severely overloaded. In a number o f circuits the voltage often drops to levels well below the limits established by quality norms. To avoid damage to electrical equipment, some customers resort to backup generators even when there i s power available from EdeNorte’s network. Most customers’ connections to the grid are in bad shape and a large number o f the legal smaller

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customers do not have meters. EdeNorte’s losses are the highest o f the three EDEs. The company has a large program to rehabilitate i t s medium and l o w voltage distribution grids under the proposed project, as shown in the following table.

Geographic area

Santiago La Vega Puerto Plata- Valverde San Francisco

Total

Number of customers Total investment (thousand) (US$ million, excl. contingencies)

84 13.6 52 12.8 34 6.4 51 8.1

22 1 40.9

EdeSur

Geographic area

9. The company has installed remote metering systems for approximately 8,000 large consumers connected to the medium voltage network. It i s installing remote modules for metering, disconnection and reconnection for i t s larger l o w voltage customers (consumption above 700 kWh per month - a higher threshold than the one adopted by EdeNorte, which has a lower average consumption per customer).

Number o f customers Total investment (thousand) (US$ million)

10. Over hal f o f EdeSur’s electricity sales are in the Santo Domingo area. While the medium and low voltage distribution networks in Santo Domingo are in reasonable shape, the client connections are often in very poor shape. This affects negatively the quality o f service and electricity losses. In the other four geographical zones supplied by EdeSur, both medium and low voltage networks are in poor condition, similar to EdeNorte’s networks. Nevertheless, about half o f EdeSur’s planned investments are in the Santo Domingo area, in line with i t s share o f sales, because i t i s the area where, in general, rehabilitation investments yield higher returns.

Santo Dorningo

EdeSur - Proposed investments in electricity losses reduction

206 26.2

Barahona San Juan Total

46 3.3 49 4.1

500 53.6

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EdeEste

Geographic area Santo Doming0

Santo Domingo Este Santo Domingo Norte

El Ceibo, L a Romana, San Pedro de Macoris

1 1 I Unlike EdeNorte and EdeSur, EdeEste has not yet installed real-time-remote metering systems for most o f i t s large medium voltage customers (approximately 5,000), nor has it invested in remote modules (meter, communications, and disconnect and reconnect devices) for i t s larger low voltage customers, so these are included in the project. EdeEste’s distribution network i s generally better than that o f EdeNorte, but it s t i l l needs to repair or replace a large number o f individual connections which are in poor state. EdeEste’s rehabilitation investment program i s quite concentrated in greater Santo Domingo, where i t s commercial and industrial customers are mostly located. Because it i s not proposing very extensive works during the project period outside o f Santo Domingo, i t s total investment, and especially the estimated number o f customers who would be affected, i s less than that o f the other two EDEs.

Number of customers Total investment (thousand) (US% million)

17 8.8 14 4.0 17 9.1

19 4.4

Total

Large customers (over totality o f concession area) 0.728 I

68 27.3 1 .o I

Component 2 - Outreach to Consumer Communities (US$9.2 million, excluding con tinpen cies)

12. The outreach would focus on communities living in areas receiving Component 1 investments, in order to re-establish trust and define clear rules between them and the EDEs, in the context o f the “24-Hours o f Light Program” o f improving power supply in areas where the CRI i s rising.

13. This Component would be implemented through the Social Management Units established in the EDEs. In each circuit where the 24 Hours o f Light Program would be implemented, the Unit would design and develop a Social Action Plan, including a Pacto Social (Social Agreement) between the EDE and the community, whereby the EDE would provides electricity for longer periods o f time in exchange for regularization o f illegal connections and better payment o f bills. The standard Social Management Plan would contain the following seven modules:

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Modules Review o f technical, commercial and social characteristics o f the selected circuit.

Sensitization and community organization to formulate and implement the 24 Hours Program

Diagnosis o f the socioeconomic characteristics o f the neighborhoods. Diagnosis o f the current status o f the electrical service. Formulation o f the intervention strategy

Formulation o f the 24 Hours Program. Definition o f the strategy for inter- institutional coordination

Implementation o f the 24 Hours Program (implementation o f agreements reached)

Activities Identification o f the neighborhoods included in the circuit and their administrative organization. Identification and analysis o f current status o f users, consumers, clients, level o f cash recovery and electricity losses. Identification o f community leaders and organizations. Introduction o f the Social Management Team and the 24 Hours Program to the community organizations. SWOT analysis regarding the perception o f the electrical service in the communities.

Dissemination o f the 24 Hours Program at individual, group and community levels. Creation o f the Cornifis de Seguimiento y Enlace -COSE (monitoring committees) in the different sectors o f each circuit.

Baseline study o f the socioeconomic characteristics o f the neighborhoods involved. Analysis o f the physical and environmental characteristics. Participatory assessment o f the electrical networks, public lighting and connections. Perception and attitudes o f communities toward these issues.

Participatory diagnosis o f quality o f power supply, electricity measured and cash recovery. Classification o f sectors according to the level o f payment. Discussion and validation o f findings with the community organizations.

Consensus among stakeholders, leaders, and community authorities regarding the content and scope o f the Program. EDEs define the specific activities for improving the service (rehabilitation o f networks, distribution substations and feeders, installing meters, etc.). Communities define the legalization o f illegal users, regularization o f customers in default and payment o f bills., Dissemination o f the content and scope o f the Program to the communities.

Assessment o f communities’ responses. Assessment o f the leaders’ capacity to resolve conflicts. Creation o f a grievance and conflict resolution mechanism. Agreements regarding the efficient use o f energy and the payment o f consumption. Signature o f the Pacto Social (Social Agreement).

Information, dissemination and community educational activities on the following topics:

Generation, transmission and distribution o f electricity (technical aspects and costs). Country energy sector (organization, responsibilities and rights). Legal framework. Duties and rights o f consumers and distribution companies. Organization o f the distribution company and customer service. Saving electricity. Household connections and in-home electrical installations Electricity metering. Read and understand electricity bills Safe and efficient use o f electricity. Positive and negative aspects o f the availability o f electricity 24 hours a day.

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Modules

I Monitoring and evaluation.

Social Network Maintenance

Component 3 - Technical Assistance and Training (USS2.S million)

Activities Legalization o f electricity users.

Regularization o f customers in default.

Cash recovery campaigns.

Electricity network improvements.

Dissemination o f activities carried out and results. Implementation o f social solidarity activities to improve communities’ living conditions (health, solid waste management, sports, recreation, etc.).

Monitoring o f fulfillment o f agreements. Follow up o f quality o f service and level of payment. Information to communities about the monitoring results. Program evaluation. Customer satisfaction assessment. Ongoing training program.

Accountability reports. Community forums.

14. This component would consist o f technical assistance and training for the following:

(a) Debt restructuring to CDEEE: (i) Performing legal and financial due diligence on the amounts and legal status o f the debts o f the EDEs remaining after compensations have been paid; (ii) Defining options for restructuring o f these debts, such as cancellation, capitalization and refinancing, among others, and preparing a plan of execution.

(b) Audits to certify: (i) The performance o f the contractors on the project works, in order to authorize payments to the EDEs; (ii) The achievement o f project performance indicators relating to the CRI o f both the circuits rehabilitated and the EDEs as a whole, and the operating costs o f the EDEs to UERS; (iii) The number o f hours o f electricity supply in the circuits rehabilitated to UERS; (iv) The f low o f funds provided by the Government to the sector.

(c) Customer satisfaction with the quality o f electricity service in the rehabilitated circuits, by means o f periodic surveys to UERS.

(d) Administration, monitoring and evaluation o f the project to UERS.

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Annex 5: Project Costs DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project

Foreign Total in US$million US$million

- Rehabilitation o f Distr ibution Networks Component 2 9.2 0.0 9.2 - Outreach to Consumer Communities Component 3 0.5 2.0 2.5 - Technical Assistance

Total Baseline Cost Physical Contingencies (5%) Price Contingencies (8.5%)

Total Project Costs

51.5 82.0 133.5 2.6 4.1 6.7 4.6 7.3 11.9 58.7 93.4 152.1

Total Financing Required 58.7 93.4 152.1

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Cost estimates do not include VAT The foreign cost o f Component 1 i s for imported equipment; the local cost i s mainly labor.

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Annex 6: Implementation Arrangements DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project

General Institutional and Implementation Arrangements

1. The project would be managed by UERS, a unit within CDEEE’s corporate structure, responsible for rural and suburban electrification nationwide. The three EDEs will be directly responsible for project planning, engineering and design and will actively participate, in coordination with UERS, in procurement, supervision and contracts management.

2. General administration, procurement and financial activities under the project will be carried out by UERS staff under i t s present organizational structure, especially the project planning, engineering, administration, finance, and construction/maintenance/operations directorates. UERS support directorates and units such as internal auditing, legal, administrative and technical controls, and information and technology will be available to support and meet overall project requirements. The three EDEs will be responsible for technical aspects o f the project. Overall project coordination wil l be the responsibility o f the UERS Director General (DG), who reports directly to CDEEE’s Executive Vice President. The DG will coordinate al l project related activities with CDEEE and the EDEs and will be the direct liaison with the Bank and other financiers.

Rehabilitation o f Distribution Networks Component

3 . Administrative, procurement and financial activities would be the responsibility o f the Administrative Directorate (AD) using existing monitoring, procurement, financial, budget, and f i l ing systems and staff. To strengthen the AD, an experienced full time procurement specialist was hired for the project. The EDEs would also participate and coordinate with UERS on procurement matters, and be responsible for preparing technical specifications, managing the supply and construction contracts, and supervising the construction o f works. UERS will be responsible for completing procurement bidding documents packages and managing the whole procurement process, including the preparation o f supply and service contracts for signature by the EDEs. UERS and the EDEs will joint ly be responsible for the evaluation o f proposals and recommendations for award.

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Community Outreach Component

4. The community outreach component would be a direct responsibility o f the EDEs through their Social Units. These Units have developed strategies and methodologies to implement the social aspects o f the 24 Hours o f Light Program. In each circuit, the Social Unit would work with the local community to design a Social Action Plan, including a Pacto Social (Social Agreement) whereby the EDE commits to provide electricity for longer periods o f time each day in exchange for reduced commercial losses, better collections and regularization of illegal connections. Terms o f reference for seminars and consultants to assist the EDEs in handling prevailing issues with communities and local institutions, would be prepared by the EDEs’ specialized staff. Procurement related to these activities will be the responsibility of UERS.

Technical Assistance Component

5 . This component would consist o f technical assistance to the following agencies:

a. Secretaria de Estado de Hacienda - flow o f funds from Government to power sector

b. CDEEE - restructuring o f the debt o f the EDEs

c. UERS - (i) Audits to certify the achievement o f project performance indicators relating to the CRI o f both the circuits rehabilitated and the EDEs as a whole; (ii) Audits to certify the number o f hours o f electricity supply in the circuits rehabilitated; (iii) Customer satisfaction with the quality o f electricity service in the rehabilitated circuits, by means o f periodic surveys; (iv) Administration, monitoring and evaluation o f the project.

d. EDEs -- Audits to certify the performance o f the contractors on the project works, in order to authorize payments.

6. Figure 6.1 shows the organizational structure for the project:

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I

m m

I

Responsibilities o f Parties Involved in the Project

7 . The main functions and responsibilities o f CDEEE, UERS and the EDEs are l is ted below.

CDEEE

a.

b.

C.

d.

UERS

a.

b.

C.

d. e.

f.

€5

h.

Receives Bank loan through a subsidiary agreement signed with the Government, and subject to the terms o f the Project Agreement signed with the Bank.

Signs on-lending agreement with the EDEs, re-passing the Bank loan resources.

Ensures compliance o f agreements with the EDEs as per the sub-loan agreements.

Reports to the Government on project execution and implementation and compliance with agreed conditions with the Bank and EDEs.

Complies with al l functions and responsibilities as project coordinator.

Prepares the project Operations Manual and updates the manual as needed, with support from the EDEs.

Prepares and updates, as required, the project procurement plan on the basis o f the information provided by the EDEs.

Prepares al l procurement documents in coordination with the EDEs.

Follows up on all procurements processes (bid announcements, reception o f bids, bids evaluation and recommendations for award, and preparation o f draft contracts for the EDEs’ signing) with the participation o f the EDEs, up to the signing o f the contracts.

Prepares al l required project progress reports, including those for financial management and procurement.

Establishes and maintains al l project files.

Establishes and maintains the required financial management systems, including the hiring o f financial and audit staff, f low o f funds, accounting records based on generally accepted principles and practices, budget coding to allow the monitoring o f financial, administrative, and functional aspects o f the project, preparation and submittal o f routine and annual financial reports and statements, to allow external auditing o f the project as per international practices.

Electricity Distribution Companies (EDEs)

a. Prepare detailed budget, economic evaluations, engineering and design, and technical specifications for the whole rehabilitation component.

b. Provide al l required support to UERS for the preparation and revision o f the Operations Manual.

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c. Provide al l required information for the preparation o f the bidding packages, the procurement plan, and the updating o f the procurement plan.

d. Prepare technical specifications and required information for completion o f the bidding documents for the rehabilitation o f the distribution networks, including preparation o f terms o f reference for al l consulting services.

e. Participate actively in all procurement processes, including the bid evaluations and recommendations for award o f contracts for the supply o f goods, works and services.

f. Negotiate and sign, in coordination with UERS, al l contracts for the supply o f goods, works and services.

g. Supervise the construction and supply contracts for installation o f electrical facilities, c iv i l works and other project investments.

h. Approve construction and supply certificates for payment purposes by UERS, following procedures agreed and established in the procurement manual.

i. Approve final acceptance certificates for works, goods, and consulting services.

j. Maintain al l budget and accounting figures, financial statements and audit information that might be required by CDEEEkJERS.

- 4 1 -

Annex 7: Financial Management and Disbursement Arrangements DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project

Overview

1. A Financial Management (FM) Assessment was conducted to determine if CDEEE through UERS has acceptable FM capacity to engage in Bank projects as a Coordinating Entity for the EDEs. The assessment was carried in accordance with the OP/BP 10.02 and the guidelines for Assessment o f FM Arrangements in World Bank projects issued by the Financial Management sector board on October 15,2003.

2. The FM country risk was rated as high by the WB/IDB 2005 DR Country Fiduciary Assessment (CFAA). According to the 2006 WB/EC Public Expenditures and Financial Accountability (PEFA) report in recent years, the public FM system in the DR has undergone significant changes and reforms which have improved it. In the past two years there has been a track record o f adequate and timely allocation o f counterpart funds. In addition, a very positive outcome from the implementation o f the new Treasury Law, among others, reduced the transfer cycle time it took for Bank proceeds from the Central Bank to the projects' own operating accounts from 45 to 9 days. Based on improvements in this cycle, which has effectively sped up project execution, the Bank authorized advances as another disbursement method for new projects and now the borrower i s allowed to open Designated Accounts. Implementations o f FM reforms are already yielding good results, so the country risk can be downgraded to substantial.

3 . The main conclusion o f the Assessment i s that, within the country and project context, CDEEEIUERS, as the proposed coordinating entity for the EDEs, has sound FM capacity to engage in Bank project. The FM overall risk rating i s moderate, and, to strengthen the internal control environment, foster transparency and enhance accountability while implementing project activities, the project team needs to complete certain risk mitigating measures.

Financial Management Risks: Country, Project and Entity Risks

4. Overall control risk i s rated as substantial, and this rating i s substantiated by the combination o f ratings for the country, project and al l involved entities. This rating i s downgraded to moderate, once risk-mitigating measures are implemented.

Country Risks

5. The Government i s in the midst o f an ambitious public sector reform agenda, due to the legal framework recently in place for the public sector in general. Nevertheless, FM capacity at the entities' level needs strengthening.

6. Many ministries, departments and agencies are implementing the Sistema Integrado de GestiBn Financiera (SIGEF), an automated FM country system, but s t i l l quarterly budget reports are prepared and issued within weeks o f the close o f the quarter. There remain concerns about the accuracy o f information, mainly the lack o f capital accounting, and more effort i s needed to use the governmental account classification. Comparison to budget i s possible only for main

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administrative headings. Accounts are not audited on a timely basis, and few if any actions are taken on budget reports and audit findings.

7. The Government recognizes the existence o f problems in FM arrangements and i s determined to adapt public finances to international standards. In late 2006 and early 2007, i t passed a series o f new laws to strengthen the budget process24, improve fiscal p e r f ~ r m a n c e ~ ~ , promote transparency and increase public accountability26. These laws are notable steps forward; their expeditious implementation will be critical to achieve intended results. Donors (including the Bank) are supporting efficient and transparent public sector FM and capacity-building for debt management. Although these measures contribute to improving overall FM, the country ranks low in the Transparency International Index, indicating a fairly high level o f corruption perception2’. Weak public institutions and insufficient leadership outside the Executive Power are exacerbated by conflicts o f interests that continue to affect day-to-day work in Government.

8. The Bank-financed Energy Sector TA Loan (ESTAL)aims at strengthening sector institutions and coordination, including the design o f the budget module o f UEPEX, the automated sub-system o f SIGEF for project implementing units, with external resources.

9. Country risk, rated as high by one o f latest the CFAA, was downgraded to substantial when considering major efforts under way to improve the FM environment. Despite the risky country F M environment, CDEEEKJERS already has adequate staff and controls in place to comply with i t s proposed fiduciary responsibilities on behalf o f the implementing distribution companies. Finally, although the country fiduciary risk i s substantial, i t s impact on the project i s moderate.

Project Risks

10. Without underestimating the significance o f the country risks above, these will not affect the project directly. The project’s implementation arrangements, including FM, f low o f funds, procurement and audits will not rely on the country’s procedures, but on the entity’s procedures which are generally much stronger. The FM staff assigned within the Department o f Administration and Finance o f UERS will be trained in the specific procedures they need to know to comply with Bank policies and procedures.

The laws promulgated in November and December 2006 that affect the budgeting process are Law 498-06 on Public Planning and Investment, Law 496-06 creating the State Secretariat o f Economy, Planning and Development, and Law 423-06 on Organic Budget for the Public Sector. Also the Organic Law on the Public Sector Budget (423-06) promoted a drastic reduction o f discretionary spending.

The following laws are aiming to have more f iscal discipline: Law on the National Treasury (567-05), Law on Public Credit (6-06), Law on the granting o f autonomy o f the General Directorate o f Customs -DGA (226-06) and the General Directorate o f Internal Taxes -DGII (227-07). 26 Amongst the laws aiming to strengthen FM, transparency and accountability, we can name the Law on Government Procurement and Contracting (449-06), Law on the Financial Management System o f the State (5-07), and the Law on the establishment o f the Internal Control System (10-07). This last one defined the roll o f the General Comptroller’s Office as the internal auditor, and the Chamber o f Accounts remained as the external auditor and Supreme Audit Institution (SAI) to avoid having duplication o f efforts. Also the incompatible roles with auditing that the Comptroller General exhibited as the ex-ante approving entity o f the “libramientos” was taken out, and this eliminated an unnecessary and useless step in the flow of funds chain.

With a score o f 3 out o f a maximum o f 10, the Dominican Republic ranked 99 out o f 179 countries in 2007, the same ranking and position as in 2006.

24

25

21

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11. The project itself does not present any significant risk and its overall FM risk i s rated moderate due to the high level o f coordination needed, especially if we recognize that the ability to effectively and efficiently coordinate project activities i s weak in the DR public sector in general. I t would be downgraded to low later on when risk-mitigating measures are complete.

Entity Risk

12. The energy sector has a long history o f problems with weak institutions and, at times, inconsistent policies. The EDEs are financially weak and faced with very high debts, and this fact has been highlighted in the external audit reports with qualified opinion. CDEEE implemented a Bank-financed project more than a decade ago (although i t i s one of the beneficiaries o f the ESTAL), so its previous experience with Bank projects i s o f limited relevance, and the EDEs are new to Bank’s procedures.

13. The activities o f the project are not complex, and there will be few spending units, with most o f the payments made directly to the providers; however, good coordination i s needed among UERS and the three EDEs, and this poses a strong challenge to them. Although the basic legal and institutional framework i s in place, coordination may be hampered by political interference.

14. The impact o f country, project and entity risks are likely to be limited given the defined project activities and institutional setup. These arrangements mainly rely on the entities’ systems, and despite the EDEs’ poor financial performance, they are considered as continuing entities due to the public interest nature o f the electricity service that they provide. In addition, although FM and FM-related systems at CDEEELJERS need strengthening mainly in the budgeting process and timely submission o f audit reports, there are already FM procedures in place with level of controls superior to what i s generally found in a public entity, and an Operations Manual was finalized for project staff to follow.

15. to low once risk-mitigating measures have been completed.

For this reason, both project and entity risks are rated moderate and will be downgraded

16. measures:

The following table shows the FM risk matrix and the recommended risk-mitigating

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Risk I R1 Inherent Risk

Project Entity Overall Inherent Risk

Countrv I H M S S

3. Funds Flow: N o major issues identified, but intensive work and training i s needed at project inception to setup operations.

4. Accounting Policies and Procedures: Implementing entities use an accrual basis o f accounting according to international standards. A l l of them already have a manual specifying accounting policies and procedures.

5 . Budgeting: Budgets are currently prepared. At CDEEEIUERS, they are prepared manually, increasing risk o f errors. 6. Internal Audit: Al l the entit ies have internal audit departments with multifunctional professional staff. EDEESTE uses AES online, an automated internal audit system to follow up the implementation o f audit report recommendations Internal auditors at CDEEEiUERS implement ex-ante controls. 7 . External Audit: Although the entities are subject to International Audit Standards, their audit reports are not timely, usually appearing eight or more months after the audited period. 8. Reporting and Monitoring: The entities follow International Financial Reporting Standards. 9. Information Systems: The CDEEE-UERS has automated almost all of i t s F M systems, although they need to adoptiadapt a budgeting system with SAP interface. Overall Control Risk

Con;olRisk 1 ~

1 . Coordinating and Fiduciary Entity: Weak coordinating abilities. Responsibilities o f each entit need to be ne otiated and formalized. 2. Staffing: Staffing i s adequate, but previous experience with WB projects i s non-existent.

M

L

S

M

M

L

M

S

Risk-Mitigating Measures

See text above on country risk See text above on Project risk See text above on Entity ‘s inherent risk

Subsidiary agreements are to be signed delineating functions and responsibilities.

The assigned staff wi l l be trained to have a good understanding o f the Banks F M requirements. Specific procedures for the project were developed in the Operations Manual. Direct payments are to be made to major providers/vendors. Specific procedures for the project were defined in the Operations Manual. Project should avoid having unneeded bureaucratic review/approval processes or with no value added to the processes. They commonly delay recording project data therefore delaying periodic reports. The current practice i s to have manual system. UERS-DAF i s to implement budgeting software with SAP interface. The O M will include adequate provision for the internal audit function. Incompatible functions, e.g. ex-ante control and internal audit, wil l not be included in the O M for the Project.

The project wil l require annual audits performed by an independent private auditor acceptable to the Bank. The audit reports will be due four months after the close o f the fiscal year. The Operations Manual defines the arrangements for the interim financial reports.

To ensure effectiveness, UERS wi l l need to implement an automated budgeting system with interfaces to SAP prior to effectiveness.

H - High S - Substantial M - Moderate L - Negligible or Low R1 -Current Risk-Rating, R 2 -Risk after Mitigation: Condition of Negotiation, Board or Effectiveness

- M

L

- L

L

M

- L

- M

L

- L

- M

17. A summary o f the evaluated control risks and the risk-mitigating measures follow. More details on the risk-mitigating measures are included in the sections for Action Plan, Legal Covenants and Supervision Plan.

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Coordinating and Implementing Entities

18. The team supports using country systems, the Bank default option when circumstances permit, to comply with the Principle 6 o f the GAC Strategy2*: The project will be implemented by EdeNorte, EdeSur and EdeEste, with CDEEEAJERS as i t s coordinating and fiduciary entity. This aspect i s defined in more detail in the Implementation Arrangements (Annex 6).

19. CDEEE i s an autonomous entity created by Law 125-01, promulgated in July 2001. I t s enabling regulations were approved in June 2002. I t s legal representative i s the Executive Vice-president. UERS was created by Presidential Decree 16-06, the enabling regulation to implement the Law 125-01 for the functioning o f the UERS.

20. EdeSur and EdeNorte are governmental entities privatized as part o f the reform process, General Law o f Public Enterprises Reform, 141-97 promulgated in 1997 and later on re-purchased from Unidn Fenosa in 2003. EdeEste remains privately controlled and managed, although Government owns 50 percent. CDEEE's budget i s allocated through the SEH. The EDEs receive Government payments to cover their deficits, also f rom the SEH budget.

Staffing

2 1. Staff in general has adequate qualifications and experience commensurate with the scope of the project. At UERS, within the Directorate o f Administration and Finance (DAF), Finance Management handles accounting, payroll, treasury, budget, etc. Administration Management has procurement, logistics and general services units. There i s a separate Internal Audit unit, divided into operations audit and internal control audit. For the project, the Director o f (DAF), i t s Finance Manager and one Project Accountant will be responsible for the FM functions. This level o f staffing i s deemed adequate to handle the project. Key positions have not yet been assigned, but currently there are enough capable professionals in the DAF to perform the tasks. The assigned staff wil l be trained to satisfy the Bank's FM requirements.

22. An organizational chart o f the CDEEEAJERS-DAF follows:

GAC Strategy: "The WBG wi l l strive to strengthen, rather than bypass, country systems - better national institutions are the more effective and long term solution to governance and corruption challenges and to mitigating fiduciary risk for all public money, including thatfvom the Bank."

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C D E E EIU E RSIDAF

-

- Department

Recording

- Payroll

- Accounts

Receivable

Accounts Payabl ? -

- Capital (Fixed)

CDEEE

Organizational Chart

UERS Direction

Internal Audit

Direction Adm. and Financ

Finance Management

Administration

Department Procurem.Dept

23. from 128 earlier.

DAF has a large payroll o f 100 employees, including 11 internal auditors, although down

24. Financial staffs responsibilities are properly defined and main processes, such as flow of funds and budgeting, are described in the Manual on Procedures Description that was implemented to strengthen the SAP environment. Finance and accounts staff are adequately qualified and most o f them are experienced accountants, although relatively new to the organization. The OM will define duties, responsibilities, l ines o f supervision, and limits of authority for al l o f the project officers, managers, and staff.

Funds Flow and Disbursement Arrangements

25. With regard to fund flow and disbursement, CDEEE will borrow from the Government and on-lend to the three EDEs under sub-loan agreements (see flowchart below). According to current Government procedures and to disbursement arrangements established by the Bank, the

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Bank would advance loan proceeds into a Designated Account (DA). The DA would be opened and managed by UERS, denominated in US dollars and maintained in the Central Bank (Banco Central de la Repziblica Dominicana -BCRD). These funds will finance eligible expenditures as they are incurred and for which supporting documents will be provided later.

26. The Bank will design detailed procedures for the management o f the Bank Accounts, which include acceptable internal controls, as well as procedures for the transfer o f resources from the Designated Account to the local currency Project account.

27. A Project Operating Account in local currency will also be opened to finance project expenditures in local currency. From the DA, the funds will be transferred to the Project Operating Account to be replenished with reimbursements as eligible expenditures are incurred in accordance with agreed annual work plans. To access the funds, UERS would request Treasury to transfer funds from the DA to the Project Operating Account. Once the funds are cleared, the Treasury would process an electronic transfer in Dominican pesos.

28. In order to access the funds in the DA, DAF would request a transfer from there to the Treasury. Once the funds are cleared, the Treasury would inform DAF that a transfer in Dominican pesos was made available in the Project Operating Account. Funds will be replenished as expenditures are incurred in accordance with agreed annual work plans. The Bank may also process payments for eligible expenditures, at UERS's request, directly to a third party (e.g. supplier, contractor, and consultant).

29. The DA will be used mainly to finance minor operating and social work expenses, since most o f the payments are expected to be high figures directly paid by the Bank to the providers. The DA will allocate an advance equal to three months o f operational costs, excluding any direct payments.

30. Eligible expenditures paid from the DA will be reported on the basis o f Statements of Expenditures (SOEs) and/or Records. Per the current Country Financing Parameters (CFP), taxes and duties are not considered unreasonable or discriminatory and may be financed, although the Bank would consider whether taxes and duties constitute an excessively high share o f project expenditures. The Operations Manual contains detailed procedures on activities concerning the DA, including the types and amounts o f funds, documentation, control and reporting.

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Accounting Policies and Procedures

3 1. UERS keeps accounting records in SAP, an automated accounting system. SAP allows for the proper recording o f financial transactions, including the allocation o f expenditures in accordance with the respective components, disbursement categories, and sources o f funds (funds accounting). I t has also multi-currency capabilities. Transactions are recorded using the country code by expense object, account and sub-account, per the Manual for Budgeting Classification o f the Public Sector, adhering to the standard international classification practices. The project will rely on the UERS accounting system. This will facilitate harmonization and has a greater potential for reducing the entities' transaction costs by removing or reducing the need for building and maintaining parallel structures to satisfy the Banks' needs. UERS will have to customize the account classification to be able to generate the interim financial reports according to the project activities.

32. I t s chart o f accounts can be adjusted to properly account for and report on project activities, disbursement categories, components or intermediate results. I t i s worth highlighting that, unlike most DR governmental entities which lack assets and liabilities balance sheets in the FS, a serious weakness in presenting the financial information, CDEEE and the EDEs manage their assets and liabilities according to international norms on financial information.

Budgeting

33. Currently, the budget for the involved entities lays down physical targets. CDEEE and the EDEs use computerized budgeting systems. However, UERS has not adopted SEP, the budget system for CDEEE, because the Director o f DAF considers SEP to be a cumbersome software. DAF is currently evaluating a simpler off-the-shelf budgeting software with SAP interface. Its Budget Department has the capability to coordinate with other units to plan project activities, collect information from the units in charge o f the different components and prepare project budgets and forecasts.

34. DAF prepares annual budget calendars and allows concerned departments enough time to complete detailed estimates with clear guidance on the preparation o f budget submissions. At UERS, the Budget Manager i s responsible for budget preparation and to present it to the Administration Board for approval and to the General Budget Directorate (DIGEPRES). Budget presentation to the Sub-secretary o f Planning and Development within the SEH rests with the CDEEE Executive Vice-president.

35. The budget has a multi-year perspective as the foundation o f i t s strategic corporate decisions. Actual expenditures are compared to the budget monthly, and explanations are provided for significant variations. Approvals for variations from the budget are required in advance and, in special circumstances, after the fact. UERS submits monthly execution reports to CDEEE. Once compiled with the other entities, CDEEE submits consolidated monthly execution reports to the SEH, Ministry o f Planning and Economy, Sub-secretary o f Planning and Development, General Directorate for Governmental Accounting, Central Bank and Chamber o f Accounts (DR Supreme Audit Institution), and internally to all finance and control departments. The EDEs send their monthly reports to CDEEE and al l o f them send their financial reports to the F M I quarterly.

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36. In addition to the Bank’s US$42.0 million, IDB i s expected to parallel finance US$40.0 million and OFID US$30 million. Although according to the revised Country Financing Parameters (CFPs) Annex D o f the 2007 CAS Progress Report29 the Government i s not required to provide counterpart funds, it has offered to make US$40.5 million available. This was confirmed during negotiations. Accordingly, the packages financed by the Bank will have a 25 percent share o f Government funding.

Project Component 1. Rehabilitation o f Distribution Networks 2. Outreach to Consumer Communities 3 . Technical Assistance Total

Bank Financing (USS million)

Bank Financing 37.0 3.0 2.0 42.0

Internal Control and Internal Auditing

37. Controls are in place for the preparation and approval o f transactions, ensuring that all transactions are correctly made and adequately explained. CDEENERS and EDEs have internal audit departments. They are also subject to the internal audit mandate o f the Comptroller’s General o f the Dominican Republic. These audit departments also exercise ex-ante controls.

38. Minor internal control weaknesses have been identified, and management has mostly taken prompt action for resolution. Adequate and simple controls were defined in the Operations Manual.

39. Control exists in the preparation o f payroll and i t s changes are properly authorized; however, the tax deductions are not calculated coi-rectly and payments to the Director General o f Internal Revenue (DGII) need to be appropriately made. This topic was covered in the Operations Manual.

40. There i s segregation o f duties; furthermore, CDEEE has recently created an office to comply with the Law on Citizens’ Access to Public Information, which i s expected to foster greater transparency in CDEEE’s management and use o f public funds.

41. Procedures exist to ensure that only authorized persons can alter or establish a new accounting principle, policy, or procedure to be used by the entity. Written policies and procedures cover all routine FM and related administrative activities, and the Operations Manual defines the internal audit function at CDEEE.

Per the current CFPs, the cost sharing limit on the proportion o f individual project costs that the Bank may finance went up from 90 to 100 percent, although financing up to 100 percent wi l l be applied on a selective and case-by-case meritijustification. As indicated in the Annex: “In addition to accelerating project implementation, the resulting increased flexibility would allow for more efficient project administration; with the phasing out of the traditional pari passu approach, cost sharing needs wi l l not be determined at the level o f individual expenditures, thus enabling project teams to focus more on technical aspects o f projects rather than on financing categories.”

29

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Reporting and Monitoring

42. Since the separation o f UERS from CDEEE for accounting purposes in 2006, UERS has not prepared annual entity financial statements, but they were prepared as one o f the corporate departments. CDEEE prepares annual entity financial statements regularly, albeit not in a timely enough fashion to be useful for decision making. The latest financial statements prepared are those for calendar 2006. Unaudited financial statements o f UERS will be required four months after the end o f the fiscal year.

43. Reviews o f the latest financial statements for a l l entities show that they are overall adequately prepared. The reporting systems have the capacity to link the financial information with the project’s physical progress. There are automated controls built within them to allow for the physical data to synchronize with the financial data. Financial reports are prepared directly by the automated accounting systems and figures are exported for formatting purposes.

44. UERS will provide the Bank with quarterly interim unaudited financial reports (IFRs), in form and substance satisfactory to the Bank. The format o f these reports i s included in the Operations Manual. The interim unaudited financial reports will be integrated into the project progress reports.

External Auditing

45. CDEEEIUERS i s externally audited by Stephens DS, which audited fiscal years 2005 and 2006. The audits were performed according to International Standards on Auditing (ISA) issued by the International Federation o f Accountants. CDEEE financial statements are subject to audit by the Chamber o f Accounts o f the DR Supreme Audit Institution (SAI) as a government corporation. But this has not been done for several years now, as the SA1 needs to strengthen the capacity to carry out i t s mandate properly.

46. CDEEE Audit reports, and therefore UERS’ as part o f it, are normally issued with delays. The FY05 audit reports were issued 8 months after the end o f the fiscal year, and the audit reports for FY06 were not in final as o f October 2007.

47. The project audit will be done by a private sector audit firm acceptable to the Bank in accordance with ISA. In addition to the project’s annual audit, UERS will be required to annually submit i t s financial statements for the unit with special opinions and compliance report. The audit will be limited to UERS, not to the entire CDEEE, so that the above delays do not affect the timely reception o f the audit report for the project.

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Action Plan

48. As a result o f this assessment, the fo l lowing actions have been or should be implemented:

Action

Operations Manual - Develop detailed procedures o n the types, amounts, documentation, control and reporting o n expenditures financed f rom the Designated Account (DA). - Submit format o f the interim financial reports to be prepared by UERS, including physical progress and procurement reports.

Audit - Appoint the auditors for the project acceptable to the Bank, according to TORS acceptable to the Bank

Accounting and Budgeting Systems - Adapt the accounts classification to reflect the structure o f the project activities. - Implement the budgeting software with SAP interface to be able to monitor project performance t imely and accurately.

Counterpart funds - Commit adequate level o f counterpart funds in the budget

Responsibility

UERSIEDEs

UERS /EDEs

UERS

UERS

Secretaria de Estado de Hacienda

Completion Date

Negotiations

N o later than six months after project effectiveness (see audit schedule below)

Board Presentation

Project Effectiveness

Negotiations

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49. The l i s t o f audit reports required i s presented below:

Audit Report Schedule

Audit Report

Jnit specific financial statements with information for imulative, comparative and by source o f funds.

Special Opinions . Statement o f Expenditures Designated Account Internal Control

Regulations . Compliance with Applicable Laws and

Periodicity

Annual

Annual

Due Date

4 months after the end o f each fiscal year.

4 months after the end o f each fiscal year.

Legal covenants

50. The following standard FM covenants were included in the legal agreements:

Maintenance o f an adequate FM system throughout the l i fe o f the project.

Submission o f quarterly harmonized interim financial reports, as part o f the project progress report, no later than 45 days after the end o f each quarter.

Appointment o f a project auditor acceptable to the Bank and selected according to terms o f reference acceptable to the Bank.

CDEEE will submit annual audit reports o f the project’s financial statements not later than 4 months after the end o f the fiscal year.

Supervision plan

5 1. Supervision o f the project financial management will be based on:

Desk review o f the quarterly interim financial reports and the annual audit report. All o f these reports will be harmonized with the IDB and, if possible, the OFID.

On-site supervision: given the relative simplicity o f the project and the assessment o f the risk, at least one supervision mission should be done per year. Coordination will be done with the IDB and OFID to perform joint supervisions whenever possible.

.

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Annex 8: Procurement Arrangements

DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project

General

1. Procurement for the project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan, the different procurement or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect project implementation needs and improvements in institutional capacity.

2. Procurement o f Works: Works to be procured would include construction o f facilities to upgrade the existing distribution system through the installation or replacement o f medium and low voltage distribution transformers on the primary and secondary feeders, distribution lines, secondary main service meters, capacitors, service drops and meters. Investments would also include the installation o f remote reading equipment and related infrastructure at the premises o f large industrial, commercial and residential consumers, as well as the installation o f efficient lighting fixtures. Procurement o f works related to the rehabilitation o f the distribution systems would include the supply o f al l material needed to complete the work and wil l be procured under the supply and installation method o f procurement through I C B or N C B as required. Procurement processes would be managed by UERS, the project coordinating unit, with a strong participation o f specialized staff from the three EDEs. Details o f the organizational structure, agreed during the capacity assessment exercise, as well as details o f the procurement arrangements and methods to be used in the project are described in the procurement chapter o f the project Operations Manual.

3 . Procurement o f Goods: Goods (not included in the supply and installation o f goods and equipment packages), to be procured would include efficient street lighting fixtures, vehicles, audio-visual equipment, materials and supplies for training, capacity building, and materials and supplies for information, dissemination and community educational activities. Procurement processes would be carried out by UERS in close coordination with the EDEs, using the Bank's Standard Bidding Documents under ICB, N C B and/or other procurement methods agreed with or satisfactory to the Bank and included in the Procurement Plan.

4. Procurement o f non-consulting services: Expenses related to training and capacity building activities - other than consultant services - would be procured as non-consulting activities. Under this subcategory, expenses such as rental facilities, reproduction or purchase o f training and disseminating materials, food and other related expenses would be financed by the project. Non-consulting services estimated to cost less than US$50,000 per contract will be procured with the use o f price comparison (shopping) procedures o f at least three quotations

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obtained from qualified local suppliers. procurement method wil l be submitted by UERS to the Bank for i t s approval.

Standard bidding documents to be used under this

5 . Selection o f Consultants: Consulting services under the project would be provided by firms and individual consultants and would include technical assistance to review the restructuring o f the EDEs’ debt, conduct several performance audits, and execute the Community Outreach component assigned to predefined electrical circuits under rehabilitation. The short l i s t of consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

6 . Firms: All contracts for f i r m s would be procured using the QCBS method except for small and simple contracts estimated to cost less than US$lOO,OOO equivalent that would be procured using QBS, CQS, FBS or LCS. Depending on the nature o f and complexity o f the o f the services, direct contracting may be utilized for very small contacts, less than US$25,000, where it i s not possible or justified to obtain competitive proposals.

7. Individuals: Specialized consulting services would be provided by individual consultants selected by comparison o f qualifications o f three candidates and hired in accordance with the provisions o f paragraphs 5.1 through 5.4 o f the Consultant Guidelines and selected on the basis of their qualifications for the assignement required under TOR agreed with the Bank team.

8. Prior Review Thresholds: Procurement thresholds for prior review which are summarized in table 8.1 below and are based on the recommendations o f the procurement capacity assessment o f the project implementing unit. In addition to prior review o f individual procurement actions, any plan or budget assigned by the project to UERS will be reviewed and approved by the Bank on an annual basis.

Assessment o f the Agency’s Capacity to Implement Procurement

9. Procurement activities under the project will be carried out by UERS under i t s present organizational structure, with a strong participation o f technical and procurement staff assigned by the EDEs. Overall project coordination will be the responsibility o f UERS Director General (DG), who reports directly to CDEEE’s executive vice-president. The DG will coordinate all project related activities with CDEEE and the distribution companies and wil l be the direct liaison with the Bank and other financial institutions involved in the project. Under this scheme, the DG will discharge i t s functions and responsibilities for the project through i t s staff under the present organizational structure, in particular the staff o f the project planning and engineering, the administratiodfinances, and the construction/maintenance/operations directorates. UERS support directorates and units such as internal auditing, legal, administrative and technical controls, and information and technology will be available to support and meet the proposed project fiduciary requirements.

10. The procurement function will be the responsibility o f the procurement specialist hired by CDEEE; the specialist will report directly to the UERS Administrative and Financial Director, who wil l coordinate procurement planning and oversight tasks and provide technical assistance and guidance to the distribution companies participating in the project.

- 56 -

11. An assessment o f the capacity o f UERS to implement procurement activities for the project was carried out in November-December 2007 The assessment reviewed the organizational structure, the operational systems in place to administer procurement, the management and procurement capabilities o f UERS staff directly involved in the procurement and engineering activities o f the project, the capacity and interaction between the project staff and i t s counterparts at the distribution companies, as well as the availability and capacity o f the support and control systems (auditing, legal, anticorruption, and ethics).

12. The main issues and r isks related to project procurement implementation identified during appraisal included the following: (i) lack o f prior experience and skilled staff in both, UERS and the distribution companies in the implementation o f Bank-financed project procurement; and (ii) lack o f a procurement specialist with experience and knowledge o f Bank procurement rules and regulations and guidelines. A detailed action plan was discussed and agreed with CDEEE to reduce or eliminate above risks. The main corrective actions taken were: (i) hiring o f a full time procurement specialist with at least five years o f experience in World Bank and IDB funded projects, to assist the project staff during the entire duration o f the project; (ii) preparation o f a sample standard bidding document for procurement o f works, goods and services and in particular the standard contractors prequalification document as well as the standard bidding document for the construction o f distribution l ines under the supply and installation format; (iii) preparation o f an Operations Manual (OM) with a specific chapter on procurement detailing al l the procedures, channels o f responsibilities and f low o f documentation (the final version o f the OM should be approved before any project procurement activity i s started); and (iv) preparation o f the project procurement plan (PP) for the f i rst two years o f project implementation, including those activities funded by the Government. In addition, it was agreed that a procurement training program for UERS and the EDEs should be started as soon as possible, but not later than project launch, and continued periodically during the entire l i f e o f the project.

13. The overall project risk for procurement i s considered moderately high.

Procurement Plan (PP)

14. During appraisal the Bank discussed with UERS and the EDEs the status o f project engineering and design, the investments plans, and the procurement packages and methods, which provided the basis for preparation o f the PP for the first two years o f project implementation. A detailed final PP was agreed during negotiations o f the loan. The PP will be annually updated with the project team or as required to reflect actual project implementation needs. At the beginning o f each calendar year, UERS will update the PP with a detailed procurement schedule for the coming year. Detailed description o f al l procurement methods for the purchase o f works, goods, consulting services, and non-consulting services listed in the PP will be included in OM. Standard procurement bidding documents used under the project as well as details of administrative procedures for processing procurement tasks will be incorporated in the OM.

- 57 -

Frequency o f Procurement Supervision

15. Prior review supervision will be carried out from the Bank’s offices, and as recommended in the project capacity assessment, one annual field procurement supervision mission w i l l be carried out to conduct post review o f procurement actions, including a reassessment o f the capacity o f the coordinating agency to carry on procurement activities under the project. This reassessment will provide the basis to review the prior review thresholds. It i s recommended to carry out two supervision missions per year during the f i rs t two years o f project implementation, and one every year thereafter.

- 5 8 -

Table 8.1 - Thresholds and Procurement Methods and Pr ior Review

Expenditure Category

, Works and Supply and istallation o f Goods and quipment

, Goods and non msulting Services

Consulting Services - raining

1 Firms

2 I n ividun

Contract Value

Threshold US%

thousands

Contracts = or > 3,000

Contracts < 3,000 and > 250

Contracts = or < 250

Contracts = or > 250

Contracts < 250 and > 50

Contracts = or < 50

Contracts = or ’ 100

Contracts < 100

Contracts = or > 50

Contracts < 50

[US% x 0001

Procurement Method

ICB

NCB

3 Quotations (Shopping)

ICB

NCB

National or International Shopping

QCBS, QBS, FBS, LCS

QCBS, QBS, LCS, CQS, FBS or SSS

IC

IC, and SSS

Contracts Subject to Prior Review

A l l

A l l

First three contractsiyear

A l l

First three contractslyear

First three contractdyear

Al l contracts, including TOR, RFP, short list o f f i rms, review o f complete technical and final evaluation reports, and final negotiated contract.

Al l TOR and short list o f f i r m s or individual for sole source

Al l contracts, including TOR, CV’s and short list

Al l TOR and short l i s t o f firms or individual for sole source

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Details o f the Procurement Arrangements Involving International Competition

1. Goods, Works, Non consulting Services

(a) Contract packages to be procured following I C B and direct contracting (in US$ millions).

3

Estimated cost

Million US$

1

Ref. No.

00 1

002

003

004

005

006

007

4 5

Procurement PQ Method

2

Contract (description)

6 7

Domestic Review Preference By Bank

(yedno) (prior/post)

.Distribution Rehabilitation Edesur - I

Distribution Rehabilitation Edesur - I1 .Distribution Rehabilitation Edenorte - I.

Distribution Rehabilitation Edenorte - I1 Distribution Rehabilitation Edenorte - I11 Distribution Rehabilitation Edeeste - I Distribution Rehabilitation Edeeste - I1

Goods

8 9

Expected Comments Bid Opening Date

Non consulting services

No

No

No

Prior 04.09

Prior 04.09

Prior 05.09

29.8 1 Et - Supply Yes

Installation ICB - Supply

I Installation I

14.4 ICB -Supply Yes ~ and ~ I Installation I I ICB-Supply I _ _ .

14.8 I and I Yes I Installation I I ICB-Supply I

17.2 I and I Yes I Installation I I ICB-Supply I .. .

14.5 I and I Yes I Installation I I ICB -Supply 1 :lie ~ and ~ Y;s

Installation Direct

None Direct I I

Prior 05.09

Prior 06.09

ICB processes 001-007 above may end up with one or more construction contracts each depending on the outcome o f the bids received. Total investment US$138.2 million (including price and physical contingencies), i s about 90 percent o f total project cost.

(b) All ICB contracts will be subject to prior review by the Bank.

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2. Consulting Services

(a) List o f consulting assignments with short-list o f international f i r m s

Selection Method

1 Ref. No.

Review By Bank

(prior/post)

OOlC QCBS

002c

Prior

Description o f Assignment Estimated

cost Million

0.120

I US% Studies to restructure the EDE’s debt, I and to determine the need o f Government funds for the power sector. Carry out several audits to certify (i) achievement o f performance indicators; (ii) the number o f hours o f power supply in rehabilitated circuits; (iii) customer satisfaction; and (iv) performance o f construction contractors.

0.300

4 1 5

I

I

6 Expected Proposals

Submission Date

10.08

05.09

7

Comments

(b) Prior review by the Bank will be carried out according to the instructions given in Category 3 o f Table 8.1 above. .

(c) Short l i s t o f consultants for services estimated to cost less than US$350,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultants Guidelines.

- 6 1 -

Annex 9: Economic and Financial Analysis DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project

A. Economic Analysis o f the Project

1. The first economic benefit will be f rom the reduction in system technical losses. The technical losses in the circuits being rehabilitated currently average around 15 percent o f power supplied. As a result o f the physical rehabilitation, these are expected to be reduced to about 7 percent. Technical losses (energy lost in the form o f heat dissipated by cables and other equipment) obey the laws o f physics. Once the network i s upgraded, those losses are immediately reduced. The opt imum level o f technical losses i s determined during project design, considering the gains f rom smaller losses and the investments needed to achieve them. These losses are valued at the cost o f the power purchased by the EDEs, wh ich i s US$130 per MWh.

2. A second benefit i s the result o f the reduction in theft -- through both illegal and un- metered connections, and by not paying bills. These are being addressed through a) greatly expanded metering, b) tamper-proof meters and other technical measures to make theft more diff icult, and c) improved service quality and the Community Outreach component o f the project, both o f which are expected to make consumers more willing to pay. Whi le much of the resultant benefit to the EDEs will be only a transfer payment (in economic terminology) f rom consumers, there will be a reduction in demand by consumers who wou ld have to pay for their electricity and therefore use the energy in a more rational and efficient way. Based o n their experience, the EDEs have estimated this reduction in demand to be at least 20 percent o f consumption. Because consumers value this consumption at between zero and the tariff, we have used (the other) ha l f o f the US$200/MWh tar i f f as the estimated economic saving.

3. A third benefit wou ld be increased hours o f power availability, as distribution circuits are upgraded f rom category D and C (less than 18 hourdday) successively to categories B (21 hourdday) or A (24 hours/day). Improvements in power availabil ity brought about by the project are expected to lead to an increase in consumption o f about 10 percent. Mos t o f i t will replace energy that costs more than twice as much, such as electricity produced by small and inefficient backup generators and light f rom candles or gas lamps. Fo r the energy that i s replacing other sources o f energy, the economic value i s the difference in economic costs between the energy sources. For the remainder, which will be increased use o f energy, the net economic benefit i s the difference between what it i s wor th to the consumer and the cost o f producing that electricity. T o simplify, we assumed that a l l o f this new electricity f rom the grid was replacing energy which cost twice as much; tests were carried out to determine h o w sensitive the overall project’s economic rate o f return was to variations in this parameter.

4. A ten-year stream o f benefits f rom a Base Case scenario considering the assumptions described above was built. The economic rate o f return (ERR) i s 73 percent and the net present value (discounted at 10 percent) i s US$428 mil l ion.

5 . results o f the economic analysis for the Base Case.

The fo l lowing tables present the key assumptions considered for the three EDEs and

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Project Data for Economic Analysis - Base Case

Before project (2006 totals) Distribution Energy Energy Total Technical Technical Company purchased collected Losses losses (%) losses

(GWh) (GWh) (GWh) (GWh) Edenorte 1167 508 659 15 175 Edesur 1192 586 606 15 179 Edeste 57 1 272 299 15 86 TOTAL 2930 1366 1564 15 439

484 427 213 1124

After project (yearly totals) Dist ri b u t io n E ne rgy Company purchased collected

Energy

(GWh) (GWh) Ed en o rt e 1190 817 Edesur 1143 668

TOTAL 3118 2166 Edeste 785 681

To ta I Tech n ica I Tech n ica I losses losses (%) losses (GWh) (GWh)

373 7 83 475 7 80 104 7 55 952 7 2 18

Economic Analysis - Base Case

Reduction in Reduction in Increase in Increase in technical misallocation power power

losses (GWh) of electricity availability (%) availability (GWh) (GWh)

TOTAL 221 78 10 312

Theft (GWh)

290 395 49

734

ERR

73%

Misallocation of electricity (GWh)

58 79 10

147

NPV (US$ million)

428

6. Sensitivity analysis. If one considers only the benefits o f the reduction in technical losses, the ERR i s 11 percent and the net present value US$7 million. These results are robust, since after the network rehabilitation the grid overload will disappear and heat losses will be reduced. If one adds the reduction in misallocation o f electricity from consumers paying for their power, the ERR comes out to 25 percent and the NPV to US$103 million.

Sensitivity Analysis

BENEFITS FROM Reduction in technical losses Reductions in technical losses and misallocation

ERR NPV (US$ million) 17% 36 25% a3

- 63 -

B. Financial Analysis o f the Project

7 . The financial rate o f return (FRR) o f the project i s estimated at 59 percent and i t s net present value at US$421 million. This number i s quite high, even for distribution projects, which usually have high rates o f return because o f their short implementation periods and relatively low investment requirements. In this case the return i s even higher because electricity losses are so high in the Dominican Republic and the selection o f sub-projects i s based on their expected contribution to the CRI.

8. Assumptions for the base case scenario. The recent experience o f the EDEs i s that network rehabilitation projects can in some cases increase the C R I to above 90 percent. In two rehabilitation projects completed by EdeSur in 2007 in the Santo Domingo neighborhoods o f Julieta Morales and Los Prados 111, the CRIs increased from 60 percent to 92.5 percent and from 85.5 percent to 94.2 percent, respectively. These results, however, are probably not representative o f what might be achieved in other areas o f the country. An increase in the cash recovery index o f 20 percentage points was assumed in computing the base case scenario for all three companies. The resulting average CRI for the circuits selected for the project would increase from 50 percent before the project to 70 percent afterwards. In al l cases technical losses are assumed to be reduced to 7 percent.

9. Cash-flow. A ten-year cash f low associated with the implementation o f the project was built. Al l benefits deriving from reduction o f technical losses would accrue at the end o f the first year following project implementation, while those benefits due to increases in collections were assumed to gradually increase from year one to year five. The discount rate used for calculating the net present value was 12 percent. The resultant financial rate o f return for the project i s 59 percent, and the net present value US$421 million.

Project Data for Financial Analysis - Base Case

Before project (2006 totals Distribution Consumers 2006 2007 Company affected Cash estimate

(thousand) Recovery Cash Index (%) Recovery

Index (%) Edenorte 221 43.5 46.5 Edesur 500 49.2 52.2 Edeste 67 47.6 50.6 TOTAL 788 46.6 49.6

After project (yearly totals) Energy Energy Cash

purchased collected Recovery (GWh) (GWh) Index (%)

1190 792 66.5 1143 825 72.2 785 554 70.6

3118 2171 69.6

- 64 -

Project Data for Financial Analysis - Base Case

Investment Increase in Average tariff Total (US$ million) energy (US$/MWh) increase in

Distribution collected revenues

million) Company (GWh) (US$

Edenorte 40.9 238 200 48 Edesur 53.6 229 200 46 Edeste 27.3 157 200 31 TOTAL 121.8 624 200 125

Increase in Increase in revenues due to revenues due

reduction in to increase in technical losses collections

(US$ millon) (US$ millon)

17 30.9 16 29.7 11 20.4 44 81.1

Financial Analysis - Base Case

Internal Net Present Distribution Rate of Value (US$ Company Return million) Ede no rte 65% 166 Edesur 51% 145 Edeste 64% 109 TOTAL 59% 420

10. Sensitivity analysis. Tariffs are forecast to remain stable except for passing through power purchase cost increases. The cash flows remain particularly sensitive to a) the CRI and b) the pass-through o f o i l costs. Sensitivity tests were carried out to determine how the internal rate o f return and net present value would change with different assumptions for the evolution o f tariff and the cash recovery index.

11, Sensitivity to tariff cuts. The table below shows project returns in a scenario where o i l prices increase and the Government does not allow the full pass-through o f the increase to tariffs. This would, in practice, be equivalent to a reduction in electricity tariffs. In theory, as the table shows, the project would remain very attractive even if tariffs were cut in half. In practice, such tariff cut would result in the collapse o f the Dominican power sector (see next section for a financial analysis o f the sector). The conclusion i s that the project would remain attractive even if tariffs are frozen, provided that the power sector as a whole remains functional.

- 65 -

Financial Analysis - Sensitivity to Tariff Cuts

Average tariff N PV (US$/MWh) IRR (US$

million) Edenorte 100 36% 63 Edesur 100 27% 46 Edeste 100 36% 4 1 TOTAL 32% 150

12. Sensitivity to Cash Recovery. Although collections in a l l three distribution companies have recently been improving, in the past they have been remarkably immune to great improvement, so the sensitivity analysis i s made on the assumption that a l l the increase in cash recovery i s due only to the reduction in technical losses (from current 15 percent to 7 percent after project implementation). As mentioned before, upgrading networks necessarily reduce technical losses (which are the energy lost in the fo rm o f heat dissipated by overloaded cables and other equipment). The table be low shows that even if eventual improvements in cash collections are disregarded, the project remains attractive for a l l three distribution companies.

Cash N PV IRR (US$ Recovery Distribution ,ndex (%)

Company million) Edenorte 53.5 60% 100 Edesur 59.2 16% 9 Edeste 57.6 35% 29 TOTAL 56.6 36% 138

- 66 -

C. Financial Performance o f the Distribution Companies

13. Results from 2004 - 2007. Based on the audited financial statements for 2004,2005, and 2006, and the preliminary financial statements for 2007, it i s clear that the three EDEs have continued to incur heavy operating losses, primarily because o f their l o w CRIs (despite some improvement in that indicator) and, more recently, Government’s failure to raise tariffs in line with fuel price increases. All three EDEs now have significantly negative net worth - combined, their negative net worth was US$911 mi l l ion at the end o f 2006, and an estimated US$1,156 mil l ion at the end o f 2007. The Government has had to inject a large amount o f subsidies, through CDEEE, to cover the operating deficits and enable the EDEs to purchase energy from the generators, and to finance minimum investments. The EDEs have also financed their losses by increasing their accounts payables to CDEEE for the energy which they buy through them. As o f end-2006, the Government owed the EDEs about US$500 mi l l ion (primarily compensation due because o f failure to raise tariffs in l i ne with the regulations), while the EDEs owed CDEEE US$1,8 13 million, giving them a net estimated debt with the Government o f US$1,3 13 mil l ion (see Table 1). This net estimated debt has continued to grow (we are awaiting the final, audited figures for end-2007).

Table 1

ESTADO DE TRANSACCIONES Y SALDOS CON CASA MATRIZ Y ENTES RELACIONADOS

En millones de US$

Cuentas por Cobrar al Gobierno Edenor Edesur Edeste Total

Por Reso1.007 y Res.113 172,6 179,6 0,o 352,2 Por Subs.fact.Secretaria de Finanzas 39,O 38,3 77,2 Edenorte SA 70,5 70,5

Total Cuentas por Cobrar 21 I ,5 250,2 38,3 500,O

Cuentas por Pagar Largo Plazo Casa Matriz CDEEE -269,6 -529,6 0,o -799,2

Cuentas por Pagar de Corto Plazo Casa Matriz CDEEE -549,4 -99,3 -295,O -943,7 Edesur SA -70,5 -70,5

Total Cuentas por Pagar -889,6 -628,Q -295,O -1a13,4

Diferencia Deuda a sanear -678,l -378,7 -256,7 -1 31 3,4

- 67 -

14. Financial Projections 2008-2013. Financial projections for the EDEs and CDEEE (including EGEHID and ETED), and the overall electricity sector, were formulated for 2008-1 3. They were prepared using 2006 audited financial statements, unaudited data for 2007, the budget submitted for 2008 -as per the Plan de Accidn para la Recuperacidn del Sector Ele'ctrico, and estimates prepared by the EDEs and CDEEE for 2009-20 13.

15. The base case scenario includes (a) investments resulting from the proposed project, and others that would be financed by the Government; (b) an applied tari f f equivalent to a technical tariff o f US$24.2/kWh; (c) fixed prices for fuel; (d) a CRI that i s projected to reach 78.5 percent in 2013; (e) the conversion o f the CESPM plant (Cogentrix) to natural gas by 2009; and ( f ) introduction o f a coal plant operation (300MW in 201 1 and 300 M W in 2012). Alternative scenarios using different baseline values have been considered, in order to evaluate the impact of tariffs, fuel price increases, a more conservative CRI projection, and without the conversion of the plant to natural gas or the introduction o f a coal plant operation. Additional sensitivity analyses were also conducted to evaluate results without the project. The summarized results are described below.

Assumptions

0 Baseline

With Project Technical tari f f o f US$/KWh24.2 cents (as o f 2009) Fixed fuel prices during the period under study (2008 budget) High CRI (to reach 78.5 percent by 2013) Conversion o f the CESPM plant (Cogentrix) to natural gas by 2009; and introduction of a coal plant operation (300MW in 201 1 and 300 MW in 2012).

0 Baseline, with Low CRI

With Project Technical tari f f o f USUKWh24.2 cents (as o f 2009) Fixed fuel prices during the period under study (2008 budget) Conservative CRI (low: reaching 69 percent by 2013) Conversion o f the CESPM plant (Cogentrix) to natural gas by 2009; and introduction o f a coal plant operation (300MW in 201 1 and 300 MW in 2012).

Baseline, without natural gas and coal plants

With Project Technical tariff o f US$/KWh24.2 cents (as o f 2009) Fixed fuel prices during the period under study (2008 budget) High CRI (to reach 78.5 percent by 2013)

- 68 -

0 Baseline, with frozen tariffs

With Project Tariffs in RD$ frozen during the period under study Technical tari f f o f US$/KWh24.2 cents (as o f 2009) Fixed fuel prices during the period under study (2008 budget) High CRI (to reach 78.5 percent by 2013) Conversion o f the CESPM plant (Cogentrix) to natural gas by 2009; and introduction of a coal plant operation (300MW in 201 1 and 300 MW in 2012).

0 Baseline, considered with increase in fuel prices

With Project Technical tari f f o f US$/KWh24.2 cents (as o f 2009) Increased fuel prices affecting monomic prices by 30 percent by the end o f the period under stud High CRI (to reach 78.5 percent by 2013) Conversion o f the CESPM plant (Cogentrix) to natural gas by 2009; and introduction of a coal plant operation (300MW in 201 1 and 300 MW in 2012).

Additional sensitivity analyses (Tables in project files)

0 With Project and Low CFU Technical tari f f o f US$/KWh24.2 cents (as o f 2009) Fixed fuel prices during the period under study (2008 budget) Conservative CRI (low: reaching 69 percent by 2013)

0 Without Project with a Low CRI Technical tari f f o f US$/KWh24.2 cents (as o f 2009) Fixed fuel prices during the period under study (2008 budget) Conservative C R I (low: reaching 69 percent by 2013)

- 69 -

Con Proyecto Tarifa TBcnica

Combustibles Fiios CRI Alto

Cas0 Base

Consolidado TOTAL EDES - Proyecciones Financieras

Conversibn a Gas y Entrada planta a Carb6n

Supuestos Demanda: Energia siRacionamiento (Gwh) 13.176 12.523 14.106 14.798 15.747 16.440 18 266 Abastecimiento Promedio (Oh) 76% 83% 8 5 Q/o 88% 90% 93% 93% Energia Suministrada (Gwh) 9.808 10.394 11.990 12.948 14.094 15.207 16.896 Energia Suministrada PRA (Gwh) 1.237 1.301 1.247 1.214 1.177 1.125 1.009 Energia Suministrada s/PRA (Gwh) 8.571 9.093 10.743 11.734 12.917 14.082 15.887 Otros: Tasa de Cambio (RD$/US$) 33,5 36,O 37,O 38,9 41,O 43.6 46,5 USA CPI 2015 205,4 2115 217,9 224,4 231.1 238,l inflacion RD 9% 7% 7% 7% 7% 7% 7% HFO (US$/Barril) 46,43 67,5 6 7 5 6 7 5 67,5 67,5 67.5 Gas (US$/MMBTU) 6,94 8,O 8,O 8,O 8,0 8,0 8,0 Carbon US$iTon 54,75 62.5 62,5 62.5 62,5 62,5 62,5 Compra Enerpia: Total (Millones US$) 1.252 1.573 1.742 1.820 1.852 1802 1.927 Monomico Compra (US$/Kwh) 0,128 0,151 0,141 0,141 0,124 0,114 0,114 Eneraia Facturada : siPRA (Millones US$) 1.083 1.145 1.696 1.933 2.210 2.484 3.008 Energia Facturada (GWh) 6.872 7.634 8.495 9.481 10.665 11 881 13.855 siPRA (GWh) 5.635 6.091 7.249 8.266 9.488 10.756 12.846

Perdidas s/BBMM (%) 34,4% 33,1% 32,7% 29,7% 26,7% 23,7% 19,2% Tarlfa Medla

siPRA (US$/Kwh) 0,19 0,18 0.24 0,24 0.24 0.24 0,24 Tarifa PRA (RD$/Kwh) 0,45 0,46 0.47 0.46 0,46 0,46 0,46 Porcentaje Cobrado s/PRA 90,3% 90,6% 90.7% 91,8% 93,8% 95,5% 97.2%

Inversiones: Capex (Millones US$) 83.2 70,6 100,o 100,o 130,O 130.0 130,O Deficit (Millones US$):

-

PRA (GWh) 1.237 1.301 1.247 1.214 1.177 1.125 1.009

siPRA (RD$/Kwh) 6,43 6,49 8,64 9,07 9,53 10,07 10,88

"Cash Recovery Index" siPRA 59,3% 60,5% 61,0% 64,6% 68,8% 72,9% 78.5%

a/Capex (532) (748) (333) (180) 99 470 919 Ede Sur (141) (243) (110) (47) 61 201 376 Ede Este (195) (218) (107) (70) 15 140 245 Ede Norte (195) (288) (116) (64) 23 129 298

Final (616) (819) (436) (283) (34) 337 785 Ede Sur (171) (266) (145) (81) 17 157 331 Ede Este (222) (241) (141) (104) (30) 95 201 Ede Norte (223) (31 1) (150) (98) (21) 85 253

- 70 -

CAS0 BASE con CRI bajo

Consolidado TOTAL EDES - Proyecciones Financieras Con Proyecto Tarifa Tecnica

Combustibles Fijos CRI COnSeNadOr (bajo) Conversidn Central a Gas y entrada Centrales Carbdn

Supuestos Demanda: Energia sIRacionamiento (Gwh) 13.176 12.523 14.106 14.798 15.747 16440 18 266 Abastecirniento Promedio (%) 76% 83% 85% 66% 90% 93% 93% Eiiergia Suministrada (Gwh) 9,808 10.394 11,990 12.948 14.094 15.207 16.896 Energia Surninistrada PRA (Gwh) 1.237 1.301 1.247 1.214 1.177 1.125 1,009 Energia Suministrada s/PRA (Gwh) 8.571 9.093 10.743 11.734 12.917 14082 15.887 Otios: Tasa de Cambio (RD$/US$) 33,5 36.0 37.0 38,9 41 ,O 43.6 46,5 USA CPI 201 3 205.4 211,5 217,9 224,4 231,l 238,l infiaaon RD 9% 7% 7% 7 % 7% 7% 7% HFO (USSiBarrii) 46,43 67.5 67.5 67.5 67.5 6 7 5 67,5 Gas (US5IMMBTU) 6,94 8,O 8,O 8,0 8.0 8.0 8,0 Carbon US$/Ton 54.75 6 2 3 62,5 623 62.5 62.5 62.5 Compra Eneraia: Total (Miiiones US$) Monornico Compra (US$IKwh) Eneraia Facturada : siPRA (Millones US$) Energia Facturada (GWh) s/PRA (GWh) PRA (GWh) Perdidas s/BBMM (%) Tarifa Media sIPRA (RD$/Kwh) slPRA (US$/Kwh)

1.252 1.573 1.742 1.820 1.941 2.033 2.234 0,128

1.083 6.672 5.635 1.237 34,4%

6,43 0,19

0,151

1.145 7.634 6.091 1.301 33,1%

6,49 0.18

0,141

1.696 8.495 7.249 1.247 32,7%

6/54 0.24

0,141

1.885 9.275 8.061 1.214 31,4%

9,07 0.24

0,124

2.139 10.360 9.182 1.177 29,1%

9 5 3 0.24

0,114

2 368 11.360 10 255

1.125 27.3%

10.07 0.24

0,114

2 733 12.682 11.673

1.009 26,7%

10,88 0,24

Tanfa PRA (RD$/Kwh) 0.45 0,46 0,47 0,46 0-46 0,46 0,46

"Cash Recovery index" s/PRA 59,3% 60.5% 61.0% 62,5% 66,0% 68,6% 693% Inversiones: Capex (Millones US$) 83.2 70,6 100,O 100.0 130,O 130,O 130,O Deficit (Millones US$):

Porcentaje Cobrado siPRA 90,3% 90.6% 90.7% 91 2% 93.0% 94,5% 94,8%

a/Capex (532) (748) (333) (239) (79) 96 263 Ede Sur (1 41 (243) (110) (71) (27) 15 65

Ede Norte (1 95) (288) (116) (86) (9) 83 169 Ede Este (1 95) (218) (107) (81 ) (42) (2) 29

Final (616) (819) (436) (341) (212) (38) 129 Ede Sur (171) (266) (145) (105) (71) (30) 20 Ede Este (222) (241) (141) (115) (87) (46) (1 6) Ede Norte (223) (311) (1 50) (121) (54) 38 125

- 71 -

CAS0 BASE con TARIFA CONGELADA

TOTAL EDES - Proyecciones Financieras Con Proyecto Tarifa Congelada

Consolidado Combustibles Fijos CRI Alto Conversion a Gas y entrada planta a Carbon

@$ Supuestos

Demanda: Energia SiRacionamiento (Gwh) 13.176 12 523 14.106 14.798 15.747 16.440 18.266 Abastecimiento Promedio (%) 76% 83% 85% 88% 90% 93% 93% Energia Suministrada (Gwhj 9.808 10.394 11.990 12.948 14.094 15.207 16.896 Energia Suministrada PRA (Gwh) 1.237 1.301 1.247 1.214 1.177 1.125 1.009 Energia Suministrada s/PRA (Gwh) 8.571 9.093 10.743 11.734 12.917 14.082 15.887 Orros: Tasa de Cambio (RD$/US$) 33,5 36,O 37,O 38.9 41,O 43,6 46,5 USA CPI 201,5 205,4 211.5 217,9 224,4 231,l 238,l inflacion RD 9% 7% 7% 7% 7% 7% 7 Qh HFO (US$/Barril) 46,43 67,5 67,5 6 7 5 67,5 67,5 67,5 Gas (USUMMBTU) 6,94 8,O 8,O 8,O 8,O 8,O 8,O Carbon US$/Ton 54,75 62,5 62,5 62,5 62,5 62,5 62,5 Compra Energia: Total (Miliones US$) 1.252 1.573 1763 1.863 1.937 1 953 2.116 Monomico Compra (USSiKwh) 0,128 0,151 0,144 0,144 0,133 0,126 0,126 Enerala Facturada : s/PRA (Miliones US$) 1.083 1145 1.280 1.390 1.513 1.609 1.803 Energia Facturada (GWh) 6.872 7.634 8.495 9.481 10.665 11.881 13 855 s/PRA (GWh) 5.635 6.091 7.249 8.266 9.488 10.756 12 846

Perdidas s/BBMM (%) 34,4% 33,1% 32,7% 29,7% 26,7% 23.7% 19,2% Tarifa Media s/PRA (RD$/Kwh) 6,43 6,49 6,49 6,49 6,49 6 4 9 6,49 siPRA (UWKwh) 0,19 0,18 0,18 0,17 0.16 0.15 0,14 Tarifa PRA (RD$/Kwh) 0,45 0.46 0.47 0,46 0,46 0,46 0.46 Porcentaje Cobrado s/PRA 90.3% 90.6% 90,7% 91,8% 93,8% 95,5% 97,2% "Cash Recovery Index" s/PRA 59.3% 60,5% 61,0% 64.6% 68,8% 72.9% 78,5% Inversiones: Capex (Millones US$) 83,2 70,6 100,o 100,o 130,O 130,O 130,O Deficit (Millones US$):

PRA (GWh) 1.237 1.301 1.247 1.214 1.177 1.125 1.009

aiCapex (532) (748) (742) (733) (555) (540) (475) Ede Sur (141) (243) (232) (213) (1631 (89) (35) Ede Este (195) (218) (245) (263) (268) (275) (292) Ede Norte (195) (288) (266) (257) (225) (176) (147)

Final (616) (819) (845) (835) (789) (674) (608) Ede Sur (171) (266) (266) (247) (208) (133) (80) Ede Este (222) (241) (279) (297) (313) (320) (337) Ede Norte (223) (31 1) (300) (291) (269) (220) (1 92)

- 72 -

CAS0 BASE con Preclo Monomico con 30 % Incremento de combustibles

TOTAL EDES - Proyecciones Financieras Con Proyecto Tarifa TBcnlca

Consolidado Increm.Combustlbles CRI Alto Conversi6n a Gas y Entrada pianta a Carb6n

Supuestos Demanda: Energia siRacionamiento (Gwh) 13.176 12.523 14.106 14.798 15.747 16.440 18.266 Abastecimiento Promadio (Oh) 76% 83% 85% 88% 90% 93% 93% Energia Suministrada (Gwh) 9.808 10.394 11.990 12.948 14.094 15.207 16 896 Energia Suministrada PRA (Gwh) 1.237 1.301 1.247 1.214 1.177 1.125 1.009 Energia Surninistrada siPRA (Gwh) 8.571 9.093 10.743 11.734 12.917 14.082 15.887 Otros: Tasa de Cambio (RD$/US$) 33,5 36,O 37,O 38,9 41 ,O 43,6 46.5 USA CPI 2013 205,4 211.5 217,9 224.4 231,l 238.1 Inflacion RD 9% 7% 7% 7% 7% 7% 7% HFO (US$iBarril) 46.43 6 7 3 74,3 81,7 89,8 89,8 89.8 Gas (USUMMBTU) 6,94 8,0 8 8 9.7 10,6 10,6 10.6 Carbon US$TTon 54.75 62,5 68,8 75,6 83,2 83,2 83,2 Compra Enerqia: Total (Millones US$) Monomico Compra (US$/Kwh) Enerqia Facturada : siPRA (Millones US$) Energia Facturada (GWh) siPRA (GWh) PRA (GWh) Perdidas siBBMM (Oh) Tarifa Media siPRA (RD$/Kwh) siPRA (US$iKwh) Tarifa PRA (RD$iKwh) 0,45 0,46 0,47 0.46 0,46 0.46 0,46 Porcentaje Cobrado siPRA 90,3% 90,6% 90,7% 91,8% 93,8% 95,5% 97,2%

Inversiones: Capex (Millones US$) 83,2 70,6 100,o 100,o 130,O 130.0 130,O Deficit (Millones US$): a/Capex (532) (748) (426) (474) (407) (126) 281

Ede Sur (141) (243) (146) (158) (131) (26) 133

"Cash Recovery Index" siPRA 59,3% 60,5% 61,0% 64,6% 68,8% 72,9% 783%

Ede Este (195) (218) (136) (161) (141) (42) 53 Ede Norte (195) (288) (145) (155) (135) (58) 95

Ede Sur (171) (266) (180) (192) (1 76) (70) 88 Ede Este (222) (241) (170) (195) (185) (87) 9

Final (616) (819) (529) (576) (540) (260) 147

Ede Norte (223) (31 1) (179) (189) (180) (103) 50

1.252 0,128

1.083 6.872 5.635 1.237 34,4%

6,43 0.19

1.573 0,151

1.145 7.634 6.091 1.301 33,1%

6,49 0.18

1.835 0,155

1.696 8.495 7.249 1.247 32,7%

8,64 0.24

2.114 0,170

1.933 9.481 8.266 1.214 29,7%

9,07 0.24

2 358 0,165

2 210 10 665 9 488 1177 26,7%

9,53 0.24

2.398 0,152

2.484 11 881 10 756

1.125 23,7%

10,07 0,24

2 565 0,152

3 008 13 855 12 846 1 009 19,2%

10 88 0,24

- 73 -

CAS0 BASE sin entrada de piantas a gas y a carb6n

TOTAL EDES - Proyecciones Financieras Consolidado

Con Proyecto Tarifa TBcnica

Combustibles Fijos CRi Alto

Supuestos Dernanda: Energia siRacionamiento (Gwh) 13.176 12.523 14.106 14.798 15.747 16.440 18.266

Energia Suministrada (Gwh) 9.808 10.394 11.990 12.948 14.094 15.207 16.896

Energia Suministrada siPRA (Gwh) 8.571 9.093 10.743 11.734 12.917 14.082 15.687

Tasa de Cambio (RD$/US$) 335 36,O 37.0 38,9 41,O 43,6 46,5 USA CPI 201,5 205,4 211,5 217,9 224,4 231,l 238,l Infiacion RD 9% 7 % 7% 7% 7% 7% 7% HFO (US$/Barril) 46,43 675 6 7 3 67,5 67,5 67,5 67,5 Gas (US$/MMBTU) 6,94 8,O 8.0 8,O 8,O 8,O 8,O Carbon US$/Ton 54,75 62.5 62,5 62.5 62,5 62,5 62,5 Compra EnerQia: Total (Millones US$) 1.252 1.573 1.81 2 1.957 2.131 2.300 2.556 Monomico Compra (US$iKwh) 0,128 0,151 0,151 0,151 0,151 0,151 0,151 Enerqia Facturada : siPRA (Miiiones US$) 1.083 1.145 1.696 1.933 2.210 2.484 3 008 Energia Facturada (GWh) 6.872 7.634 8.495 9.481 10.665 11.881 13.855 s/PRA (GWh) 5.635 6.091 7.249 8.266 9 488 10.756 12.846 PRA (GWh) 1.237 1.301 1.247 1.214 1.177 1.125 1.009 Perdidas siBBMM (%) 34,4% 33,1% 32.7% 29,7% 26,7% 23,7% 19,2% Tarifa Media siPRA (RD$/Kwh) 6,43 6,49 8,64 9.07 9,53 10,07 10,88 siPRA (US$iKwh) 0,19 0,18 0,24 0,24 0,24 0,24 0,24 Tarifa PRA (RD$/Kwh) 0,45 0,46 0,47 0.46 0,46 0.46 0,46 Porcentaje Cobrado siPRA 90,3% 90,6% 90,7% 91,8% 93.8% 95.5% 97,2% "Cash Recovery index" s/PRA 59,3% 60,5% 61,0% 64,6% 68,8% 72,9% 78,5%

Abastecimiento Promedio (%) 76% 83% 85% 88% 90% 93% 93%

Energia Suministrada PRA (Gwh) 1.237 1.301 1.247 1.214 1.177 1125 1.009

Otros:

inversiones: Capex (Millones US$) 83,2 70,6 100,o 100,o 130,O 130,O 130,O Deficit lMiiiones US$): aiCapex (532) (748) (403) (317) (180) (28) 290

Ede Sur (141) (243) (137) (99) (45) 12 136 Ede Este (195) (218) (129) (112) (71) (12) 56 Ede Norte (195) (288) (138) (106) (65) (28) 98

Final (616) (819) (506) (420) (313) (162) 156 Ede Sur (171) (266) (171) (133) (89) (33) 92 Ede Este (222) (241) (163) (147) (115) (57) 11 Ede Norte (223) (31 1) (172) (140) (109) (72) 53

,-

Conclusions

16. companies under the different scenarios are summarized below:

Annual funding requirements (before investments) for the operation o f the distribution

EDES - PROYECCIONES FINANCIERAS 2008-2013 Deficit alCapex (Millones US$):

Caso Base- con CRI bajo (79) 96 263 Cas0 Base - c/Tarifa Cong. (532) (748) (742) (733) (656) (540) (475) Cas0 Base - c/aum.Comb. (532) (748) (426) (474) (407) (126) 281 Caso Base - s/Ptas.Gas y Carbon (532) (748) (403) (317) (180) (28) 290

- 74 -

17. companies, under the different scenarios, i s as follows:

After including investments in the calculations, the total deficit o f the three distribution

EDES - PROYECCIONES FINANCIERAS 2008-2013 Deficit Total Final (Millones US$):

Cas0 Base- con CRI bajo (61 6) (81 9) (436) (341) (212) (38) 129 Cas0 Base - c/larifa Cong (61 6) (87 9) (845) (835) (789) (674) (608) Cas0 Base - ciaum Comb (616) (81 9) (529) (576) (540) (260) 147 Cas0 Base - siPtas Gas y Carbon (616) (81 9) (506) (420) (313) (1 62) 156

18. The above analysis indicates that as a result o f the implementation o f the Plan de Accidn para la Recuperacidn del Sector Ele'ctrico, the EDEs have achieved progress, notably in the increase in the supply o f electricity to consumers, the reduction o f losses, and the increase in collection performance. However, the non-application o f the formula for the automatic adjustment o f the tariffs to the increase in fuel prices, which occurred particularly during the second hal f o f 2007, has worsened the financial situation, and unless this i s corrected, annual deficits are projected to remain well above US$SOO mil l ion during the next three years. Results show that:

a. In the baseline scenario, the distribution companies would continue to lose money until 201 1, but after that they would be generating profits. The combined funding needs during 2009-10 would total US$700 million. By 2012 i t would be possible to lower tariffs.

b. With tariffs frozen at current levels, the distribution companies would need substantial financial contributions, in the order o f US$600 mi l l ion even in 20 12- 13.

c. Without the conversion to natural gas o f the existing plant and the new coal plants, the EDEs would not break even until by 20 12-20 1 3.

d. A slower growth o f the CRI would also delay the EDEs' breaking even until 2012.

e. An increase in the power purchase price resulting from the increase in fuel prices, if uncompensated by tariffs, would extend the delay the EDEs' breaking even for two years.

19. The basic conclusion i s therefore, that in order for the EDEs to be self-sustaining by 20 1 1, i t i s necessary not only to improve their CRI (projected to be 69 percent by then) but also to implement the technical tariff.

20. Given the profitability o f EGEHID (and o f ETED to a much lesser degree), CDEEE would be profitable by 2010, in spite o f the fact that i t would continue to lose money under i t s PPA. The following chart shows the projected deficitdprofits o f CDEEE, EGEHID and ETED:

- 75 -

TOTAL CDEEE, EGHID Y ETED Consolidado

Total (171,3) (38,7) 11,O 19,0 64,l 121,3 CDEEE (258,o) (260~6) (270,3) ( 2 8 0 3 (2833) (287,3)

318,4 369,2 EGEHID 82,O 205,7 261,l 278,7 ETED 4 3 16,2 20,2 20,9 29,5 393

2 1. results o f ETET, EGEHID and CDEEE are as follows:

The operational deficits for the consolidated sector, taking into account the provisional

TOTAL SECTOR - PROYECCIONES FINANCIERAS 2008-2013 Deficit alCapex (Millones US$):

\Cas0 Base (852) (319) 174 591 1097 I Cas0 Base- con CRI bajo (852) (319) (174) (4) 216 44 1 Cas0 Base - c/Tarifa Cong. (852) (728) (668) (582) (420) (296) Cas0 Base - claum.Comb. (852) (413) (409) (333) (6) 460 Cas0 Base - s/Ptas.Gas y Carbon (852) (390) (252) (1 06) 92 468

22. follows:

And the final deficits o f the consolidated sector, including investments would be as

TOTAL SECTOR - PROYECCIONES FINANCIERAS 2008-2013 Deficit Total Final (Millones US$):

Cas0 Base- con CRI bajo (990) (474) (330) Cas0 Base - clTarifa Con

- 76 -

ATTACHMENT I ASSUMPTIONS FOR FINANCIAL PROJECTIONS

1. The following are the main assumptions adopted in the financial projections:

Base year and currency

2. The financial projections are at current prices, in Dominican Pesos (RD$) and in US$, taking the audited financial statements o f 2006 as the base year. For 2007, preliminary values up to June 2007 have been taken and projected thereafter.

Macroeconomic variables

3. inflation, exchange rate and interest rate are the following:

The forecast macro-economic variables in terms o f economic growth, domestic and US

Tabla 1

2007 2008 2009 201 0 201 1 201 2 Inflaci6n Local (YO) 5,3 6,O 5,4 6,5 5,9 7,O Inflaci6n US (YO) 2 3 1,9 2 7 3,4 3,3 3,4 Devaluaci6n anual promedio (YO) 0 Yo 5% 5% 6% 5 Yo 7% Tasa de Cam bio a fin de ai70 RD$/US$ 34,5 34,8 36,6 38,9 41 ,O 43,6 Tasa de Cam bio promedio RD$/US$ 33,3 347 35,8 37,9 40,O 42,5 Tasa de Inter& interna 18% 18% 18% 18% 18% 18%

Demand projections, installed capacity and energy generation

4. The main variables have been estimated by CDEEE on the basis o f the Action Plan for 2007 which includes a number o f actions to achieve the financial viability o f the sector including projections in terms o f energy purchases and sales.

5. and cost o f generation (Table 2).

The following table presents the installed capacity and the energy generation, fue l prices

- 77 -

DEMANDA, CAPACIDAD INSTALADA, GENERACldN

UNIDAD INDICADOR , Sltusclon Ai i t

2006

I 2008

6,00% 13740

791 12949 6,3%

DEMANDA TOTAL DE ENERGIA DEL SEN1 G w h USUARIOS NO REGULADOS

2009

5,7596 14530

826 13703 5,8% I DEMANDADEMERCADOREGULADO

CRECIMIENTO %

3.206 550 302 536

1.090 726

1.256 220 213 257 462 105

39,256

62,07 7,92

49,55 82,31

2.39 7,92 7,73

14,lO

2,16

ABASTECIMIENTO DEL MERCADO REGULAD

3.247 593 302 831

1 090 432

1.369 311 213 465 381 0

46,6%

62,53 8,27

52,04 84,60

2.41 8,27 8,12

14,52

2,lO

HIDROELECTRICA + EOLICA CARBON GAS NATURAL FUEL OIL No 6 FUEL OIL No 2

1,oo

1.601

14,54

0 Osb

133.40

HIDROELECTRICA + EOLICA CARB6N GAS NATURAL FUEL OIL No 6

1,oo

1.729

14,42

0 0%

144,lO

G w h GWh

Gwh /a

MW MW MW MW MW

MW MW MW MW

USMO” GAS NATURAL FUEL OIL No 6 FUEL OIL No 2

CARB6N GAS NATURAL FUEL OIL No 6 FUEL OIL NO 2

US$ MM

SISTEMA ACTUAL UScenWKwh

US$ MM mes

UScenUKWh

h) CACORES MACROECOhOM COS -cc 38 C a m z RDB -SO RDS LSS PC -3ca FC EB’BCCS “-30s

USSIMMBTU US$lBarril USfIBaml

USSIMMBTU USSIMMBTU USSIMMBTU USSIMMBTU

12.512 767

11 745

9.523 81,081

3.086 430 302 536

1.090 726

1.276 183 167 257 565 105

41,4%

50.95 6,22

45,55 76.96

1,96 6.22 7,11

13.18

2,26

0,66

1.185

12 63

0 0%

101,82

19,82

33.30 5,OO 2,54

Estlmado 2007

12 962 779

12 183 3,7%

10 112 83,00%

3.206 550 302 536

1090 728

1.154 207 213 257 373 105

36,0%

56,3: 7,61

47,9’ 76,9t

2 , l i 7,6d 7,4I

13,lS

2,23

0,66

1 362

13,47

0 0%

113,47

19$7

33,15 5,25 2,45

CDEEE

11.006 85,00%

11.990 87.50%

34.81

‘Nota Dafos acfuairzados a Julio 2007 Provecciones realizadas DO r teCfliCOS dQ Se asurne que toda la energia suminislrada por 18s distribuidoras 8s comprada a precios de 10s conlratos actuales

2010

5,50% 15.329

662 14.467 5,6%

-

12 946 69,50%

3.667 713 602 831

1 090 432

1.478 366 453 465 175 0

45,7%

- - 65,75

8,132 54.03 87,17

2,53 6,62 6,43

14,93

2,04

1,oo

1.906

14,72

0 0%

158,81

20,97

36.65 6,52 3,39

- 201 1

5,25% 16.133

897 15 236 5,3%

- - -

14 094 92,50%

4.494 940

1.202 831

1.090 432

1.861 463 933 465

0 0

62,6%

- - 68,Zd 8,9!

56,2: 89.7:

2,6: 8,9! 8,7i

15,3i

1,97

l ,oo

2 132

15,13

0 0%

177,66

21,31

40,96 5,87 3,26

- 2012

5,00% 16.940

933 16 008 5,1%

- - -

15 207 95,00%

8.028 1174 1 502 631

1090 432

2.127 490

1173 465 0 0

60,7%

- - 74,18 9,36

58,52 92,53

2,86 9,36 9,13

15,85

1.91

1,oo

2.362

15,54

0 0%

19687

21,67

43.63 7,04 342

- 78 -

Allowance for Uncollectable Bills

6. totals.

The allowance for uncollectible bills has been estimated at three percent o f receivables

Depreciation

7. Depreciation o f technical installation and equipment are determined according to the straight l ine method over their estimated useful life. The annual rate has been estimated at the average o f 3.6 percent for the facilities and installations in service.

Staffing

8. maintain the 2006 U S $ value.

Staff number are assumed to be those in 2006 and personnel cost have been assumed to

General and administrative costs

9. pay commissions to different agencies as follows:'

I t has been assumed the same level o f cost in US$ o f 2006. The companies will need to

- - - -

Organism0 Coordinador de Electricidad 0.12% o f the energy purchased Superintendencia de Electricidad 0.35%*75% o f 1% energy purchased Comisibn Nacional de Energia: 0.12%*25% o f 1% o f energy purchased Municipalities: 3% o f bills collected

Interest rates

10. The interest on the arrears and payables are the following:

On arrears - Resoluci6n 007 12%

On payables Long te rm debt with generation companies 17%

Others 18% Debt with CDEEE 5 yo

- 79 -

Annex 10: Safeguard Policy Issues DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project

Background

1. The Dominican Republic has weak enforcement capabilities o f i t s environmental regulations. The Government i s we l l aware o f this, and has, with the agreement o f the C N E (supported with a Bank operation) requested and obtained support to strengthen this area. A MOU has been signed and i s being implemented. The environmental control approach adopted i s brief ly defined as: environmental licensing i s required, graded according to the intervention expected environmental impact; a license defines an environmental management plan that the licensee agrees to implement; as recorded in the license, the licensee has to provide periodic progress reports on the implementation o f the agreed environmental plan; these reports ought to include an audit report, prepared by certified independent environmental auditors registered with the SEMARN. Environmental control i s managed through private sector participation. SEMARN, with the support o f the Bank, i s training a cadre o f 40 to 60 professional in environmental auditing for international certification. But S E M A R N has not yet the required capability, as the new procedures and training will be completed in mid 2008.

2. In general, electricity distribution projects are classified as l o w environmental impact activities in most legislation in Lat in America and worldwide. Nonetheless, o ld equipment s t i l l contains dangerous chemicals, polychlorinated biphenyls (PCBs), wh ich required special handling and strict f inal destruction requirements, see B o x N o . 1. In the Dominican Republic, as in most o f La t in America, transformers and breakers used PCBs until the end o f the 1970’s, but equipment replacement has been slow. I t i s estimated that 5 to 7 percent o f the transformers that will be replaced in the project use PCB. The f inal disposition o f a l l transformers and breakers w i th PCB do pose a serious threat t o the environment if adequate procedures are not implemented. Therefore, the project environmental management strategy i s two fold: the verification o f the existence o f adequate regulations and procedures for the identification, handling and f inal disposal o f PCB contaminated equipment, and the development of best practice environmental guidelines for the electricity distribution sector for the country.

Box No.1 - Polychlorinated biphenyls (PCBs)

Polychlorinated biphenyls (PCBs) are a class o f organic compounds with 1 to 10 chlorine atoms attached to biphenyl which i s a molecule composed o f two benzene rings each containing six carbon atoms. The chemical formula for all PCBs i s C12HlO-xClx.

PCBs were used as coolants and insulating fluids for transformers and capacitors, stabilizing additives in flexible PVC coatings o f electrical wiring and electronic components, pesticide extenders, cutting oils, flame retardants, hydraulic fluids, sealants, adhesives, paints, de-dusting agents, and in carbonless copy paper.

PCB production was banned in the 1970s due to the high toxicity of most PCB congeners and mixtures. PCBs are classified as persistent organic pollutants which bioaccumulate in animals.

- 80 -

3 . The EDEs have developed environmental management offices staffed with we l l trained personnel and adequate logistic support. These offices are charge with the responsibility o f proper disposition o f PCB contaminated products, are we l l aware o f the procedures, have created the required infrastructure, have trained technical personnel to screen oils for PCB content, and are familiar with the f inal disposition drill (to hired an international company for the collection treatment and destruction o f oils o f metals contaminated with PCB). N o serious institutional constraint was detected. The EDEs are capable o f managing the PCB safely and environmentally adequately.

4. The new country environmental framework, as described, will be applicable to the project. Given the l o w environmental impact o f the proposed project activities, distribution o f electricity requires no licensing in the existing Government legislation. The handling o f PCBs and PCB-contaminated equipment -the main environmental concern in this project- i s regulated through a well defined and concerted environmental procedure. Strict adherence to the PCB environmental standard i s mandatory.

5 . The EDEs and S E M A R N have agreed: (i) to adopt guidelines for environmental good practices; (ii) to enact the guidelines through their Board o f Directors as Corporate Guidelines for immediate application; (iii) that S E M A R N will adopt the guidelines for environmental good practices and formally opt for a Certif ication o f not requiring additional environmental supporting documentation to grant the corresponding environmental licenses; and (iv) that the disposal o f discharged equipment will fo l low the existing regulation wh ich has been judged to be adequate.

Handling PCBs

6. S E M A R N has enacted a well-structured, and highly-fol lowed specific regulation as to the use, handling, transportation and final disposal o f PCBs. This regulation was reviewed by environmental experts and i t s implementation was verif ied in the field. It was found that the regulation adheres to best practices in environmental management, and the EDEs proved to be well aware o f i t s existence, have the information database o f i t s equipment with PCB, have the required facilities and personnel, and fo l low the set guidelines. It was also judged that the implementation o f environmental audits was an efficient and effective enforcement mechanism. I t was concluded that no additional intervention was required to ensure adequate handling and final disposition o f PCB-contaminated equipment that will be replaced during project implementation.

Environmental Guidelines for Activities in Electric Distribution Networks

7. As indicated, the EDEs jo in t l y developed, under terms o f reference agreed with the Bank, environmental guidelines for the implementation o f activities in the electricity distribution sector. Joint technical working sessions were held with SERMARN to receive their guidance and reach consensus on the scope and terms o f the proposed guidelines. S E R M A R N has formally reviewed the guidelines.

- 81 -

1.

2.

3.

4.

5 .

6.

7.

8.

9 .

I O .

11.

BoxNo.2 - Guidelines for Environmental Guide Electric Distribution Activities

Introduction.

Basic instructions: Overview and recommendations for effective use o f the Guidelines.

Planning and organizational framework for environmental management: Description o f the conceptual, organizational and operational framework for the effective implementation o f environmental management in general, applied to the specific case o f electricity distribution companies in Dominican Republic.

Legal and regulatory considerations: Presentation and description o f the legal and regulatory environmental framework applicable to the electricity distribution sector. I t includes a brief description o f major legislation related to environmental issues, and a summary presentation o f participating agencies

Activities description: Presentation o f the basic components and activities associated with the provision of electricity from the transmission lines to the final user. For each type o f activities a list o f main tasks i s presented indicating options and sub-activities to implement.

The environment and i t s characterization: Description o f the environmental components and issues to take into account while planning and implementing electricity distribution networks. Each environmental element i s defined and sources o f basic data are suggested.

Environmental impacts and environmental management good practices: This i s the core area o f the Guidelines. For each construction, operational and maintenance subactivity identified a CARD was developed considering as target audience those who have to plan and implement the environment mitigation, conservation or preservation activities. The card includes: Code; description o f tasks that are likely to cause environmental degradation; description environmental measures to implement; classification o f the measures to implement; description o f the likely impact; responsible party; and, recommended timing. A contingent procedure was defined in case o f discovering cultural physical assets that ought to receive special care.

Monitoring and evaluation system: Simple guidelines for the implementation o f a monitoring and evaluation system for the environment and the impacts from Project activities. The monitoring and evaluation system guidelines cover planning, implementation, operation and maintenance activities.

Occupational health and industrial safety.

References and bibliography: List o f documents and material used during the preparation o f the Guidelines.

Glossary: Definition o f main technical terms used in the Guidelines.

Other Safeguard Issues

8. Other environmental issues were investigated during project preparation, in particular those with reference to physical cultural property preservation. Initially such potential impact was identified as relevant, taking into account the rich cultural heritage o f the Dominican Republic. Field visits and interaction with field officers tended to minimize the risk o f such findings. Nevertheless, the Environmental Good Practices Guidelines do incorporate a detailed procedure to implement in the event o f such findings, in accordance with the recommendations o f OP 4.1 1.

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Annex 11: Project Preparation and Supervision DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project

Planned Actual PCN review July 3,2007 July 3,2007 Initial PID to PIC Initial ISDS to PIC Appraisal Feb 4-12,2008 Negotiations April 8,2008 Board/RVP approval May 15,2008 Planned date o f effectiveness August, 2008 Planned date o f mid-term review February, 20 10 Planned closing date August, 20 12

Key institutions responsible for preparation o f the project: CDEEE, EdeNorte, EdeSur, EdeEste.

Bank staff and consultants who worked on the project included:

Name Title Unit Lucio Monari Task Team Leader LCSEG David Reinstein Sr. Energy Specialist LCSEG Maritza A. Rodriguez Financial Mgmt Specialist LCSFM Jayme Porto-Carreiro Energy Specialist Consultant Stephen Ettinger Economist Consultant Vladimir Jadrijevic Power Engineer Consultant Catherine Abreu Procurement Analyst LCSPT Pedro Antmann Power Engineer Consultant Elena Correa Sr. Social Dev. Specialist SDV Alejandro Deeb Environmental Specialist Consultant Fabiola Alt imari Counsel LEGLA Mariana Montiel Sr. Counsel LEGLA Miguel-Santiago da Silva Oliveira Finance Officer LOAFC Alma Domenech Program Assistant LCSEG Robert Taylor Peer Reviewer EASTE Malcolm Cosgrove-Davies Peer Reviewer AFTEG

Bank funds expended to date on project preparation: 1. Bank resources: U S $ l 80,000 2. Trust funds: 0 3. Total: US$180,000

Estimated Approval and Supervision costs: 1. Remaining costs to approval: 2. Estimated annual supervision cost:

- 83 -

Annex 12: Documents in the Project Fi le

DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project

1, Fichus Proyecto Rehabilitacidn de Redes de Distribucidn de Electricidad de EdeEste, prepared by EdeEste, November 2007

2. Fichus Proyecto Rehabilitacidn de Redes de Distribucibn de Electricidad de EdeNorte, prepared by EdeNorte, November 2007

3 . Fichus Proyecto Rehabilitacidn de Redes de Distribucidn de Electricidad de EdeSur, prepared by EdeSur, November 2007

4. Guia Ambiental para Proyectos de Distribucidn de Energia Ele'ctrica, prepared by CDEEE, EdeEste, EdeNorte, EdeSur, October 2007

5 . Andlisis de Sostenibilidad Financiera del Sector, prepared by Cora Kamman (IDB Consultant), October 2007

- 84 -

Annex 13: Statement of Loans and Credits DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project

Project ID FY Purpose

~ _ _ _ _ _ ~ ~ ~ ~ ~ ~ ~ ~ ~

Difference between expected and actual

disbursements Original Amount in US$ Millions

IBRD I D A SF GEF Cancel Undisb Orig Frm Rev’d

PO90010 2008 DO Social Sectors Investment Program 19.40 0.00 0.00 0.00 0.00 19.40 0.00 0.00 PO96605 2006 DO Youth Development Project 25.00 0.00 0.00 0.00 0.00 25.00 9.72 0.00

PO827 12 2005 DO Power Sector Program Loan 150.00 0.00 0.00 0.00 0.00 100.00 100.00 16.67 PO78838 2004 DO Financial Sector Technical Assistance 12.50 0.00 0.00 0.00 0.00 11.40 9.73 0.00 PO8271 5 2004 DO Power Sector TA Project 7.30 0.00 0.00 0.00 0.00 6.07 3.70 1.71

PO54937 2003 DO-EARLY CHILDHOOD EDUCATION 42.00 0.00 0.00 0.00 0.00 30.18 23.72 0.00

PO76802 2003 DO-Health Reform Support (AF’L) 30.00 0.00 0.00 0.00 0.00 22.83 22.83 3.57 PROJECT

PO71505 2001 DO-HIV/AIDS Prevention & Control Proj. 25.00 0.00 0.00 0.00 0.00 3.92 3.92 0.84

Total: 311.20 0.00 0.00 0.00 0.00 218.80 173.62 22.79

DOMINICAN REPUBLIC: Statement of IFC’s Held and Disbursed Portfolio In Mil l ions o f US Dollars

Committed Disbursed

IFC I F C

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

2003 ADOPEM 0.00 1 .oo 0.00 0.00 0.00 0.00 0.00 0.00 2005 Aerodom 45.00 0.00 0.00 15.00 45.00 0.00 0.00 15.00 2006 Aerodom 17.00 0.00 0.00 0.00 16.50 0.00 0.00 0.00 2003 Banco BHD 10.00 0.00 10.00 0.00 0.00 0.00 10.00 0.00

2005 Basic Energy 22.65 0.00 0.00 0.00 10.22 0.00 0.00 0.00

2002 C I I 28.50 0.00 0.00 0.00 28.50 0.00 0.00 0.00 2004 Domicem S.A. 24.00 0.00 0.00 24.00 24.00 0.00 0.00 24.00 2005 Domicem S.A. 3.75 0.00 0.00 3.75 3.75 0.00 0.00 3.75 1998 Flamenco Bavaro 1.18 0.00 7.70 4.07 1.18 0.00 7.70 4.07 2004 Grupo M 20.00 0.00 0.00 0.00 12.95 0.00 0.00 0.00 2000 Hospiten 1 .oo 0.00 0.00 0.60 1 .oo 0.00 0.00 0.60 2005 Occidental Hotel 0.00 0.00 20.00 0.00 0.00 0.00 20.00 0.00 2005 0 c c i d o m 8.89 0.00 0.00 35.56 8.89 0.00 0.00 35.56 2002 OrangeDominicana 23.29 0.00 15.00 33.27 23.29 0.00 15.00 33.27 2000 Rica 5.63 0.00 3.00 0.00 5.63 0.00 3.00 0.00

Total portfolio: 210.89 1.00 55.70 116.25 180.91 0.00 55.70 116.25

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic

2003 ADOPEM 0.00 0.00 0.00 0.00

Total pending commitment: 0.00 0.00 0.00 0.00

- 85 -

Annex 14: Country at a Glance DOMINICAN REPUBLIC: Electricity * Distribution - Rehabilitation Project

POVERTY and SOCIAL Dominican Republic

2006 Puiiiildtioii rnid y e a (nulhmd GNI per capita (AUes meulcd US$) CNI (Atlas mlhod, US$ Lnllims)

Average annual growth, 2000-06

Popidallon (!%/

Most recent estimate (latest year available, 2000-06) Poveity (% d ~ l a 6 o n belownatrcmal poverty line) IJrban popiilatiw (% of iota1 popila0an) Life expectancy at birth (years) Infant mortaliw (per 1,0001rw hrfhs) Cliilrl inalrritntion (% of diildren undei 5) A( cess Io an improved water scnirce (% of populatrrm)

GI oss pninary enrollment (% of sLJld-age popda6on)

LdllrJl f l l l L 0 (%)

I lrnlscy (% Of~wpUleDw age 15+)

k&l I 0 Fainale

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1986

GUP (US$ b/l/iw?s) (3 UYS taptnl fainabodGDP txpol.ts of goods and sewicesiGDP Gross dnmeslic savingdGDP Giuss national savingdGDP

Cuirern awoint blancslGDP interest paymentsiGDP Total debVGDP rolal debt setvice/expwts Prrsant valw of d&tiGDP Piasei% valw of d&tiexpatts

6 1 19 8 24 4 10 7 164

-3 4 3 0

60 2 24 7

1986.96 1946-06 (average annual gfowul) (< DP 3 1 5 2 W P per capita 1 2 3 4 Expxts ofgocds and sewices 6 5 3 5

0 6 2.910 28 0

1 6 3 6

42 88 68 26 5

95 87

113 115 110

1996

14 2 18 9 30 7 14 1 16 8

-1 5 1 1

30 4 6 2

2005

9 3 7 6 8 1

Latin America 8 Carib.

556 4,767 2,650

1 3 2 1

78 73 26

Ql 90

118 120 116

2005

29 5 19 9 34 0 162 189

-1 e 0 9

25 1 6 9

24 9 57 0

2006

10 7 0 0 5 8

Lower- middl t income

2.276 2.037 4,635

0 9 1 4

47 71 31 13 81 89

113 117 114

2006

31 8 20 1 33 5 155 196

-2 5

2006-10

5 9 5 2 4 4

Dewloprnent dlarnond'

I Life experxancy

Amass to improved water source

- Domnican ReplMc --- Locver-m,ddleincome gmup

Econornlc rstlos' i I T-

Domestic Capital savings formation

IndoMedncss

----Domnican Reflibhe - - Laver-middleincome group

STRUCTURE of the ECONOMY

(I of GDP) Ayntultue IridLi yl r v

Seivices

Household final cnrauiiiptlon experlditlre General gov't final consimption expenditure Irriyxiils of p o d s drld seiviws

Maniifactunnq

(avt~rage nnnrial grmvth) Aqni%llure IIldUStry

Salvlces

I lnusehdd final cnnsunipbon expendifwe General yov'l final cwisunflion expenditure Gross c.apital formation Imports of qocids and sewices

Manufaciunnq

1986 1996

174 128 23 7 324 127 175 500 5 4 8

7 1 8 2 335 355

822 797

198696 1996-06

1 2 44 3 7 3 6 3 4 3 2 3 3 6 2

2 7 4 1 3 4 4 5 4 4 4 3 6 4 2 0

2005

12 4 25 5 15 1 62 1

74 0 9 8

37 7

2005

7 3 5 2 5 4

11 7

ir o -2 6 9 6

14 2

2006

12 1 26 2 14 0 61 8

77 9 6 7

40 0

2006

9 9 13 1 7 4 9 7

8 6 9 7

12 1 12 6

Qrowth of capital and GDP (%) 1 2 o T

- GGF "9 'GOP I Growth of exports and Imports (%) al 10

0

- i o

-a - E w r b 'O ' ImwrL?

Note a 0 6 data me preliminary eamates This table was proiiiced from the Development Econmics LDB database ' Tlir didmonds show fwi key indcators in the coupdiy (in bold) compared with Irs incomegroup averaqe lldata are missinq. the diamond wli

be IllLullnl~lote

- 86 -

PRICES and GOVERNMENT FINANCE

0 67 35

Domestic prices (76 chanye) Consumer prices lmliiicit GDP deflator

E - Bilalrrzl

G . Short-tewi

A- IERU E - IDA U . '9thnr rnulblaleiai F . Frivaie C-IMF

Government finance (76 of GDP, iridudes airrent yrilrits) Current revenue Current budget balance Overall suiplusideficit

TRADE

(USY rnlI/onS) Total exports (fob)

Raw sugar

Maiiutactures Total imports (at)

Food Fuel and energy Capital goods

&dW COCOa

Expoil pnce index (2000=100) lrnport pnce index (2000=100) Terms oftrade (2000=100)

BALANCE ofPAYMENTS

(US$ rnDms) Exports of goods and services linports of floods and seivices Resw im balance

Net iricorne Net wirerit transfers

Currmt amount halance

Financrng items (net) Changes in net reseives

Memo. Reserves including sold (US$ rn///ons) Conversion I ate (DEC /oca// US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ nulllms) Total debt outstanding and disbursed

IBRD IDA

Total deb1 sewice IBRD IDA

Composition of net resource Rows Ofkaal grants Otfiaal creditors Pnvate crediton Foi agn direct investment (net inflows) Portfolio equity (net inflows)

WnId Bank proqiam Comrnitnients Disbursements Principal repayments Net flows liderest payments Net transfers

~

1986

7 6 Y4

1986

897 114 59

326 1743

45 50 I 303

1986

1499 2 059 -560

-245 596

-209

227 -1 8

430 2 9

1986

3 687 180 21

374 33

0

21 102

-8 50 0

0 13 18 -6 15 21

1996

5 4 5 5

14 2

1996

4 053 246 58

3 107 6 300

31 5 844 61 4

1996

6 193 6 848 -656

-725 1.168

21 3

183 30

51 2 129

1998

4 331 244 17

448 56

1

54 -29 -28 97 0

37 18 38

-1 9 19

-39

~

2005

4 2 4 2

179 3 6 1 2

2005

6 145 74 33

4 760 9876

2 378

2005

10.058 11 336 -1.278

-1.897 2.897

-478

1376 -898

1 929 30 0

2005

7 398 405

11

894 59

1

62 149 175

1,023 0

150 64 38 26 21

4

18 2 3 5

-1 9

2006

6.441

4 513 11,190

2 568

2006

10 664 12.748 -2 084

-1,735 3 033

-786

1,069 -283

2 251 33 1

Export and Import levels (US$ mill )

i63w1

The Woi Id Bank Group Tlns table was prepared by cointry unit staff figures may differ from other World Bank published data 9128107

Current account balance to GDP (%)

' O T

2o06 I Composition of 2005 debt (US$ mill)

I A 405

G QW 6 'i 438 1

i n I _n

. -

I 5

32 23

9

- 87 -

MAP SECTION

PepilloSalcedo

Villa Vásquez

Rincón

Pimental

Cabrera

Sánchez

Miches

Boca de YumaBocaChica

El Macao

Sabana de la Mar

GasparHernández

Luperón

Bonao

Cabral

Oviedo

VicenteNoble

Duverge

El Cercado

Imbert Sousúa

Rio SanJuan

Fantino

Sabana Grandede Boya

Yamasa Bayaguana

Nigua

VillaAltagracia

San Josede Ocoa

Constanza

Polo

Punta Palenque

Restauración

Monte Cristi

Mao

Sabaneta

Elías PiñaSan Juan

Santigo

Moca

Puerto Plata

Salcedo

La Vega

Cotuí

San Cristóbal

Baní

San Franciscode Macorís

Nagua

Samaná

El Seibo

Higüey

La RomanaSan Pedrode Macorís

HatoMayor

Neiba

Barahona

Jimaní

Pedernales

Azua

Dajabón

Monte Plata

San Josede las Matas

Jánico

SANTODOMINGO

MONTE

CRISTI

2

1

S A N T I A G O

S A N J U A N

B A O R U C OA Z U A

L A V E G A H AT OM AY O R

LA ROMANA

L AA L TA G R A C I A

5

6

7

S A M A N Á

ESPAILLAT

3

4

MARÍATRINIDADSÁNCHEZ

1. DAJABÓN2. SANTIAGO RODRÍGUEZ3. VALVERDE4. SALCEDO5. SÁNCHEZ RAMÍREZ6. MONSEÑOR NOUELSAN7. SAN CRISTÓBAL

E L S E I B O

LA

ES

T RE L

L ETA

PEDERNALES

BARAHONA

DUARTE

INDEPENDENCIA

MONTE PLATA

DISTRITONACIONAL

SANPEDRO DE MACORÍS

PUERTO PLATA

PERAVIA

H A I T I

LagoEnriquillo

Yaque del Norte

Yaque

del S

ur

Camu

Yuna

Bahíade Ocoa

Bahía de Neiba

Ozama

ATLANTIC OCEAN

Caribbean Sea

72º W 71º W 70º W

72º W 71º W 70º W 69º W

18º N

19º N

20º N

18º N

19º N

20º N

E D E N O R T EE D E N O R T E

E D E E S T EE D E E S T EE D E S U RE D E S U R

E D E N O R T E

E D E E S T EE D E S U R

DOMINICANREPUBLIC

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 20

0 20 40 Miles

40 Kilometers IBRD 35856

FEBRUA

RY 2008

DOMINICAN REPUBLIC

ELECTRICITY DISTRIBUTIONREHABILITATION PROJECT

EDENORTE

EDEESTE

EDESUR

GEOGRAPHICAL AREAS COVERED BYELECTRICITY DISTRIBUTION COMPANIES:

SELECTED CITIES AND TOWNS

PROVINCE CAPITALS

NATIONAL CAPITAL

RIVERS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES