West Bank and Gaza Electricity Sector – World Bank project – Information paper

Project Name                  West Bank and Gaza-Electricity Sector…
                              Investment and Management Project

Region                        Middle East and North Africa

Sector                        Power

Project ID                    XOPA40506

Borrower                      The Palestinian Authority

Implementing Agency           Palestinian Energy Authority (PEA) with
                              assistance of PECDAR
                              Palestinian Economic Council for
                              Development and Reconstruction
                              Contact: Dr. A.T. Hamad
                              Tel : 972-050-264870
                              Fax : 972-050-206195

Date PID Prepared             December 12, 1995

Projected Appraisal Date      May, 1996

Projected Board Date          September, 1996

I.   Background.   Municipalities have historically been the major providers  of public utility services in WBG.   They are confronting a host of serious managerial and financial challenges, including population densities that are amongst the largest in the world; an uncertain political mandate; a complicated and at times conflicting overlay of authorizing legislation; a pronounced drop in revenues for both operating and capital expenses; and an increase in the nature and scope of responsibilities that they are being asked to assume. Long neglect, compounded by the Intifada, has led to a pronounced deterioration of existing infrastructure systems and services, and has hindered economic growth and efforts at rehabilitation.  The unfortunate but predictable result of the above set of circumstances has been a significant breakdown in service delivery. There is an urgent need to create new institutions — to seek opportunities for the rationalization and consolidation of services between municipalities where practical — particularly in the electric utilities —  and, to develop indigenous managerial talent.

II.   Responsibility for electric utility service delivery is currently vested in municipal departments or village councils, except for the Jerusalem District Electric Company (JDECO) — a shareholder-owned utility.  In Gaza (population of about 840,000)  municipalities buy electricity from the Israeli Electric Company (IEC).  In the West Bank (population of 1,830,000), there are 2 communities — 110 take wholesale supplies from IEC for resale at low voltage;  67 have a partial supply from generation owned by the village; 75 have no formal electricity supply.

III. Project Objectives. The major objectives of the proposed project are to: a) implement unfunded investments needed to urgently rehabilitate and reinforce the power distribution and transmission networks in the West Bank; b) provide for the consolidation of the disparate municipal electric distribution systems in WBG — concentrating on the northern and southern regions of the West Bank — by establishing two new electricity distribution utilities; c) create an overall institutional basis — building on international best-practices — for the sustainable operation of the power sector.  The enabling environment created would provide for the introduction of private sector participation in the new distribution utilities, and ultimately for the self-financing of the bulk of new investments needed to develop the sector; and, d)provide for the establishment and the reinforcement of PEA as the national bulk power supplier and transmission company, responsible for planning, central dispatch, acquisition of supplies from independent power producers (IPPs) and wholesale purchases/sales from the regional interconnected power system with neighboring countries.

IV.  Project Description.   The proposed operation is comprised of three components:

     A.   Emergency rehabilitation of electric utility distribution
          facilities in the West Bank.  This US$ 100 million component
          forms the critical initial part of the least-cost solution of
          power system expansion and includes the work and associated
          professional project management services (and training of
          Palestinian counterparts) necessary to regain the bulk of the
          capacity and reliability of the existing infrastructure.  It
          would be implemented over the next 3 years;

     B.   Distribution Utility Management Contracts.  This component
          covers the first year cost of two performance-based management
          contracts to establish two regional utilities in the West
          Bank:  one in the northern region in the vicinity of the city
          of Nablus, and; one in the southern region, in the vicinity of
          the city of Hebron.   The contractual arrangements would
          likely be of the operational contracting  class, wherein the
          operator takes all normal commercial risks associated with
          electric distribution utility operational activities, and
          provides all, or part, of the working capital needs for the
          new utility. A competitive and transparent procurement process
          would be followed to recruit the utility operating
          companies/joint ventures.  An indicative cost for this
          component is US$7 million.

     C.   Technical assistance (TA) for institutional strengthening of
          the power is required.  Areas in need of TA support include:
          (i) establishment of PEA as a fully operational generation and
          transmission company;  (ii) preparation of bidding documents
          for the operational management contracts;  (iii) drafting of
          concession, power purchase, fuel supply and other legal
          agreements;  (iv) preparation of technical and safety
          standards for the sector;  (v) assistance in negotiating
          wheeling and interconnection agreements, and;  (vi)
          determination of an electricity pricing and regulatory system.
          An indicative cost for this component is approximately US $3
          million.

V.   Tentative Project Cost and Financing.  Detailed cost estimates and a financing plan have still to be prepared.  The expansion program for the power sector has been designed in a modular fashion to permit its packaging in a segment-and-time-slice format to suit program and finance consideration.  Estimated financing requirement — exclusive of taxes– for the Project is about US$110 million.  The Bank's contribution could be up to US$ million; thus some US$85 million would be needed from cofinancing and other sources.  Based on the interest expressed by
potential cofinanciers at the recent consultative group meeting in Paris, prospects for obtaining the funds needed for this project are promising.  

VI.  Rationale for Bank Involvement. A reliable power supply is a necessity for private sector based economic activity and improving the quality of life.  In view of the large public investment needs of the sector (at least US$ 600 millon over the decade ahead exclusive of new investments by IPPs) an effective partnership among the PA, donors, multilateral institutions and the private sector will be required if sector development goals are to be achieved.  Publicly funded investment needs to proceed in parallel with the development of management contracts, a framework for IPP involvement, and the institutional framework. Failing this, urgent work to reduce the present deficiencies of the power system will be delayed.  The World Bank group is ready in principle to support the establishment of an IPP and operational management contracts in the West Bank.

VII. Project Implementation.   The proposed project encompasses a labor intensive exercise to implement the emergency rehabilitation component, and  to meet the emergency recovery target it would require the disbursement of  substantial sums of money over a relatively short period of time. An examination of the implementation experience recently gained under the Emergency Rehabilitation Project  (ERP) shows it would be best for large single-responsibility contracts to be let to reputable contracting firms with construction experience on similar projects and circumstances. In order to meet the overriding objectives of creating local employment to kick-start the economy, the general contractor would maximize local labor as well as recruit Palestinian staff  with the
appropriate experience in utilities.  The contracts would provide for separate-on-the-job training.  To ensure the success of the implementation of the project and timely completion it is judged necessary to retain the services of a single project management (PM) team to oversee the works. The objectives of the PM team would be to ensure uniformity of construction standards, minimize operating costs and maximizes benefits, use specialists for project appraisals, negotiate contracts with bidders, provide contract clarifications, testing, design approvals and monitor cost control, commissioning etc.  The PM also would ensure interface with the financiers/donors of the project.

VIII.     Environmental Aspects.  The environmental impact of the construction of the rehabilitation of the distribution system has been reviewed by the PEA and their consultants and judged to be manageable.  The impact would normally be expected to be moderate as it entails the rehabilitation of distribution and substation capacity at existing sites.  The upgrade of the facilities would likewise have limited impact.  The project has been placed in environmental screening Category B.

Contact Point:      Public Information Center
                    The World Bank
                    1818 H Street N.W.
                    Washington D.C. 20433
                    Telephone No.: (202)458-5454
                    Fax No.: (202)522-1500
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Note:  This is information on an evolving project.  Certain components may not necessarily be included in the final project.