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Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 66259-UZ

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$180 MILLION

TO THE

REPUBLIC OF UZBEKISTAN

FOR THE

ADVANCED ELECTRICITY METERING PROJECT

March 1, 2012

Energy Sector Unit Sustainable Development Department Europe and Central Asia Region

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

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CURRENCY EQUIVALENTS

(Exchange Rate Effective as of January 5, 2012) Currency Unit Uzbekistan Som (UZS) UZS 1,000 US$0.5534 US$1 UZS 1,807

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank LRMC Long-run Marginal Cost

AEM Advanced Electricity Meter MAWR Ministry of Agriculture and Water Recourses

AMI Advanced Metering Infrastructure MDM Metering Data Management

bcm billion cubic meters MFERIT Ministry of Foreign Economic Relations, Investment and Trade

CAPS Central Asian power system MM Meter Management

CAS Country Assistance Strategy MOF Ministry of Finance

CIFA Country Integrated Fiduciary Assessment MOS Meter Operating System

CPAR Country Procurement Assessment Report MW megawatts

CPS Country Partnership Strategy NCB National Competitive Bidding

CQS Selection Based on Consultants’ Qualification NPV Net Present Value

CRM Customer Relationship Management O&M Operation and Maintenance

DC Direct Contracting OM Operational Manual

DL Disbursement Letter ORAF Operational Risk Assessment Framework

EDM Energy Data Management ORGRES a subsidiary of UE

EIRR Economic Internal Rate of Return PDO Project Development Objective

FBS Fixed Budget Selection PES Regional Distribution company

FIRR Financial Internal Rate of Return PIU Project Implementation Unit

FM Financial Management PMU Project Management Unit

GFS Government Finance Statistics PoM Project Operation Manual

GPN General Procurement Notice QBS Quality Based Selection

GWh Giga Watt-hours QCBS Quality and Cost Based Selection

IBRD International Bank for Reconstruction and Development R/P Reserves-to-Production

ICB International Competitive Bidding RES District Distribution Branch

ICB Individual Consultant selection procedure RFP Request for Proposal

IEC International Electrotechnical Commission SLA Subsidiary Loan Agreement

IFAC International Federation of Accountants SOE Statement of Expenditure

IFI International Financial Development Institution SPN Specific Procurement Notice

IFR Interim Financial Report SSS Single (or Sole) Source Selection

IFS International Finance Statistics TOR Terms of Reference

IS Implementation Support TTL Task Team Leader

ISA International Standards on Auditing TWh Terawatt Hour

kWh kilowatt-hours UE Uzbekenergo

LCS Least Cost Selection VSL Variable Spread Loan

LIB Limited International Bidding

Regional Vice President: Philippe H. Le Houerou Country Director: Takuya Kamata:

Saroj Kumar Jha Country Manager

Sector Director: Country Manager:

Laszlo Lovei Takuya Kamata

Sector Manager: Task Team Leader:

Ranjit J. Lamech Leiping Wang


ADVANCED ELECTRICITY METERING PROJECT

Table of Contents I. Strategic Context .................................................................................................................... 1

II. Project Development Objectives............................................................................................ 5

III. Project Description ................................................................................................................. 6

IV. Implementation ...................................................................................................................... 8

V. Key Risks and Mitigation Measures .................................................................................... 10

VI. Appraisal Summary ............................................................................................................. 10

Annex 1: Results Framework and Monitoring ............................................................................. 17

Annex 2: Detailed Project Description ........................................................................................ 22

Annex 3: Implementation Arrangements ..................................................................................... 33

Annex 4: Operational Risk Assessment Framework (ORAF) ..................................................... 46

Annex 5: Implementation Support Plan ....................................................................................... 48

Annex 6: Team Composition ....................................................................................................... 51


ADVANCED METERING PROJECT

PROJECT APPRAISAL DOCUMENT

EUROPE AND CENTRAL ASIA

Energy Sector Unit (ECSS2)

Sustainable Development Department (ECSSD)

DATA SHEET

Date: March 1, 2012 Country Director: Saroj Kumar Jha Sector Director: Laszlo Lovei Sector Managers: Ranjit J. Lamech Team Leaders: Leiping Wang Project ID: P122773 Lending Instrument: SIL

Sector(s): Power (100%) Theme(s): Infrastructure services for private sector development (100%) Environmental Assessment Screening Category: C

Project Financing Data: Proposed terms: flexible loan with a final maturity of 25 years including a grace

period of 5 years. [ X ] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other:

Source Total Amount (US$M) Total Project Cost:

Cofinancing: Uzbekenergo: Total Bank Financing:

IBRD IDA

New Recommitted

246.1

66.1

180.0

180.0 0.0

Borrower: Republic of Uzbekistan Responsible Agency: Uzbekenergo (UE) Khorazm str., 6 Tashkent, 100000 Uzbekistan Tel: (998 71) 233 98 21 Fax: (998 71) 236 27 00 Contact Person: Mr. Batirdjan Teshabaev, Chairman of the Board

Estimated Disbursements (Bank FY/US$ m)

FY 2012 2013 2014 2015 2016 2017

Annual 0.0 30.0 80.0 40.0 20.0 10.0

Cumulative 0.0 30.0 110.0 150.0 170.0 180.0

Project Implementation Period: Start: June 30, 2012 End: December 30, 2016 Expected effectiveness date: June 30, 2012 Expected closing date: June 30, 2017

Does the project depart from the CAS in content or other significant respects?

○ Yes No

If yes, please explain:

Does the project require any exceptions from Bank policies? Have these been approved by Bank management? Is approval for any policy exception sought from the Board?

○ Yes No ○ Yes ○ No ○ Yes No

If yes, please explain:

Does the project meet the Regional criteria for readiness for implementation?

Yes ○ No

Project Development Objective: The project development objective is to reduce commercial losses of Uzbekenergo’s three regional power distribution companies in Tashkent City, and the Oblasts of Tashkent and Syrdarya by improving their metering and billing infrastructure, and the commercial management systems. Project description: Component 1: Advanced Metering Infrastructure (AMI). This components include supply and installation of: (a) Around 1.2 million advanced electricity meters (AEMs); (b) Data concentrators and related communication systems; (c) Hardware and software of the meter data management systems, one for each regional distribution company. Component 2: Energy Data Management (EDM) /Billing/ Archive System. This component includes: (a) Supply and installation of software and hardware of a centralized EMD/Billing/Archive system

in Tashkent and its applications for the three regional distribution companies; (b) Migration of all the existing billing data to the databases of the new EDM/billing system. Component 3: Management Efficiency Improvements and Project Implementation Support. This component includes: (a) Assessment of electricity consumption patterns and connection conditions to identify losses

reduction opportunities, and develop and implement a losses reduction strategy; (b) Business process re-engineering and institutional capacity strengthening for the operation of the

new AMIs; (c) Project communication program to educate consumers on the benefits of the new system, how it

works and the responsibility of the consumers to pay the electricity bills on time; (d) Project implementation supervision and administration; (e) Technical assistance for further customizations of the EDM system, and financial audits.

Safeguard policies triggered? Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waters (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60)

○ Yes No ○Yes No ○ Yes No ○ Yes No ○ Yes No ○ Yes No ○ Yes No ○ Yes No ○ Yes No ○ Yes No

Conditions and Legal Covenants:

Loan/Project Agreement Reference

Description of Covenant Date Due

Loan Agreement; Article V, 5.01 (a)

The Subsidiary Agreement has been executed on behalf of the Borrower and the Project Implementing Entity (PIE).

By effectiveness

Loan Agreement; Article V, 5.01 (b)

The Project Management Unit (PMU) established by the PIE is functioning with a composition, resources and terms of reference satisfactory to the Bank.

By effectiveness

Loan Agreement; Article V, 5.01 (c)

The PIE has adopted the Project Management Manual satisfactory to the Bank.

By effectiveness

Loan Agreement; Article V, 5.01 (d)

The PIE has established an automated accounting system for Project accounting, budgeting and reporting satisfactory to the Bank and has appointed a financial management specialist for each of the three distribution companies with terms of reference and qualifications satisfactory to the Bank.

By effectiveness

Loan Agreement; Schedule 2, Section I.A.2

The Borrower shall cause the PIE to maintain throughout the duration of the Project the PMU.

Annually

Loan Agreement; Schedule 2, Section I.A.3

The Borrower shall cause the PIE to maintain, throughout the duration of the Project, a Project Implementation Unit (PIU) within each of the three regional distribution companies in Tashkent City and the Oblasts of Tashkent and Syrdarya.

Annually

Project Agreement; Schedule Section II.B.3

Maintain debt service coverage ratio (DSCR) of at least 1.2 times the estimated maximum debt service.

Annually

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I. Strategic Context A. Country Context 1. Uzbekistan is a low mid-income, resource rich country in the heart of Central Asia. The country accounts for one-third of the region’s population, and its economic and social prospects are important both for the 28 million citizens, and the populations in the rest of the Central Asian countries (Kazakhstan, Kyrgyz Republic, Tajikistan and Turkmenistan), which were part of the former Soviet Union over two decades ago. 2. The country has enjoyed robust GDP growth since the mid-2000s—averaging 8 percent annually according to official data. Its economy withstood the 2008-09 global recession relatively well, due mainly to the continued high international demand for, and world market prices of the country’s key export commodities—copper, cotton, gold, and natural gas; prudent macro-economic management; and the country’s limited exposure to world financial markets. Overall growth is projected to continue around 7-8 percent annually during 2011-14, supported by net exports and a large capital investment program. 3. To become a high middle-income country in a sustainable manner, Uzbekistan needs to transform its current commodity-dependent economy into an industrialized, private demand-driven one. Critical elements for such a transformation include the following: (a) increasing the economy’s efficiency and competitiveness; (b) strengthening the financial sector to support entrepreneurial activity in industrial and agricultural development; (c) diversifying production towards higher value-added activities and sub-sectors where comparative advantage can be demonstrated; (d) creating jobs for the rapidly growing population of young educated people; (e) improving governance to enhance the effectiveness of industrial development; and (f) improving access to information on government policies and their outcomes.

4. Uzbekistan’s long-term development goal is to become an industrialized, high middle-income country by mid-century. The authorities’ approach toward achieving this goal is to continue the gradual transition to a more market-oriented economy, to mitigate the potential negative consequences of external shocks, to ensure equitable distribution of growth between regions, and to maintain infrastructure and social services at an adequate level. In the mid-term, the government’s key development priorities are to (i) increase the efficiency of infrastructure, especially of energy, transport, and irrigation; (ii) enhance the competitiveness of targeted, strategic industries, such as agro-processing, petrochemicals, and textiles; (iii) diversify the economy, in particular to reduce its reliance on commodity exports; and (iii) improve access to and the quality and outcomes of education, health and other social services, so that the benefits of overall growth are shared equitably by the entire population. B. Sectoral and Institutional Context 5. Uzbekistan has rich energy resources. At the end of 2009, Uzbekistan had 600 million barrels of proven oil reserves and a Reserves-to-Production (R/P) ratio of 18.7 years. It has about 1.7 trillion cubic meters of proven natural gas reserves with a R/P ratio of 26.4 years. Its proven coal reserves are estimated at 3 billion tons. In 2010, the country produced 65 billion cubic

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meters (bcm) of natural gas and 32 million barrels of oil. The domestic consumption and exports of gas were around 49.5 bcm and 15.5 bcm respectively. Domestic production of oil is estimated to cover 80 percent of the country’s domestic demand1. 6. The Uzbek power network is part of the larger Central Asian power system (CAPS), which is coordinated through a central dispatch coordination center located in Tashkent. In the past, the CAPS consisted of the five Central Asian national power grids, but is currently operating with only three countries, e.g. Kazakhstan, Kyrgyz Republic and Uzbekistan. The national power transmission network has 1,850 km of 500 kV lines, 6,200 km of 220kV lines, and 15,300 km of 110 kV lines. The transmission network is interconnected with neighboring countries with 220 kV and 500 kV transmission lines.

7. The state owned national power company, Uzbekenergo (UE), has the mandate for providing electricity in Uzbekistan. It is a state-owned company governed by a council chaired by a Deputy Prime Minister. It was established in August 2001 after public sector reorganization and is the legal successor of the former Ministry of Energy and Electrification. It is a holding company of 54 companies and has 51-100 percent equity ownerships of these subsidiaries. 8. UE is a vertically integrated power company, generating, transmitting and distributing most2 of the electricity in the country. By the end of 2010, its installed generation capacity was 12,038.7 MW with total electricity generation of 50,063 GWh. UE also owns and operates the national transmission network. The total number of employees of UE was around 61,700 in 2010.

9. UE owns and operates all the distribution networks and is a monopoly in the retail business through its 14 distribution companies following a geographical spread of the network across the country. Each of these distribution enterprises comprises a number of regional network units that deliver the electricity to end users. In total, there are 256 such regional network units. Latest statistics indicate that UE has around 5 million customers. Most of the electricity consumed by industrial (46 percent) and agricultural (24 percent) consumers. Average annual per capita electricity consumption is 1,940 kilowatt-hours (kWh). Table 1 Characteristics of Electricity Consumers in Uzbekistan - 2010

Consumer Groups Number3 Consumption (TWh)

Percentage

Residential 4,800,000 11.25 24 Industrial 16,000 20.25 46 Agricultural 21,000 10.35 24 Commercial and Public sector consumers 125,000 3.15 6 Total 5,006,000 45.0 100

Data Source: UE

1 BP Statistical Review 2011. 2 The Ministry of Agriculture and Water Resources (MAWR) also owns and operates serval hydropower generation plants on some reservoirs and irrigation canals managed by the MAWR. These power plants sell electricity to UE. There are no privately owned independent power producers (IPPs) in the country. 3 2008 statistics.

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10. The electricity tariffs are regulated by the central government4 and have been regularly adjusted since 2004 when the nominal average electricity tariff was at about US$ 0.018/ kWh. Tariff categories have been simplified and cross-subsidies reduced. In the past few years, the tariff level has been increased at a rate exceeding the 8 - 10 percent annual rate of inflation. Currently, the average level of end-user tariffs is US$ 0.053/kWh (as of October 2011). These steps have allowed UE to cover operational costs without direct subsidies from the government5. As a result, the overall financial performance of UE was sound though some deterioration of operating profitability and higher leverage have been observed recently. 11. The power sector is facing some major challenges to support the country to achieve the target of becoming an industrialized, and high middle-income country by mid-century:

Efficiencies of the power industry are low. All existing gas fired thermal power plants

run on old steam thermal technology with efficiency of barely around 34 percent. The latest combined cycle gas turbine technologies have an efficiency of over 55 percent. Transmission and distribution system losses, both technical and commercial, are officially reported to be around 20 percent of electricity generated6, around two to three times the losses experienced in advanced European power grids and some middle income developing countries. Although the collection rates for power bills improved in the past few years, there is still significant room for further improvement.

Aging assets will have to be replaced or rehabilitated in the mid to long terms, requiring significant financing resources. Most of the generation assets are 40 to 50 years old. Around one-third of power transformers and circuit breakers are also over 30 or 40 years old and many distribution assets are approaching service lives of around 40 years. A large portion of existing electricity meters have been in service well beyond their designed economic life and cannot be recalibrated. These meters have poor measurement accuracy and are easy to tamper with. Significant financing resources from both public and private sectors will be required to replace and/or rehabilitate the aging assets.

Existing technical standards and management practices require urgent updates to be consistent with international norms and/or best practices. UE continues to rely on many Soviet era technical standards for design and construction of power sector facilities, which limits the participation of international suppliers. The accounting and financial management system and approaches of system planning are not fully consistent with international practices. Significant changes are needed to transform the company into a commercialized and efficient power utility.

12. The security and affordability of the energy supply are the key priorities of the GoU’s energy sector policies. The government’s energy sector strategy7 is focusing on: (a) improving

4 There is not an independent regulator to regulate the tariffs. 5 The inheritance of power infrastructure from Soviet era without debt has enabled cost-recovery tariffs that cover mostly operation and maintenance costs. 6 Sector Assessment (Summary): Energy. Asian Development Bank (ADB), September 2011. 7 Government of Uzbekistan. 2007. Welfare Improvement Strategy of Uzbekistan. Tashkent, http://www.wis.uz

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energy efficiency and promoting clean energy technologies; (ii) integrating energy efficiency into national planning; (iii) improving energy sector performance by commercializing utility operations; (iv) attracting private sector participation; and (v) increasing commercial energy exports. 13. Currently, a major focus of GoU’s energy strategy is to rapidly improve the energy efficiency of both energy supply industries, and energy end users. A key action in the power sector is to implement a country wide advanced electricity metering (AEM) program to improve transparency and accountability of the sector. The program aims to implement modern technologies in electricity metering, billing and payment collection to reduce commercial losses. It will also encourage electricity consumers to use electricity more efficiently by providing transparent and fair pricing signals, and information of electricity consumption.

14. The program will cover all consumers nationwide, both low voltage small (residential and institutional), and high- and medium-voltage (10 kV and above) large (mostly industrial, and agricultural) consumers. According to related government regulations, all consumers will be required to install advanced metering systems8. For low voltage consumers, the metering systems will be financed and installed by UE and for high and medium voltage consumers, the metering systems will be installed by themselves but under the supervision of UE and in accordance with the technical specifications defined by related national authorities.

15. In the past few years, UE has spent around US$ 32 million in installing bulk revenue meters capable of accurately measuring and reporting interval demand for large, high- and medium- voltage customers, power generation plants and transmission-distribution interfaces. Large consumers are also installing meters within their own premises. Recently, UE has undertaken several pilot AEM projects in Tashkent, covering around 53,000 residential customers. These pilot projects have significantly reduced commercial losses and substantially increased revenue in the project areas. Building on the experience of the pilot projects, the GoU is requesting the Bank and other international financial institutions to finance the scaling-up of the AEM program9. C. Higher Level Objectives to which the Project Contributes 16. The Bank’s new country partnership strategy (CPS)10 for Uzbekistan (Report No. 65028-UZ) for FY12-15 supports the implementation of efficiency, competitiveness, diversification, and social equity elements of the government’s medium-term development strategy. In this regard, the CPS strongly supports increasing the efficiency of infrastructure (energy, drainage, irrigation and water management, and, potentially, transport) where government and Bank Group views on sector-specific reforms and strategy broadly converge. 17. In line with the Bank’s CPS and the GoU’s strategic priorities, the Bank’s energy sector program is supporting (a) the improvements of energy efficiency of industrial enterprises through

8 The Decree of the Cabinet of Ministers No 150 on additional measures to improve metering and control system of electric power consumption, 2009. 9 ADB will finance an AEM project for around 1.0 million consumers in Bukhara, Jizzakh and Samarkand. 10 Approved by the board on November 1, 2011

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an on-going financial intermediary lending operation; (b) strengthening the power transmission system to improve operational efficiency of the power transmission networks through an on-going investment lending; and (c) updating the technical standards and improving financial management of UE through technical assistance. The Bank is also in discussion with the GoU for providing technical assistance in electricity tariff setting and regulations and financing a power distribution system technical losses reduction project. 18. The proposed AEM project is consistent with the result area I of the CPS - increasing the efficiency of infrastructure, as well as with UE’s development strategy issued by the Cabinet of Ministers and approved by the President of Uzbekistan in December 2010. It provides the Bank with a unique opportunity to: (a) support the GoU’s policy priority of improving energy sector performance by commercializing utility operations and improving energy efficiency; (b) introduce the Bank’s rich experience in reducing commercial losses and strengthening governance of power utilities in meter reading, billing and revenue collections; and (c) assist UE to significantly advance its metering, billing and revenue collection systems with the most advanced “smart” metering technologies. II. Project Development Objectives A. PDO 19. The project development objective is to reduce commercial losses of Uzbekenergo’s three regional power distribution companies in Tashkent City, and the Oblasts of Tashkent and Syrdarya by improving their metering and billing infrastructure, and the commercial management systems. 20. This objective will be achieved by (a) installing around 1.2 million advanced meters and associated communication systems to replace the existing and outdated metering infrastructures and equipping the three regional distribution companies with modern metering data management (MDM) systems; (b) installing a centralized Energy Data Management(EDM) /Billing/Customer Relationship Management(CRM)/Archive system with working stations and, secured and independent accounts for each of the three regions; and (c) assisting the three regional distribution companies in re-engineering their procedures in meter reading, billing and collection and improving management efficiency. B. Beneficiaries 21. The direct project beneficiaries are the three power distribution companies of UE and electricity consumers in the project areas. If successfully implemented, the project will increase the collection rates of the three power distribution companies, leading to the improvements of their financial viability and operational efficiencies. The project will benefit electricity consumers by improving supply reliability. It will also send fair and transparent pricing signals and other useful information to the consumers to allow them to better manage their electricity consumption. This will eventually reduce energy waste in the mid to long-term, which will also reduce carbon emission and benefit the environment. Finally, the project will benefit related

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employees of the three distribution companies by reducing labor intensive activities in meter reading, billing and collection. C. PDO Level Results Indicators 22. Achievement of the development objective will be assessed through the following indicators: (a) increase in the billing rate, and (b) increase in the collection rate. III. Project Description A. Project Components 23. The Project has three components. Each component is described below (See Annex 2 for a detailed project description). 24. Component 1: Advanced Metering Infrastructures (AMIs). This component includes supply, installation, and commissioning of (i) advanced electricity meters (AEMs) for about 1.2 million low voltage customers and at low voltage sections of relevant distribution transformers of the three regional distribution companies; (ii) data concentrators, and communication systems among various sub-systems, the centralized management system in Tashkent and AEMs of both low voltage and medium and high voltage customers of the three regional distribution companies; and (iii) hardware and software of one metering data management (MDM) system per regional distribution company.

25. Component 2: Energy Data management (EDM) /Billing/Archive System. This component includes (i) supply, installation, customization and commissioning of the hardware and software, as well as training and after-sale services of a centralized EDM/billing/archiving center in Tashkent and its applications for the three regional distribution companies; and (ii) migration of all the existing billing data to the databases of the new EDM/billing system. 26. Component 3. Management Efficiency Improvements and Project Implementation Support. This component includes: (i) assessment of electricity consumption patterns and physical connection conditions of various customers to identify opportunities for reducing commercial losses, starting from large consumers and to develop and implement a loss reduction strategy; (ii) business process re-engineering and institutional capacity strengthening for the operation of the new AMI and better utilization of rich information collected by the AMI to reduce commercial losses; (iii) project communication program to educate consumers of the benefits of the new system, how it works and the responsibility of the consumers to pay the electricity bills on time; (iv) project implementation supervision and administration; and (v) project entity and project financial audits and technical assistance for further customization of the EDM system. B. Project Financing

1. Lending Instrument

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27. UE, in agreements reached with the Ministry of Finance (MOF), has selected a US Dollar denominated, and commitment-linked variable spread loan (VSL) of US$ 180 million for the project. The amortization profile will be level repayment, with a repayment period of 25 years, including 5 years of grace. The Bank loan will be on-lent by MOF to UE under a subsidiary loan agreement (SLA).

2. Project Financing

28. The total project financing requirements of the proposed project are estimated at US$ 246.1 million inclusive of price and physical contingencies, tax and duties, interest during construction and front end fee. The Bank will finance: the supply of all the AMI equipment and installation of related communication systems; the supply, installation of software and hardware of the MDM systems of the three regional distribution companies; the centralized EDM/billing system in Tashkent; the services of the supervision consultant; and the front end fee, together totaling US$ 180.0 million. UE will finance installation of AEMs, taxes and duties, interest during construction, project communication and other project activities, for a total of US$ 66.1 million. Detailed information on costs and financing sources is provided in Table 2. C. Lessons Learned and Reflected in the Project Design

29. The project draws upon lessons of the previous Bank engagement in Uzbekistan, the pilot smart metering projects implemented by UE in Tashkent and similar projects implemented by the Bank elsewhere, as well as other international experience in reducing commercial losses of power distribution companies11. The design of the project reflects the following lessons learned:

In addition to technical solutions (installation of the AMI system), it is essential to implement a management efficiency improvement component to identify and reduce commercial losses, and re-engineer the business process for the operation of the new AMI system;

The smart meters should at least have the functions of fraud detection, and remote disconnection and re-connection;

Sufficient trainings should be provided by equipment suppliers to the operation and maintenance staff of UE;

For residential customers, meters should be installed outside their premises to prevent meter tempering;

Strong commitment and ownership by the implementation agency is essential for the successful implementation of the project; and

Advanced preparation of bidding documents during project preparation stage strengthens the project ownership and speeds up project implementation.

11 Reducing Technical and Non-Technical Losses in Power Sector, Background Paper for the World Bank Group Energy Sector Strategy, Pedro Antmann, July 2009

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Table 2 Project Cost and Financing

IV. Implementation A. Institutional and Implementation Arrangements 30. UE will be the implementing entity for the proposed project. Within UE, the project will be implemented by a Project Management Unit (PMU) established within ORGRES (a subsidiary of UE), the three regional distribution companies in Tashkent City, the Oblasts of Tashkent and Syrdarya respectively, and other related departments and subsidiaries of UE. The core staff of the PMU has been appointed with terms of reference agreed with the Bank. A tendering committee will be established to conduct bid evaluation and make procurement decisions. Selected contractors and an international supervision consultant will assist UE in implementing the project and provide goods and services. Detailed institutional arrangements are described in Annex III. 31. The project will be implemented during a period of around 48 months. A detailed project implementation plan has been developed and agreed with the Bank. A project operation manual (PoM) has been drafted by UE and, reviewed and commented upon by the Bank. It will be

Project ComponentsProject cost

(US$ million)

IBRD Financing

(US$ million)% Financing

1. Advanced Metering Infrastructures (including MDM Systems)

1) Equipment and related Services 150.1 150.1 100%

2) Installation of Meters 33.0 0.0 0%

2. EDM/Billing and Archive System

1) Hardware&Software, installation and services 10.9 10.9 100%

2) Central processing center customization and data migration 6.9 6.9 100%

3. Management Efficiency Improvements and Project Implementation Supports 1) Project supervision technical assistance 2.0 2.0 100% 2) project communication and other activities 1.0 0.0 0% 3) Other technical assistance 2.0 2.0 100%

Total Baseline Costs 205.8 171.8 83% Physical contingencies 5.1 4.3 83% Price contingencies 4.1 3.4 83% Taxes and Duties 26.9 0.0 0%

Total Project Costs 242.0 179.5 74%Interest During Implementation 3.6 0.0 0%

Front-End Fees 0.4 0.4 100%Total Financing Rquired 246.1 180.0 73%

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agreed with the Bank, and adopted by UE for project implementation before the effectiveness of the loan. B. Results Monitoring and Evaluation (Annex 1) 32. The performance indicators of the project have been discussed and agreed with UE and baseline has been established. At project development objective level, the billing rates and collection rates of each of the three regional companies will be monitored. For each project components, the monitoring will be focused on the progresses of procurement activities in the first year of the project implementation. Starting from the second year, the focus will be on the progresses of installation of equipment and software. Project communication and capacity building activities will also be closely monitored. 33. The PMU, with the support of the selected international supervision consultant, and the three distribution companies will monitor and evaluate project progress and outcomes. Semi-annual project progress reports will be prepared by the PMU. The Bank team will supervise the project implementation at least twice a year to monitor the progress of the project, including the financial management and procurement aspects of the project implementation. A project completion report will be prepared to finally evaluate the project performance and outcomes. C. Sustainability 34. Sustainability of the proposed project will ultimately be determined by the sustainability of the power sector, and at the project level, by the proper implementation and operation of the proposed project. In addition, UE should also ensure that all the advanced electricity meters, including those installed by medium and high voltage customers, operate properly as part of the integrated AMI system. 35. GoU is committed to strengthening the electricity sector’s institutional capacity, along with UE’s management efficiency. The proposed project will be part of the GoU’s strategy to improve the efficiency of the sector. 36. UE has demonstrated a high level of commitment to the project through project preparation and established project management capacity. Extensive training and capacity building will be provided by selected contractors and consultant to build UE’s capacity to operate the proposed project.

37. Though the project will only finance AEMs for low voltage customers, all the high and medium voltage customers are required to install AEMs and associated systems at their own costs. All these meters will communicate properly with the MDM and EDM/billing system financed by the project before the completion of the project. Ensuring the proper working of those AEMs and their proper communications with the MDM and EDM/billing system will be part of the proposed project.

38. In addition, the project is technically sound, and construction will be supervised and managed by a qualified international consultant with strong experience in advanced metering

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systems. If successfully implemented, the project will contribute to UE’s financial viability by reducing commercial losses. Finally, the advanced metering system will help send right pricing signals to the consumers, which will encourage energy savings and rational use of electricity. This will benefit the environment. V. Key Risks and Mitigation Measures

A. Risk Ratings Summary Table

Risk Rating

Stakeholder Risk M

Implementing Agency Risk

- Capacity S

- Governance M

Project Risk

- Design M

- Social and Environmental L

- Program and Donor L

- Delivery Monitoring and Sustainability M

Overall Implementation Risk S

B. Overall Risk Rating Explanation

39. The proposed project will be the first12 large scale advanced electricity metering project in the country. Key potential risks are summarized in the Operational Risk Assessment Framework (see Annex IV). The overall risk for project implementation is rated substantial. Key risks are mostly related to the decentralized nature of the project which involves several sub-project sites and various sub-implementation agencies, and relative lack of Bank project experience, especially in the areas of procurement and financial management. Mitigation measures have been agreed with project agencies and will be monitored carefully during project implementation. VI. Appraisal Summary A. Economic and Financial Analysis

Economic Analysis 40. Cost Effectiveness. The project is considered as a cost effective option to reduce commercial losses in services for electricity consumers given the fact that (a) most existing

12 In parallel with the Bank, the Asian Development Bank (ADB) is financing a similar project in other three distribution companies of UE.

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meters have been in service well beyond their designed economic life and are installed inside the premises of the customers, causing poor measurement accuracy, and are easy to tamper with; (b) the current practice of self-reading and reporting of electricity consumption by customers and verifications by UE staff involves “human factors”, leading to possible fraud and collusion between some customers and UE meter readers; and (c) traditional prepayment meters can be a potential solution to improve poor revenue collection but they can not provide an effective solution against electricity theft involving meter by-passing or meter tampering. 41. An advanced metering system plus the associated meter data management and billing system, offers the most effective solution to rapidly reduce commercial losses. In addition, the proposed project is considered “future proof” investment because AEM meters are regarded as a key building block for smart grid development and virtually all power companies in major developing countries are investing in smart grid development to meet the power sector needs of tomorrow. 42. Cost-Benefit Analysis. A cost-benefit analysis was carried out to estimate the economic internal rate of return (EIRR) of the proposed project. It was conducted based on estimated economic prices of costs and economic values of quantified benefits of the project. The key economic benefits considered in the analysis include (a) reduced energy wastes (energy savings); and (b) climate change benefit (reduction of greenhouse gas emission from energy savings). The economic costs of the project considered in the analysis include capital cost of the project and incremental operation and maintenance (O&M) costs.

43. The EIRR was estimated at 13 percent. The sensitivity analyses indicate that (i) if the improvements of billing and collection rates decrease by 20 percent, the EIRR would be 11 percent; and (ii) if investment cost increases by 20 percent, the EIRR would be 10 percent. These analyses suggest that changes in important assumptions, such as investment cost and benefits of the project will not fundamentally affect the economic viability of the project. Financial Analysis 44. Current financial performance of UE: The overall financial performance of UE is sound. The company has adequate liquidity to meet its obligations. The operational performance and profitability of the company are improving. This is primarily due to continuous increase of the end-user tariffs in the past few years. 45. Since 2008, the company has embarked a sizeable investment program aimed at generation and transmission system capacity expansion and improvements in the metering system. A substantial part of the investment program is financed through debt, leading to a rapid increase of the debt to equity ratio from 14:86 in 2007 to 52:48 in 2010. Nevertheless, for a well established power utility like UE, this debt to equity ratio does not expose the company to significant financial risks. 46. Projected financial performance of UE: Overall, the company’s financial performance is expected to be sound with a net profit margin of around 15 percent, debt service coverage ratio higher than 4 and debt to equity ratio below 60:40. The liquidity situation may deteriorate in

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around 2012 but would recover around 2014. UE expects an annual revenue growth of around 16 percent from 2010 to 2015. As a result, the projected net profits of the company will increase from around US$188 million in 2010 to around US$387 million in 2015. This substantial growth is mainly driven by electricity sales growth, increase in electricity tariffs and improvement of efficiency. 47. Monitoring UE’s Financial Condition: In the context of the above financial projections, the key focus of monitoring UE’s financial viability would be on (i) the effectiveness of UE’s action plan to improve commercial efficiency, especially to reduce commercial losses; and (ii) timely increases of tariff levels to reflect the increases of operating and investment costs of UE. These two issues will be closely monitored by the Bank during the project implementation. 48. Project Financial Internal Rate of Return (FIRR): The financial analysis was conducted based on nominal prices/costs and inclusive of taxes. The key financial benefit of the project is the increased revenue from improvements in metering, billing and collection. The main financial costs of the project are the capital investment and incremental O&M costs. The financial analysis of the project yielded an FIRR of 19 percent, providing positive benefits to UE’s financial viability. B. Technical 49. The feasibility study of the project was conducted by a reputable international consultant. It was reviewed by the Bank and found to be sound. The study reviewed the existing metering and billing system of the UE, assessed various commercial advanced metering solutions, and metering data communication and management technologies. Based on the reviews and assessments, the study proposed advanced metering infrastructure for each of the three regional distribution companies and a centralized energy data management/billing/customer relationship management/archive system based in Tashkent City. 50. The project presents no unusual implementation and operation challenges though risks related to the lack of implementation capacity and the decentralized nature of the project need to be mitigated properly. The equipment and technologies involved in implementation and operation of the project are all commercially proven and the project will be implemented according to internationally accepted technical standards and practices. The investment cost was estimated by the international consultant based on the costs of similar recent projects both in developed and developing countries, and specific market conditions in Uzbekistan.

51. UE is a well established power utility and has relatively strong technical capacity in implementing power projects. There are also sufficient training facilities within each of the three distribution companies which can be used to provide necessary training for its employees, contractors and temporary workers for the installation and/or operation of the advanced metering infrastructure. In addition, a qualified international supervision consultant will be recruited to assist UE in implementing the project. C. Financial Management

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52. A financial management assessment has been conducted by the Bank to determine whether the financial management arrangements of the project, including flow of funds, budgeting, accounting, reporting, and auditing, meet the Bank’s minimum requirements. The assessment has confirmed that financial management arrangements of the PMU, established within the ORGRES and the three regional distribution companies are generally acceptable, but need to be enhanced further. A time-bound action plan (see Annex 3) aimed at strengthening the financial management capacity at the PMU and the three distribution companies has been elaborated and agreed with UE. 53. UE has confirmed that the customized automated accounting system accepted by the Bank and being used to support project accounting and reporting of an on-going Bank financed power transmission project will be used for the proposed project. The system can automatically generate reports for the Uzbekenergo as well as the statement of expenditures (SOEs) and interim financial reports (IFRs) required for reporting to the GoU and the Bank. The interim financial reporting format and audit arrangements, which will be consistent with those of the on-going Bank financed project, have been discussed and agreed. 54. The PMU has appointed a full time disbursement specialist and a financial management specialist respectively to manage the project related financial management and disbursement of the Bank loan under the project. The three distribution companies will also formally appoint financial management specialists to be responsible for financial management and disbursement of co-financing funds for project components directly implemented by them before the start of the project implementation. The UE’s Chief Accountant will have the ultimate responsibility for accounting, reporting on the flow of funds, and disbursement functions of the Project. 55. The Bank has provided some training to related staff of the PMU and will continue to provide focused training to all financial management staff during project launch and hands-on training during implementation. The Financial Management Manual, which is part of the PoM, has been drafted based on the manual of the on-going Bank financed transmission project. It describes budgeting, audit arrangements, internal control and accounting policies and procedures to be followed for this project. The manual will be finalized and agreed by the Bank, and adopted for project implementation before the effectiveness of the loan.

56. Methods of disbursements of the IBRD loan include: (a) direct payment; (b) special commitment; and (c) reimbursement (with full documentation and against SOEs), subject to the minimum amount per withdrawal application defined in the Disbursement Letter (DL). Any expenditures or invoices below the minimum amount need to be paid by UE, then consolidated for submission to the Bank for reimbursement when the amount reaches the minimum amount specified in the DL.

57. Annex 3 provides additional information on financial management implementation arrangements. D. Procurement

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58. A procurement assessment has been carried out and has concluded that UE has adequate experience and capacity to carry out procurement activities related to the proposed project. UE has some knowledge of the Bank procurement procedures through its experience with the implementation of the Bank financed transmission project. As a result, procurement risk is assessed as moderate. Risk mitigation measures have been discussed and agreed with UE. 59. The PMU has appointed two procurement specialists; one of them has worked as a senior procurement specialist for the on-going Bank financed project. The procurement plan for the project has been received by the Bank and found to be acceptable. It will be updated as required to reflect project implementation needs as the project progresses. A brief summary of the procurement capacity assessment and project procurement arrangements are provided in Annex III.

60. The technical specifications for the two ICB goods packages have been drafted by the international consultant who conducted the feasibility study. The terms of reference (TOR) for the supervision consulting services has been drafted by the PMU. 61. Finally, the borrower has agreed to ensure that the Project is carried out in accordance with the provisions of the Anti-Corruption Guidelines. E. Social 62. A social assessment13 was conducted. It found that overall the project will have positive impacts on the poor and vulnerable. Customers’ major concern about the electricity supply is the low supply reliability; most people believe that paying the electricity bill is an important duty and are indignant at those who engage in electricity theft. Most people don’t use electricity for heating or cooking and the cost of lifeline electricity consumption is US$ 2 to 3/month. Therefore the proposed project is not expected to significantly increase financial burdens to the poor. The project will improve customer services by (a) improving the efficiency of the existing service centers of the three distribution companies in the project areas; (b) introducing a 24-hour customer service hotline with emergency response services for customers; (c) establishing a complaint-redress mechanism; and (d) developing a participatory public information program. In addition, the project will significantly improve the transparency and fairness of the metering reading, billing and fee collection of the three power distribution companies. These will be socially beneficial to all the electricity consumers in the project areas. 63. Although the project triggers no social safeguard policies, it does raise two potential social risks: the risk of increased power disconnection of the poor and vulnerable, and redundancies of staff controllers now reading old meters. The social assessment recommended that procedures be developed to ensure that the customers are given sufficient notice to clear any outstanding bills before their power is disconnected, and that opportunities for skills development training be offered to any affected employees, so that they could be absorbed in the UE organization performing other tasks. Both recommendations are reflected in the project design. In addition, a project communications program will be implemented to educate customers about how the system works and its benefits. 13 Feasibility Study for the Advance Electricity Metering Project, Fichtner, October 2011

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F. Environment 64. The project is likely to have minimal or no adverse environmental impacts. It is expected that none of the proposed project activities will trigger any of the Bank’s safeguards policies and the project is classified as Category C. Furthermore, the project is expected to reduce the technical and non-technical losses in the distribution networks and in this way will reduce the mainly thermal power generation in the country, resulting in a potential reduction of CO2 emissions. 65. New meters provided under the project are specified considering environmental compatibility with regard to:

Critical materials: No components with critical content materials (mercury, cadmium, cobalt etc.); and

Manufacturer processes: The manufacturer shall have the manufacturer processes certified according ISO 14001.

G. Conditions and Legal Covenants 66. The Additional Conditions of Effectiveness consist of the following:

The Subsidiary Agreement has been executed on behalf of the Borrower and the Project Implementing Entity.

The PMU established by the Project Implementing Entity is functioning with a composition, resources and terms of reference satisfactory to the Bank.

The Project Implementing Entity has adopted the POM satisfactory to the Bank.

The Project Implementing Entity has established an automated accounting system for Project accounting, budgeting and reporting satisfactory to the Bank and has appointed a financial management specialist for each of the three distribution companies with terms of reference and qualifications satisfactory to the Bank.

67. Financial ratio:

Except as the Bank shall otherwise agree, the Project Implementing Entity shall not incur any debt, unless the net revenues of the Project Implementing Entity for the fiscal year immediately preceding the date of such incurrence or for a later twelve month period ended prior to the date of such incurrence, whichever is the greater, shall be at least 1.2 times the estimated maximum debt service requirements of the Borrower for any

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succeeding fiscal year on all debt of the Project Implementing Entity, including the debt to be incurred.

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Annex 1: Results Framework and Monitoring

UZBEKISTAN: ADVANCED ELECTRICITY METERING PROJECT Results Framework

Project Development Objective (PDO): The project development objective is to reduce commercial losses of UE’s three regional power distribution companies in Tashkent City, and the Oblasts of Tashkent and Syr Darya by improving their metering and billing infrastructure, and the commercial management systems.

PDO Level Results

Indicators Cor

e Unit of Measure

Baseline (2011)

Target Values Monitoring

2012 2013 2014 2015 2016 Frequency Data Source/ Methodology

Responsibility for Data

Collection

Description (indicator

definition etc.) Indicator One: Billing rate in the project areas

% 80

80

82

83

84

88

Annually

The billing system database of the three targeted regional distribution companies.

PMU with the support of the three regional distribution companies.

Billing rate=electricity billed/electricity injected in the distribution networks

Indicator Two: Collection rate in the project areas

% 78 78 81 84 92 98 Annually

The billing system database of the three targeted regional distribution companies.


Collection rate = revenue collected/revenue billed.

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INTERMEDIATE RESULTS

Intermediate Indicators C

ore Unit of

Measure Baseline (2011)




Collection


definition etc.) Intermediate Result: Component I

Intermediate Result indicator One: Accumulated Percentage of all the single-phase meters and associated communication infrastructure installed

% 0.0

0.0

25.0

75.0

100.0 100.0

Semi-annually

Project progress reports and commissioning certificate by UE.

PMU with the support of the three regional distribution companies, verified by the supervision consultant.

Only for meters financed by the project

Intermediate Result indicator Two: Accumulated Percentage of all three-phase meters and associated communication infrastructure installed

% 0.00

0.0

25.0

75.0 100.0

100.0

Semi-annually



Only for meters financed by the project

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ore Unit of





Collection


definition etc.) Indicator Three: Metering data management system installed and functioning.

% 0.0 50.0 85.0 100.0 100.0 100.0 Semi-annually



Bidding document issued= 20% Evaluation complete=30% Contract signed=50% Completion of physical works and installation of equipment and software: 85% Creation of meter database = 100%.

Indicator Four: Percentage of customer meters communicating with the management system

% 0.0 0.0 0.0 80.0 95.0 100.0 Semi-annually



Including both low voltage consumers (meters financed by the project) and high voltage consumers (meters financed by the consumers themselves).

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ore Unit of





Collection


definition etc.) Intermediate Result: Component II

Indicator One: System installed and functioning.

% 0.0 50.0 85.0 100.0 100.0 100.0 Semi-annually



Bidding document issued= 20% Evaluation complete=30% Contract signed=50% Completion of physical works and installation of equipment and software: 85% Fully functioning= 100%.

Indicator Two: Percentage of existing billing data to the new system

% 0.0 0.0 0.0 50.0 100.0 100.0 Semi-annually



Bidding document issued= 20% Evaluation complete=30% Contract signed=50% Completion of physical works and installation of equipment and software: 85% Fully functioning= 100%.

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ore Unit of





Collection


definition etc.) Intermediate Result: Component III

Indicator One: Business re-engineering and capacity building

Activities and timing

of the completion

of the activities

Business re-engineering design.

Training conducted.

New business procedures and institutional arrangement established.

Annually Project progress reports.


Indicator Two: Project communications

Activities and timing

of the completion

of the activities

Team established, and trained, with budget and work-plan.

Communication activities start: (i) presentations to focus groups; (ii) TV and radio programs; (iii) letters, leaflets, etc.

Communication activities start: (i) presentations to focus groups; (ii) TV and radio programs; (iii) letters, leaflets, etc.

Annually Project progress reports.


*Target values should be entered for the years when data will be available, not necessarily annually

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Annex 2: Detailed Project Description

UZBEKISTAN: ADVANCED ELECTRICITY METERING PROJECT Introduction 1. A large portion of the existing electricity meters for low voltage customers are of electromechanical type and were manufactured during the period of 1960 to 1990. These meters typically have an accuracy class of 2 percent, and most of them have been in service well beyond their designed lives and without recalibration. These meters have no internal controls to detect or prevent meter tampering nor can they permit time-of-use tariffs or remote connection and disconnections.

2. Metering reading is heavily dependent on the self-service provided by the electricity customers. For residential customers, normally, the customers are required to read their own meters once each month, calculate consumption and pay for the electricity at outlets of commercial banks. The commercial banks forward the meter reading and the payment information to the regional distribution centers of UE, where operators manually enter the data into local billing workstations. The consolidated billing data is sent upwards, to the regional distribution companies, and from there to the central billing database. Corporate consumers are required to bring their meter readings directly to the utility, instead of commercial banks, where the bill is calculated, printed and given to the consumer to pay at commercial banks.

3. The meter readers’ (controllers’) job is to check the readings reported by the consumers. They are required to visit each customer once every two months to verify the readings. In the role, the controllers interact with the consumers every day, reading the meters and entering the readings into the local workstations of UE’s billing system. They also check the payments against the consumption. Because the revenue meters are installed inside consumers’ premises in locations normally not publically accessible, it often takes the controllers longer than two months to complete their meter verification cycle. Meter installations in locations not publically assessable also make it difficult for the controllers to detect electricity thefts.

4. Many customers under-report their electricity consumption. This is identified only when the controller gets access to the customer’s premises; but by then the customer’s electricity bill may reach a level beyond the customer’s ability to pay. This situation also places the meter readers in a position of power, where they can either decide to disconnect the customers for under-payment or overlook the excess consumption in exchanges of money and/or other favors. This creates conditions for possible collusion between the meter readers and consumers, and bribery.

5. There are two billing systems in use at UE, one for approximately 220 thousand corporate customers and one for around 5 million residential customers. Both systems were developed based on DOS operation system in late 1990s. Both have the same design and similar interfaces which are outdated. Security of the systems is also a major concern of UE. Information within the main database of the billing system is updated every 24 hours for corporate customers and once every two weeks for residential consumers. The main database is physically stored on a

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corporate server of UE and back up copies of current status are generated and saved every day. Historical archives are generated monthly, containing data for the previous 36 months.

6. When a customer is late in payment, the billing system generates alarms and calculates penalties. When a consumer exceeds its approved credit limit14, disconnection is initiated. The software generates the list of customers in default and this list is sent to the appropriate regional network unit. Such consumers are given a warning, either by phone or through a visit by a meter reader, to pay the outstanding bill within 10 days, or face disconnection. If payment is not received by the due date, the consumer will be disconnected. The re-connection is possible only after full settlement of the outstanding bill, including penalties and fees for reconnection services.

7. The major shortcomings of the existing metering, billing and collection system are summarized below:

Many of the existing meters have been in service well beyond their designed economic

life and cannot be recalibrated, causing poor measurement accuracy. The accuracy of these meters is expected to be worse than 2 percent while the international standard15 requires revenue meters to have accuracy of 0.2 percent.

With a majority of the meters installed inside the premises of the customers, or in locations not readily accessible to UE staff, the revenue meters can be easily bypassed or tampered with.

The practices of self-reading and reporting of electricity consumption by customers result

in under reporting of energy consumptions and lead to revenue losses. The verification of customers meter readings by UE also involve “human factors”, leading to the possibility of fraud and collusions between consumers and meter readers.

The current metering, and billing system can not send correct and fair pricing signals to the customers, leading to waste. The waste, especially those during peak hours, increases the burden to the aging distribution networks, leading to higher technical losses.

The existing system does not allow for introduction of new services that would encourage demand side management through time-of-use (ToU) tariff or providing enough information about electricity consumption for system operation and expansion planning.

The billing information system needs to be updated to benefit from the recent developments of IT technologies.

8. To improve load management, reduce technical and commercial losses, and encourage consumers to use electricity more efficiently, the GoU has directed UE to implement a country-wide advanced (“smart”) electricity metering (AEM) program. According to the concept paper

14 For residential consumers, it is equivalent of the fee of 300 kWh of consumption. 15 IEC Standard 687.

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approved by the Chairman of the UE Board, the proposed AEM system should meet following major functions:

Timely monitoring of the whole value chain of the power supply to allow prompt identification and response to failures;

Allowing the adoption of flexible tariff schemes, based on customer types, volume of consumption, time of consumption etc.

Encouraging consumers to save energy by responsible use of electricity and energy saving technologies;

Managing power and energy consumption of consumers through continuous monitoring of their consumption to keep it within their approved credit limits;

Improving power supply quality by reducing overloading of the system through active management of consumers’ power and energy consumption;

Controlling fraud and meter tampering and improving revenue collection through automatic disconnection of those consumers engaged in electricity theft or in violation of the electricity supply contracts;

Ensuring accurate billing, decreasing collection time, improving liquidity predictability of sales;

Improving system load factors and reducing system peak load by shifting load from peak to off-peak hours;

Ensuring faster access to meter readings and eliminate subjective human factors.

9. The Bank is requested by GoU to finance the AEM system in three regional distribution companies of UE in Tashkent City, the Oblasts of Tashkent and Syr Darya. The Power Market Structure of Uzbekistan 10. The electricity business in Uzbekistan is owned and operated by UE, the State Joint Stock Company, established in 2001. The company’s organization structure includes 53 enterprises and organizations, including 39 open joint-stock companies, 11 unitary enterprises and 2 societies with limited liability and company branch-“Energosotish”16. Further restructuring of UE is planned with the objective of commercializing its operations and for introducing competition, but at the present, the company operates as a vertically integrated generation, transmission and distribution business. Any problems in revenue collection by the distribution sector will thus impact the financial position of UE. 11. In Uzbekistan, a single buyer power market concept has been introduced as indicated in Figure A2.1

16 http://www.uzbekenergo.uz/eng/about_us; Retrieved August 08, 2011

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Figure A2.1: Single Buyer Organization

Note: Energosotish: The wholesale buyer of the electricity from the power stations and selling it to network enterprises (PES); Territorial Power Grid Companies (PES): the regional distribution companies. Source: Feasibility Study: Advanced Electricity Metering Project, Fichtner, 2011

12. ENERGOSOTISH as the single buyer: buys energy from all generation companies in the country (UE owned plants and others); pays transmission fees to the transmission company UZELEKTROSET; Sells the energy to the regional distribution companies (PESs). 13. UZELECTROSET as the transmission company (i) owns the 500 / 220kV Transmission Network as well as some 110kV lines considered important for bulk power transmission between regions; (ii) is responsible for operation and maintenance of the transmission network; and (iii) is responsible for dispatch functions in the power system. 14. The 14 regional distribution companies (i) are the monopolistic seller of electrical energy in their concession area (normally called Oblast); (ii) own the distribution networks (110/35/10/6/0.4 kV) in their concession areas; (iii) are responsible for operation and maintenance of the 110/35kV distribution networks; (iv) are responsible for metering and billing of all customers (residential customers, legal entities, industrial customers, agriculture and budget customers ) in their concession area; (v) manage branch offices (RES) responsible for the 10/6/0.4kV networks in the districts.

15. The typical organization structure of a regional distribution company (PES) is shown in Figure A2.2. It should be noted that Figure A2.2 shows the principle organization of PES and the organization of individual PES might differ.

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Figure A2.2: Organization of a Typical Regional Distribution Company (PES)

Source: Feasibility Study: Advanced Electricity Metering Project, Fichtner, 2011

16. Each regional distribution company has a number of district distribution branches (RES) responsible for the 10/6/0.4kV networks in the districts. The RESes are normally organized as shown in Figure A2.3.

Figure A 2.3: Organization of RES

Source: Feasibility Study: Advanced Electricity Metering Project, Fichtner, 2011

17. The regional distribution companies provide customer services, including meter reading, billing and collection. They interface with the customers through 256 district distribution branches (centers). UE has approximately 5 million customers.

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The Objectives of the Project 18. The project development objective is to reduce commercial losses of UE’s three regional power distribution companies in Tashkent City, and the Oblasts of Tashkent and Syr Darya by improving their metering and billing infrastructure, and the commercial management systems. 19. This objective will be achieved by (a) installing around 1.2 million advanced meters and associated communication structures to replace the existing and outdated metering infrastructures and equipping the three regional power distribution companies with modern metering data management (MDM) systems; (b) installing a centralized Energy Data Management(EDM) /Billing/Customer Relationship Management(CRM)/Archive system with working stations and, secured and independent accounts for each of the three regions; and (c) assisting the three distribution companies in re-engineering their procedures in meter reading, billing and collection and improving management efficiency. Project Components 20. The Project has three components. Each component is described below: 21. Component 1: Advanced metering infrastructures (AMIs) in the three distribution companies in Tashkent City, Tashkent Oblast, and Syr Darya Oblast. This component includes supply, installation, and commissioning of (i) advanced electricity meters (AEMs); (ii) data concentrators, and communication systems; and (iii) hardware and software of the metering data management (MDM) systems, one for each of the three regional distribution companies.

Meters

22. The proposed project will finance AEMs for around 1.2 million low voltage customers, both residential and institutional, and bulk AEMs to be installed at the low voltage side of the distribution transformers together with the required current transformers. All the meters shall be specified according to IEC standards. It should be noted that though the project does not finance AEM meters for generation, transmission systems, or for legal entities connected to the medium and high voltage networks, these consumers shall install AEM meters and necessary voltage and current transformers at their own cost as required by the electricity law. All the AEM systems installed by medium and high voltage consumers have to be compatible with the central AEM system financed by the project.

23. Basic functions of the advanced meters financed by the project will include:

a) Automatic collection and upload of following data: (i) hourly values of received and

delivered active energy; (ii) instantaneous active power values (maximum values); (iii) voltage quality (minimum/maximum voltage); (iv) statuses and alarm signals.

b) On board memory to store up to one month of hourly data;

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c) Interoperability – if AEM meters are produced from multiple vendors, they should conform to an interoperable communication protocol standard depending on the communication method applied;

d) Remote connection/disconnection; e) Load limiting; and f) Tamper prevention functions.

24. For three phase bulk meters used for load balancing, the following additional features shall be provided:

a) Hourly values of received and delivered re-active power; b) Instantaneous active and reactive power values; c) Maximum active and reactive power; d) Instantaneous power factor; and e) Average power factor.

25. All the meters financed by the project will be installed outside of the premises of customers and accessible by the staff of UE. The typical designs of new meter panel and other simple works will be conducted by the regional distribution companies. Communication Infrastructures 26. Communication infrastructure consists of: (i) communication modules located at the meters; (ii) communication equipment located at the AMI rooms at each of the three distribution companies, the central system production server room and back-up server room in Tashkent, and at regional distribution companies for user access; and (iii) data concentrators at related transformer stations. The operations of the project will also rely on public communication system which will be procured from public communication service provider(s) in the country. 27. PLC technology will be used for the communications between advanced electricity meters and the data concentrators in most service areas. Zigbee technology is recommended to be used for service areas where it PLC will not work well. In these areas, ZigBee technology will also be used for drive-by meter reading. The selection between the communication principles of PLC and Zigbee will be made based on a measurement of impedance at the low voltage section at each transformer station. The communications between concentrators and regional service centers will be radio or wired communication technologies.

28. For large commercial/industrial and agricultural customers connected at medium and high voltage networks, meter data will be sent to the meter data management centers of the regional distribution companies.

29. All advanced electricity meters, including those small and large customers, will be connected to the meter data management (MDM) system financed by the project at the completion of the project. Ensuring the proper working of those AEMs and their communications with the MDM system will be part of the proposed project.

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Meter Data Management (MDM) System

30. A MDM system will be provided to each of the regional distribution companies (PES). Each of the distribution branches (RES) in the three distribution companies will be equipped with PC terminals/clients and act as customer service centers having access to metering and billing data for customers in their districts. The following figure indicates the common functions of the system.

Figure A2.4 AMI Common Functions

Source: Feasibility Study: Advanced Electricity Metering Project, Fichtner, 2011 31. Component 2: Energy Data management (EDM) /Billing/Archive System. This component includes (i) supply, installation and commissioning of the hardware and software, as well as training and after-sale services of a centralized EDM/billing/archiving center in Tashkent and its applications for the three regional distribution companies; and (ii) migration of all the existing billing data to the databases of the new EDM/billing system. 32. The centralized EDM/Billing/Archive system will have multi-client capabilities and respective accounting areas for various regional distribution companies. Under the project, it will have three accounting areas to cover the three regional distribution companies. It can be expanded to cover all the other regional distribution companies of UE in the future. The system will be first procured and customized at a center in Tashkent, and then it will be replicated at the three regional distribution companies and their district branches. If satisfactory to the UE, the system will be replicated for all the other distribution companies of UE in the future.

33. The MDM systems, and the EDM and billing system consist of three major layers: the service centers at district branches (RES) of regional distribution companies (10 to 25 each

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regional distribution company); regional offices at the headquarters of regional distribution companies (PES) and national level (headquarter of UE in Tashkent).

34. Traditionally, the service centers have been the main points of contacts between the power utility and customers and handling all the transactions and system operations. UE has decided to maintain the traditional roles of the service centers. The MDM and billing system at this level is designed to include three major function modules: (a) customer communications; (b) billing, payment collection and load limitation; and (c) system operations handling connect/disconnect; tamper detection; local load balance; fault detection and prepayment capability. The service center will only deal with low voltage customers. Workstations will be installed at each service center linking to the master station based in the regional office.

35. The regional offices will be responsible for: (a) regional load balance; (b) quality monitoring; (c) regional demand-side management; and (d) medium and high voltage customers. A master station will be located at the regional office.

36. At the national level, the system will be mainly responsible for (a) data warehouse and sharing; (b) system oversight; (c) nationwide demand side management programs; (d) integrated resource planning; and (e) management and updating of regional office software and systems. The MDM and billing systems will be integrated with UE’s main management information system and exchange information with other sub-systems of the main system. 37. Component 3. Management Efficiency Improvements and Project Implementation Supports. This component includes: (i) assessment of electricity consumption patterns and physical connection conditions to identify opportunities to reduce commercial losses, starting from large consumers and to develop and implement a losses reduction strategy; (ii) business process re-engineering and institutional capacity strengthening for the operation of the new AMIs and better utilization of rich information collected by the AMIs to reduce commercial losses; (iii) project communication program to educate consumers on the benefits of the new system, how it works and the responsibility of the consumers to pay the electricity bills on time; (iv) project implementation supervision and administration; and (v) technical assistance for further customizations of the EDM system, and financial audits.

38. The following figures show the indicative and conceptual infrastructure structure of the project and the conceptual structure of the AMI/EDM/Archive/Billing systems.

31

Figure A2.5 Conceptual Structure of the Proposed Project

AEM MeterAppartments

AEM Meter/Data Collector/Building Gateway

AccessNetwork

Hub/Data Concentrator at Distribution Transformer locations

Local Network

AEM MeterHouses

AEM Meter atDistribution Transformer locations

DistributionTransformer

BackhaulNetwork

• • •

Regional and DistrictService Centers

Avanced Energy Data Management and Billing System

AEM MeterLarge Customers

AEM Metering Infrastructure

Source: Feasibility Study: Advanced Electricity Metering Project, Fichtner, 2011 Figure A2.6 One AMI for Each Regional Company and One Centralized EDM/Billing/Archive System in Tashkent.

Source: Feasibility Study: Advanced Electricity Metering Project, Fichtner, 2011 39. The total project financing requirement of the proposed project is estimated at US$ 246.1 million inclusive of price and physical contingencies of US$ 7.7 million, tax and duties of around US$ 26.9 million, interest during construction plus a front end fee of US$ 4.0 million. The Bank will finance the supply of all the AMI equipment and the supply, installation of

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software and hardware of the MDM systems and the centralized EDM/billing system, the services of supervision consultant, and the front end fee at around US$ 180.0 million. UE will finance installation of AMI equipment, materials for meter installation, such as low voltage cables, taxes and duties, interest during construction, project communication and other project activities, for a total of US$ 66.1 million. Detailed information on costs and financing sources is provided in Table A2.1

Table A2.1 Project Cost and Financing

Project Components Local ForeignProject cost

(US$ million)

IBRD Financing

(US$ million)% Financing

1. Advanced Metering Infrastructures (including MDM Systems)

1) Equipment and related Services 0.0 150.1 150.1 150.1 100%

2) Installation of Meters 33.0 0.0 33.0 0.0 0%

2. EDM/Billing and Archive System

1) Hardware&Software, installation and services 0.0 10.9 10.9 10.9 100%

2) Central processing center customization and data migration 0.0 6.9 6.9 6.9 100%

3. Management Efficiency Improvements and Project Implementation Supports 1) Project supervision technical assistance 0.0 2.0 2.0 2.0 100% 2) project communication and other activities 1.0 0.0 1.0 0.0 0% 3) Other technical assistance 0.0 2.0 2.0 2.0 100%

Total Baseline Costs 34.0 171.8 205.8 171.8 83% Physical contingencies 0.9 4.3 5.1 4.3 83% Price contingencies 0.7 3.4 4.1 3.4 83% Taxes and Duties 26.9 0.0 26.9 0.0 0%

Total Project Costs 62.5 179.5 242.0 179.5 74%Interest During Implementation 0.0 3.6 3.6 0.0 0%

Front-End Fees 0.0 0.45 0.4 0.4 100%Total Financing Rquired 62.5 183.6 246.1 180.0 73%

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Annex 3: Implementation Arrangements

UZBEKISTAN: ADVANCED ELECTRICITY METERING PROJECT Project Administration Mechanisms Project implementation institutional arrangements 1. UE will be the implementation agency of the proposed project. Within UE, the project will be implemented by a Project Management Unit (PMU), the three regional distribution companies in Tashkent City, the Oblasts of Tashkent and Syrdarya, and other related departments and subsidiaries of UE. A tendering committee will be established to conduct bid evaluation and make procurement decisions. Selected contractors and international supervision consultant will assist UE to implement the project and provide goods and services. Detailed institutional arrangements are summarized below:

The PMU has been established by UE in Tashkent. The PMU, funded by UE’s internal sources, has been designated by the management of UE to manage all the consulting, and goods procurement contracts on behalf of UE. It will also be responsible for preparing project plans, project progress reports, applications for withdrawal of funds and any other reports required by the Bank, and assist the tendering committee in conducting procurement. In addition, the PMU will coordinate with the three regional distribution companies and related departments and subsidiaries of UE for the implementation of the project. The PMU will be the main point of contact for working communication between UE and the Bank.

The PMU consists of a project director, project managers, procurement specialists, project accountants, social development/public relations officers, qualified technical experts and other staff members. The director of the PMU directly reports to the Chairman of UE. The PMU will be supported by a selected international consultant for project implementation supervision.

The three regional distribution companies will be responsible for (i) the installation of advance metering and communication infrastructures between meters and data concentrators in their respective service areas under the supervision of the selected international supervision consultant; (ii) ensuring that all the high voltage and medium voltage consumers in their regions install AEMs (including data acquisition systems) in accordance with technical specifications defined and the project implementation schedule; (iii) supporting the selected contractor for the installation of MDM and energy data management/ billing systems and associated communications infrastructures in their companies; (iv) assisting the selected contractor(s) to connect all the meters to the management system, and to validate and convert existing billing data to the new billing system; (v) business re-engineering and capacity building; and (vi) project communications.

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Within each distribution companies, a PIU17 has been established to administrate the implementation of the project components in their regions. These regional PIUs will report to the PMU and the senior management of the distribution companies. The capacity of these PIUs will be further strengthened with qualified financial management specialists before the effectiveness of the project.

Under the coordination and guidance of the PMU and regional PIUs, each regional distribution company will install all the AMIs in its region. Currently, each of the three regional distribution companies has 25 to 80 designated staff members for meter and other equipment installation. According to the feasibility study, however, 80 to 320 personnel will be required for the installation of the equipment. Extra man power (55 to 240 respectively) will be recruited both internally from other units of the regional companies and externally from the labor market. All the installation staff will be trained and obtain necessary certificates before the start of the installation. The UE has confirmed that there are enough qualified candidates in the labor markets, especially in and around Tashkent. Recruiting temporary workers for the low voltage distribution projects is a common practice of UE.

Under the coordination of the PMU and regional PIUs, the marketing (sales) unit and the automation and IT unit of each regional distribution companies, as well as ASU NALADKA Energosotish18 and other related central departments of UE will assist the selected supplier(s) for the installation and commissioning of the MDM and EDM/billing system (both hardware and software), and converting the existing billing data into the new database. The centralized EDM/Billing/Archive system will be installed in ASU NALADKA Energosotish.

A tendering committee will be set up. The committee will consist of senior government officials and senior managers of UE as members. The tendering committee will officially make all the procurement decisions, including, but not limited to, the approval of the bidding documents, bid evaluation, and contract awards.

The senior management of UE will provide strategic guidance to the project implementation. It will review and approve the project feasibility study, and approve the bidding documents on behalf of UE. In addition, it will provide guidance on issues of business process re-engineering and coordination among different departments and subsidiaries for the project implementation.

Qualified international contractors will be selected to (i) supply, install and commission the MDM and EDM/billing systems; (ii) supply the equipment of the advanced electricity meters and, supply and install associated communication systems; and (iii) provide technical supports to the three regional distribution companies for the installation and commissioning of meters and associated communication infrastructures, and related services to UE such as training, and other post-sale serves.

17 The official name of this unit is advanced metering unit. 18 A subsidiary company of UE responsible for operation of UE’s centralized information system, including the existing billing system.

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An international consultant will be recruited to assist the PMU for project implementation

supervision. In addition, the consultant will also provide assistance to UE for business process re-engineering, capacity building, project communication, and reporting.

2. The project will be implemented during a period of around 60 months starting from mid 2012. An operation manual has been drafted by UE, to be agreed with the Bank and will be adopted by UE for project implementation before the effectiveness of the loan. 3. At the completion of the project, the assets installed within the boundaries of a regional distribution company will belong to the company. The centralized system in Tashkent will be operated and owned by ASU NALADKA Energosotish.

Figure A3.1 Implementation Institutional Arrangements

Measures to address capacity constraints 4. To deal with the decentralized nature of the project, and address the issue of UE’s lack of experience in implementing the Bank financed projects, a qualified international consultant will be recruited to assist the PMU in (a) managing project implementation; (b) coordinating among the contractors, the three regional distribution companies and other related departments and subsidiaries of UE; (c) reviewing project documents; and (d) monitoring project progresses and preparing project progress reports. In addition, procurement and financial management trainings will be conducted by the Bank team for related staff of UE at the early stage of project implementation.

UE Board

Tashkent City Distribution

Company (PIU)

Tashkent Oblast Distribution

Company (PIU)

Syrdarya Oblast Distribution

Company (PIU)

Other Subsidiaries and Departments

of UE

PMU

Implementation Supervision Consultant

Tendering Committee

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5. The Bank team will also provide special supports to UE in developing and implementing an effective revenue protection program by introducing relevant international experiences and providing specific technical assistance. Financial Management, Disbursement and Procurement Financial Management 6. According to the findings of the Country Integrated Fiduciary Assessment (CIFA) report for Uzbekistan and UZ Accounting & Auditing ROSC report, the capacity in the accounting profession in the country is still low as there is no critical mass of professionally qualified accountants. Knowledge of internationally recognized accounting and auditing standards, such as IFRS, IPSAS, ISA, is limited, in both the public and private sectors. As such the UE does not have any accountants with internationally recognized accounting qualifications. However, the accountants are quite knowledgeable about National Accounting Standards that, in most cases, are based on international standards. 7. Most Bank-financed projects in the country are implemented through stand-alone project implementing agencies that install parallel accounting systems to those used in the respective line ministries. Audit of Bank-financed projects in the country has been performed by private sector firms that meet the Bank’s eligibility criteria. In 2011 the Bank conducted a review of local audit firms to determine their capacity to audit Bank-financed projects, and only two firms were qualified for entity audits such as would be required under the project.

8. The UE Chief Accountant will have the ultimate responsibility for financial management arrangements and disbursement functions of the Project. However, the three regional distribution companies and the PMU established by UE will be responsible for the implementation of the financial management (FM) function of the project including the flow of funds, budgeting, accounting, reporting, and auditing. All payments made from IBRD funds will be approved by the UE Chairman and verified by the UE Chief Accountant. The FM arrangements of the PMU and the three regional distribution companies have been reviewed and it was established that the PMU’s financial management capacity needs to be enhanced. The PMU has assigned its own accounting staff to maintain financial management system of the project. The three regional distribution companies will do so before the effectiveness of the project. 9. The Bank has provided some trainings to related staff of the PMU and will continue to provide focused training to all financial management staff during project launch. Hands-on training will also be provided during project implementation. The Financial Management Chapter of the PoM has been drafted. It describes budgeting, audit arrangements, internal control and accounting policies and procedures to be followed for this project. The manual was drafted based on the manual for the on-going Bank financed transmission project. The final version of the manual will be reviewed and agreed by the Bank and adopted for project implementation before effectiveness of the Project.

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10. The following Action Plan has been agreed to be implemented to strengthen the financial management capacity of the PMU and the three regional distribution companies. Satisfactory implementation of those actions will ensure existence of satisfactory financial management arrangements that meet Bank requirements:

Table A3.1 Action Plan

Actions for capacity building Responsible Completion Date a) To install the same automated

accounting system used for the on-going Bank financed project at the PMU and the three distribution companies for project accounting, budgeting and reporting. The system shall have functions of automatic generation of reports for Uzbekenergo as well as SOEs and IFRs for the Project, and with inbuilt controls to ensure data security, integrity and reliability.

UE By Effectiveness

b) To appoint a qualified financial management specialist for each of the three regional distribution companies.

UE By effectiveness.

c) To organize training on the Bank’s financial management and disbursement policies and procedures for the PMU staff and other related staff of UE.

UE and the World Bank

Training was conducted in November 2011. Focused training will be conducted during project launch and hands-on training will be conducted during implementation.

d) To finalize the financial management chapter of the PoM to reflect the project related internal control, budgeting, external auditing, financial reporting and accounting policies and procedures, and adopt the PoM for project implementation.

UE By Effectiveness

11. The overall residual FM risk of the Project is Substantial. 12. Budgeting and Planning: The annual budget of the project will be based on the procurement plan agreed with the Bank. All changes to the procurement plan will be reviewed by the PMU director and approved by the World Bank. The director, the financial manager of the PMU and assigned financial staff at the three regional distribution companies, as well as the procurement specialist of the PMU will be involved in the preparation of the annual budget. The Financial Manager of the PMU will take overall responsibility for the compilation of the budget,

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its approval and entry into the accounting system. The final plans and budget shall be submitted to the UE for approval.

13. Accounting and maintaining of accounting records: The project accounting will be maintained on the cash basis. For reporting purposes, cash basis and the World Bank guidelines for investment projects will be used under the project. The Financial Management Chapter of the PoM will properly reflect accounting policies and procedures applicable to the Project. The PMU and the three distribution companies will utilize project 1- C accounting system specially designed to meet the Bank financed projects requirements including ability to generate IFRs, withdrawal applications, statement of expenditures (SOEs), annual financial statements, etc. The project accounting system at each regional distribution company will provide inputs to the accounting system installed at the PMU for consolidation of project accounting. Accounting records for the expenditures incurred by the regional distribution companies from their own funds will be processed at the project’s accounting software by designated financial staff of each of the three distribution companies. PMU will be responsible for recording expenditures made from IBRD funds and maintenance of consolidated accounts/records for the proposed Project. The system shall have the safeguards against the input of inaccurate data using appropriate security profiles. In addition, regular back up of the accounting data shall be made by the accounting staff.

14. The Project’s financial management function will be the responsibility of a financial manager and disbursement specialist of the PMU, assisted by the designated financial specialists at each of the three distribution companies. The assigned financial management staff will be trained accordingly on financial management issues applicable to the Project at project launch and during project implementation.

15. Internal controls: For the purposes of project implementation, sound three-tier internal control system will be maintained by UE. All IBRD funded expenditures incurred by the three regional distribution companies will be verified by the designated financial staff at each respective distribution company and approved by its Director. Full package of primary documents (including invoices, acceptance acts certified by the technical staff of the distribution companies, etc.) will be then passed to the PMU for further verifications, i.e. for the eligibility and accuracy. Afterward, Project related payments made from the Loan funds will be verified by the UE Chief Accountant and approved by the UE Chairman. Expenditures incurred from own funds of the regional distribution companies will be reviewed by the companies’ designated financial specialists, verified by their chief accountants and approved by their Directors.

16. Project related specific internal control activities will be described in the Financial Management Chapter of the PoM including: expenditure authorization, invoices approval and payments processing procedures; data back up arrangements; reconciliation procedures of project records with Client Connection, safeguards of assets, including cash. This section of the PoM also reflects the policies and procedures that clearly define conflict of interest and related party transactions (real and apparent) and provides safeguards to protect the organization from associated risks. The bank account reconciliation will be prepared by the disbursement specialist of the PMU and reviewed and approved by the Financial Manager of the PMU.

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17. Financial Reporting: Consolidated project management-oriented Interim Un-audited Financial Reports (IFRs) will be prepared under the Project. UE will produce a full set of IFRs every three months throughout the life of the project to minimize the financial reporting risk. The format of IFRs has been agreed during the assessment, and includes: (a) Project Sources and Uses of Funds, (b) Uses of Funds by each regional distribution company, and (c) SOE Withdrawal Schedule. IFRs will be produced by the accounting software, and will be submitted to Bank within 45 days of the end of each quarter.

18. External audit: For each operation supported by a Bank loan, the Bank requires the borrower to maintain financial management arrangements acceptable to the Bank. As part of the overall arrangements that the borrower has in place for implementing the project, the financial management arrangements provide assurance that the proceeds of the loan are used for the purposes for which the loan was granted.

19. Local audit firms carry out regular audits of the unconsolidated financial statements of UE and its subsidiaries as required by the Uzbekistan Law. Unqualified audit opinion on the UE financial statements have been issued for the past three years. However, these local audit firms are not on the list of audit firms that are eligible to conduct audit of Bank-financed projects and are, therefore, not considered acceptable to the Bank for the audit of the project and entity financial statements required under this project. Being the Implementing Agency for the proposed project, the UE is to submit its audited separate IFRS financial statements for the FY 2012 and audited consolidated IFRS financial statements from the year thereafter.

20. It has been agreed that under the proposed project the project and entity (i.e. UE) audits will be conducted (i) by independent private auditors acceptable to the World Bank, on terms of reference (TOR) acceptable to the World Bank; and (ii) according to the International Standards on Auditing (ISA) issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants (IFAC). The TORs will include activities involving (a) audits of financial statements, (b) assessments of the accounting system and (c) a review of the internal control mechanisms. The annual audited project entity financial statements together with the management letter will be provided to the World Bank within six months of the end of each fiscal year and also at the closing of the project.

21. The following table lists the audit reports to be prepared by the project implementation agency and their due date for submission to the World Bank:

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Table A3.2 Audit Report and Due Date Audit Report Due Date Continuing entity’s financial statements Within 6 months of the end of each fiscal year

and also at the close of the project Project Financial Statements (PFS) The PFS include Project Balance Sheet, Sources and Uses of Funds, Uses of Funds by the three regional distribution companies, SOE Withdrawal Schedule, the Notes to the financial statements, and Reconciliation Statement.

Within 6 months of the end of each fiscal year and also at the closing of the project

22. The audited financial statements will be publicly disclosed in a manner acceptable to the Bank and, following the Bank’s formal receipt of these statements from the borrower, the Bank makes them available to the public in accordance with The World Bank Policy on Access to Information. Flow of funds and disbursement arrangements

Table A3.3 Eligible Expenditures (US$) Category Amount of the Loan

Allocated

(expressed in USD)

Percentage of Expenditures to be

financed

(exclusive of Taxes)

(1) Goods, works, non-consulting services, consultants’ services and training for the Project

179,550,000 100%

(2) Front-end Fee 450,000 Amount payable pursuant to Section 2.03 of the Loan Agreement in accordance with Section 2.07 (b) of the General Conditions

TOTAL AMOUNT 180,000,000

23. Disbursements from the IBRD Loan Account will follow the transaction-based method, i.e., traditional Bank procedures: including Direct Payments, Special Commitments and Reimbursement (with full documentation and against Statements of Expenditures (SOEs)). For payments above the minimum application size, as specified in the disbursement letter, UE will submit withdrawal applications to the Bank for payments to suppliers and consultants directly from the Loan Account. 24. Supporting documentation should be provided against payments to contracts for works and goods exceeding US$500,000, US$100,000 for contracts with consulting firms and US$50,000 for individual consultant services contracts. Disbursements below these thresholds will be made according to certified SOEs. Full documentation in support of SOEs would be

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retained by PMU for at least two years after the Bank has received the audit report for the fiscal year in which the last withdrawal from the Loan Account was made. This information will be made available for review during supervision by Bank staff and for annual audits which will be required to specifically comment on the propriety of SOE disbursements and the quality of the associated record-keeping.

25. Counterpart funding contribution will be provided by the UE for installation of meters, project communication, and other related project activities. Procurement

26. Procurement for the Project will be carried out in accordance with the World Bank’s "Guidelines: Procurement of Goods, Works and Non-Consulting Services under IBRD Loans and IDA Credits & Grants" published January 2011(Procurement Guidelines); and "Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits &Grants by World Bank Borrowers" published in January 2011 (Consultant Guidelines) and the provisions stipulated in the Loan Agreement. Assessment of the Agency’s capacity to implement procurement 27. The Country Procurement Assessment Report (CPAR) was prepared in February 2003. The Country Integrated Fiduciary Assessment (CIFA) was conducted in early 2010. An assessment of the implementing agency’s capacity to implement project procurement has been conducted by the Bank during the pre-appraisal mission and completed on November 23, 2011. 28. The procurement risks were assessed and identified. Related mitigation measures were discussed and agreed with the client. The procurement risks identified and risk mitigation measures agreed are summarized in the table below:

Table A3.4 Summary of Procurement Risk Assessment Description of risk Rating of

risk Mitigation measures Rating of

residual risk

There are risks of mis-procurement and/or long delay of decision making in procurement as a result of the authorities price verification process.

S Dialogue between MFERIT, the Ministry of Economy, and the Bank will be maintained on the issue of project expertise price verification.

At project level, the Bank team will closely monitor the progresses of contract registration, and if necessary, work closely with the PMU and the responsible government agencies, especially with the

S

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MFERIT, to expedite the contract effectiveness.

PMU is lack of knowledge and experience of the Bank’s procurement procedures and policies.

S The total number of contracts to be financed by the Bank is limited to a small number (two ICB contracts and around two consulting services), reducing the procurement risk significantly.

The UE has already got some experience of working with the international development financial institutions, such as ADB. It is also implementing a Bank financed large power transmission project with several ICB contracts for goods and large consulting services contracts. One of the procurement specialists of the PMU is working on the transmission project and has attended the Bank’s procurement trainings.

Other related staff of UE and its PMU, as well as the members of the evaluation committee will be trained by the Bank during the project implementation.

M

There is risk that the government officials may intervene in the procurement decision making.

S Roles and responsibilities of the tendering committee, the evaluation committee, the PMU and other related stakeholder will be clearly defined in the project’s operation manual to prevent from unnecessary intervention by some government officials. The Bank’s procurement procedures will be followed strictly. Finally, a grievance/complaints mechanism will be in place.

M

Average S M

Rating of Risks: H: High; S: Substantial; M: Moderate and L: Low.

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Procurement implementation and arrangements 29. A tender committee will be set up before conducting procurement. Normally, the committee will consist of a number of senior government officials and senior managers of UE as members. The tendering committee will officially make all the procurement decisions, including, but not limited to, the approval of the bidding documents, bid evaluation, and contract awards. 30. The PMU has been designated by the management of UE to manage all the consulting, and goods procurement contracts on behalf of UE. It will be responsible for implementing all the required procurement activities, from advertising up to contract award and providing technical and procurement supports to the tendering and the evaluation committees. 31. A qualified international consultant will be recruited to assist UE in implementing the project. It will provide necessary assistance to the PMU to carry out procurement activities.

32. Procurement of Goods: there will be two ICB packages for goods: (i) package I (US$ 150.1 million) is for the supply and installation of AMI in three regional distribution company, using the Bank’s standard bidding documents for procurement of plant design, supply and installation; and (ii) package II (US$ 17.8 million) is for the supply and installation of the centralized EDM/Billing/Archive system in Tashkent and its applications in the three regions, using the Bank’s standard bidding document for procurement of information system (single stage bidding). Potential bidders will be allowed to bid for one or both packages.

33. Selection of Consultants: The consultant for the supervision engineering services at US$ 2.0 million will be selected based on QCBS selection. Other consulting services may be required for further customizing the EDM system and audits. The procurement arrangements for these consulting services will be discussed and agreed during the project implementation. 34. Preparation of the Bidding Documents and RFPs: PMU, on behalf of UE, will work with related departments and subsidiaries of UE and if necessary, the selected international consultants to develop bidding documents for the procurement of goods and RFPs for the procurement of consulting services. The technical specifications for the two ICB goods packages have been drafted by the international consultant who conducted the feasibility study. The terms of reference (TOR) for the supervision consulting services has also been drafted by PMU.

35. Filing and records keeping: The PMU will be responsible for filing and records keeping. The records will be kept up to five years after the project completion. Thresholds for Procurement Methods and Bank Prior Review 36. The following prior-review and procurement method thresholds will apply for procurement using loan funds.

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Table A3.5 Procurement Thresholds

Expenditure Category

Contract Value (US$)

Procurement Method Bank Prior Review

Goods

>=500,000 ICB, LIB All the ICB and LIB contracts

< 500,000 NCB The 1st two NCB contracts

< 100,000 Shopping The 1st one Shopping contract

NA DC All DC contracts

Works

>=1,000,000 ICB All the ICB contracts

< 1,000,000 NCB The 1st two NCB contracts

< 100,000 Shopping The 1st one Shopping contract

NA DC All DC contracts

Consultant Services

>=200,000 QCBS, QBS, FBS, LCS All contracts above US$ 100,000 for firms; and all contracts above US$ 50,000 for individuals; and all SSS contracts.

< 200,000 CQS NA SSS NA IC

Notes: ICB – International Competitive Bidding LIB – Limited International Bidding NCB – National Competitive Bidding DC – Direct Contracting QCBS – Quality and Cost Based Selection QBS – Quality Based Selection FBS – Fixed Budget Selection LCS – Least Cost Selection CQS – Selection Based on Consultants’ Qualification SSS – Single (or Sole) Source Selection IC – Individual Consultant selection procedure NA – Not Applicable

Procurement Plan 37. The procurement plan has been prepared by the PMU, and reviewed and agreed with the Bank. The procurement plan describes the procurement methods of each procurement package and methods of consultant selections. It also presents other important procurement information, such as, the need for pre-qualification; estimated cost of each contract; the Bank prior review requirements; and time frame. The procurement plan will be updated as required to reflect the actual project implementation needs. The general procurement notice (GPN) has been drafted by the PMU, reviewed and agreed by the Bank. Specific Procurement Notices (SPN) will be published for all ICB procurement and consulting contracts when the corresponding bidding documents and RFPs become ready and available. 38. The procurement plan agreed is summarized below:

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Table A.3.6 Summary of Procurement Plan - Goods

Package Number

Description Est. Cost (US$

Million)

Procurement Method

Pre-Qualification

Domestic Preference

World Bank

Review

Exp. Bid Opening

Date

AEM/ICB1 Meters, Communications, and Meter Data Management System

150.1 ICB No NO PRIOR June 22, 2012

AEM/ICB2 Centralized Energy Data Management/ Billing/Archive System

17.8 ICB No NO PRIOR June 22, 2013

Table A.3.7. Summary of Procurement Plan – Consulting Services

Contract Ref.

Description of Assignment

Estimated Cost

(USD’m)

Selection Method

Review by Bank

(Prior/Post)

Expected Proposal

Submission Date

Comments

1 Project Implementation Consultant

2.0 QCBS Prior May 21, 2012

Frequency of Procurement Supervision 39. In addition to the prior reviews by the Bank team of all the major procurement activities as described in the procurement plan, the capacity assessment of the implementing agency has recommended one supervision mission to visit the field on average every 6-month for the first two years of the project implementation. The frequency of procurement supervision (including special procurement supervision for post-review/audits) will be further defined after the first two years of the project implementation. Monitoring and Evaluation 40. The PMU, with the support of the selected international supervision consultant, and the three distribution companies will monitor and evaluate the project progress and outcomes. Semi-annual project progress reports will be prepared by the PMU. The Bank team will also supervise the project implementation at least twice a year to monitor the progresses of the project, including the financial management and procurement aspects of the project implementation. A project completion report will be prepared to finally evaluate the project performance and outcomes.

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Annex 4: Operational Risk Assessment Framework (ORAF)

UZBEKISTAN: ADVANCED ELECTRICITY METERING PROJECT

1. Project Stakeholder Risks Rating Moderate Description : Electricity consumers may not understand the benefits of the new system, endangering the full realization of the project benefits.

Risk Management: A public information campaign will be implemented to educate customers of the benefits of the new system, and how it works.

Resp: Client Stage: Imple. Due Date : 12/31/2013 Status: not yet due.

2. Implementing Agency Risks (including fiduciary) 3.1. Capacity Rating: Substantial Description :

a) Given the limited number of staff available, it is very challenging to install over 1.2 million meters and associated equipment as planned.

Risk Management: UE has decided to recruit temporary workers to assist in installing meters and associated equipment under the guidance of experienced UE staff. UE has confirmed that there are enough qualified temporary workers in the labor market and these workers will be trained by UE before the start of installation.

Resp: Client Stage: implementation Due Date : Mar. 1, 2013

Status: not yet due.

a) Delays in the project implementation could occur given UE’s lack of experience with Bank procedures, especially in procurement and financial management.

Risk Management: Bank team will provide timely guidance and trainings to related staff of UE.

Resp: the Bank Stage: In Progress

Due Date : July, 2 2012


b) When conducting procurement, UE may tend to apply local rules and practices which are inconsistent with the Bank guidelines.

Risk Management: Bank team will provide timely guidance and monitor procurement activities of UE closely to make sure that the Bank guidelines are applied.

Resp: the Bank Stage: Implementation

Due Date : April 1, 2013


3.2. Governance Rating: Moderate Description: Complicated decision making process involving many stakeholders may delay the project implementation.

Risk Management: The feasibility study is well prepared and has been reviewed and commented by the Bank and various stakeholders inside and outside of UE. The project has been strongly supported by various government agencies. UE will continue to seek strong support from various decision makers for the successful implementation of the project.

Resp: Client Stage: Implementation Due Date: Dec. 30, 2016

Status: not yet due

Resp: Bank Stage: Implementation Due Date : 12/30/2016 Status: not yet due

4. Project Risks 4.1. Design Rating: Moderate

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Description: Large scale deployment of advanced electricity metering infrastructure is not common in developing countries, leading to general concerns of technical feasibility of project design for Uzbekistan.

Risk Management: The feasibility study has been prepared by a reputable international consultant in close cooperation and coordination with UE and other stakeholders. Technologies and equipment proposed for the project are commercially proven and have been deployed in other developing countries similar to Uzbekistan.

Resp: Client Stage: Prep Due Date :12/31/2011 Status: completed

4.2. Social & Environmental Rating: L Description: This is a category C project. No major environmental or social issues are anticipated. However, there are two potential risks: a) The risk of increased power disconnection of the poor and

vulnerable;

Risk Management: A procedures has been developed to ensure that the customers are given sufficient notice to clear any outstanding bills before their power is disconnected.

Resp: Client Stage: Prep Due Date :12/31/2011 Status: completed

b) Redundancies of staff controllers now reading old meters; Risk Management: Training will be provided to related staff for jobs focusing on customer services and job opportunities will be offered to these staff accordingly.

Resp: Client Stage: Imple. Due Date :12/31/2013 Status: not yet due

4.3. Program & Donor Rating: L Description: ADB is financing a parallel project in other three provinces as part of the national advanced metering program. Lack of coordination between the ADB and the Bank teams may cause confusions of decision makers in the UE and the GoU, and delay the project implementation

Risk Management: ADB and the Bank teams have been coordinating closely during project preparation and will continue to do so during the project implementation. The Bank and ADB may have different approaches in dealing with procurement, financial management and other project implementation issues. These differences, however, will not have big negative impacts on the implementation of the project financed by ADB or the one financed by the Bank. Resp: ADB and the Bank teams

Stage: Prep., and Imple.

Due Date :06/30/2016 Status: Not yet due

4.4. Delivery Monitoring & Sustainability Rating: Moderate Description: The project only finances meters for small customers who consume only 25% of the total electricity but leaves medium and large consumers to finance the meters themselves. This may endanger the sustainability of the project.

Risk Management: UE has agreed that the project will ensure proper installation of advanced meters for large and medium consumers and the proper communications between these meters and the metering data management system financed by the project.

Resp: Client Stage: Implementation Due Date :06/30/2016 Status: not yet due

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Annex 5: Implementation Support Plan

UZBEKISTAN: ADVANCED ELECTRICITY METERING PROJECT 1. The strategy for implementation support (IS) has been developed based on the nature of the project and its risk profile. It aims to make implementation support to the client more flexible and efficient, and will focus on implementation of the risk mitigation measures defined in the ORAF. 2. The key focus of the implementation support will be on:

Timely procurement and technical supports to UE in preparing and reviewing bidding documents and resolving issues arising during the procurement process;

Training and other capacity building supports to UE in the areas of (i) procurement; and (ii) financial management;

Advice to UE in monitoring the project implementation schedule and coordination among

contractors and suppliers, and consultants to further mitigate technical risks;

Assistance to UE in improving commercial efficiency;

Ensuring that the capacity building activities embedded in different components of the project are well coordinated; and

Communication to ensure that adequate and effective project communications to

electricity consumers are conducted on a regular basis. Implementation Support Plan Technical 3. The technical support of the task team to UE will focus on (i) preparation of the technical specifications of the bidding documents; (ii) development and implementation of a commercial loss reduction strategy; and (iii) better utilization of the information collected by the new AMI and EDS system for commercial efficiency improvements. 4. A senior international distribution business specialist will be a key team member for project implementation support.

Fiduciary requirements and inputs 5. Procurement implementation support will include: (a) providing training to related staff of UE, as well as its consultants; (b) reviewing procurement documents and providing timely feedback to UE; (c) providing detailed guidance on the Bank’s Procurement Guidelines to UE

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and related government agencies; (d) monitoring procurement progresses against the procurement plan. 6. An accredited Financial Management Specialist will participate in the provision of implementation support as well as in the supervision of the operation. With regard to the implementation support of the operation, the Bank will conduct risk-based financial management supervisions, initially after every six months and later at appropriate intervals based on assessed risk. During project implementation, the Bank will supervise the Project’s financial management arrangements in the following ways: (a) review the project’s quarterly interim financial reports as well as the annual audited financial statements and auditor’s report and remedial actions recommended in the auditor’s management letters; and (b) during the Bank’s on-site supervision missions, review the following key areas: project accounting and internal control systems; budgeting and financial planning arrangements; and disbursement management and financial flows, as applicable.

7. Training will be provided by the Bank’s financial management specialist and procurement specialist before the commencement of project implementation. The team will also help UE identify capacity building needs to strengthen its financial management capacity and to improve procurement management efficiency. Though formal supervision of financial management and procurement will be carried out semi-annually, procurement and financial management supports will be provided on a timely basis as required by the client. Financial review of UE 8. Input is required from a financial specialist for regular review of UE’s financial status. The review will focus on timely increases of tariff levels to reflect the increases of operation and investment costs of UE. The financial analyst will also participate in the Bank’s policy dialogue with GoU on electricity pricing issue. Operation

9. An energy specialist, based in the country office, will provide supervision of all operational aspects of the project. He will identify and report to the task team leader of any issues emerging from the implementation of the project, and assist the task team leader in coordinating with the client and among Bank team members for project implementation support. Project communications and safeguards 10. Although the project is rated as a category C from safeguards point of view, the Bank team will monitor the safeguards aspects of the project implementation. A communication analyst based on the country office will monitor the implementation of the project communication program by the UE and provide necessary support. Team and Resources Requirements 11. Most of the task team members will be based in the region to ensure timely, efficient and effective implementation support to the client. They are the team’s procurement specialist,

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financial management specialist, financial analyst, energy specialist and communication analyst. The rest, including the task team leader, and an electricity distribution business specialist, etc. are expected to be highly experienced internationally based staff and consultants who were key team members for project preparation. 12. Staff skill mix required is summarized below.

Skills Needed Number of Staff Weeks Number of Trips Comments

Task team leader 6 SWs annually Two/year Internationally based

Distribution business specialist

6 SWs one/year Internationally based

Financial management specialist

4 SWs annually As required Country based

Procurement Specialist 6 SWs the first two years, then 2 SWs annually

As required Country based

Energy specialist 8 SWs annually As required Country based

Financial analyst 2 SWs annually One Country based

Communication Officer 2 SWs annually As required Country based

Safeguards specialists 2 SWs annually One Internationally based

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Annex 6: Team Composition

UZBEKISTAN: ADVANCED ELECTRICITY METERING PROJECT

World Bank staff and consultants who worked on the project:

Name Title Unit

Leiping Wang Senior Energy Specialist/Task Team Leader ECSS2

Ghada Youness Senior Counsel LEGEM

Sunil Khosla Senior Energy Specialist ECSS2

Galina Alagardova Financial Management Specialist ECSC3

Fasliddin Rakhimov Procurement Specialist ECSO2

Joseph Paul Formoso Senior Finance Officer CTRLA

Iskander Buranov Energy Specialist ECSS2

Stefan Rose Consultant/Metering ECSS2

Arthur Kochnakyan Financial Analyst ECSS2

Irina Tsoy Communication Associate ECCUZ

Bernard Baratz Consultant/Environmental ECSCS

Warren Waters Consultant/Social EASIS

Josephine Kida Program Assistant ECSS2

Elena Klementyeva Program Assistant ECCUZ

Eugenie Muminova Translator/Interpreter ECCUZ

Peer Reviewers

Mohinder Gulati Lead Energy Specialist ECSSD

Petro Antmann Senior Energy Specialist SEGEN

Franz Gerner Lead Energy Specialist EASVS

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