Project Number: 49450-011 Grant Number: tbd December 2018

Republic of the Marshall Islands: Energy Security

Project

Project Administration Manual

ABBREVIATIONS

ADB – Asian Development Bank API EA EIRR EMP FFP IEE MEC

– – – – – – –

American Petroleum Institution executing agency economic internal rate of return environment management plan facility financing proposal initial environment examination Marshalls Energy Company

MTF MOF

– –

Majuro tank farm Ministry of Finance

PAM – project administration manual PMU PSC

– –

project management unit project steering committee

QCBS REG

– –

quality-cost-based selection regional

RMI – Republic of the Marshall Islands

CONTENTS

I. PROJECT DESCRIPTION 1

II. IMPLEMENTATION PLANS 2

A. Project Readiness Activities 2 B. Overall Project Implementation Plan 3

III. PROJECT MANAGEMENT ARRANGEMENTS 4

A. Project Implementation Organizations: Roles and Responsibilities 4 B. Key Persons Involved in Implementation 5 C. Project Organization Structure 6

IV. COSTS AND FINANCING 7

A. Cost Estimates Preparation and Revisions 7 B. Key Assumptions 7 C. Detailed Cost Estimates by Expenditure Category 8 D. Allocation and Withdrawal of Grant Proceeds 9 E. Detailed Cost Estimates by Financier 10 F. Detailed Cost Estimates by Outputs and/or Components 11 G. Detailed Cost Estimates by Year 12 H. Contract and Disbursement S-Curve 13 I. Fund Flow Diagram 14

V. FINANCIAL MANAGEMENT 15

A. Financial Management Assessment 15 B. Disbursement 19 C. Accounting 19 D. Auditing and Public Disclosure 19

VI. PROCUREMENT AND CONSULTING SERVICES 20

A. Procurement of Goods, Works, and Consulting Services 20 B. Procurement Plan 21 C. Consulting Services Contracts Estimated to Cost $100,000 or More 23 D. Consultant's Terms of Reference 23

VII. SAFEGUARDS 24

VIII. GENDER AND SOCIAL DIMENSIONS 25

IX. PERFORMANCE MONITORING, EVALUATION, REPORTING, AND COMMUNICATION 26

A. Project Design and Monitoring Framework 26 B. Monitoring 27 C. Evaluation 28 D. Reporting 28 E. Stakeholder Communication Strategy 28

X. ANTICORRUPTION POLICY 28

XI. ACCOUNTABILITY MECHANISM 28

XII. RECORD OF CHANGES TO THE PROJECT ADMINISTRATION MANUAL 29

Project Administration Manual Purpose and Process

1. The project administration manual (PAM) describes the essential administrative and management requirements to implement the project on time, within budget, and in accordance with the policies and procedures of the government and Asian Development Bank (ADB). The PAM should include references to all available templates and instructions either through linkages to relevant URLs or directly incorporated in the PAM.

2. The Ministry of Finance (the executing agency) and Marshalls Energy Company (the implementing agency) are wholly responsible for the implementation of ADB-financed projects, as agreed jointly between the Recipient and ADB, and in accordance with the policies and procedures of the government and ADB. ADB staff is responsible for supporting implementation including compliance by executing and implementing agencies of their obligations and responsibilities for project implementation in accordance with ADB’s policies and procedures.

3. At grant negotiations, the Recipient and ADB shall agree to the PAM and ensure consistency with the granta agreement. Such agreement shall be reflected in the minutes of the grant negotiations. In the event of any discrepancy or contradiction between the PAM and the grant agreement, the provisions of the grant agreement shall prevail.

4. After ADB President’s approval of the project's Facility Financing Proposalb, changes in

implementation arrangements are subject to agreement and approval pursuant to relevant government and ADB administrative procedures (including the Project Administration Instructions) and upon such approval, they will be subsequently incorporated in the PAM.

a The name of the operational financing document may vary on a project-to-project basis; this reference shall be

deemed to encompass such variations, e.g., a Framework Financing Agreement, as applicable. B This project is being processed under the Pacific Regional Renewable Energy Facility; approval authority for projects

under this facility has been delegated to ADB’s President. The Facility Financing Proposal is the approval document, equivalent to a Report and Recommendation of the President to the Board.

I. PROJECT DESCRIPTION

1. The proposed Energy Security Project will contribute to energy security in the Republic of the Marshall Islands (RMI) by enabling the Marshalls Energy Company (MEC) to receive, store, and deliver for domestic and international sale and consumption of diesel fuel for power generation and transportation. The proposed project will rehabilitate the fuel handling and storage facilities built in 1981 and operated by MEC on Majuro Atoll (the Majuro Tank Farm – MTF). The MTF comprise eight 750,000-gallon above-ground steel storage tanks, two smaller intermediate transfer tanks, and associated piping and pumping infrastructure. Power generation throughout RMI is dependent on fuel delivered by MEC through the MTF, as is domestic and international maritime transport operating in Marshall Islands waters. The MTF has become dilapidated due to the harsh operating environment and insufficient maintenance practices and budget constraints. The proposed project will return the MTF to compliance with applicable industry standards and will institute policies and practices (including personnel training) to provide for appropriate maintenance to ensure future sustainable operations. 2. The project is aligned with the following impacts: (i) improved energy security for theRMI, and (ii) reduced safety and environmental risks associated with handling and storage of refined petroleum products. The project will have the following outcome: Sustained safe and reliable operation of the fuel tank farm and continued supply of fuel to power generation facilities throughout the Marshall Islands. 3. The project will have the following outputs: (i) Output 1: Rehabilitation of the Majuro fuel tank farm facilities completed; and, (ii) Output 2: Fuel tank farm facilities operation and maintenance practices instituted. 4. Output 1: Rehabilitation of the Majuro fuel tank farm facilities completed. The proposed project will fund an Engineering, Procurement, and Construction (EPC) contract for the restoration of the entire fuel tank farm facilities to acceptable condition for sustained operation in compliance with applicable norms and standards for safety, reliability, and environmental protection. The project scope will include site preparation and rehabilitation of the facilities’ tanks, pipes and pipelines, valves, pumps, sea wall, concrete berms and site bunding, and oil-water separator. 5. Output 2: Fuel tank farm facilities operation and maintenance practices instituted. The project will develop adequate operation and maintenance procedures and practices, including identification of budgeting requirements, to ensure sustained operation of the rehabilitated facilities. MEC personnel will be trained to implement these procedures and practices throughout the project implementation period.

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II. IMPLEMENTATION PLANS

A. Project Readiness Activities

Table 1: Implementation Schedule

Indicative Activities

Months

Nov 2018

Dec 2018

Jan 2019

Feb 2019

Mar 2019

Apr 2019

Responsible Individual/Unit/Agency/ Government

Establish project implementation arrangements x PSC

ADB Management approval x ADB

Grant signing x EA, ADB

Government legal opinion provided x

EA, ADB

Grant effectiveness x EA, ADB

ADB = Asian Development Bank, EA = executing agency, PSC = project steering committee. Source: Asian Development Bank.

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B. Overall Project Implementation Plan

Table 2: Project Implementation Plan

Indicative Activities 2019

Quarter 2020

Quarter 2021

Quarter 2022

Quarter 2023

Quarter

A. DMF

Output 1: Rehabilitation of the Majuro fuel tank farm facilities completed

Activity 1.1: Award of EPC contract(s) for all goods and works packages (by June 2019).

Activity 1.2: All goods and works contracts completed (by December 2023)

Output 2: Fuel tank farm facilities operation and maintenance practices instituted

Activity 2.1: Award of contract for preparation of operation and maintenance program and training of MEC personnel (included in main EPC contract) (by June 2019)

Activity 2.2: MEC personnel fully trained and sufficiently resourced to implement operation and maintenance program (by December 2022)

Key Management Activities

1. Tank-farm detailed design preparation

Activity 3.1: Project implementation supervision consultant hired (by April 2019)

1.1 Contractors review existing asset condition reports (Q3 2019).

1.2 Contractors perform detailed technical inspection of tank-farm assets to confirm condition (Q3 2019).

1.3 Contractors prepare detailed designs for all goods and works packages (Q3-Q4 2019).

1.4 Implementation supervision consultants review and approve detailed designs (Q4 2019).

2. Repair and rehabilitation of tank-farm assets

2.1 Execution of all goods and work packages (Q1 2020-Q3 2023)

2.2 Inspection and acceptance by MEC and supervision consultant of completed goods and works packages upon completion (Q1 2020 – Q3 2023)

3. Project management support and capacity building

3.1 Management of delivery of all goods and works packages (Q2 2019 – Q4 2023)

3.2 Continuous support to PMU for project administration and reporting (Q2 2019 – Q4 2023)

3.3 Preparation of operation and maintenance program for tank farm facility and training of MEC personnel in its implementation (Q3 2019-Q4 2022)

ADB = Asian Development Bank, AMI = advanced metering infrastructure, DMF = design and monitoring framework, IFB = Invitation for Bids; qtr = quarter, MEC = Marshalls Energy. Source : Asian Development Bank.

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III. PROJECT MANAGEMENT ARRANGEMENTS

A. Project Implementation Organizations: Roles and Responsibilities

Table 3: Project Implementation Organizations

Project Implementation Organizations

Management Roles and Responsibilities

Executing agency (Ministry of Finance)

➢ Overall delivery of the project and reporting to Government.

➢ Ensure compliance with grant agreement covenants.

➢ Coordinate with MEC the preparation of withdrawal applications and submission to ADB.

➢ Maintain separate project accounts; and have all project accounts audited annually and sent to ADB.

➢ Ensure the compliance and presentation of all reporting requirements under the project.

Project steering committee (PSC)

➢ The PSC will consist of Combined Utility Board chairman, Ministry of Finance Division of International Development Assistance Director, Ministry of Resources & Development National Energy Planner, Minister of Public Works, and ADB project officer and ADB Development Coordination Officer. The PSC will provide overall guidance, receive and review reports from MEC on project implementation.

Implementing agency (Marshalls Energy Company)

➢ Responsible for the overall implementation of the project.

➢ Ensure compliance with the provisions of the grant and project agreements and government policies and guidelines.

➢ Responsible for procurement and services for the project (including civil work contracts).

➢ Request contract variation orders as appropriate.

➢ Establish and implement the project monitoring and evaluation framework.

➢ Ensure compliance of submission of required project reports, such as quarterly progress report, safeguards monitoring report and the audited project financial statements and its own financial statements to ADB.

Project Management Unit (PMU)

➢ The PMU will consist of MEC personnel responsible for project implementation and management of consultants and contracts, and will include an environmental safeguards specialist. The PMU will be nominated by, and will report to, MEC’s Chief Executive Officer.

ADB ➢ Monitor and review overall implementation in consultation with MOF and MEC, including project implementation schedule; actions required with reference to summary poverty reduction and social strategy; gender action plan and environment management plan (as applicable); project expenditures progress with procurements and disbursement; compliance with grant covenants and likelihood of attaining project outputs and outcome.

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➢ Assist the implementing agency or the project management unit in the procurement of consulting services, goods and works (as applicable).

ADB = Asian Development Bank, MEC = Marshalls Energy Company, MOF = Ministry of Finance, PSC = project steering committee. Source: Asian Development Bank.

B. Key Persons Involved in Implementation

Executing Agency Ministry of Finance Ms. Maybelline-Andon Bing

Secretary of Finance Government of the Republic of the Marshall Islands mayabing@gmail.com

P.O. Box D. Majuro MH, 96960 Republic of the Marshall Islands

Implementing Agency Marshalls Energy Company Asian Development Bank

Mr. Jack Chong-Gum Chief Executive Officer Jack.chonggum@mecrmi.net

Transport, Energy and Natural Resources Division (PATE)

Mr. Olly Norojono Director +63 2 6326109 onorojono@adb.org

Mission Leader J. Michael Trainor Energy Specialist +63 2 6321407 mtrainor@adb.org

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C. Project Organization Structure

Government of RMI

Project Steering Committee

Executing Agency (Ministry of Finance)

Implementing Agency (Marshalls Energy

Company)

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IV. COSTS AND FINANCING

6. The project will include two procurement packages: (i) for goods and works for the entire rehabilitation of the Majuro Tank Farm facility, and (ii) implementation supervision consultant services to support MEC and the Project Management Unit during project implementation. The total project cost amounts to $16.8 million of which $12.70 million will be financed by an ADB grant and the balance by RMI counterpart financing. Counterpart support will be provided by MEC for casual labor during site preparation. Counterpart financing will include exemption of taxes and duties, and proportional cash payment to the Goods and Works contractor. A. Cost Estimates Preparation and Revisions

7. Cost estimates were prepared by consultants engaged for transactional technical assistance under TA 9242-REG. Any necessary revisions to cost estimates during project implementation will be carried out (i) upon opening of financial bids of qualifying offerors for the Goods and Works package (package 1) by the PMU, subject to the endorsement of the PSC and ADB, and (ii) on an ad-hoc basis as necessary in response to identification of cost overruns. B. Key Assumptions

8. The following key assumptions underpin the cost estimates and financing plan:

(i) Exchange rate: N/A. The Marshall Islands uses the United States dollar; all estimates are in USD.

(ii) Price contingencies based on expected cumulative inflation over the

implementation period are as follows:

Table 4: Escalation Rates for Price Contingency Calculation Item 2017 2018 2019 2020 2021 Average

Foreign rate of price inflation 1.4% 1.5% 1.5% 1.5% 1.6% 1.5% Domestic rate of price inflation 1.0% 1.0% 1.4% 1.9% 2.3% 1.5%

Sources: ADB. 2018. International Cost Escalation Factors 2017–2021. Manila; and ADB. 2018. Domestic Cost Escalation Factors 2017–2021. Manila.

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C. Detailed Cost Estimates by Expenditure Category

Table 5: Detailed Cost Estimates by Expenditure Category ($ Million)

Foreign Exchange

Local Currency

Total Cost

% of Total Base Cost

A. Investment Costs 1. Rehabilitation of Fuel Tanks 0.00 13.30 13.30 79.2% 2. Consulting Services 0.00 0.70 0.70 4.2% Subtotal (A) 0.00 14.00 14.00 83.3%

B. Contingencies

1. Physical Contingencies 2. Price

0.00 0.00

2.32 0.48

2.32 0.48

16.6% 3.4%

Subtotal (B) 0.00 2.80 2.80 20.0% Total Project Cost (A+B) 0.00 16.80 16.80 100.0% Notes: Numbers may not sum precisely because of rounding. Total costs include $3.11 million in taxes and duties which the government will provide through exemptions.

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D. Allocation and Withdrawal of Grant Proceeds

ALLOCATION AND WITHDRAWAL OF GRANT PROCEEDS

Category ADB Financing

Item

Total Amount Allocated for ADB

Financing Percentage and Basis for Withdrawal from the Grant Account ($)

Category

1 Works (EPC contract)

12,000,000 97.4% of total expenditure claimed

2

Consulting Services (project management)

700,000 100% of total expenditure claimed*

Total 12,700,000 * Exclusive of taxes and duties imposed within the territory of the Recipient.

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E. Detailed Cost Estimates by Financier

Table 6: Detailed Cost Estimates by Financier

($ million)

ADB MEC Government (taxes

and duties) Total Cost

Amount % of Cost Category

Amount % of Cost Category

Amount % of Cost Category

Amount

Item

A. Investment Costs

1. Rehabilitation of Fuel Tanks 12.0 90.2% 0.315 2.4% 0.985 7.4% 13.3 2. Consultants 0.7 100.0% 0.7

Subtotal (A) 12.7 90.7% 0.315 2.3% 0.985 7.0% 14.0

C. Contingencies 0.0 0.0% 0.7 25.0% 2.1 75.0% 2.8 1. Physical 0.0 0.0% 0.543 23.6% 1.757 76.4% 2.3 2. Price 0.0 0.0% 0.135 27.0% 0.365 73.0% 0.5

Total Project Cost (A+C) 12.7 76.0% 0.99 5.9% 3.11 18.5% 16.8 Note: Numbers may not sum precisely because of rounding. Source: Asian Development Bank estimates.

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F. Detailed Cost Estimates by Outputs and/or Components

Table 7: Detailed Cost Estimates by Components ($ million)

Item Total Cost Component

Amount % of Cost Category

A. Investment Costs

1. Rehabilitation of Fuel Tanks

13.30

13.30

95.0%

2. Consultants 0.70 0.70 5.0% A. Project management 0.70 0.70 5.0% Subtotal (A) 14.00 14.00 100.0% B. Contingencies 1. Physical 2.30 2.30 100.0% 2. Price 0.50 0.50 100.0% Subtotal (B) 2.80 2.80 100.0% Total Project Cost (A+B) 16.80 16.80 100.0%

Note: Numbers may not sum precisely because of rounding. Source: ADB Estimates

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G. Detailed Cost Estimates by Year

Table 8: Detailed Cost Estimates by Year

($ million)a

Item Total Cost 2019 2020 2021 2022 2023

A. Investment Costsb

1. EPC contract 2. Consultants

13.300 0.700

0.000 0.140

4.655 0.140

2.660 0.140

2.660 0.140

3.325 0.140

Subtotal (A) 14.000 0.140 4.795 2.800 2.800 3.465 B. Contingenciesc

1. Physical 2.319 0.024 0.796 0.464 0.463 0.572

2. Price 0.5 0.004 0.163 0.096 0.097 0.121

Subtotal (B) 2.8 0.0 1.0 0.6 0.6 0.7

Total Project Cost (A+B) 16.800 0.168 5.754 3.360 3.360 4.158

% Total Project Cost 100%

100% 1% 34.25% 20% 20% 24.75%

Source: Asian Development Bank Estimates. a Includes taxes and duties of $3.11 million. Such amount does not represent an excessive share of the project cost. The government will finance taxes and duties of $3.11 million through exemption. b In mid-2018 prices as of 19 October 2018. c Physical contingencies computed at 16.6% of base cost. Price contingencies computed at 3.4% of base cost.

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H. Contract and Disbursement S-Curve

9. The graph below shows quarterly contract awards and disbursement projections over the life of the project. The S-curve represents projections for ADB financing and ADB-administered cofinancing, which will be recorded in ADB’s systems and reported through e-Ops. Counterpart funds and any other cofinancing are excluded. The projection for contract awards include contingencies and unallocated amounts.

Table 9: Contract Award and Disbursement Projection

S-Curve

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

2019Q3

2019Q4

2020Q1

2020Q2

2020Q3

2020Q4

2021Q1

2021Q2

2021Q3

2021Q4

2022Q1

2022Q2

2022Q3

2022Q4

2023Q1

2023Q2

2023Q3

2023Q4

Chart Title

Cumulative contract awards Cumulative disbursements

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I. Fund Flow Diagram

10. The diagram below shows how the funds will flow from ADB, and the recipient to implement project activities, and how documents for requests for disbursement will flow to ADB.

Document Flow Fund Flow MEC submits WA to MOF for approval

Executing Agency: Ministry of Finance

Implementing Agency Marshalls Energy Company

(MEC)

Withdrawal application

Invoice

Contractor/Consulting Firm Direct Payment

ADB

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V. FINANCIAL MANAGEMENT

A. Financial Management Assessment

11. A financial management assessment (FMA) was conducted in October 2018 in accordance with ADB’s Guidelines for the Financial Management and Analysis of Projects and the Financial Due Diligence: A Methodology Note. The FMA considered the capacity of the Ministry of Finance and MEC, including funds-flow arrangements, staffing, accounting and financial reporting systems, financial information systems, and internal and external auditing arrangements. Based on the assessment, the key financial management risks identified are listed in the table below. It is concluded that the overall pre-mitigation financial management risk of executing agency and implementing agency is substantial. 12. Overall pre-mitigation financial management risk to the project is considered substantial, reflecting the numerous and substantial MEC entity-level financial management risks. These must be mitigated for the sake of MEC’s and the project’s long-term viability. The Ministry of Finance and MEC have agreed to implement key measures to address the deficiencies, which is being prepared through ADB technical assistance TA 9425-REG (footnote 5). 13. As a state-owned enterprise, MEC’s board is appointed by the government. Its current composition shows apparent conflicts of interest that affect MEC’s and its board members’ ability to act in the interest of the enterprise. MEC’s board currently includes two government ministers, which inevitably results in political considerations influencing corporate governance decisions. Compounding this problem, MEC’s board is a shared board known as the Combined Utilities Board (CUB). Two other state-owned utilities, viz. the Kwajalein Atoll Joint Utilities Resources (KAJUR), which provides power and water services on Ebeye, Kwajalein Atoll; and the Majuro Water and Sewage Company (MWSC), are governed by the CUB. These two state-owned utilities are substantial debtors to MEC; KAJUR alone as of September 2018 owed MEC over $5 million for diesel fuel delivered to it for power generation. Despite these arrearages, MEC continues to deliver fuel to KAJUR, whose debt to MEC continues to grow.

14. Tariff and subsidy policy is not based on an assessment of MEC’s costs or revenue requirement or, in the case of subsidies, need of beneficiaries (i.e. subsidies are not targeted). To the contrary, the RMI government provides a subsidy of 1000 kWh per month free-of-charge to a growing number of landowners across whose territory parts of MEC’s distribution network passes, ostensibly as compensation for granting an easement to MEC. When the RMI government approved its decision in 1992 to extend this compensation to landowners, the number of qualifying landowners was assessed at approximately 180, with an associated cost per year of $180,000. By 2017, landowners had effectively subdivided their parcels to allow other family members to claim this compensation. The number of landowners claiming (and receiving) this compensation has now increased to 940, with the cost of this subsidy ballooning to over $3 million. While this subsidy is provided in the form of pre-payment vouchers and recorded as income for MEC, it creates a challenge for MEC’s financial management in the form of an unquantified contingent liability. MEC records the payment by government for this subsidy as sales of electricity, but has no record of delivery of electricity against this payment. 15. Tariffs for electricity service are based on a tariff template that was adopted in 2005 and provides for a fixed per-kWh charge plus a fuel surcharge that adjusts according to a Singapore refined product price index (“Means of Platts Singapore”). While the pass-through fuel surcharge is a reasonable feature of MEC’s tariff formulation, the fixed per-kWh charge does not appear to reflect any robust analysis of MEC’s fixed costs or variable costs (other than fuel). Indeed, MEC

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has no basis for such an analysis: most of the core assets that it operates are not capitalized, and thus are not depreciated. Nor does MEC adequately budget for responsible maintenance. In other words, MEC’s true costs are not precisely known, nor reflected in its budgeting, estimates of its revenue requirement, or end-user tariffs. 16. Notwithstanding the imprecision that characterizes MEC’s tariff policy, the current tariff was last approved by the RMI government (Cabinet of Ministers) in January 2014, reflecting a world oil price in 2013 of $105 per barrel. This has boosted MEC’s fortunes as the world oil price has declined (MEC reported an operating profit for the utility business of $2.7 million and $0.8 million in FY2016 and FY2017, respectively), but this is illusory, and masks MEC’s true financial performance and long-term viability. 17. MEC’s annual budgeting process does not appear to be based on criteria directly linked to achievement of priority performance indicators and long-term viability of MEC as a commercial enterprise. As a consequence, maintenance of core assets has been neglected. The failure for MEC to capitalize its distribution network, power plant, and the MTF (all of which were granted to it under a capital lease) has caused MEC to underestimate its revenue requirement and masked the sector’s decapitalization. 18. The magnitude of MEC’s shortcomings in its physical and financial performance and risks to its sustainability is reflected in ADB’s program of engagement with RMI in energy. ADB consultants deployed under TA 9425-REG are currently preparing a comprehensive diagnostic of all of MEC’s operations and influences affecting MEC, including financial management and accounting, sector policy and governance, and the entirety of MEC’s business processes and systems. The diagnostic and analysis will be available in Q1 2019; a comprehensive program of reform and capacity-building measures will be produced in Q2 2019, which will form the basis for continued engagement in energy in RMI. Implementation of the program of reform will be incorporated into the design of future energy projects. 19. In the absence of a final program of reform for MEC, ADB has introduced four key assurances in the project legal agreements to which the government has assented:

(i) within one year of grant effectiveness, the government has committed to transfer ownership of the Majuro Tank Farm to MEC;

(ii) within fifteen months of grant effectiveness, the government has committed to a reform of MEC’s corporate governance arrangements such that they conform to OECD Guidelines for Corporate Governance of State-Owned Enterprises (2015);

(iii) to provide for a tariff policy and rate structure that establishes MEC’s authorized revenue based on verifiable, prudent and reasonable costs, while providing MEC an opportunity to recover its costs associated with providing electricity service and incentivizing MEC to control and minimize its costs, and

(iv) to cause MEC to make available adequate budgetary resources for the implementation of a suitable operations and maintenance program for the Majuro Tank Farm (Output 2 of the project).

20. Key project-specific and entity-level financial risk management action plan mitigation measures are summarized in Table 10.

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Table 10: Financial Risk Management Action Plan

Risk Type Risk Assessment

Rating

Risk Description Mitigation Measures

A. Inherent Risk (the susceptibility of the project financial management system to factors arising from the environment in which it operates, such as country rules and regulations and entity working environment (assuming absence of any counter checks or internal controls)).

1. Country-specific Risks

Moderate PEFA report 2013 notes several PFM challenges such as the credibility of the national budget and expenditure control, delays in account payable settlements, fiscal risk from SOEs and local government, lack of multi-year fiscal perspective, inadequacy of account reconciliation procedures, inadequacy of periodic reporting

RMI has recruited full time expatriate staff to strengthen the account reconciliation process and general accounting. They are actively considering a new FMIS.

2. Entity-specific Risks

Substantial 1. As a state-owned enterprise, MEC’s board is appointed by the government. Its current composition shows apparent conflicts of interest that affect MEC’s and its board members’ ability to act in the interest of the enterprise. 2. Tariff and subsidy policy is not based on an assessment of MEC’s costs or revenue requirement or, in the case of subsidies, need of beneficiaries (i.e. not targeted). 3. MEC’s annual budgeting process does not appear to be based on criteria directly linked to achievement of priority performance indicators. Maintenance of core assets has been neglected as a consequence.

1. ADB has included as an assurance in the grant agreement a commitment to bring MEC governance arrangements into compliance with OECD’s Guidelines on Corporate Governance of State-Owned Enterprises to address these and related shortcomings. 2. ADB is implementing technical assistance (TA 9425) to perform a comprehensive diagnostic and develop a package of reform measures that will address these and other critical factors undermining MEC’s performance and viability. The package of reform measures will be presented by TA consultants in Q2 2019. 3. ADB has included as an assurance in the grant agreement a commitment that MEC or the Government will make available sufficient resources to provide for the tank farm’s operation and maintenance (a program and training for operation and maintenance will be prepared under Package 1 of the project.) The reform measures being developed under TA 9425 will further strengthen MEC’s budgeting and planning processes.

Overall Inherent Risk

Substantial

B. Project Risk (the risk that the project’s accounting and internal control framework are inadequate to ensure project funds are used economically and efficiently and for the purpose intended, and that the use of funds is properly reported).

1. Implementing Entity

Substantial MEC’s governance arrangements, management practices and business processes do not reflect international best practices.

TA 9425 for sector reform and capacity building is currently ongoing and will be completed by 2Q 2019. The TA will produce a package of concrete reform measures and implementation action plan that will address deficiencies in MEC’s business processes and systems, governance and policy

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constraints, as well as tariffs and overall financial management. Successive ADB investment projects in energy in RMI will support the reform program’s implementation.

2. Funds Flow Low RMI well versed with ADB disbursements procedures. The project will employ direct payment procedures.

3. Staffing

Moderate Difficulty in attracting and retaining qualified and experienced staff; staffing profile and functions and duties among MEC management fragmented. MEC staff has limited experience in the implementation, reporting and monitoring of ADB financed projects.

TA 9425 for sector reform and capacity building is developing recommendations on human resource management as part of the reform measures. Project implementation consultants will be relied on to ensure adequacy of project financial performance reporting and monitoring.

4. Accounting Policies and Procedures

Substantial MEC’s core capital assets the power plant, tank farm and distribution system are currently not reflected in MEC’s books, therefore depreciation in understated and profit and loss is overstated. Other accounting and financial issues exist, such as non-transparency in fuel pricing.

The project legal agreements commit RMI to ensuring that tank farm assets will be reflected on MEC’s books within one year from grant effectiveness. Non-fulfilment of this commitment by RMI can serve as grounds for suspension of disbursement of grant proceeds. The TA 9425 for sector reform and capacity building will assess these and other weaknesses and prescribe measures to address them.

5. Internal Audit Moderate MEC has no internal audit function. Very difficult to recruit skilled internal auditors. Constraint on verification of use of project resources.

Project implementation consultants will be relied on to ensure adequacy of project financial performance reporting and monitoring.

6. External Audit Low

Financial statement production is on time and monthly reporting to the Board on time. Financial statements are audited by Deloitte.

The external auditors have given an unqualified opinion on the financial statements.

7. Reporting and Monitoring

Low Automated systems are functioning. The GL is on Abila Micro Information Product (MIP) by the Sage group and interfaces with the billing software

8. Information systems

Low Automated systems are functioning. The GL is on Abila Micro Information Product (MIP) by the Sage group and interfaces with the billing software

Overall Project Risk

Substantial

Source: Asian Development Bank.

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B. Disbursement

21. The grant proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time), and detailed arrangements agreed upon between the government and ADB. Online training for project staff on disbursement policies and procedures is available.1 Project staff are encouraged to avail of this training to help ensure efficient disbursement and fiduciary control. 22. Direct payment will be used for the EPC contract and consulting services. MEC will be responsible for: (i) preparing disbursement projections; (ii) requesting budgetary allocations for counterpart funds (if applicable); and (iii) collecting supporting documents. MEC will be responsible for preparing and sending the withdrawal applications to ADB.

23. Before the submission of the first withdrawal application, the recipient should submit to ADB sufficient evidence of authority of the person(s) who will sign the withdrawal applications on behalf of the government, together with the authenticated specimen signatures of each authorized person. The minimum value per withdrawal application is stipulated in the Loan Disbursement Handbook (2017, as amended from time to time). Individual payments below this amount should be paid by the executing agency and/or implementing agency and subsequently claimed to ADB through reimbursement, unless otherwise accepted by ADB. The Recipient should ensure sufficient category and contract balances before requesting disbursements. Use of ADB’s Client Portal for Disbursements (CPD)2 system is encouraged for submission of withdrawal applications to ADB. C. Accounting

24. The executing agency will maintain, or cause to be maintained, separate books and records by funding source for all expenditures incurred on the project following accrual-based accounting following financial reporting standards acceptable to ADB. The executing agency will prepare consolidated project financial statements in accordance with the government's accounting laws and regulations which are consistent with international accounting principles and practices. D. Auditing and Public Disclosure

25. The Ministry of Finance (MOF) will cause the project financial statements to be audited in accordance with the Government’s audit regulations by an independent auditor acceptable to ADB. The audited project financial statements together with the auditor’s opinion will be presented in the English language to ADB within 9 months from the end of the fiscal year by the MOF. 26. The Ministry of Finance will also cause the financial statements of MEC to be audited in accordance with Government Auditing Standards issued by the Comptroller General of the United States and adopted by RMI Government, by an independent auditor acceptable to ADB. The audited financial statements of MEC, together with the auditor’s report and management letter, will be submitted in the English language to ADB within 1 month after their approval by the competent authority.

1 Disbursement eLearning. http://wpqr4.adb.org/disbursement_elearning 2 The CPD facilitates online submission of WA to ADB, resulting in faster disbursement. The forms to be completed by

the Recipient are available online at https://www.adb.org/documents/client-portal-disbursements-guide.

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27. The annual audit report for the project accounts will include a management letter and auditor’s opinions, which cover: (i) whether the project financial statements present an accurate and fair view or are presented fairly, in all material respects, in accordance with the applicable financial reporting standards; (ii) whether the proceeds of the grant were used only for the purpose(s) of the project; and (iii) whether the recipient or executing agency was in compliance with the financial covenants contained in the legal agreements for the project. 28. Compliance with financial reporting and auditing requirements will be monitored by review missions and during normal program supervision, and followed up regularly with all concerned, including the external auditor. 29. The Ministry of Finance and Marshalls Energy Company have been made aware of ADB’s approach to delayed submission, and the requirements for satisfactory and acceptable quality of the audited project financial statements.3 ADB reserves the right to require a change in the auditor (in a manner consistent with the constitution of the recipient), or for additional support to be provided to the auditor, if the audits required are not conducted in a manner satisfactory to ADB, or if the audits are substantially delayed. ADB reserves the right to verify the project's financial accounts to confirm that the share of ADB’s financing is used in accordance with ADB’s policies and procedures. 30. Public disclosure of the audited project financial statements, including the auditor’s opinion on the project financial statements, will be guided by ADB’s Public Communications Policy 2011.4 After the review, ADB will disclose the audited project financial statements and the opinion of the auditors on the project financial statements no later than 14 days of ADB’s confirmation of their acceptability by posting them on ADB’s website. The management letter, additional auditor’s opinions, and audited entity financial statements will not be disclosed.5

VI. PROCUREMENT AND CONSULTING SERVICES

A. Procurement of Goods, Works, and Consulting Services

31. All procurement of goods and works will be undertaken in accordance with ADB’s Procurement Guidelines (2015, as amended from time to time). 32. An international competitive bidding procedure, single-stage two-envelope will be used for goods and works contracts estimated to cost $12.3 million or more. A consulting firm will be engaged using the quality and cost-based selection (QCBS) method with a standard quality–cost

3 ADB’s approach and procedures regarding delayed submission of audited project financial statements: (i) When audited project financial statements are not received by the due date, ADB will write to the executing agency

advising that (a) the audit documents are overdue; and (b) if they are not received within the next 6 months, requests for new contract awards and disbursement such as new replenishment of imprest accounts, processing of new reimbursement, and issuance of new commitment letters will not be processed.

(ii) When audited project financial statements are not received within 6 months after the due date, ADB will withhold processing of requests for new contract awards and disbursement such as new replenishment of imprest accounts, processing of new reimbursement, and issuance of new commitment letters. ADB will (a) inform the executing agency of ADB’s actions; and (b) advise that the loan may be suspended if the audit documents are not received within the next 6 months.

(iii) When audited project financial statements are not received within 12 months after the due date, ADB may suspend the loan.

4 Public Communications Policy: http://www.adb.org/documents/pcp-2011?ref=site/disclosure/publications 5 This type of information would generally fall under public communications policy exceptions to disclosure. ADB.2011.

Public Communications Policy. Paragraph 97(iv) and/or 97(v).

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ratio of 90:10 to provide implementation supervision services to MEC and the PMU. MEC has requested that ADB manage this selection. 33. An 18-month procurement plan indicating threshold and review procedures, goods, works, and consulting service contract packages and national competitive bidding guidelines is in Section C. 34. All consultants will be recruited according to ADB’s Guidelines on the Use of Consultants (2013, as amended from time to time).6 The terms of reference for all consulting services are detailed in Section D.

35. For the implementation of the proposed project, the Ministry of Finance will be the executing agency. MEC will be the implementing agency. ADB and the Government have agreed on the formation of a project steering committee (PSC). The PSC will be chaired by the Combined Utilities Board chairman, Director of the Ministry of Finance Division of International Development Assistance, National Energy Planner of the Ministry of Resources and Development, Minister of Public Works, and ADB Project Officer and ADB Development Coordination Officer. MEC Chief Executive Officer will be supported by consultants to be appointed under the project to manage its implementation. B. Procurement Plan

PROCUREMENT PLAN

Basic Data

Project Name: Republic of the Marshall Islands: Energy Security Project

Project Number: 49450-011 Approval Number:

Country: Marshall Islands Executing Agency: Marshall Islands Ministry of Finance

Project Procurement Classification: B Implementing Agency: Marshalls Energy Company (MEC)

Procurement Risk: Low

Project Financing Amount: $16.8 M ADB Financing: $12.7 M Co-financing (ADB Administered): None Non-ADB Financing: $ 4.1 M

Project Closing Date: June 2024

Date of First Procurement Plan: 26 October 2018 Date of this Procurement Plan: 26 October 2018

C. Process Thresholds, Review and 18 Month Procurement Plan 1. Procurement and Consulting Methods and Thresholds

36. Except as the Asian Development Bank (ADB) may otherwise agree, the following process thresholds shall apply to procurement of goods and works.

6 Checklists for actions required to contract consultants by method available in e-Handbook on Project

Implementation at: http://www.adb.org/documents/handbooks/project-implementation/

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Procurement of Goods and Works

Method Threshold Comments

International Competitive Bidding (ICB) for Goods and Works a

≥ $ 1.0 M The whole of the works

a Including limited international bidding if appropriate

Consulting Services

Method Comments

Quality and Cost Based Selection (QCBS) For consultants

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1. ADB prior or Post Review. 37. Except as ADB may otherwise agree, the following prior or post review requirements apply to the various procurement and consultant recruitment methods used for the project. Procurement Method Prior or Post

ICB Goods and Works Prior

QCBS Prior

2. Goods and Works Contracts Estimated to Cost $1 Million or More 38. The following table lists goods and works contracts for which the procurement activity is either ongoing or expected to commence within the next 18 months.

Package Number

General Description

Estimated Value

Procurement Method

Review [Prior /

Post/Post (Sample)]

Bidding Procedure

Advertisement Date

(quarter/year) Comments

Package 1 of 2

The whole of the Majuro Tank Farm rehabilitation, including seawall strengthening and introduction of new O&M practices.

$ 12.3a million

ICB Prior Single stage, two envelope

Q1 2019

a Excludes taxes and duties

4. Consulting Services Contracts Estimated to Cost $100,000 or More

39. The following table lists consulting services contracts for which the recruitment activity is either ongoing or expected to commence within the next 18 months.

Package Number

General Description

Estimated Value

Recruitment Method

Review (Prior/Post)

Advertisement Date

(quarter/year)

Type of Proposal

Comments

2 of 2 Project implementation supervision

$ 0.7 million

QCBS Prior Q1 2019 Full Technical Proposal

Specialist consultant for full project duration

D. Consultant's Terms of Reference

40. The project will include a contract for consulting services to support MEC in supervising the delivery and implementation of all project packages. (NB: Procurement support, including bid document preparation, on-site pre-bid conference with prospective bidders, and evaluation of received bids and preparation of a bid evaluation report, is provided under the transaction Technical Assistance for the proposed project, TA 9242-REG.)

41. The procurement plan is prepared in accordance with the generic or country-specific

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templates prepared by the Procurement, Portfolio and Financial Management Department.

VII. SAFEGUARDS

42. This project, and all project activities to be financed by ADB and government, will be subject to ADB’s Safeguard Policy Statement (2009) (SPS).[1] The project is classified as Category B for environment and Category C on involuntary resettlement and indigenous persons. An IEE was prepared during project preparation and the project management unit (PMU), comprised of an environmental safeguards specialist and other project personnel within MEC will be directly responsible for all safeguards related matters. The project will also assist in building the capacity of MEC including providing regular trainings and coaching sessions to undertake effective environment management planning and implementation and improve the quality of safeguards monitoring. 43. Environment. The project is classified as category B for environment following ADB’s Safeguard Policy Statement 2009 (SPS). The main potential impact identified under the project include (i) potential for (i) leakage, minor (e.g. ruptured pipework) or (ii) catastrophic (e.g. outlet or tank shell failure) failure leading to contamination of land within the bunded area and surrounding marine environment. Adequate mitigation measures have been incorporated into the environmental management plan and it is expected that project outputs will have only small, temporary, and localized adverse impacts on the environment, which can be readily managed by proposed mitigation measures in the IEE and EMP. Work on-site will be conducted under the supervision of qualified contractors who will be required to adhere to occupational safety and health standards recommended by the American Petroleum Institute.

44. MEC will have overall responsibility for the project’s compliance with environment safeguard requirements. The established PMU team based in MEC with capacity building support from ADB under the project will be responsible for implementing the IEE and EMP, and facilitate and supervise the implementation of the EMP which will include (i) revising the construction section of the EMP and ensuring its integration along with other safeguards provisions into the bid and contract documents; (ii) providing induction to contractors on EMP requirements during construction and reviewing and approving the contractor’s CEMPs; (iii) as required, supporting contractors in implementing the CEMPs and monitoring requirements; (iv) undertaking compliance monitoring of CEMP implementation; (v) preparing the necessary environmental assessment of candidate subprojects to be prepared during project implementation; and (vi) preparing monitoring reports and other reports as required.

45. Involuntary Resettlement. The project is classified as category C for involuntary resettlement following ADB’s SPS. A due diligence report has been prepared confirming that there are no anticipated land acquisition and resettlement impacts. MEC will be responsible for the day–to–day management of the project including resettlement safeguards under the established PMU with targeted safeguards capacity building assistance from the project. 46. Indigenous peoples. The project is classified as Category C for indigenous peoples. The project is not expected to impact any distinct and vulnerable group of indigenous peoples as defined under ADB’s SPS. The beneficiaries of the project are not discriminated upon due to their language, skin color, or traditional practices. All project outputs will be delivered in a culturally appropriate and participatory manner.

[1] Available at: http://www.adb.org/Documents/Policies/Safeguards/Safeguard-Policy-Statement-June2009.pdf

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47. Prohibited investment activities. Pursuant to ADB’s Safeguard Policy Statement (2009), ADB funds may not be applied to the activities described on the ADB Prohibited Investment Activities List set forth at Appendix 5 of the Safeguard Policy Statement (2009).

VIII. GENDER AND SOCIAL DIMENSIONS 48. The project has no gender elements. However, the project management unit (PMU) will conduct training as required to increase gender awareness among the staff of MEC, and contractors. Training will be provided to the PMU and project staff to be able to detect, intercept, respond to, and prevent (or refer cases of) sexual harassment, gender-based violence, and other problems that may emerge during project implementation.

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IX. PERFORMANCE MONITORING, EVALUATION, REPORTING, AND COMMUNICATION

A. Project Design and Monitoring Framework

Table 9: Design and Monitoring Framework Impacts the Project is Aligned with

Energy security for the Marshall Islands improved (National Energy Policy and Energy Action Plan).a Safety and environmental risks associated with handling and storage of refined petroleum products reduced (National Energy Policy and Energy Action Plan).a

Results Chain Performance Indicators

with Targets and Baselines Data Sources and

Reporting Mechanisms Risks

Outcome By 2023:

Safe and reliable operation of the fuel tank farm sustained and supply of fuel to power generation facilities throughout the Marshall Islands continued.

a. Tank farm facilities restored to appropriate American Petroleum Institute standards. (2018 baseline: very poor condition, non-compliant, and rapidly deteriorating).

b. Tank farm capacity fully restored to design capacity of 6 million gallons (2018 baseline: 50% capacity available)

a. Inspection and acceptance reports for all goods and works contracts prepared by the implementation supervision consultants.

b. Implementation supervision consultant and MEC project completion reports

Outputs 1. Majuro tank farm rehabilitated

By December 2023, 6 million gallons of fuel storage capacity and associated facilities rehabilitated (2018 baseline: none).

PMU reports Asset degradation more extensive than what was assessed during the feasibility study, leading to cost overrun and delays.

2. Majuro tank farm O&M program instituted

2a. By 2021, tank farm facilities O&M procedures introduced (2018 baseline: none).

2b. By December 2022, MEC personnel fully trained and sufficiently resourced to implement the O&M program (2018 baseline: not applicable).

2a-b. PMU reports, MEC annual financial statement (including detailed budgeting for O&M)

2b. MEC management, MEC board, and government fail to budget adequately for maintenance.

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Key Activities with Milestones

1. Tank-farm detailed design preparation

1.1 Contractor reviews existing asset condition reports (Q4 2019);

1.2 Contractor performs detailed technical inspection of tank-farm assets to confirm condition (Q4 2019)

1.3 Contractor prepares detailed designs (Q1 2020)

1.4 Implementation supervision consultants review and approve detailed designs (Q2 2020)

2. Repair and rehabilitation of tank-farm assets

2.1 Execution of goods and works (Q3 2020 – Q4 2023)

2.2 Inspection and acceptance by MEC and supervision consultant of completed goods and works milestones (Q3 2020 – Q4 2023)

3. Project management support and capacity building

3.1 Management of delivery of all goods and works packages (Q3 2019 – Q4 2023)

3.2 Continuous support to PMU for project administration and reporting (Q3 2019 – Q4 2023)

3.3 Preparation of operation and maintenance program for tank farm facility and training of MEC personnel in its implementation (Q4 2019 – Q4 2022)

Project Management Activities

Supervision consultant support to MEC during project implementation

Inputs

Asian Development Bank: $12.7 million (ADF grant)

Government: $3.1million

MEC: $1.0 million

Assumptions for Partner Financing

Not Applicable

ADF = Asian Development Fund; EPC = engineering, procurement, and construction; MEC = Marshalls Energy Company, O&M = operation and maintenance; Q = quarter; PMU = Project Management Unit

a Government of the Marshall Islands, Ministry of Resources and Development. 2016. National Energy Policy and Energy Action Plan, Majuro.

Source: Asian Development Bank.

B. Monitoring

49. Project performance monitoring. The executing agency will submit a quarterly progress report which contain information necessary to update ADB’s project performance reporting system. 50. Compliance monitoring. Compliance monitoring will be provided through regular quarterly progress reports and during regular ADB review missions. 51. Safeguards monitoring. With no involuntary resettlement and gender impacts envisaged, monitoring and reporting will focus on environment safeguards. Progress on the implementation of the EMP will be included in the periodic project progress reports with specific monitoring activities defined in the IEE and EMP to be carried out by the contractor, supervised by the PMU under MEC as the implementing agency. MEC through the executing agency will

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submit semi-annual environmental monitoring reports on EMP implementation for ADB’s review C. Evaluation

52. Within 6 months of physical completion of the project, the Ministry of Finance will submit a project completion report to ADB.7

D. Reporting

53. The executing agency will provide ADB with (i) quarterly progress reports in a format consistent with ADB's project performance reporting system; (ii) consolidated annual reports including (a) progress achieved by output as measured through the indicator's performance targets, (b) key implementation issues and solutions, (c) updated procurement plan, and (d) updated implementation plan for the next 12 months; and (iii) a project completion report within 6 months of physical completion of the project. To ensure that projects will continue to be both viable and sustainable, project accounts and the implementing agency audited financial statement together with the associated auditor's report, should be adequately reviewed.

E. Stakeholder Communication Strategy

54. Prior to the inception mission, a communication strategy and communication plan will be prepared by MEC. The communication strategy and communications plan will indicate the types of information, the mode of communication, and the timing of communications to be conveyed to stakeholders regarding the project and its implementation.

X. ANTICORRUPTION POLICY

55. ADB reserves the right to investigate, directly or through its agents, any violations of the Anticorruption Policy relating to the project.8 All contracts financed by ADB shall include provisions specifying the right of ADB to audit and examine the records and accounts of the executing agency and all project contractors, suppliers, consultants, and other service providers. Individuals and/or entities on ADB’s anticorruption debarment list are ineligible to participate in ADB-financed activity and may not be awarded any contracts under the project.9 56. To support these efforts, relevant provisions are included in the grant agreement/regulations and the bidding documents for the project.

XI. ACCOUNTABILITY MECHANISM

57. People who are, or may in the future be, adversely affected by the project may submit complaints to ADB’s Accountability Mechanism. The Accountability Mechanism provides an independent forum and process whereby people adversely affected by ADB-assisted projects can voice, and seek a resolution of their problems, as well as report alleged violations of ADB’s operational policies and procedures. Before submitting a complaint to the Accountability

7 Project completion report format is available at: http://www.adb.org/Consulting/consultants-toolkits/PCR-Public-

Sector-Landscape.rar 8 Anticorruption Policy: http://www.adb.org/Documents/Policies/Anticorruption-Integrity/Policies-Strategies.pdf 9 ADB's Integrity Office web site: http://www.adb.org/integrity/unit.asp

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Mechanism, affected people should make an effort in good faith to solve their problems by working with the concerned ADB operations department. Only after doing that, and if they are still dissatisfied, should they approach the Accountability Mechanism.10

XII. RECORD OF CHANGES TO THE PROJECT ADMINISTRATION MANUAL

58. All revisions and/or updates during the course of implementation should be retained in this section to provide a chronological history of changes to implemented arrangements recorded in the PAM, including revision to contract awards and disbursement s-curves.

10 Accountability Mechanism. http://www.adb.org/Accountability-Mechanism/default.asp.