Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 44287-TJ

PROJECT PAPER

ON A

PROPOSED ADDITIONAL FINANCING GRANT

IN THE AMOUNT OF SDRl.6 MILLION (US$2.5 MILLION EQUIVALENT)

TO

REPUBLIC OF TAJIKISTAN

FOR THE

PAMIR PRIVATE POWER PROJECT

June 23,2008

Sustainable Development Department Central Asia Country Unit Europe and Central Asia Region

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

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CURRENCY EQUIVALENTS

AKFED CAS D C GBAO E M M P ESIA GoRT FMR IBRD I C B IDA IFC I L O IRR N P V PEC P I U PPID PPPP R V P sss

(Exchange Rate Effective June 21,2008) CurrencyUnit = US$

U S $ = 3.43 Taj ik Somoni

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

Aga Khan Fund for Economic Development Country Assistance Strategy Direct Contracting Gorno Badakhshan Autonomous Region Environmental Monitoring and Management Plan Environmental and Social Impact Assessment Government o f the Republic o f Tajikistan Financial Management Report International Bank for Reconstruction and Development International Competitive Bidding International Development Association International Finance Corporation International Labor Organization Internal Rate o f Return Net Present Value Pamir Energy Company Project Lmplementation Unit Project Planning and Implementation Department Pamir Private Power Project Regional Vice President Single Source Selection

Vice President: Shigeo Katsu Country Director: Annette D ixon

Task Team Leader: Nikolay Nikolov Sector Director/Sector Manager: Peter ThornsodCharles Feinstein

FOR OFFICIAL USE ONLY

TABLE OF CONTENTS

Project Paper Data Sheet

Page

1 . 2 . 3 . 4 . 5 . 6 . 7 . 8 . 9 . 10 . 11 .

Introduction.. ................................................................................................................. -1 Background and Rationale for Additional Financing in the Amount o f $2.5 million ... 1 Proposed Changes .......................................................................................................... 3 Consistency with CAS ................................................................................................... 5 Economic Analysis o f Financing Gap ........................................................................... 5 Key Project Aspects ....................................................................................................... 6 Exceptions to Bank Policies ........................................................................................... 8 Benefits and Risks ......................................................................................................... -9 The Expected Outcome ................................................................................................ 10 Financial Terms and Conditions for the Additional Financing ................................... 10 Procurement ................................................................................................................. 10

. .

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

Project Paper Data Sheet

Date: June 23,2008 Country: Republic o f Tajikistan Project Name: Pamir Private Power Project Project ID: 105727

Team Leader: Nikolay Nikolov Sector DirectodManager: Peter ThornsodCharles Feinstein Country Director: Annette Dixon Environmental Category: B

Borrower IDA Additional Financing Others:

FY Annual Cumulative

Total

2005 2006 2007 2008 2009 4,558,357.71 2,692,771.75 271,100.52 1,311,400.00 646,370.01 4,558,357.71 7,251,129.46 7,522,229.98 8,833,629.98 9,479,999.99

0.9 0.2

1.1

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

2.3 4.4

6.7

oXYes o N o oXYes o N o oYes o X N o

0.9 2.5 4.4

7.8

Source Local I Foreign I Total

1. Introduction

1.1 This Project Paper seeks the approval o f the Executive Directors to provide additional financing in the form o f a Grant in the amount o f SDRl.6 mi l l ion (US$2.5 mi l l ion equivalent) to the Republic o f Tajikistan for the Pamir Private Power Project, Credit Number 3682-TJ.

1.2 The proposed additional financing would help cover the costs associated with a financing gap, caused by the unexpected need to restore and repair equipment and facilities damaged by a catastrophic flooding, which occurred on February 5,2007 at the Pamir 1 Hydro Power Plant (HPP). Pamir 1 HPP i s a part o f the Pamir Private Power Project in the Gorno Badakhshan Autonomous Region (GBAO) o f Tajikistan - one o f the poorest regions in the world.

1.3 The proposed additional financing for an unanticipated financing gap wil l enable the project company Pamir Energy (PEC) to complete the original project scope by focusing on rehabilitation o f plant infrastructure and provision o f parts and equipment to ensure the plant’s long-term sustained operation and prevent further accidents.

2. Background and Rationale for Additional Financing in the Amount of $2.5 million

2.1 Background. Shortly after the catastrophic flooding on February 5,2007 at the Pamir 1 hydropower plant (HPP), the World Bank, joint ly with IFC, sent a team to help assess the damage, design a recovery plan, and assess related financing needs. In response to the request from the Republic o f Tajikistan (GoRT), World Bank management committed in principle in April 2007 to provide additional IDA funds to help overcome the damage from the flooding. Insurance funds and surplus funds from the current Pamir Private Power project were used to cover the immediate needs for carrying out restoration works and supply o f equipment. In consideration o f the overall country priorities, existing IDA allocation and available resources outside the Bank, a concrete proposal to provide a US$2.5 mi l l ion equivalent IDA Grant as additional financing was recently made, and in addition, an agreement was reached in April 2008 among the project stakeholders on a Financial Restructuring Plan for the project company.

2.2 Pamir 1 HPP accounts for 75% o f the capacity in the main grid system of GBAO, which i s operated by a fully privately owned special purpose company Pamir Energy (PEC) under a 25-year concession given by the Government to operate and further develop al l existing electricity generation, transmission, and distribution facilities in GBAO. The concession was developed under the Pamir Private Power Project (PPPP), which is a successful public-private partnership between the GoRT, the Aga Khan Fund for Economic Development (AWED), as the main private sponsor, and the IFC. The Project, at a total cost o f US$26 million, combines public-private partnership with a subsidy from the Swiss Government to ensure affordable tariffs paid by households. The Project objective is, through private sector involvement, to improve the reliability and enhance the quantity o f electricity supply in the Gorno Badakhshan Autonomous Oblast (GBAO) in a financially, environmentally and socially sustainable way.

2.3 Project Status. The IDA Credit for the Pamir Private Power Project was approved on June 27, 2002 and became effective on March 3, 2003. K e y construction and equipment

1

deliveries were completed satisfactorily in 2006, doubling the capacity o f Pamir 1 HPP to 28 MW, enhancing winter water f low for generation through a regulating structure at the upstream Lake Yashilkul and upgrading other assets o f the system. An extension o f the Closing Date from December 3 1,2006 to December 3 1,2007 enabled complete installation and testing prior to contractor payment. A subsequent extension from December 3 1,2007 to December 3 1,2008 enabled the use o f surplus funds for initial mitigation o f the flooding, supply o f electric meters and completion o f minor remaining c iv i l works at Lake Yashilkul, postponed because o f the accident. The surplus funds resulted from an increase o f the US$ equivalent o f the SDR- denominated IDA Credit.

2.4 Implementation progress (IP) and Development Objectives (DO) ratings for the Project continue to be Satisfactory. The Project has led to improved electricity supply through increased generation and enhanced collections and management. The project company has maintained reliable financial management systems. The Project has not had any fiduciary, environmental, social or other safeguard problems. A 2006 audit, acceptable to IDA, has been completed and submitted. The preparation o f the 2007 audit has begun. The performance o f PEC and other stakeholders, especially GoRT, has been generally satisfactory to date. PEC completed the construction o f the Project elements on time and essentially on budget. The GoRT has complied with i t s obligations under the concession agreement, including enabling tariff adjustments and collections improvements. A social protection subsidy to support a lifeline tariff has been duly provided. Project stakeholders recently agreed on a Financial Restructuring Plan that ensures the continued operation o f the company on a commercial basis.

2.5 The catastrophic flooding, which occurred on February 5, 2007, at the Pamir I HPP severely damaged the plant’s equipment and infrastructure, forcing the plant’s shutdown, causing a 75% energy loss o f the PEC’s power generation capacity in the main grid and affecting 18,000 consumers at the peak o f the winter period. PEC with support from AKFED reacted swiftly to address the problem and i t s aftermath on multiple fronts. The Government helped with emergency food and fuel supplies. In addition, World Bank and IFC teams arrived on site to help design an emergency action plan whose implementation has already led to recovering 75% o f the plant capacity. N o w the rehabilitation efforts focus o n measures preventing further occurrences o f these problems, and addressing longer term sustainability issues.

2.6 Rationale for the Proposed Approach. The additional financing through an IDA Grant o f SDR 1.6 mi l l ion (US$2.5 mi l l ion equivalent) i s in accordance with OP/BP 13.20 and represents a critical and an integral part o f the comprehensive US$8.3 mi l l ion package for the rehabilitation o f the Pamir 1 HPP, designed by PEC after the flooding with support from Government, the World Bank, IFC and international consultants, and co-financed so far by insurance funds (US$4.4 million), own funds o f PEC (US$0.9 million) and surplus funds from the IDA Credit under the current Pamir Private Power Project (US$0.5 million). Furthermore, the US$2.5 mi l l ion equivalent additional financing would leverage the use o f the existing implementation capacity and arrangements at PEC, developed during the implementation o f the current Project. Analysis o f the impact o f the proposed additional financing within the entire rehabilitation package has indicated that the Project remains economically sustainable. The activities supported by the additional financing (including installation o f equipment and payment) require an extension o f the Closing Date until end-2010.

2

2.7 The original Project objective i s st i l l highly relevant and remains unchanged. The additional financing i s critical for ensuring that the Project meets i t s Development Objective by enabling the completion o f the original Project. The Government, the main sponsor AKFED and the project company Pamir Energy remain committed to the Project in view o f the Project’s significant social impact and demonstration effect o f public-private partnership approach to development.

2.8 Implementation w i l l be based on existing arrangements, benefiting also from a newly formed Project Planning and Implementation Department (PPID) with staff from the P I U for the original Project. Disbursement and financial management would fol low arrangements o f the current Project. Retroactive financing will be used as well, for goods and services purchased according to Bank procurement procedures after the date o f June 7, 2007 (see table below). The procurement plan has been agreed with PEC. As the Additional Financing wil l address a financing gap, the Development Credit Agreement and the Project Agreement will be amended. As a consequence, the procurement guidelines governing the current agreements will also apply to the proposed additional financing operation, namely, the M a y 2004 World Bank Guidelines for procurement and selection and employment o f consultants.

3. Proposed Changes

3.1

3.2

The Project scope and Development Objective remain unchanged.

Other complementary changes are presented below:

Description 1 .Project Management

2.Proj ect Costs

3.Financing Plan

4.Financial Management 5 .Disbursement arrangements

Table 1 Complementary changes Implementation wil l be based on existing arrangements, benefiting also from a newly formed Project Planning and Implementation Department (PPID) with staff from the P IU for the original project. Incremental costs related to restoration o f PEC operating capacity after flood damage are US$8.3 million, o f which US$O.S mil l ion were already covered by surplus funds from the original Pamir Private Power Project. SDRl.6 mill ion (US$2.5 mill ion equivalent) IDA Grant, US$4.4 mil l ion insurance. and US$O.9 mil l ion comDanv own funds No changes in financial management from the original project No change in the main disbursement arrangements except for (i) allowing all expenditkes to be financed at 100% for the activities covered by additional financing and (ii) allowing that eligible expenditures, incurred after June 7, 2007 up to SDR865,612 (rounded to SDR870,OOO) - US$1,410,044 equivalent, i.e. up to 56% o f the overall IDA Grant amount o f SDR 1,534,725 (rounded to SDRl.6 million) - US$2.5 mil l ion equivalent (slightly beyond the standard 12-month limit prior to expected signing o f Amendments to Project and Credit Agreements, and beyond the 20% standard l imit on expenditures) would be financed from the IDA Grant on a retroactive basis. The disbursement schedule i s amended to reflect the additional U S 2 . 5 mil l ion eauivalent Grant.

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6 .Procurement

7.Closing date

8 .Implementation Schedule 9.011-lending terms

lO..Effectiveness o f additional financing

In the Amendment to Project Agreement o f December 17, 2007, Re: Tajikistan: Credit No. 3682 TJ (Pamir Private Power Project), the table on other methods o f Procurement o f Goods and Works in Schedule 1, Section B 2 i s further amended to read as follows: Procurement Method (a) Limited International Bidding (b) National Competitive Bidding (c) Shopping (d) Direct Contracting A procurement plan for the additional financing has been agreed with PEC. Extension o f the closing date from December 31, 2008 to December 31, 2010. The proposed additional program wi l l be implemented over a three year period. Existing IDA Credit: (i) The repayment terms o f the existing on-lent IDA loan to PamirEnergy company will be revised as follows: repayment terms o f 15 years (2013- 2027), instead o f 10 years.

(ii) the interest rate on the amount withdrawn and outstanding from the Credit Account shall be six percent (6%) per annum, except for the period from July 1, 2008 through to 201 1 when payment on interest equivalent to four and three quarter o f a percent (4.75%) shall be deferred, such deferred amount to be paid to the Republic o f Tajikistan from 2012 over fifteen (15) years or as otherwise determined by the Parties following a review of PamirEnergy in 201 1, and on terms and conditions mutually acceptable to PamirEnergy, the Republic o f Tajikistan and the Association.

(iii) PEC has paid interest on the disbursed on-lent IDA Credit to GoRT at the rate o f 0.75% in 2007 and first semester o f 2008. The unpaid interest in 2007 and first semester o f 2008 (equivalent to 5.25%) on the disbursed and unpaid on-lent IDA Credit would be deferred and paid to GoRT after 201 1 and over 15 years (2012-2026) or as otherwise determined as part o f the 201 1 review.

These new terms wil l be reflected in the amendment to the Subsidiary Loan Agreement between the Borrower and PEC.

The Subsidiary Loan Agreement has been duly amended on behalf o f the Borrower and PEC.

3.3 The table below sets forth the categories o f items to be financed out o f the proceeds o f the Additional Financing, the allocation o f the CredWGrant amounts to each category and the percentage o f expenditures for items to be financed in each category.

4

Category

(1) Works

(2) Goods (a) cement and steel (b) other goods

Amount o f the Credit Allocated (Expressed in SDR)

2,700,000

% o f Expenditures to be Financed

100% o f foreign expenditures and 90% of local expenditures 100% o f foreign expenditures, 100% o f local expenditures (ex- factory cost) and 90% o f local expenditures for other items

163,839.89

4,486,160.1 1

Amount o f the Grant Allocated (Expressed SDR)

80,000

% o f Expenditures to be Financed

100%

100% 0

1,500,000

(3)Technical 20,000 100% N procured locally 200,000 100%

Assistance

Assistance (5) Unallocated Total

(4) Emergency

N 1,600,000

350,000 100%

0 7,900,000

4. Consistency with CAS.

0

4.1 The effort to overcome the impact o f the flooding i s consistent with the key strategic objective o f the Bank’s Country Assistance Strategy for Tajikistan to improve the delivery o f energy services and exploit the country’s hydropower potential, and improve business opportunities in rural and urban areas (including through improved supply o f electricity).

100%

5. Economic Analysis o f Financing Gap.

5.1 The original Project was appraised in 2002, at which time the economic analysis revealed a positive net economic benefit from the Project. The IRR was 21%, with the results indicating benefits exceeding costs at a 12% discount rate under a wide range o f sensitivity assumptions. The new analysis was carried out with actual data on generation, losses, consumption, tariffs and costs for the period 2002-2007, and with a new schedule for al l these parameters, for the period 2008-2027, including the additional investments.

5.2 With the additional investments the Project s t i l l remains economically justified with a positive N P V and an IRR o f 14%. However, the results o f the economic analysis are lower than the original economic analysis due to (a) actual costs o f operation that turned out to be several times higher, (b) unexpected financing gap in investments ($8.3 M) caused by the catastrophic flooding, and (c) lower energy sales (45% less in 2002-2007 and 22% less in 2008-2027) due to higher than expected losses (10% estimate vs. an actual range o f 18% to 3 1 ‘YO). Also, actual weighted average tariffs in 2002-2007 were at about 80% o f the maximum authorized average tariff used at appraisal.

5

Original Estimate Revised Estimate

Benefits costs Net Benefits IRR (YO)

3 1.070 27.668 3.402 14 34,395 18,440 16,470 21

5.4 Without taking externality benefits into account, an increase of Project costs by 45%, and reduction of generation to 88% of the projected level would make the Project uneconomical. With benefits from externalities considered, the switching values for the Project’s costs are a 50% increase, and a reduction of generation below 82% of the projected level.

Original Estimate Revised Estimate

6. Key Project Aspects

Benefits costs Net Benefits IRR (%) 37,470 1 8,440 19,030 22 32,483 27,668 4,837 15

6.1 Financial: Project stakeholders recently agreed on a Financial Restructuring Plan that focuses on continuing the operation of the company on a commercial basis and addresses the issues the company was facing in end-2006/early 2007, caused by losses and investment requirements which turned out to be higher than estimated at appraisal. In order to alleviate the debt burden on the company, stakeholders agreed on the following:

AKFED’s existing subordinated debt and additional contribution wil l be converted to some type o f equity, subject to AKFED Management approval. IFC’s existing senior loan wil l be converted to some type of equity (ensuring IFC’s shareholding does not exceed the current level o f 30%) subject to IFC Management approval. The existing on-lent IDA loan repayment terms wil l be revised as follows: repayment term of 15 years (2013-2027), instead of 10 years. Interest that has accrued during the standstill period (2006-2007) on the existing IFC loan

wil l be written of f subject to IFC Management approval. PEC has paid interest on the disbursed on-lent IDA Credit to GoRT at the rate o f 0.75% in 2007 and f i rst semester o f 2008. The unpaid interest in 2007 and first semester o f 2008 (equivalent to 5.25%) on the disbursed and unpaid on-lent IDA Credit would be deferred and paid to GoRT after 201 1 and over 15 years (2012-2026) or as otherwise determined as part o f the 201 1 review. PEC would pay to GoRT, for the second semester o f 2008 and through the year 201 1, interest on the disbursed and unpaid on-lent IDA Credit at the rate o f 1.25%, and the unpaid interest equivalent to 4.75% on the disbursed on-lent IDA Credit wi l l be deferred and paid to the GoRT after 201 1 over 15 years (2012-2026) or as otherwise determined as part o f the 201 1 review.

6

The Swiss Trust Fund subsidizing the electricity payments ofpoor consumers i s anticipated to be depleted in 201 1. In parallel, al l stakeholders (GoRT, World Bank, IFC and AKFED) will work together to secure additional donor funding to enable GoRT to meet i t s obligations to provide social protection needs beyond 201 1 to the extend deemed necessary as part o f the 201 1 review. GoRT commits to review in 201 1 further reductiorddeferment o f the on-lending interest rate beyond 2011 if such additional donor funds become available and subject to the company’s financial situation. Furthermore, stakeholders have agreed on measures towards loss reduction, optimization o f operating costs, improving collections, revenue enhancement within the full application o f the authorizations given in the Concession Agreement. The financial restructuring plan ensures cash f low to the company to cover operating and capital expenses, enabling annual investments in critically needed network improvements. The plan has been approved by the Government.

In the context o f the agreed Financial Restructuring Plan, the possibility o f varying debt burden on the company might result in varying level o f compliance with the original project financial covenants. In such cases the Association would apply i t s right to agree otherwise with respect to the original covenants as stipulated in the relevant Section 4.03 (a) o f the Project Agreement.

6.2 Financial Management Arrangements: PEC has maintained reliable financial management systems for the Pamir Private Power Project, as wel l as for company operations. Current Financial Management arrangements are acceptable to the Association. Project and Company accounts are subject to auditing arrangements acceptable to the Association. There are no overdue audits or FMRs to be submitted by PEC. Budget formulation process i s also adequate. PEC and Project accounting records are maintained in an adequate manner by automated accounting software. PEC has developed a comprehensive Manual on Accounting Policies and Procedures. An experienced finance team headed by an expatriate Chief Financial Officer looks after the financial aspects o f PEC and the Project. The last FM supervision was carried out in March 2007. The FM proposed ISR rating was Satisfactory and risk rating was rated as Moderate.

6.3 Disbursement and Funds Flow Arrangements. Recipient wil l establish a Designated/Special Account in a commercial bank, acceptable to IDA. Disbursements from the Account wi l l fol low the transaction-based method, i.e., traditional Bank procedures: Statements o f Expenditure (SOEs), Direct Payments, Special Commitments. For certain payments, above the Minimum Application Size as specified in the Disbursement Letter, PEC wil l submit withdrawal applications to the Bank for payments to suppliers and consultants directly from the Account.

6.4 Safeguards: A review o f the safeguards situation concluded that the additionally planned emergency rehabilitation work at Pamir 1 HPP will not involve activities significantly beyond the scope and scale o f the original Project, and that no relevant additional environmental impacts are to be expected. The environmental and social impacts have already been assessed during original project preparation and an ESIA and E M M P elaborated and disclosed to the public. A review o f these documents was undertaken by a Bank safeguards expert for their applicability to the new project and they were found to cover all aspects required for diligently dealing with the safeguards issues related to the new rehabilitation work.

7

6.5 Institutional: Implementation o f the additional financing component will benefit from the experience accumulated with the implementation o f the original Project. The Project Planning and Implementation Department, in charge o f Project implementation, i s staffed with experienced professionals who have undergone procurement and engineering training at renowned institutions (ILO) and advanced utilities in other countries. An experienced international engineering and construction management firm has been retained since April 2007 to assist with key aspects o f the plant rehabilitation effort. The recent appointment o f a local General Director o f PEC improved immensely the company’s relations with local authorities. Regional managers obtained greater empowerment fol lowing a recent management restructuring. A newly established regional hub o f the project sponsor AKFED for industry and infrastructure - Industrial Promotion Services (IPS) Asia in Dubai to handle operations in Asia, including Tajikistan, wil l ensure greater support to PEC from high-level IPS management as needed.

6.6 Technical: The flood affected the lower level o f the power plant, housing the turbines, and the transformer yard outside the power house. The electric and electromechanical equipment in the hydropower plant were severely damaged. Electronic protection and control instrumentation and equipment were also damaged. L o w and medium voltage switchgears and components o f plant auxiliary services, e.g., batteries, building services, communication channels, etc. were damaged to the point o f requiring 100% replacement. Out o f the four turbine-generator units, unit #2 was completely destroyed. Units #1, #3 and ##4 were damaged to varying degrees. The flooding was deemed to have been caused by an airlock from a piece o f ice from the sedimentation basin, which draws water from the River Gunt through the penstocks to the plant turbines. The ice airlock clogged the penstock, and subsequently, under the increasing water pressure, moved in and blew the head cover o f unit # 2, unleashing the flood in the power house, within 1-2 minutes. T o date, key engineering studies have been completed, three o f the four 7 M W units at the plant have been permanently restored. Critical remaining activities include the restoration o f unit #2, supply o f spare parts and auxiliary equipment for the turbine/generator units and a full solution to the issues o f sedimentation and ice formation at the regulating basin o f the plant.

7. Exceptions to Bank Policies. Some o f the equipment intended to be financed by IDA additional financing was needed urgently and before the IDA funds would become available. In order to avoid delays in project implementation, the Project team agreed that PEC would use the already available insurance funds to procure this equipment on time. Then, these costs would be reimbursed later with IDA funds. The insurance funds provided bridge financing to the company to procure the turbine/generator unit #2, which IDA would not fund directly because o f prolonged manufacturing time (18-20) months. In this context, in accordance with OP 6.00 on Bank Financing, RVP clearance was obtained to allow retroactive financing o f eligible expenditures, incurred after June 7, 2007 up to US$1,410,044, (56% o f the overall IDA Grant amount o f US$2.5 mi l l ion equivalent). This exception was necessary because the proposed retroactive financing went beyond the limit for retroactive financing (normally no earlier than 12-months prior to the expected signing o f Amendments to the Project and Development Credit Agreements) and beyond the 20% standard limit on retroactive financing as a share o f the total grant. (See table below).

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8. Benefits and Risks

8.1 Benefits. The main benefits are derived from improving the electricity supply particularly in winter, and subsequently enhancing the standard o f living in one o f the poorest regions in the world. The public-private partnership approach with output-based aid provides a model for delivering infrastructure services to poor consumers and enhances the country’s opportunity to attract investments. Environmental and health benefits are derived from reducing fuel wood-related emissions by increased use o f clean hydropower for heating and cooking.

8.2 Risks. All relevant r isks have been identified in the original Project and the mitigation measures in place have been satisfactory. The original Project activities have been completed with the exception o f minor c iv i l works and delivery o f electric meters. Risk o f cost over-run under the additional financing i s minimal since contracts totaling 34% o f the proposed additional financing have been already signed, and another 22% o f the additional financing amount is expected to be contracted and disbursed by end June 2008; al l have been processed according to World Bank procedures. The remaining Project activities are expected to be completed in 2009 and deviations o f contract prices from current estimates are unl ikely in this short period. A financial restructuring plan, enabling the financial performance o f the company on a commercial basis has been agreed upon among the stakeholders applying realistically adjusted projections for level o f losses and sales at tar i f fs within the framework o f the existing Concession Agreement, for which the Government has reiterated i t s support. Swiss subsidy funds for social protection for electricity consumption wil l be exhausted in 2011 and stakeholders have committed to work together to secure additional donor funding for this purpose, although there i s a certain risk that such funding may not materialize. Procurement o f a replacement for turbine-generator unit #2 may take longer than expected due to the l imited number o f qualified manufacturers. IDA funds are not tied to this contract. The Project team wil l assist PEC with engineering advice and close supervision as needed. Governance risk i s minimized by Project implementation carried out by PEC, privately owned 70% by AKFED

9

and 30% economic High, and

by IFC, and already experienced. Nevertheless, in the context o f the country’s management and institutional capacity, overall risk would be prudently set as s t i l l fiduciary supervision will be commensurate with that risk level.

9. The Expected Outcome. The expected outcome o f the activities funded by the additional financing i s the restoration o f the original Project scope, which wil l consequently ensure the achievement o f the original Project Development Objective through private sector involvement, to improve the reliability and enhance the quantity o f electricity supply in the Gorno Badakhshan Autonomous Oblast (GBAO) in a financially, environmentally and socially sustainable way.

10. Financial Terms and Conditions for the Additional Financing. The additional financing wil l be made available to the Republic o f Tajikistan as a Grant, which wil l be subsequently onlent to Pamir Energy Company with a grace period o f 10 years, from 2008 to 2017, under a repayment term o f 10 years, from 2018 to 2027, at an interest rate 0.75% per annum.

11. Procurement: The procurement plan has been agreed in the Minutes o f Negotiations. This section specifies

the circumstances under which methods other than International Competitive Bidding (ICB) may be used, and sets forth those contracts that wil l be subject to Association’s Prior Review. The PPID shall update the Procurement Plan on a semi-annual basis or more frequently, if needed, always covering the period until end-2010 (project’s end). Any revisions proposed to the Procurement Plan shall be furnished to Bank for i t s prior approval. Bank-financed procurement o f goods, works, and consulting services wil l be carried out as follows: 0 ICB w i l l be used for procurement o f new items (Le., supply o f floating pumps with motor

boat; and supply o f auxiliary systems - 6kV). Given the emergency needs and the non complexity nature o f such items, i t i s agreed to allow a 21-day bid submission period. Direct Contracting (DC) has been already used for the supply o f excitation systems for all four units at the Pamir 1 HPP within the emergency response to mitigate the damage caused by the flooding o f the plant. The direct contract for the excitation systems has received World Bank’s no-objection and wil l be funded retroactively. In addition, i t i s agreed that Direct Contracting wil l be used for supply o f spare parts f rom the original supplier( s). Shopping wil l be applied for goods and works to cost less than US$lOO,OOO equivalent per contract. Single Source Selection (SSS) wil l be applied for a Study for improving the closing mechanism for open ended water f low at the safety inlet valves before turbines. The study wil l be carried out by the manufacturer o f the wicket gate at the penstocks at Pamir 1 hydropower plant, which i s uniquely suitable for this assignment in view o f the previous involvement with the project. Bank Prior review is required for al l the ICB, D C and SSS contracts. For other IDA funded contracts that are not subject to the Bank’s prior review, ex-post review wil l be carried out during Bank supervision missions. Non-Bank financed procurement o f goods and works would be carried out in accordance with the national procurement procedures with due consideration o f the principles o f economy and efficiency. Procurement arrangements are properly coordinated by the PPID to meet the agreed overall procurement plan.

0

0

10