PROJECT INFORMATION DOCUMENT (PID)APPRAISAL STAGE

Report No.: 55106Project Name EG- Giza North Power ProjectRegion MIDDLE EAST AND NORTH AFRICASector Power (100%)Project ID P116194Borrower(s) GOVERNMENT OF EGYPT

Government of Egypt, Ministry of International Cooperation8 Adly StreetEgypt, Arab Republic ofFax: +20 -2- 391 2815

Implementing AgencyEgyptian Electricity Holding CompanyRamsis Street Extention, AbbassiaCairoEgypt, Arab Republic ofTel: (20-2) 401-2368kyassin@moee.gov.eg

Environment Category [X] A [ ] B [ ] C [ ] FI [ ] TBD (to be determined)Date PID Prepared April 9, 2010Date of Appraisal Authorization

March 15, 2010

Date of Board Approval June 8, 2010

1. Country and Sector Background

Country Issues

1. Egypt’s economic performance during the period preceding global economic crisis of 2008-09 was very strong. Between Fiscal Year 2005 (FY05) and FY08 its Gross Domestic Product (GDP) grew on average 6.4 percent, reaching about USD162 billion in 2008 in nominal terms. By FY08, unemployment declined to 8.4 percent and the overall general government budget deficit fell to 7.5 percent, despite increased public spending to accommodate the rise in food and energy prices at the time. The total share of investment in GDP increased from an average of 17.5 percent during FY01-FY04 to 22.3 percent in FY08, with share of private investment increasing from 8 percent to 15 percent and Foreign Direct Investment (FDI) from 0.6 percent to 7.5 percent over the same period.

2. The global economic crisis had an adverse impact on Egypt. Earnings from tourism fell as did the traffic through Suez Canal and foreign investment. GDP growth declined to 4.7 percent in FY09 and unemployment increased to 9.4 percent. Declining exports led to a current account deficit of 2.3 percent of GDP, for the first time since FY01. Smaller capital inflows, especially FDI (down by 39 percent), led to an overall balance of payments deficit of 1.8 percent of GDP compared with a 3.3 percent surplus in FY08. The stock market index fell 20 percent from its

FY08 close. Inflation increased by August 2009 to 24 percent, decelerating since then but continuing to be high -- 13.6 percent in January 2010.

3. In response to the crisis the Government of Egypt (GoE) implemented a response plan featuring fiscal, monetary and direct support measures. The first stimulus package was approved in October 2008 in the amount of Egyptian Pound (EGP) 15 billion (USD 2.7 billion). The second package of EGP 8 billion (over USD 1.4 billion) was approved in June 2009 simultaneously with the state budget, and the third package of EGP 11.2 billion (USD $2 billion) was announced in January 2010. Most of the stimulus funds have been allocated to infrastructure investments. The funds also supported exports and social programs. The government temporarily suspended the implementation of its plan to increase energy prices for energy-intensive industries, initially due to be accomplished by the end of 2010. On the monetary side, the Central Bank of Egypt cut its lending rates several times in 2009.

4. There are signs that the economic growth is improving. Some exports are increasing and Suez Canal traffic is recovering. The stock exchange has been on the upswing since March 2009. After depreciating by 7.7 percent between August 2008 and March 2009, the Egyptian pound has been stable or appreciating in response to renewed capital inflows. Moody’s has changed its outlook for Egypt from negative to stable. This upgrade reflects factors such as easing inflation, contained fiscal pressures as well as a relatively resilient economy and banking system. The economic outlook for the future is cautiously optimistic. GDP growth is forecast at 5.2 percent for FY10, an improvement over the FY09 but still below the pre-crisis level.

5. The government has generally made great strides in implementing its reform program and continues to be committed to an agenda of private sector-led and equitable growth. The key development objectives of the government on which the Country Assistance Strategy (CAS) is based1 , are the achievement of high and sustainable GDP growth and the alleviation of poverty and attenuation of income disparities. To achieve these objectives, the government has endeavored to improve the business climate for the private sector and enhance the provision of public services, including in infrastructure. The Country Assistance Strategy Progress Report (CASPR)2 states that the main objectives of the government policies and the broad strategy to help the authorities address them, as articulated in the CAS, remain valid, extending the 2005 CAS to FY11.

Sector Context

6. Primary Energy Resources: Egypt has significant primary energy resources, both in traditional fossil fuels (especially oil and gas) and in renewable energy. Egypt’s proven oil reserves stand at 3.7 billion barrels3 and natural gas reserves as of 2007 were estimated at 67 trillion cubic feet (Tcf)4 with yet-to-find reserves by 2040 at 90 Tcf; Egypt’s gas consumption was about 1.3 bcf in FY07. Natural gas is likely to be a key growth engine of Egypt's energy sector, which is illustrated by the fact that its production increased over 30 percent between 1999 1 “Country Assistance Strategy for The Arab Republic of Egypt for the Period FY06-FY09”, May 20, 2005, Report No. 32190-EG.2 “Country Assistance Strategy Progress Report for The Arab Republic of Egypt for the Period FY06-FY09”, June 9, 2008, Report No. 43476-EG.3 U.S. Energy Information Administration, http://www.eia.doe.gov/emeu/cabs/Egypt/Oil.html.4 (ECA gas pricing study)

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and 2007. Hydropower is the third major energy resource in use, but most of the Nile's hydropower potential, about 85 percent, has already been exploited to generate about 13 TWh of electricity per annum. Egypt also has limited coal reserves estimated at about 27 million tones (Mt)5 . Egypt’s solar thermal electricity generating potential has been estimated at 73,656 terawatt-hours (TWh)/year6. Some of the world’s best wind power resources are in Egypt, especially in the areas of the Gulf of Suez where at least 7,200 MW could be potentially developed by 2022, with further 1,000 MW that could be developed on the west and east banks of the Nile7.

7. External Energy Trade: Egypt has been traditionally a net exporter of oil until 2006, when domestic consumption (645 thousand barrel/day) outstripped production (639 thousand barrel/day)8 , due to a steady decline in domestic production since mid-2006 and increasing domestic demand. Egypt, however, still has a strategic importance in international oil trade because of its operation of the Suez Canal and Sumed (Suez-Mediterranean) oil pipeline, two routes for export of Persian Gulf oil. Egypt has the largest refining capacity on the African continent with nine refineries and a combined crude oil processing capacity of 726,000 bbl/d. Egypt exports natural gas to Jordan, Syria, and Lebanon through the Arab Gas Pipeline, with further planned connections to Turkey and Europe, and to Israel through the Arish-Ashkelon gas pipeline (completed in 2008). There are three Liquefied Natural Gas (LNG) trains for natural gas exports. Egypt’s electricity network is interconnected with neighboring Libya and Jordan and through these countries further on with Maghreb and Mashreq countries, respectively.

8. Electricity sector institutional organization. The Ministry of Electricity and Energy (MoEE) is the principal policy agency in the electricity sector9. A number of the authorities and companies report to the MoEE, including Egyptian Electricity Holding Company (EEHC), New and Renewable Energy Agency (NREA), Rural Electrification Authority, Hydropower Projects Authority, and nuclear energy agencies. The MoEE thus through the governance system acts as the owner of the state-owned companies operating in the sector, such as EEHC and NREA. The Supreme Council for Energy, established in 2006 as a Committee of the Prime Minister’s Cabinet and reporting to the President, deals with strategic issues in the energy sector, including major policy initiatives, investment programs, and energy pricing. Egyptian Electric Utility and Consumer Protection Agency (EEUCPA) (hereinafter: Electricity Regulatory Agency -- ERA) was established in 1997. Its main authorities include licensing and sector supervision, but not electricity tariffs, which are approved by the Cabinet of Ministers at the proposal of the MoEE. Minister of Electricity and Energy is also Chairman of the Board of Directors of ERA, with the other nine members of the Board appointed by the Prime Minister and selected to represent the various stakeholders in the industry.

9. Electricity industry structure. The electricity industry, vertically integrated under Egyptian Electricity Authority (EEA) until 2000, has been structurally unbundled, both “vertically” (along 5 The International Development Research Center, http://www.idrc.ca/en/ev-132146-201-1-DO_TOPIC.html.6 “Clean Technology Fund Investment Plan for Concentrated Solar Power in The Middle East and North Africa Region”, Climate Investment Fund, CTF/TFC.IS.2/2, November 10, 20097 “Clean Energy Investment in Developing Countries: Wind Power in Egypt”, by Mohamed Elsobki (Environics, Egypt), Peter Woodersm and Yasser Sherif (Environics, Egypt), International Institute for Sustainable Development, October 2009; http://www.iisd.org/pdf/2009/bali_2_copenhagen_egypt_wind.pdf.8 http://www.indexmundi.com/energy.aspx?country=eg9 The Ministry of Petroleum manages oil and gas.

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the functional lines of generation, transmission, and distribution/supply) and “horizontally” in the generation and distribution/supply segments, with a number of companies operating in each segment. This unbundled structure is linked together under the umbrella of EEHC, whose subsidiaries include: one hydropower and five thermal electricity generation companies; nine electricity distribution companies; and a transmission-and-dispatch company, Egyptian Electricity Transmission Company – (EETC). In addition, there are three privately owned independent power plants (IPPs) constructed in late 1990s/early 2000s with total capacity of 2,050 MW, operating under build-own-operate-transfer (BOOT) arrangements underpinned by 20-year power purchase agreements (PPAs) with EEHC/EETC. There are several very small private power suppliers serving isolated load pockets, mainly tourist areas. NREA develops and operates renewable energy generation facilities, which as of mid-2010 will include about 545 MW of wind power plants and a 150 MW hybrid solar-thermal power plant with a 20 MW concentrated solar plant (CSP).

10. Electricity market. Wholesale electricity trading at this stage is based on a “single buyer” model, with EETC acting as the wholesale single-buyer/single-seller of electricity, procuring electricity from generation companies and selling it to distribution companies and transmission network customers (‘direct customers”) which are connected to the transmission network directly (as opposed to being indirectly connected through a distribution network). All generation companies, including three BOOT projects, wind power plants, and four industrial plants sell their electricity to EETC, which – in turn -- sells it to direct customers and nine distribution companies. This single buyer market relies in dispatch on production cost curves of the plants and, as such and in the context of centralized governance and financial management of EEHC, offers limited space for commercially-based competition for dispatch among the incumbent generation companies. This is intended as an intermediate step towards the establishment of a more liberalized electricity market, which is to start gradually, with liberalization of supply to large industrial consumers.

11. Electricity sector reform. EEHC and its predecessor, EEA, have been quite successful in developing the sector, as it now serves more than 99 percent of households. Egypt has put in place a number of measures to reform its sector from a vertically integrated state-owned monopoly into a commercially oriented flexible structure, although the transition has been and remains very cautious and gradual. A semi-autonomous electricity regulator agency has been established, although with strong links to MoEE and EEHC through its governance structure and without authority over tariffs. EEHC has been unbundled, but operates as a tightly controlled holding company, with the holding having a strong sway over its subsidiaries in financial and governance matters. EEHC still has strong links to the government, through subsidies, facilitation of investment financing, fuel prices, and electricity tariff regulation. The three IPPs have been in successful operation since early 2000s. After a pause of about ten years, the government is restarting private investment program.

12. The government is preparing the ground for advancing the sector reform further. A new Electricity Law, awaiting parliamentary approval, introduces a number of changes toward strengthening sector’s commercial orientation and its opening to private investment and competition. The law, inter alia, gives the authority for tariff regulation to the electricity regulatory agency; grants more independence to EETC, converting it to an independent system operator with open access for bilateral trading between generation and consumers; and promotes

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introduction of a competitive end-user market. Submitting the law to parliament for adoption has been delayed, however, as the government gave priority to the nuclear energy law, which has been submitted to parliament in mid-2009.

Sector Issues

13. Tight Balance of Electricity Demand and Supply. Egypt is well electrified, with 99 percent of households connected to the electricity system. During the past several years, between FY03 and FY08, electricity demand grew on average 7.5 percent per. In FY08, peak demand at the net generation level reached 19,738 MW, increasing to 21,330 in FY09. Total electricity generation in FY09 was 126,284 GWh and electricity sold to end-consumers was about 113 TWh. As of June 2009, total installed gross generation capacity of Egypt was 23,502 MW, including 21,030 MW in EEHC’s power plants (2,800 MW hydropower and 18,230 MW thermal); 2,048 MW in three private power plants (net capacity); and 425 MW in wind power. The nominal installed generation capacity exceeded the peak demand in FY09 by about 10 percent. However, once the wear and tear of the older stock of plants is taken into account, as well as the self consumption of power plants (2-3 percent) and outdoor temperature related derating of gas turbine technology (about 8-10 percent for Egypt climate), the available capacity at the time of high demand (summer) was lower than the peak demand. As result, load shedding occurred in the summer of both 2008 and 2009. Although EEHC has added some capacity since 2008, the reserve margin will remain too low for the next several years, generally below ten percent instead of a standard 12-15 percent which is needed to ensure adequate level of reliability. Because of the low projected reserve margin, EEHC has not been able to guarantee connections to a number of large industrial facilities which have been planned for construction.

14. Energy Efficiency. The GoE has prepared a National Energy Conservation plan and has set up an interministerial energy conservation coordination group to coordinate activities of energy consumers and suppliers in promoting more efficient use of energy. The current activities are focusing on increasing use of compact fluorescent lamps (CFLs), improving energy efficiency in street lighting and public buildings, and scaling up solar water heating (SWH). An energy efficiency program for small and medium enterprises is under implementation by the Credit Guarantee Company (CGC). On the supply side, the main effort is on improving the use of fossil fuels through the increased use of combined cycle gas turbine power plants and supercritical technology for steam power plants.

15. Electricity and energy pricing and subsidies. The prices of energy products in Egypt are generally below economic cost and the resulting implicit subsidies to the economy are quite large. The government partially compensates energy companies for selling at below-cost prices. In FY08, such energy subsidies in the government budget reached EGP 60.2 billion and in FY09 62.7 billion, largely subsidizing gasoline prices and liquefied petroleum gas (LPG), widely used by households for cooking. Direct budget subsidies for electricity consumption are by an order of magnitude smaller in comparison, as electricity prices benefit from low cost of fuel used in electricity production.

16. In order to bring the sector finances and energy consumption to a more sustainable path and to reduce the fiscal burden of energy consumption, a few years ago the government initiated a series of energy price increases. Gasoline price increased in early 2000s, although they are still

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below cost. Annual increases of electricity tariffs were approved in 2004 and implemented every year since then except in 2009 due to the global economic crisis. In addition, in June 2008 the government announced an increase in the price of natural gas and electricity for energy-intensive industrial users from USD1.25/mmbtu to USD3/mmbtu, and for other industries an increase from USD1.25/mmbtu to USD2.65/mmbtu to be done in three stages. As a consequence, electricity price for energy-intensive industrial users was also increased at that time to US¢6.1/kWh, US¢4.6/kWh and US¢3.7/kWh for medium, high voltage and ultra high voltage, respectively, with a fixed charge of USD1.9/kw-months for medium voltage users Electricity price for other industrial users was to increase in three stages to US¢5.4/kWh, US¢3.2/kWh and US¢3.2/kWh for medium, high voltage and ultra high voltage, respectively, with a fixed charge of USD1.9/kw-months for medium voltage users.

17. There has been a significant nominal increase in electricity tariff since 2004. Average price of electricity in FY09 was US¢3.4/kWh (0.187 EGP/kWh), compared with US¢3.2/kWh (0.174 EGP/kWh) in FY08, US¢2.9/kWh (0.162 EGP/kWh) in FY07, and US¢2.35/kWh (0.141 EGP/kWh) in FY04. A comprehensive Energy Pricing Study, financed by Energy Sector Management Assistance Program (ESMAP), was completed in June 2009, with recommendations on price adjustment program, including social mitigation measures. The government is expected to resume annual adjustments of energy prices in 2010.

18. Electricity sector investment program and its financing. The power system in Egypt needs to grow in tandem with the economy. Even with somewhat lower electricity consumption growth rate in comparison with the GDP growth -- to allow for energy efficiency improvement -- the needs for new investments in the power generation, transmission, and distribution are very large and pressing. Peak demand is expected to grow by more than 50 percent by 2017 relative to 2008. EEHC is therefore racing against time to add new power plants and transmission lines to meet this increasing demand. The MoEE, with endorsement of the Cabinet, adopted the following strategy: (i) increased use of efficient fossil-fuel generation technologies (CCGT and supercritical steam boilers); (ii) large scale development of Egypt’s renewable resources with the goal of having 20% of its installed generation capacity in the form of renewable by 2020 (including the existing hydropower); and (iii) stepping up efforts for more efficient consumption of electricity. The government is also considering development of nuclear power plants – the first such plant is planned to be put in operation in about year 2018 -- and the nuclear energy law is under consideration by parliament.

19. EEHC is executing a number of generation projects that will add in the next five years about 7,240 MW, of which 6,500 MW in thermal generation, 600 MW in wind power, and 140 MW in hybrid solar thermal technology. These projects, which are part of the FY07-FY12 five-year investment plan, have obtained financing commitments and are at various stages of construction. The FY12-FY17 five-year investment plan includes adding 15,080 MW, of which 11,850 in thermal generation, 3,100 MW in wind power, and 130 MW in concentrated solar power technology. The total investment needs during the FY07-FY12 investment plan are estimated at about USD24 billion, including USD20 billion for generation and USD 4 billion for transmission and distribution.

20. The accelerating demand growth is causing a significant increase in investment requirements in the coming years relative to the past. The acceleration started in FY08, when the annual

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investment expenditures grew from about EGP 5 billion (USD 0.9 billion) per year in the preceding years to about EGP 8 billion (USD 1.5 billion) in FY08. In FY09 investment expenditures exceeded EGP 13 billion (USD 2.4 billion) and are projected to average at about USD 3.5 billion per year for the next 6-7 years.

21. With such rapid growth in the investment needs EEHC, already highly leveraged, is becoming increasingly limited in its ability to fund the investment program on its own. To alleviate the pressure on EEHC balance sheet and public investment expenditures, the government is looking at the private sector to finance a significant portion of the investment program in electricity generation, both in renewable and conventional technologies. In parallel EEHC has to press ahead with some of its own investments in order to ensure timely increase in generation capacity and mitigate the risk of disruption in power supply.

22. Private Investment: Restarting IPP program. In the mid-1990s, Egypt initiated efforts to obtain private investment in generation under the framework of independent power producers (IPP) with 65-70 percent take-or-pay long-term off-take agreement with the utility. This effort yielded to the construction of three privately developed power plants with combined capacity of 2,048 MW, completed in 2002 and 2003, under the build-own-operate-transfer (BOOT) arrangements, with 20-year Power Purchase Agreements (PPA) supported by Central Bank guarantees and prices denominated in USD. Although this was considered as one of the most successful IPP programs10 in developing countries, there have been no new private investments in power plants since 2003, when currency devaluation led to a significant increase in payments under the PPAs in terms of local currency.

23. In late January 2010 the government invited applications from private developers to prequalify for a tender to construct a 1500-MW combined cycle gas turbine plant (with option to expand its capacity to 2,250 MW) at Dairut (Behera Governorate). The government expects to select a private developer by end of 2010 through a competitive tender. Other private investment projects on conventional generation may follow.

24. Similar effort is under way in wind power. In February 2010, the government prequalified ten international developers to construct a 250-MW wind power plant in Ras Ghareb area on the Red Sea coast. This project is supported by the funds from the Clean Technology Fund (CTF), which will be applied toward construction of a transmission line to connect the wind power plant with national transmission grid.

25. The government, on a parallel track, continues to develop a framework for private investment in a manner which will facilitate more competition in investment and operation, trying to step away from long-term government-guaranteed PPAs. The government has prepared a list of energy-intensive industries which for their new production plants are supposed to contract for electricity supply with private sector. It is estimated that the list of the companies subject to this regulation accounts for about 1500 – 2000 MW of electricity demand over the next 2-3 years. This would be complemented by liberalization of additional large industrial customers linked directly to the transmission network. Eventually, the entire end-user market will be liberalized and expected to contract freely for electricity supply with generation or independent suppliers.

10 The price of electricity for the first IPP, Sidi Krir, was 2.54 USc/kWh, the low price attributable to a good extent to a low cost of fuel; see http://iis-db.stanford.edu/docs/59/Egypt.pdf.

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The regulator has prepared a draft framework for bilateral private contracts for electricity supply, but there are a number of barriers and technical and commercial issues that need to be addressed, including electricity pricing by the incumbent supplier (EEHC), obligations of EEHC/EETC in providing transmission system and reliability support, risk-sharing arrangements and bankability of proposed arrangements, the role of the government, etc.

2. Objectives

A. Project development objective and key indicators

26. The project development objective is to contribute to improving the security and efficiency of electricity supply by adding a new generation capacity based on the most efficient thermal power generation technology. Key performance indicators include the installed capacity of the plant; electric energy generated annually by the power plant; and the ratio of thermal efficiency of the plant versus the average thermal efficiency of the existing fleet of plants in the base year.

27. The Giza North power plant is an important addition to the capacity of Egypt’s power system to provide electricity and thus help sustain economic growth and social development. Egypt clearly needs the project’s capacity as the existing fleet of generation plants is insufficient to maintain reliable supply of power, given that demand is expected to keep increasing under all reasonable economic development scenarios. The project, which would use natural gas as the principal fuel in CCGT technology, is both technically and environmentally most-efficient fossil-fuel electricity generation technology that is commercially available today at the scale needed. Technical assistance for private investment in generation (which will subsume electricity pricing policies) and for energy efficiency will address some key policy priorities in the sector at this stage.

28. The program outlined in the CAS to support the government’s reform agenda of “achieving growth with equity” is articulated around three pillars: (i) facilitating private sector development; (ii) enhancing the provision of public services; and (iii) promoting equity. The Giza North project directly supports the second pillar, and contributes to the first pillar through maintaining reliable electricity supply to industrial commercial activities. Thus, the project is fully consistent with the CAS and is included in the CAS program.

3. Rationale for Bank Involvement

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29. The Bank has a checkered history of engagement in Egypt’s power sector. Following the Bank’s suspension of two power sector investment loans in 199411 because of disagreement on pricing, there was a period of more than ten years of very limited involvement, between mid-1990s and mid-2000s. The re-engagement started with El-Tebbin power project, which was approved by the Board on February 16, 200612 and over the last several years the World Bank has developed a sizable portfolio of operations and activities in the energy sector in Egypt. The El-Tebbin project was followed by a GEF-financed solar-thermal El-Kureimat power project13, which included the first concentrated solar power (CSP) plant in Egypt and one of the first integrated solar-thermal power projects in the world. Another investment project, in the gas sector, was approved on January 24, 2008 to assist in the expansion of natural gas distribution infrastructure to support the government’s fuel switching strategy away from petroleum products (such as liquefied petroleum gas – LPG) to natural gas, especially for residential consumption14. In January 2009, the Bank approved an investment loan for the Ain Sokhna power project, which is based on a more efficient supercritical steam technology, the first power plant of this type in Egypt15. All the projects are being successfully implemented.

30. The investment operations have created conditions for the Bank to develop its policy dialogue and technical assistance for a number of priority issues which are part of the government’s energy strategy: demand-side management, generation planning, public-private partnership, electricity market financial transactions management, carbon capture and storage, etc. In the policy dialogue, the Bank has focused in particular on the following areas: (a) development of renewable energy; (b) energy pricing and subsidies; (c) private investment in traditional generation technologies (gas-fired power plants); and (d) regional energy integration.

31. After completing a study on commercial framework for large-scale wind power development in 2009, supported by ESMAP, the Bank helped the government to secure approval of USD 300 million by the Clean Technology Fund (CTF) in support of an investment plan to scale up development of wind power and implement energy efficiency measures in the transport sector. In addition, the CTF has also endorsed a regional investment program for scaling up the CSP technology in MENA region. The program, supported by a USD 750 million CTF allocation, envisages development of about 1000 MW of CSP plants in several MENA countries (Egypt, Jordan, Morocco, and Tunisia). The government policy is to attract private financing both for wind power and the CSP projects.

32. In the area of energy pricing the Bank, also with assistance from ESMAP, completed studies on domestic gas pricing; time of use pricing for electricity; and a comprehensive study on pricing of all types of energy in the domestic market, with recommendations on a transition path and a methodology for maintaining cost reflective pricing taking into account and mitigating the social

11 These two loans were the Forth Power Project (Ln. 3103-EGT) approved by the Board on June 28, 1989; and Kureimat Power Project (Ln. 3441-EGT) approved by the Board on March 5, 1992.12 Project Appraisal Document for El Tebbin Power Plant, January 18, 2006, Report No. 34779-EG.13 Project Appraisal Document for Kureimat Integrated Solar Combined Cycle Power Project, November 13, 2007, Report No. 37687-EG, approved by the Board on December 11, 2007.14 Project Appraisal Document for Egypt-Natural Gas Connections Project, December 12, 2007, Report No. 41115-EG15 Project Appraisal Document for Ain Sokhna Power Project, January 8, 2009, Report No. 46695-EG, approved by the Board on January 29, 2009.

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impact of such policy. These studies provide a comprehensive analytical base and a set of policy instruments that can be used to derive an appropriate tariff adjustment program.

33. The Bank supported policy work on private investment in traditional fossil fuel based generation through a grant from Public Private Infrastructure Advisory Services (PPIAF), which financed a study on options for public-private partnership in electricity generation, completed in late 2009. The study is followed by activities on development of a commercial framework for private investment in the context of gradual liberalization of end-user electricity market in Egypt.

34. Bank activities on regional energy integration in MENA region include Egypt as a key player. In addition to the already mentioned regional CSP investment program, the Bank has prepared a study on integration of electricity and gas networks in the Mashreq region and is collaborating with the Arab League on extending the study to all Arab countries.

35. Through these investment operations and technical assistance activities, the Bank has become an important development partner in the Egypt’s energy sector and at the forefront of its power sector development. The Bank’s involvement has helped achieve a number of important outcomes:

maintaining the security of energy supply, by financing electricity generation projects and thus helping avoid disruptions in electricity supply, which would have had large economic and social costs;

contributing to the improved financial position of the power and gas sectors by providing analytical background for energy pricing. The average electricity prices have significantly increased since mid-2000s, although still not fully catching up with the costs driven up by the increasing consumption and investment needs;

scaling up development of renewable energy: with support from the Clean Technology Fund (CTF) and following up the completed analytical preparatory work, the Bank is involved in initiating a major scaling up of the commercial, privately funded, wind power program. Also, with support of the CTF funds, the Bank is assisting with expanding the use of concentrated solar power (CSP) as part of the regional CSP program;

reengagement with private sector: following a study on options for private-public partnership in the power sector, funded by the Public-Private Infrastructure Advisory Facility (PPIAF), the government is calling on the private sector to invest in conventional power plants. The government is also in the process of engaging private sector in funding wind power program;

regional integration: there is an increasingly active partnership between the government of Egypt and the Bank on regional energy issues, promoting more sustainable energy solutions for the region, including through scaling up renewable energy and regional energy integration, both within MENA region and between MENA and its neighboring regions.

36. The deepening partnership between the Bank and the government, as described by the above outcomes, and the Bank’s continuing support to the initiatives under way and the new ones that are coming in the areas of structural reforms, remain very important.

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37. The Bank loan for the Giza North project will help fill the critical financing gap that the private sector cannot do in time to help sustain the increase in generation capacity necessary to keep up with growing demand. The government has expressed a clear interest in borrowing from the Bank for the Giza North power project. MoEE and EEHC have also formally expressed interest in Bank’s technical assistance with IPP program and for helping develop a framework for private investment in generation.

4. Description

38. The investment part of the proposed project comprises development and construction of a 1,500-MW combined cycle gas turbine (CCGT) power plant at Giza North near Cairo. The plant will use natural gas as the main fuel and light diesel oil as a back-up. The plant will be owned and operated by the Cairo Electricity Production Company (CEPC), a subsidiary of EEHC.

39. The power plant will include two 750-MW modules, each module consisting of two 250-MW gas turbines (with an electricity generator for each turbine), two multi-pressure heat-recovery steam generators (HRSG), and a 250-MW steam turbine driving an electricity generator. Step-up transformers and a switchyard are also included in the project, with a number of other auxiliary systems. The specific project components include the following16: (i) four 250 MW gas turbines; (ii) two 250 MW steam turbines; (iii) four heat recovery steam generators (HRSG); (iv) water systems including cooling water, condensate system (deaerator, condenser, etc.), feedwater heaters, service water and waste water treatment; (v) electrical system including transformers and switchyard; (vi) auxiliary systems including diesel generator, uninterruptible power supply (UPS), compressed air, fire protection, heating-ventilating and air conditioning (HVAC), etc.; (vii) distributed control system and instrumentation; (viii) the implementation of the Environmental and Social Management Plan (ESMP) including environmental monitoring equipment; (ix) civil works; (x) engineering and project management services including design, procurement, construction supervision, commissioning, testing and start-up; (xi) wrap-up insurance. The project will include transmission lines to connect the plant to the national transmission grid, and gas pipeline to connect the plant to the gas pipeline system for fuel supply.

40. The technical assistance associated with the project includes the following components:

(a) Support for promotion of private sector investment in electricity generation, including for the process of selecting private developer for the IPP at Dairut (already announced by the government);

(b) Development of a power sector strategy for the power sector for the next 7-10 years, focusing on attracting additional private investment (beyond the Dairut IPP) and associated tariff and other policies to facilitate efficient financing of investment needs; and

(c) Support for promotion of energy efficiency.

41. The TA activities will be completed during the first two years of project implementation and financed through a combination of trust funds, Bank budget, and borrower’s contribution.

16 The list of project components to be refined during project appraisal

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5. Financing

The investment part of the project is expected to be financed as follows:

Source: ($m.)Borrower 475European Investment BankOPEC Fund

30730

International Bank for Reconstruction and Development 600Total 1412

The technical assistance component, estimated to cost about $550,000 will be financed through a combination of grants, and World Bank and Borrower’s contributions.

6. Implementation

42. The project will be implemented between 2010 and 2014. Implementation arrangements will be the same as for the El-Tebbin project, which is successfully implemented by CEPC. The technical assistance components will be implemented at the level of MoEE for private investment and power sector strategy and through an interministerial coordination group for energy efficiency. Transmission line, connecting the power plant with the national transmission network, will be implemented by EETC. Construction of the natural gas pipeline to connect the plant to the gas network will be the responsibility of the regional gas supply company.

43. CEPC has contracted an engineering firm, PGESCO, to assist in engineering, detailed design, procurement, construction management, and supervision of Giza North power plant project. This contract will be financed with CEPC’s own resources. Environmental and Social Impact Assessment (ESIA) has been completed. The environmental impact mitigation plan will be implemented by EEHC, which has strong institutional capacity with respect to the Bank’s safeguard policies having three large Bank-financed Category A projects under supervision.

44. The implementation arrangements reflect the structure of the sector in Egypt, where EEHC, as the holding company, plays a large role in project preparation (planning and design) and in facilitating project financing, but the operational affiliates (generation, transmission and distribution companies) have the main direct responsibility for implementation of the project.

45. The following set of agreements will govern project financing and implementation:

a loan agreement between the Government of Egypt (Ministry of International Cooperation) and the Bank;

a project agreement between EEHC and the Bank;

a subsidiary loan agreement between the GoE and EEHC, by which the GoE will on-lend the Bank loan proceeds to EEHC; and

a contractual agreement between EEHC and CEPC regarding project implementation.

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a project implementation manual, to be prepared by CEPC, which will detail all of the implementation activities under the project (including procurement, compliance with ESIA, financial management, audits, payment processes, etc).

46. The documents to be prepared by the borrower or its agencies (subsidiary loan agreement between the GoE and EEHC; the contractual agreement between EEHC and CEPC; and the project implementation manual) will be readily available, since they require only small modification of such documents already in place for the El Tebbin and Ain Sokhna power projects, financed b the Bank.

47. CEPC will establish a Project Management Unit (PMU) at the project site. The PMU will be assisted in engineering, procurement, construction and project management by PGESCO, an engineering consulting firm, under a contract financed by CEPC. PGESCO has performed similar assignment in a number of other large power generation projects in Egypt with a very successful performance track record. The PMU will have a project manager, 2-3 engineers, a procurement coordinator and an environmental specialist. The PMU will issue monthly/quarterly progress reports to the Bank and quarterly reports on the implementation of the ESIA.

48. A Financial Management Unit (FMU) will be established within the PMU to manage payments under the project and integrate project financial management and records with the financial departments in CEPC. The FMU will have the overall responsibility for the project’s financial recording, budgeting, reporting requirements, and handling the loan disbursement arrangements, including supporting documentation. The FMU will comprise an FMU manager, three accountants and a project accountant, who will be located at the project site and will ensure smooth coordination between the FMU and the rest of the PMU. It is expected that the PMU and the FMU will include the staff which performed the same functions for the bank-financed El-Tebbin project.

7. Sustainability

49. Sustainability of the project depends on the ability of EEHC/CEPC to implement and operate the project successfully, already proven under the Bank-financed El Tebbin project, as well as under other investment projects not financed by the Bank. EEHC/CEPC may, however, depend on government’s facilitation of project financing and its policy to maintain the appropriate commercial environment for the viability of the project company (CEPC). The sustainability also rests on the continuing need for the project output.

50. Giza North power plant employs the CCGT technology, which is of standard design and similar to a number of power plants already in operation in Egypt. Some of the projects procured in the period 2005-2007 experienced cost increase, which was due to the global increase in prices of construction materials, as well as in demand for power generation equipment and constructors. These pressures have relaxed as the contracts procured in 2008 and 2009 demonstrate. The cost estimates for Giza North power plant reflect the current level of prices and their expected movements during the project implementation period.

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51. There is a strong commitment to the project by both the project implementing agencies and the government. Project preparation documents – the technical feasibility study, ESIA, and the RPF -- have been completed successfully in a rather short period of time owing to a close attention of the management and experts of EEHC and CEPC. The government has been very proactive in obtaining project financing from the external agencies.

52. Giza North power plant is likely to have a secure market for its output because of the growing electricity demand in the country and the competitiveness of the plant in terms of its operational efficiency and high ranking in the dispatch merit order. The ability of the plant to operate both on natural gas and light diesel should further strengthen its sustainability.

53. The World Bank is engaged with the government to enhance the overall sector policy framework and advance reforms aimed at improving sector commercial environment and financial sustainability. The government recognizes that EEHC operates under tight financial constraints and has demonstrated its willingness to gradually increase tariffs toward cost covering levels and provide budget and other support in the meantime. Measures to improve the sector’s financial performance are discussed in detail under Section IV Appraisal Summary.

8. Lessons Learned from Past Operations in the Country/Sector

54. The suspension and subsequent cancellation in 1994 of two Bank-financed power sector projects in Egypt17 served as an example of the lessons learned globally: that individual investment projects are not appropriate instruments to promote sector policies through rigid conditions and loan covenants that may affect project implementation, once projects are approved. However, it is important that investment projects are undertaken in an environment which ensures long term sustainability of the projects and the sector and that the policy framework is in place that moves the sector in that direction. This is best achieved, in terms of Bank’s contribution, through a policy dialogue that accompanies investment projects and is implemented in parallel, supported by adequate analytical work. This enables the projects and the policies to be designed and implemented in a mutually supportive and flexible manner.

55. The Giza North project is consistent with these lessons: it does not have policy covenants, but is accompanied by parallel activities to engage private investors in generation and analytical work to develop a viable strategy for improving energy efficiency. The project also assumes that the government will implement sector pricing policies which will support the project’s long-term sustainability, as well as private investment and energy efficiency. The project is also complemented by significant investment and policy activities in renewable energy (scaling up wind power and CSP technologies).

56. Starting in 2005 with a “brick-and-mortar” type of projects, the Bank operational portfolio in the energy sector in Egypt has evolved into a broad range of activities that encompass investment operations in traditional and renewable energy, gas distribution, and associated analytical and policy work in energy pricing, sector reforms, and private investment. The investment operations which help maintain security of supply created conditions for the policy makers to devote their attention to other strategic policy issues and for the Bank to offer its assistance in those areas.

17 See footnote 11.

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The investment strategy which is to be developed and implemented as part of the Giza North project and other activities that are pursued in parallel should help gradually shift the paradigm in the sector toward more sustainable policies where public and private sectors partner in ensuring that the sector keeps providing reliable, efficient, and sustainable service.

57. Bank-financed investment projects in the energy sector in Egypt initiated since 2005 are being implemented well. This successful experience has been carried over to the design of Giza North project in terms of project implementation arrangements which capitalize on the technical capacity of EEHC and its engineering consultants. The projects are done through a number of supply-and-install contracts procured through international competitive bidding. This arrangement combines in an optimal way the capacity of EEHC and its engineering consultant with those of the contractors.

9. Safeguard Policies (including public consultation)

Safeguard Policies Triggered by the Project Yes NoEnvironmental Assessment (OP/BP 4.01) [X] [ ]Natural Habitats (OP/BP 4.04) [ ] [X]Pest Management (OP 4.09) [ ] [X]Indigenous Peoples (OP/BP 4.10) [ ] [X]Physical Cultural Resources (OP/BP 4.11) [ ] [X]Involuntary Resettlement (OP/BP 4.12) [X] [ ]Forests (OP/BP 4.36) [ ] [X]Safety of Dams (OP/BP 4.37) [ ] [X]Projects on International Waterways (OP/BP 7.50) [ ] [X]Projects in Disputed Areas (OP/BP 7.60)* [ ] [X]

10. List of Factual Technical Documents

Reports

Techno-Economic Feasibility Study for Giza North 2x750 MW Combined Cycle Power Plant Project, Ministry of Electricity and Energy, Egyptian Electricity Holding Company (EEHC), July 2009

Project preparation documents

Project Concept Note (August 2009) Minutes of Project Concept Note: (August 2009) Giza North 2x750 MWe GAS-Fired Combined Cycle Power Project: Environmental

and Social Impact Assessment, Ministry of Electricity and Energy, Egyptian Electricity Holding Company (EEHC), Cairo Electricity Production Company, January 2010

** By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas

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Giza North 2x750 MWe GAS-Fired Combined Cycle Power Project: Resettlement Policy Framework (RPF), Ministry of Electricity and Energy, Egyptian Electricity Holding Company (EEHC), Cairo Electricity Production Company, January 2010

11. Contact point

Contact: Vladislav VuceticTitle: Lead Energy SpecialistTel: (202) 473-3977Fax: (202) 614-4022Email: Vvucetic@worldbank.org

12. For more information contact:

The InfoShopThe World Bank1818 H Street, NWWashington, D.C. 20433Telephone: (202) 458-4500Fax: (202) 522-1500Email: pic@worldbank.orgWeb: http://www.worldbank.org/infoshop

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