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Document of 

The World Bank 

FOR OFFICIAL USE ONLY 

Report No: 143566-SB 

IMPLEMENTATION COMPLETION AND RESULTS REPORT 

IDA-H4150, IDA-H9130 

ON 

GRANTS 

IN THE AMOUNT OF SDR 3.9 MILLION 

(US$6.0 MILLION EQUIVALENT) 

AND 

IDA-53790 

ON 

A CREDIT 

IN THE AMOUNT OF SDR 7.2 MILLION 

(US$11.0 MILLION EQUIVALENT) 

TO THE 

SOLOMON ISLANDS 

FOR THE 

SOLOMON ISLANDS SUSTAINABLE ENERGY ( P100311 ) PROJECT 

November 11, 2019 

Energy and Extractives Global Practice East Asia And Pacific Region 

CURRENCY EQUIVALENTS 

(Exchange Rate Effective May 31, 2019) 

Currency Unit  = Solomon Islands Dollars (SBD)

SBD 8.21  = US$1

US$1.38  = SDR 1

FISCAL YEAR 

July 1 – June 30 

ABBREVIATIONS AND ACRONYMS 

TABLE OF CONTENTS 

I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES ....................................................... 6

A. CONTEXT AT APPRAISAL .........................................................................................................6 

B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE) ..................................... 13

II. OUTCOME .................................................................................................................... 17

A. RELEVANCE OF PDOs ............................................................................................................ 17 

B. ACHIEVEMENT OF PDOs (EFFICACY) ...................................................................................... 19

C. EFFICIENCY ........................................................................................................................... 25 

D. JUSTIFICATION OF OVERALL OUTCOME RATING .................................................................... 28

E. OTHER OUTCOMES AND IMPACTS (IF ANY) ............................................................................ 30

III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME ................................ 33

A. KEY FACTORS DURING PREPARATION ................................................................................... 33 

B. KEY FACTORS DURING IMPLEMENTATION ............................................................................. 34

IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME .. 35

A. QUALITY OF MONITORING AND EVALUATION (M&E) ............................................................ 35 

B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE ..................................................... 38

C. BANK PERFORMANCE ........................................................................................................... 40 

D. RISK TO DEVELOPMENT OUTCOME ....................................................................................... 41

V.     LESSONS AND RECOMMENDATIONS ............................................................................. 42

ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS ........................................................... 44

ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION ......................... 53

ANNEX 3. PROJECT COST BY COMPONENT ........................................................................... 55

ANNEX 4. EFFICIENCY ANALYSIS ........................................................................................... 56

ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS ... 69

ANNEX 6. SUPPORTING DOCUMENTS (IF ANY) ..................................................................... 94

LIST OF TABLES 

Table 1. Outcome Indicators Mapped to Relevant Project Objectives ....................................................... 12 

Table 2. Key Changes to SISEP during Implementation .............................................................................. 14 

Table 3. Project Costs at Approval and after Approval of AF and Each Restructuring ............................... 16 

Table 4. Energy-related CPF Objectives in the Solomon Islands’ Current CPF Program............................. 18 

Table 5. Changes in Indicator Targets and Relevance for Split ratings ....................................................... 20 

Table 6. Efficacy Ratings for Each Outcome of the PDO Based on Achievement Ratio .............................. 25 

Table 7. Summary of Economic Benefits and Costs .................................................................................... 25 

Table 8. Summary of Economic Benefits and Costs .................................................................................... 26 

Table 9. Benchmarking of Pacific Island SOEs ............................................................................................. 29 

Table 10. SISEP Final Outcome Ratings ....................................................................................................... 30 

LIST OF FIGURES 

Figure 1. SISEP Theory of Change Diagram ................................................................................................. 10 

Figure 2. Cost and Revenues Per kWh Generated ...................................................................................... 23 

Figure 3. Profitability Per kWh Generated (SBD) ........................................................................................ 24 

Figure 4. SISEP and MFD Approach Used in the TIna River Hydro Development Project_l .......................... 32 

DATA SHEET 

A. CONTEXT AT APPRAISAL

Context 

1. The Solomon Islands, at the time of appraisal in 2008, had emerged from a period of political turmoil and civil unrest. Over the period from 1998 to 2002, real gross domestic product (GDP) had fallen around 24 percent, exports had declined drastically, and external debt levels had soared. After ethnic tension ended in 2003, the economy started a strong recovery and recorded growth rates ranging from 8 percent in 2004 to 10 percent in 2007. The recovery was attributed to the return of business investment and an increase in export receipts and was supported by the arrival of a Regional Assistance Mission to the Solomon Islands (RAMSI). Budget surpluses were consistently observed from 2003 to 2007 due to higher government revenues and better expenditure management.

2. However, the economy of the Solomon Islands faced a number of challenges. Less than a quarter of the population was involved in any paid work and the majority was involved in subsistence or cash crop agriculture. Exports were commodity based and included timber, cocoa, and copra. Economic growth in recent years was deemed to be unsustainable as it was based on post conflict recovery and unsustainable growth of the logging sector. A reliable and cost-efficient power supply, a key ingredient for private sector growth, needed to be built.

3. High costs and poor electricity system reliability were significant issues in the energy sector. The high cost of power could be attributed to two main factors:

(a)      High cost of petroleum which was due to rising international oil prices and the costly logistics of supplying it to the Solomon Islands. Diesel-fueled power generation accounted for 98 percent of the total. Electricity tariffs which incorporated automatic fuel price adjustments rose to a point where electricity became too costly for an average family using 250 W for 8 hours a day. This usage translated to a need to pay US$1 per day, which was unsustainable in a country where total GDP per capita amounted to US$690 per year.

(b)      Power network losses with ad hoc maintenance and unsystematic operational practices added to unsustainably high costs. At appraisal, power network losses had reached 21 percent. During the period of ethnic tension, power generating capacity in Honiara declined as generator maintenance programs were neglected. Overdue maintenance needs on the distribution network were causing outages of approximately 72 hours per week.

4. Access to electricity was low. Less than 10 percent of the population had access to electricity. The Solomon Islands Electricity Authority (SIEA), a government-owned statutory body responsible for power supply and distribution, was unable to connect new customers and customers were unable to pay the high costs of electricity. The number of disconnections was increasing. The rural population, existing primarily on subsistence agriculture and fishing, relied on kerosene for home lighting and wood for cooking.

5. SIEA was in financial distress. Operating losses had increased from SBD 12 million in 2005 to approximately SBD 45 million in 2007, equivalent to about 30 percent of total operating revenue. More than 70 percent of the operating loss was interest due on past debt. A crucial factor in the remaining operating losses was the rising price of oil. Only 95 percent of the oil price increases were allowed to be recovered through electricity price increases. Further worsening SIEA’s financial health was a decline in its bill collection efficiency which had declined to 72 percent in 2007. A significant factor was unpaid electricity bills by other state-owned enterprises (SOEs). Total SOE arrears were SBD 27 million at the end of 2007.

6. Two main issues in the energy sector that needed to be addressed were reducing electricity costs and improving reliability and increasing access in rural areas and outer islands. If both issues needed to be addressed satisfactorily, a prerequisite condition was a strengthened SIEA in terms of both financial health and operational capacity.

(a)      Reducing electricity costs and improving reliability. In the near term, relatively simple measures to reduce costs such as reducing technical losses, improving maintenance and repairs, and improving operational practices were feasible. However, over the medium term, the development of a far lower-cost renewable power generation was considered critical to mitigate the impact of rising oil prices. In this context, opportunities for the development of hydropower generation were identified with a potential 22 MW run-of-the-river hydropower project at Ngalimbiu related to the development of the Gold Ridge mine. After meeting the demand of the Gold Ridge mine, the balance of power from the proposed hydropower project would be sufficient to meet load in Honiara with a potentially dramatic drop in overall electricity supply cost. International financial institutions (IFIs) such as the European Investment Bank expressed an interest in participating in the project. However, this meant that SIEA, which would play a critical role in this project, needed to be strengthened. In particular, issues that needed to be strengthened were the development of power purchase agreements, meeting compliance with safeguards such as compensation for land users and landowners, and regulatory issues.

(b)      Increasing access in rural areas and outer islands. At the time of appraisal in 2008, the Global Environment Facility-supported Sustainable Energy Financing Project (SEFP) was under implementation. The SEFP was designed to make the purchase of basic solar photovoltaic (PV) energy affordable and accessible with low interest loans to purchase, install, and maintain solar PV kits. The SEFP also supported the purchase of small generators running on coconut oil. However, a long-term effort was needed to scale up rural electrification work. At a minimum, this included the completion of a Rural Electrification Master Plan to identify best options for rural villages, putting in place a transparent legal and regulatory framework for small-scale independent power production and determining associated pricing and possible capital subsidies.

7. SIEA was central to achieving improvements in the energy sector.  It was critical that SIEA perform as a strong and capable institution to address the abovementioned energy sector issues. The objective was that SIEA be strengthened and in a position to lead the sector from a high-cost, oil-based system primarily centering only on Honiara to a more balanced, less-costly, and stable sector providing energy services throughout the Solomon Islands.

8. The project was aligned with the World Bank’s strategy for the Solomon Islands as stated in the Regional Engagement Framework FY2006–2009 for Pacific Islands.^[1] The project directly contributed to the two broad areas identified as areas of engagement. In the first area, the engagement strategy specified that the World Bank would assist the Government and other donors on public expenditure management issues to improve the delivery of basic services to communities and provide broader sector policy advice. In the second area, the World Bank would target specific initiatives to improve the climate for the private sector such as reforms to the energy sector, telecommunications, financial sector management, and foreign investment legislation. In addition, the World Bank was to contribute to longterm capacity building and make contributions to the productive sectors, recognizing that rural communities needed to benefit directly. The project contributed directly to two strategic pillars and focus areas: Improving the public expenditure management of infrastructure assets and Reducing the costs of doing business.

9. The project responded to a recommendation from an Operations Evaluation Department (now the Independent Evaluation Group) evaluation^[2] that found that the World Bank had not been able to make a satisfactory contribution toward fueling economic growth in the region. The evaluation’s recommendations included improving expenditure management and removing bottlenecks to private activity.

10. The project directly responded to a request from the Solomon Islands Government (SIG). In the Pacific Forum of the Finance Ministers of the Pacific Islands held in Washington, DC in 2005, several Pacific Island countries requested urgent World Bank support to expand sustainable energy use and energy efficiency to offset the increased price of oil. The SIG requested financing for additional investments including restoration of networks, expansion of electricity access, and development of new renewable energy-based electricity generation capacity. However, under the Honiara Club agreements that were then under effect, the SIG could not borrow for these investments. The SIG realized that before these investments could be made, SIEA needed to be strengthened. The commercialization and strengthening of SIEA therefore became the highest priority.

11. Solomon Islands Sustainable Energy Project (SISEP) was designed to be the vehicle that would lay the foundation for future efforts to develop the energy sector. Any effort to steady the sector, enable more reliable energy to be provided to customers at lower cost, expand access to rural areas, and partner with private entities and IFIs to develop the sector required building capacity in management, financial, and operational areas. Building this capacity is reflected in SISEP’s development objectives of improving operational efficiency, system reliability, and financial sustainability. SISEP’s three components, namely, strengthening management, financial operations, and technical operations, each supported all three aspects of the development objective. Strengthening management, for example, would be instrumental in improving operational efficiency, system reliability, and financial sustainability, as would technical and financial operations.

12. Figure 1 shows the Theory of Change, including a link to longer-term outcomes that SISEP would contribute to beyond its closing date. Project activities were designed with the assumption that there would continue to be political commitment to the SOE Act; that government intervention would be required in resolving SIEA’s debt, in particular from its largest government debtors; and that SIEA would be compensated for its community service obligations.

Theory of Change (Results Chain) 

Figure 1. SISEP Theory of Change Diagram 

Intermediate       ^{Long term} Issues       Activities        Outputs    Outcomes       PDOs/Outcomes         Outcomes

Note: PPA = Power Purchase Agreement. 

Page 10 of 94

Project Development Objectives (PDOs) 

13. The PDO, as stated in the Project Appraisal Document (PAD) and in the Financing Agreement of SISEP (or ‘the project’), was to improve operational efficiency, system reliability and financial sustainability of SIEA through: improved financial and operational management, reduction of losses, improved generator and distribution system reliability and increased revenue collection.

Key Expected Outcomes and Outcome Indicators 

14. The project was intended to be the foundational investment for an ambitious program of support for the energy sector in the Solomon Islands. As the first in a series of necessary steps to achieve a sustainable and affordable energy supply for the Solomon Islands, the planned project outcome was to restore SIEA to financial and operational health and build capacity so that it could play a central role in meeting energy sector goals. A strong and capable SIEA was a precondition for the SIG to undertake concerted action on a variety of fronts including developing new generation sources, working in partnership with IFIs to implement projects to further energy sector goals, and providing a reliable and stable foundation in energy access necessary for economic growth.

15. Assessment of the outcomes is organized in terms of the three outcomes of the PDO. They were (a) Outcome I: To improve the operational efficiency of SIEA, (b) Outcome II: To improve system reliability of SIEA, and (c) Outcome III: To improve financial sustainability of SIEA. While each of the outcomes contributed to improving SIEA, the PAD’s arrangements for results monitoring lists one project outcome indicator, namely, that SIEA will operate profitably. This is consistent with the overarching goal of improving SIEA’s capacity to meet energy sector goals. Each outcome and associated intermediate outcomes contribute to other outcomes supported by the project, with SIEA being able to operate profitably being an overarching goal for SISEP.

16. The Results Framework in the Implementation Status and Results Reports (ISRs) is used to evaluate SISEP’s outcomes. SISEP’s PAD listed four key indicators against which project achievements were to be assessed. The indicators in the PAD were largely reflected in ISRs but insufficient to measure all three parts of the PDO. On the other hand, the ISR’s Results Framework included additional indicators which were relevant to measuring project outcomes and were necessary and sufficient in measuring achievements of the three components of the PDO. The PDO indicators in ISRs and those in the PAD were largely aligned, had no material discrepancy, and partially overlapped. Eight of nine PDO-level indicators in the ISR are used to evaluate achievement of outcomes. One indicator, the collection ratio, was found to have significant methodological errors which disqualified it from being an appropriate indicator and was not used in this assessment. Further information is available in the Monitoring and Evaluation section. In addition, one intermediate outcome indicator was used as an outcome indicator as it was more reflective of a PDO outcome.

17. For the Implementation Completion and Results Report (ICR), the Results Framework was revisited to best reflect achievement of outcomes. As mentioned, the ISR’s Results Framework was used in evaluating achievement of outcomes. However, to align indicators with objectives, a reorganization of indicators and mapping to the three subobjectives of the PDO was necessary. Success in achieving Outcome I, namely, improving operational efficiency of SIEA, is assessed in part by evaluating SIEA’s success in implementing a commercialization program. While ISRs did not mention the commercialization program, three indicators present in ISRs were appropriate measures to assess the commercialization program’s achievements. The list of the indicators used to assess outcomes is shown in table 1.  

Table 1. Outcome Indicators Mapped to Relevant Project Objectives 

Note: a. Targets after last restructuring expected at the end of project life. 

Components 

             18.       The project had three components:

(a)      Strengthening Management (IDA: US$4.0 million, US$3.69 disbursed; SIG:^[3] US$5.4 million). Engagement of two professional utility line managers (a general manager with a technical background and a commercialization manager) and a professional director to the Board, and training of key management staff

(b)      Financial Operations (IDA: US$0.7 million, US$0.64 disbursed; SIG: US$0.8 million). Implementation of a commercialization program for the Finance Department, including new financial management (FM) and billing systems and preparation and implementation of a new Finance Accounting Manual with a staff training program.

(c)      Technical Operations (IDA: US$8.0 million, US$7.37 disbursed; SIG: US$2.0 million). Implementation of a loss reduction program, a planned maintenance program for Honiara, and a distribution reinforcement program to increase the availability of existing generation and improve system reliability. Technical project implementation support to SIEA was also to be provided with consultancy services, a technical training program for engineering staff, and establishment of a partnership with the Fiji Electricity Authority (FEA).

B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE)

Revised PDOs and Outcome Targets 

19. The PDO remained essentially unchanged during project implementation. The original PDO was to improve operational efficiency, system reliability and financial sustainability of SIEA through: improved financial and operational management, reduction of losses, improved generator and distribution system reliability and increased revenue collection. A minor change to the PDO was the deletion of the part of the PDO that described project activities, leaving the core PDO unchanged. The revised PDO of the project was to improve operational efficiency, system reliability and financial sustainability of SIEA. It remained in effect until the project closed in March 2019.

20. SISEP’s outcome indicator targets were revised several times during project implementation. The purpose of revising targets was primarily to make them consistent with the objectives of restructuring or to make adjustments consistent with increased ambition such as with the additional financing (AF) approved in 2014. SISEP was restructured four times during implementation. With each restructuring, the project attempted to either increase the ambition of outcomes to be consistent with increased financing or to adjust to be more realistic in setting appropriate goals in achieving project outcomes without compromising the objective. Outcome targets that were revised are noted below along with a brief explanation of the reason for revision:

(a)      SAIDI and SAIFI indicators. The target value was adjusted downwards at the time of approval of the AF to account for outcomes expected to accrue from activities that were financed. This included capital investments to strengthen the largest power grid (Honiara) and improve the efficiency and reliability of power supplies, a desirable outcome that would be measurable through SAIDI and SAIFI indicators.

(b)      System losses. The target for system losses was revised at three of the four restructurings of the project. At the first restructuring in FY2011, the target for system losses was made more stringent, going from 16 percent to 12 percent. In the next restructuring in 2017, the target was increased to 14 percent, and further increased to 18 percent. The final target of 18 percent was arrived at by considering a realistic reach, that is, setting the target to one that is achievable due to project activities, but without compromising on the ambition of the outcome to be achieved.

(c)      Collection ratio. The target for collection ratio was lowered from 90 percent to 70 percent in the final restructuring in 2018. This ICR finds that there were several issues with this indicator (discussed in the Monitoring and Evaluation section), one of which was that an unrealistic target was set at appraisal with the appropriate level of ambition being overstated.

(d)      Number of days between due date of tariff and, if not paid, notice of arrears and average number of debtor days to collect billed revenue. The outcome targets for both indicators were made more stringent at the time of AF approval, as the team expected the increased investment to result in incremental improvements by the new closing date. However, subsequent restructurings reverted the targets to ones that were more relevant and reflected appropriate goals.  

21. As mentioned, SISEP was restructured four times during implementation. Table 2 summarizes key changes made to the project.

Table 2. Key Changes to SISEP during Implementation 

Revised PDO Indicators 

22. During project implementation, two PDO-level indicators were dropped. Separately, two other indicators were dropped and reinstated:

(a)      Number of prepaid meters installed. This indicator was dropped when the AF was approved and SISEP was restructured. At the time, the installation of prepayment meters across all households in Honiara had been completed and SIEA had a policy in place requiring all new meters and meter replacements for household customers to be prepayment meters. This indicator does not qualify for assessing PDO-level objectives and would not have been used to assess outcomes.

(b)      Generator efficiency improved. This indicator became obsolete and was dropped when the project was restructured in 2018. At appraisal, the plan was to track the efficiency of three specific generators. However, almost 10 years after project approval, two of the generators were old and new generators had been purchased by SIEA without the support of project funds to compensate for deficiency of the old generators. SIEA had measures in place to ensure that overall efficiency of generators was adequate. The overall efficiency exceeded 90 percent at the time of restructuring when the indicator was dropped (target for all three generators was 85 percent). Reliability could also be gauged by the System Losses indicator.

(c)      The PDO indicator ‘Revenue generated per kWh’ was dropped in error after the 2014 restructuring as it was deemed that this was already captured through the collection ratio and loss reduction ratio and Component 2 had closed. The intermediate outcome indicator ‘Net profit before tax’ was also dropped because of the consideration that an absolute profit figure is not very meaningful. The indicators were reinstated to measure the financial sustainability of SIEA for evaluating the project at completion.

Revised Components

23. Revisions were made to Components 1 and 3 by the addition of the following activities financed by the AF approved in February 2014:

• Component 1: Strengthening Management. Technical assistance and training on dispatch and control, system planning, and integration of renewable and independent power producers; support to owner’s engineer; funding for the Capital Projects Manager 2014– 2017; finance and due diligence technical assistance (legal officer, finance officer, and procurement officer for PPAs); additional support for training in project management and technical assistance for strengthening project management; and preparation of feasibility engineering services and safeguard studies for renewable energy activities.
• Component 3: Technical Operations. Upgrade of transformer capacity with an additional 5 MVA 33 kV/11 kV transformer, addition of a second 33 kV switchboard, and a new system control room and dispatch at Ranadi; a 12.5 MVA transformer and upgrade of switching arrangements at Lungga Power Station; New Zone substation for transforming 33 kV/11 kV, with wa 7.5 MVA transformer at Kola’a Ridge; and relocation of the second power circuit to supply the residential area to the south of Honiara Airport (Feeder 12 area) by building a new overhead power line and an underground circuit around the airport that links to the East Honiara Substation to the Feeder 12 area.

Other Changes 

24. US$3.3 million was canceled from the IDA credit during the fourth restructuring in April 2018. Cost savings were achieved under Components 1 and 3 mostly because several contracts were less than the original estimates. SIEA also decided to fund installation of the Lungga transformer from its own funds. These funds were reallocated to another project with SIEA which was approved in July 2018.^[4]

25. Change in project costs. Table 3 shows changes in project costs (US$ million) as a result of the AF and cancellation.

Table 3. Project Costs at Approval and after Approval of AF and each Restructuring 

Rationale for Changes and Their Implication on the Original Theory of Change 

26. While SISEP was restructured four times, the most substantial change occurred when the AF along with restructuring was approved in 2014. The original project had been successful in improving commercial sustainability. As a next step, SIEA needed to undertake long-overdue investments in the generation, transmission, and distribution infrastructure to improve service to customers. With its financial position being relatively secure, SIEA was in a position to invest in infrastructure rehabilitation and maintenance. US$13 million was approved in the AF, of which US$10.3 million was allocated to technical operations. These involved improving the reliability of electricity supplies in Honiara which is both the political and commercial capital and where 90 percent of the electricity is generated and consumed. Not only was this critically important for economic growth, but the weight of Honiara in determining a national uniform tariff was expected to have a large impact on the affordability of power across the Solomon Islands.  

27. There was no impact on the original Theory of Change. The PDO was essentially unchanged except for the deletion of the portion of the PDO that described how the objectives were to be achieved. Other changes included the addition of activities as a result of the AF being approved, which strengthened existing components (1 and 3) of the project but did not have an impact on the results chain. Finally, PDO indicators and targets were revised during implementation. Their revisions had a marginal impact on indicator targets and were not material in the measurement of PDO outcomes.

A. RELEVANCE OF PDOs

Assessment of Relevance of PDOs and Rating 

28. SISEP’s PDO remains highly relevant to the development needs of the Solomon Islands. The Systematic Country Diagnostic (SCD) for the Solomon Islands,^[5] the Country Partnership Framework (CPF) for the Solomon Islands FY2018–FY2023,^[6] the SIG’s own program (National Development Strategy [NDS] 2016–2035 and Medium-Term Development Plan 2016–2020), explicitly state the need to further progress on development objectives supported by this project.

29. The current CPF 2018–2023 as well as the Engagement Framework^[7] at the time of project approval identify building government capacity for service delivery as a priority. SISEP’s development objectives were to improve operational efficiency, system reliability, and financial sustainability of SIEA. The Country Engagement Framework at the time of project approval identified reducing the cost of doing business through utility regulation and reform and improving rural access to energy as objectives for the energy sector. The current CPF 2018–2023 states that the previous Country Partnership Strategy program faced implementation challenges in reaching some objectives in several areas, one of which is reducing energy losses. In addition, service delivery in remote rural areas and outer islands was stated to be challenging. The current CPF is organized among three focus areas: (a) strengthening the foundations of well-being, (b) promoting inclusive and sustainable growth, and (c) managing uneven development. The development objectives of SISEP support all three focus areas. Support to two of the three focus areas directly translate to energy-related CPF objectives, as shown in table 4.

Table 4. Energy-related CPF Objectives in the Solomon Islands’ Current CPF Program 

30. It is evident that SISEP’s objectives are highly relevant to the CPF objectives, as shown in table 4.

The CPF further elaborates that limited access to affordable and reliable power supply in the Solomon Islands constrains economic growth in urban areas and contributes to poverty in rural areas. Improving access to affordable and reliable power was deemed an essential ingredient in not only helping ensure that future growth is sustained but also lasting peace and stability is secured. SISEP’s objective of improving operational efficiency, financial sustainability, and system reliability of SIEA was a key step in the project improving access to electricity and to service delivery.

31. The SCD identified access to energy as a Tier 3 priority. Included in Tier 3 priorities were areas where the World Bank Group already had a successful engagement. The SCD noted that energy utilities, along with water, waste disposal, and sanitation, were largely absent beyond urban areas. It deemed connective infrastructure as critical to facilitate access to the state and its services. One priority identified was full coverage of essential services in Honiara which would support essential service provision in smaller centers and beyond by lowering the unit cost of these services. The functioning and connectivity of Honiara was considered critical to security because private sector activity in the urban service economy could be a key channel for the redistribution of natural resource rents in the broader economy. Access to electricity for lighting in Honiara was 72 percent and 42 percent in provinces not including Honiara. The total access rate of electricity for lighting in the Solomon Islands was 45 percent. SISEP’s objectives of making SIEA a viable and healthy utility continue to be relevant in improving access to service delivery in rural and provincial communities.

32. SISEP is well aligned with the Government’s own NDS 2016–2035 and Medium-Term Development Plan (MTDP) 2016–2020. The NDS goals are (a) sustained and inclusive economic growth; (b) poverty alleviated across the whole of the Solomon Islands, basic needs addressed, and food security improved, with the benefits of development more equitably distributed; (c) access for all Solomon Islanders to good-quality social services, including education and health; (d) resilient and environmentally sustainable development with effective disaster risk management; and (e) a unified nation with stable and effective governance and public order. The NDS stresses the importance of good governance and public sector reforms as fundamental conditions for private sector growth. The MTDP maps the NDS’s long-term development objectives into 15 medium-term strategies (MTSs). Listed below are relevant MTSs that are supported by SISEP:

• MTS2: Improve the environment for private sector development and increase investment opportunities for all Solomon Islanders
• MTS3: Expand and upgrade weather-resilient infrastructure and utilities focused on access to productive resources and markets to essential services
• MTS5: Alleviate poverty, improve provision of basic needs, and increase food security

33. Rating. At the time of project completion, the PDO remained very relevant. As described, it is evident that SISEP’s PDO was relevant to the World Bank Group’s current country strategy, as well as the Government’s own national development plans. The PDO is directly in line with the development needs of the Solomon Islands.

34. The relevance of the PDO is therefore rated as High.

35. SISEP met or exceeded relevant and attributable indicators for all three outcomes associated with the PDO. Outcomes are assessed for the entirety of the implementation period, rather than with split ratings for any restructuring for reasons described further in the following paragraphs. Achievement of the PDO, to improve operational efficiency, system reliability, and financial sustainability of SIEA, is evaluated by assessing each of the three components of the PDO. Since restructurings made adjustments to the Results Framework, a split rating by each restructuring period was considered and rejected for the following reasons: (a) there were no changes to the PDO’s key expected outcomes; the change in PDO only removed reference to specific means for achieving the respective outcomes, and (b) the restructurings did not introduce substantial and/or material change to key outcome indicators, project scope, and the associated level of ambition.

36. Table 5 lists relevant indicators used in the outcome analysis where there was a change in targets, with comments showing why the level of ambition did not change materially, thereby disposing of the need for a split rating.

B. ACHIEVEMENT OF PDOs (EFFICACY)

Assessment of Achievement of Each Objective/Outcome 

Table 5. Changes in Indicator Targets and Relevance for Split ratings 

37. An analysis of each element of the PDO is provided in the following paragraphs.

38. The improved operational efficiency aspect, including both technical and nontechnical components of operational efficiency, is measured by the following indicators:

Outcome I: Improve Operational Efficiency 

• I.A: System losses
• I.B: Average number of debtor days to collect billed revenue
• I.C: Number of days between due date of tariff and, if not paid, notice of arrears
• I.D: Quarterly financial management reports and rolling projections for SIEA performance within 14 days at the end of each quarter

39. At the end of project implementation, all four indicators had exceeded their targets with outcomes fully attributable to SISEP’s interventions. System losses were 17.3 percent at project close relative to 27 percent at the start of the project, surpassing the end-project target of 18 percent. The commercialization program had been implemented successfully. Several management procedures had been instituted by new board members who were hired and funded by SISEP. These included, for example, the preparation of detailed reports for management before regular board meetings which were important for improving transparency and decision making. SIEA had produced quarterly FM reports and rolling projections for SIEA performance within 14 days after the end of each quarter since 2012. The average number of debtor days to collect billed revenue was 33.61 days relative to the target of 35 days and a baseline of 360 days. Customers were provided with invoices that clearly showed the current month’s charges as well as previous months’ charges with the notification that previous months’ balances were due immediately. The invoice containing the due date of the tariff, notification of when the account would be in arrears (15 days after the due date of the tariff), and amounts in arrears was sent each month, thus meeting the indicator target of 15 days. 

40. Achieving the objective of operational efficiency can be substantially attributed to activities financed by a component of SISEP which financed strengthening management and building capacity of key staff. The component financed key management positions: a technical general manager, a commercialization manager, and an external board director. Infusion of professional management staff who introduced new initiatives—corporate planning workshops, strengthened board meetings including relevant reports, key performance indicators (KPIs), and company rules—revitalized SIEA. The management launched customer surveys, reviewed debtor accounts, and made examples of intransigent customers (including government ministries) by cutting off service. Board directors were provided training and bonuses were linked to performance. SIEA was restructured organizationally after a human resources review. Management strengthening activities funded by SISEP had a direct bearing on the improvement in operational efficiency.

41. Covenants included in SISEP were key in contributing to the success of the management strengthening component. Management strengthening was considered a fundamental aspect in achieving SISEP’s goal which was to ensure the viability of SIEA by improving operational efficiency, system reliability, and financial sustainability. At appraisal, the project team considered management strengthening critical to SIEA and included the following covenants to ensure SIEA health. The covenants directly corresponded to outcome indicators that measured operational efficiency.

• SIEA shall appoint a general manager and professional external board member each with qualifications and on terms acceptable to IDA.
• SIEA shall ensure that (a) its annual bill collection from SOEs and other government entities will be at least 75 percent of what is due and (b) arrears owed to it by SOEs and other government entities will not exceed more than 120 days.
• SIEA shall no later than November 30 of each year of project implementation prepare an annual rolling business plan with financial forecasts covering at least 7 years and have such plans discussed among the project implementing entity’s Board, management, and IDA.

42. Covenants were fully or partially complied with throughout project implementation. Efficacy rating for improving SIEA’s operational efficiency is rated as High.

43. SISEP included substantial investments to improve system reliability. Two indicators measured the aspect of improving system reliability:

Outcome II: Improve System Reliability 

• II.A: System Average Interruption Duration Index (SAIDI)
• II.B: System Average Interruption Frequency Index (SAIFI)

44. Targets were met and exceeded at project closing with SAIDI and SAIFI indicators showing dramatic improvements compared to the baseline. SAIDI and SAIFI expected outcomes and targets as described in the PAD’s arrangements for results monitoring were modified in the first ISR and measured accordingly throughout the project. The change was in the way that the outcomes were communicated and did not indicate a decrease in ambition. The methodology used to determine SAIDI and SAIFI outcomes was consistent from the start of the project to its end, providing a robust measure of system reliability.

45. SIEA’s poor financial position had precluded it from making capital investments in generation, transmission, and distribution infrastructure and denied it access to commercial financing. With SISEP’s support, SIEA had demonstrated early noticeable improvements to system reliability by 2014. The SAIDI had improved from 51,840 at approval to 4,767, and the SAIFI had improved from 816 to 46.2. However, increased demand and insufficient investment had made power supply unreliable.

46. The World Bank provided support by approving the AF of US$10.3 million from an IDA credit to directly address reliability and efficiency of electricity supplies to Honiara, the largest city in the Solomon Islands and its commercial center. At project closure, the SAIDI index was 1,757.6, exceeding the target of 2,000. The SAIFI index was 17.5 versus the target of 85. There is a direct line of sight between improvements in system reliability and the World Bank’s support as the World Bank and SIEA were the only two entities active in this area. AF funds made it possible for SIEA to undertake long overdue investments to improve service to customers. Four network investment subprojects financed by the AF addressed critical weaknesses in the Honiara distribution network. In doing so, it improved the reliability of supply on the Guadalcanal grid. The improvement of reliability can also be attributed to the professional/competent technical management of the utility, which had benefited from SISEP’s operational efficiency component. The efficacy rating for improving SIEA’s system reliability is High.

47. The improved financial sustainability aspect of the PDO is measured by two indicators:

Outcome III: Improve Financial Sustainability 

• III.A: Revenue per kWh generated
• III.B: SIEA profitability

48. Both indicators were mistakenly dropped from ISRs after the project was restructured in April 2014 (along with AF approval) even though annex 1 in the AF paper lists the indicator ‘SIEA will operate profitably’ as a PDO indicator and ‘Revenue per kWh generated’ as an intermediate outcome indicator. However, the indicators measuring revenue per kWh and SIEA profitability were reintroduced at the fourth restructuring to facilitate tracking of this outcome at closing.

49. The achievement of both indicators is in the substantial to high range. At project close, SIEA’s profitability was SBD 80.1 million against a target of SBD 98.0 million, achieving 82 percent of the intended outcome. Revenue per kWh generated was SBD 4.64 per kWh versus a target of SBD 4.5 per kWh, achieving 103 percent of the intended outcome. When viewed in conjunction with revenue per kWh, costs per kWh generated is an additional metric to reflect SIEA’s financial sustainability. Figure 2 shows costs and revenues per kWh since 2013 (data are not available for previous years). From 2013 onward, revenues are substantially higher than costs, which bodes well for SIEA’s financial sustainability. 

Figure 2. Cost and Revenues Per kWh Generated 

Source: ICR team analysis of data provided by SIEA and from SIEA Annual Reports 2013-2018 

50. In addition to the indicators mentioned, additional relevant data are available to demonstrate SISEP’s success in putting SIEA on a sound financial footing. Profit per kWh can be considered an additional metric to confirm the success of this outcome. Having made a profit for the past eight years in a row (the previous operating loss was in 2010), SIEA’s performance in profitability was strong. Figure 3 shows an increasing trend in profit per kWh for 2011–2018. While the overall trend is positive, the chart shows a smaller level of profitability in 2017 and 2018. This too, can be considered a success because it meant that SIEA had the resources to make investments in infrastructure from its own funds.

Figure 3. Profitability Per kWh Generated (SBD) 

Source: ICR team analysis of data provided by SIEA and from SIEA Annual Reports 2010-2018 

51. SISEP had a direct role in improving financial sustainability through its support of the commercialization program. The SIG agreement to resolve SIEA’s debt was a condition of effectiveness for SISEP. In 2011, SIEA was in financial crisis and close to insolvency with severe cash flow problems and with poor and inconsistent information available to management. SIEA’s fuel supplier issued a threat to restrict deliveries which created the risk of power rationing across the capital city and the entire country. However, by 2013, SIEA effected a dramatic turnaround in financial position and improved its cash flow position by concentrating on key aspects of the commercialization program that was supported by SISEP. The Ministry of Finance brokered an agreement between SIEA and the Solomon Islands Water Authority (SIWA), which was SIEA’s largest customer and debtor. The agreement entailed having 100 percent of SIWA’s debt to be paid. SIEA implemented improved financial controls and replaced the General Ledger System and addressed metering fraud at large commercial/industrial customers. A stronger financial performance also meant that SIEA was in a position to plan and seek capital investments. Commercial financiers began expressing interest in debt financing of SIEA’s capital investments. SISEP had served its purpose of strengthening SIEA such that it could contribute to energy sector development. The efficacy rating for improving SIEA’s financial sustainability is Substantial.

52. The overall efficacy rating is High based on high efficacy in improving SIEA’s operational efficiency, high efficacy in improving SIEA’s system reliability, and substantial efficacy in improving SIEA’s financial sustainability.

53. Table 6 shows efficacy ratings for each aspect of the PDO based on the achievement ratio.

Justification of Overall Efficacy Rating 

Table 6. Efficacy Ratings for Each Outcome of the PDO Based on Achievement Ratio 

C. EFFICIENCY

Assessment of Efficiency and Rating 

Economic Analysis of SISEP 

54. The project has achieved the key outcomes with high efficiency based on an economic analysis as described herein, which is conservative and robust to sensitivity analysis.

55. The economic analysis at completion was conducted at project level considering that major economic benefits are the joint result of implementing all three project components. The same costbenefit approach was applied: economic benefits considered and quantified are avoided fuel cost and reduced outage cost while economic costs focused on capital investment and operations and maintenance (O&M) cost. In sum, at completion, the project has a net present value (NPV) of US$7.12 million (at a 10 percent discount rate) while the economic internal rate of return (EIRR) stands at 24.3 percent, which indicates good economic returns from the project. Considering environmental benefits, the NPV increased to US$13.31 million and the EIRR improved to 27.1 percent.

Table 7. Summary of Economic Benefits and Costs (US$) 

ECONOMIC BENEFITS 

                                    Avoided Fuel Cost                                                                                                                     304,770

                                    Reduced Outage Cost                                                                                                       13,063,619

ECONOMIC COSTS 

                                    Capital Investment                                                                                                               5,879,352

                                    O&M                                                                                                                                              366,066

1. Other economic benefits, such as customer saving through reduced requirement for autogeneration backup systems, reduced O&M costs, better voltage profile, better power harmonics, and more system stability, are evident but not included for the following two reasons: (a) to keep the same economic analysis framework used at appraisal and at AF appraisal and (b) to avoid a disproportional level of data collection and modeling efforts to quantify these benefits. For these reasons, the analysis is conservative in underestimating project benefits. Also, the conclusions are robust to sensitivity analysis if (a) O&M cost increases by 100 percent or 200 percent and (b) the discount rate was determined as about 7 percent using new ‘Discounting Costs and Benefits in Economic Analysis of World Bank Projects (2016)’.
2. Harmonized^[8] total ex ante NPV is roughly estimated at US$18.1 million. In comparison, ex post NPV is lower at US$7.12 million. Two driving factors are the lower-than-expected oil price and reduction of capital investment from US$17.0 million to US$11.7 million. Harmonized ex ante EIRR has not been calculated due to methodological constraints and lack of sufficient supporting data. However, the EIRR calculated at completion demonstrates comparable economic viability of the project broadly consistent with expectations at appraisal and at the stage of the AF.

Financial Analysis 

1. The project is also financially viable and attractive thanks to its positive financial net present value (FNPV) as well as a financial internal rate of return (FIRR) of 21.8 percent, which far exceeds the weighted average cost of capital (WACC).
2. An ex post financial analysis of the project (not the Solomon Power as an SOE or sector) was also carried out using a ‘cost-benefit analysis’ with the same discount rate of 10 percent. In sum, at completion, the project has an FNPV of US$5.63 million while the FIRR stands at 21.8 percent, which far exceeds the estimated project (WACC) of 3.6 percent. A summary of the results, assumptions, and detailed analysis is presented in following sections.

Table 8. Summary of Financial Benefits and Costs (US$)

FINANCIAL BENEFITS 

                                          Incremental revenue from reduction of loss                                          6,793,190 

                                           Incremental revenue from reduction of outage                                 12,520,779 

FINANCIAL COSTS 

                                           Capital Investment                                                                                            9,991,496 

                                           Incremental Fuel & Oil Consumption                                                        3,072,026 

                                           O&M                                                                                                                            622,100 

1. The main financial benefits considered in this analysis are tariff revenue from incremental power consumptions by the customers due to reduction of energy losses and reduction of outage, which is in line with the two economic benefits examined in economic analysis. However, it is important to point out that financial benefit from reduction of nontechnical losses is included here because it is a transfer payment from the customers to SIEA.
2. On the other hand, three main financial costs contributed to achieve the abovementioned financial benefits: total project capital investment, fuel and oil cost for the incremental power consumption, and the O&M cost. Here the capital investment included the IDA grant, IDA credit, and the US$8.20 million equity invested by SIEA.
3. Sensitivity analysis has been performed against annual project O&M cost as well as the discount rate. In both cases, the FNPV is resilient to the changes.

Financial Sustainability Analysis of SIEA 

1. Following SIEA’s implementation of its capital expenditure (CAPEX) program, which included its equity investment of US$8.2 million in SISEP and a further SBD 350.0 million (US$47.6 million) entirely from its own equity for other priority projects (the construction of a new powerhouse at Lungga Power Station and installation of four 2.5 MW diesel generators), the projected financial performance of SIEA shows that the CAPEX program has had a positive impact on SIEA’s performance. Throughout the future life of the program, total revenues, operating income, and net profit are projected to increase. Liquidity is expected to remain high with a current ratio well above 1 (lowest point is 8.5 in 2019). The debt-toequity ratio is not expected to approach 30:70, given SIEA’s aversion to debt, peaking at just 18:82 in 2018, before falling over the remainder of the program. The profitability of SIEA is projected to increase gradually over the life of the program, with net profit margins increasing from 17 percent in 2013 to 44.9 percent in 2033 and an average annual net profit of 37.0 percent over 20 years.

Implementation Efficiency 

1. Overall, the project achieved a modest level of implementation efficiency due to implementation delays but significant cost savings.
2. The project closing date was extended from June 30, 2017, to March 31, 2019, due to a significant delay in the implementation of Procurement Plans and contracts. The main contributors were SIEA’s inadequate capacity to conduct procurement in adherence to the World Bank’s Procurement Guidelines, delayed recruitment to critical roles (such as procurement specialist and owner’s engineer), and SIEA’s inability to source qualified and skilled contractors to carry out the works. On the other hand, US$3.3 million saving in project cost was achieved. The saving mainly came from (a) savings in several capital work contracts and (b) SIEA’s decision to install a transformer in Lungga by itself using its in-house capacity. 
3. Efficiency ratings for the project are noted in the following paragraphs.

Overall Efficiency Rating: Substantial

             67.       The justification of overall efficiency rating is as follows:

• High economic efficiency demonstrated by a sound NPV of US$7.12 million and a positive EIRR of 24.3 percent
• High financial efficiency of the project with an attractive FIRR of 27.5 percent compared to WACC at 2.0 percent
• High financial sustainability of SIEA with average annual net profit of 37.0 percent over 20 years
• Modest implementation efficiency due to a 21-month closing date extension but significant saving of US$3.3 million

D. JUSTIFICATION OF OVERALL OUTCOME RATING

Overall Outcome Rating: Satisfactory based on High Relevance, High Efficacy, and Substantial Efficiency 

1. SISEP was designed, appraised, and approved at a critical time for SIEA and for the Solomon Islands in the electricity sector. The Government faced a range of issues in the sector, including restoration of transmission and distribution networks which had been damaged in previous years’ riots; expansion of electricity access: less than 16 percent of households had access to electricity at the time, with rural access at only 10 percent; and development of new renewable energy-based generation capacity. Prohibition of the SIG to borrow for these investments under the Honiara Club agreements meant that strengthening SIEA became not only a desired outcome but a core requirement, essentially a prerequisite, both for basic operations and for further sector development.
2. The following is a list of issues faced by SIEA at project start and their status today. SISEP’s contribution in addressing these issues is also stated here:

(a)      At the end of 2007, system reliability was poor. Customers had power interruptions at least twice a day and the power disruptions were endured for approximately 2.5 hours a day. At the end of SISEP’s implementation, there was a dramatic improvement in system reliability. SIEA’s 2018 annual report states that the SAIFI index (measuring the number of times a customer’s service is interrupted in one year) showed that customers were interrupted 1.45 times a year in 2018. SISEP’s investments in system reliability contributed to this improvement.

(b)      SIEA had serious inefficiencies and was in crisis. In 2011, SIEA faced severe cash flow problems and was close to insolvency. However, at project close, SIEA’s financial position is sound. A 2016 Asian Development Bank (ADB) report^[9] that benchmarked the performance of SOEs in Pacific Island countries noted that the Solomon Islands’ SOE portfolio was the most profitable portfolio in the Pacific. The report further noted that SIEA represented 47 percent of the profit and 83 percent of the profit in the SOE portfolio and had contributed an average of 70 percent of the portfolio’s net profit since 2010.  

Table 8 is a snippet from the ADB report showing benchmarking of Pacific Island SOEs with the Solomon Islands at the top of the list. 

Table 9. Benchmarking of Pacific Island SOEs 

Source: ADB. 

Improvements to SIEA’s financial position are attributed to SISEP’s successful implementation of the commercialization program along with other measures undertaken (e.g., restructuring of SIEA’s debts). SIEA’s financial position now allows it to pay dividends, which it has been paying since 2016. In 2018, SIEA invested SBD 30 million in SIG Domestic Development Bonds. In addition, SIEA also began a program of capital investment in generation, transmission, and distribution infrastructure, which was previously not possible because of its poor financial position.  

(c) SIEA held a central role in advancing objectives in the energy sector but needed additional capacity and know-how. At SISEP’s start, there were no other development partners participating in the energy sector. Their involvement required a strong and capable SIEA with capacity to partner with them in developing energy sector projects and implementing them. At SISEP’s close, a substantial number of international partners are involved in the energy sector. SIEA’s 2018 Annual Report^[10] names the ADB, Japan International Cooperation Agency, the New Zealand Government, and the United Arab Emirates Government as partners in operations. SISEP’s component which strengthened management played a significant role in building capacity. By 2014, newspaper articles were reporting on SIEA’s turnaround, specifically citing World Bank’s support in providing technical assistance and expertise.  

1. In summary, this ICR assesses that SISEP was highly successful in meeting its objectives.SIEA is now in a strong position to implement each element of the Government’s planned energy sector development program. Management has been strengthened, the commercialization program has become entrenched, and SIEA has invested to further improve system performance.

Table 10. SISEP Final Outcome Ratings 

1. The overall outcome rating is rated as Satisfactory.
2. Gender inequality is generally high in the Solomon Islands. The country ranks 156th on the gender inequality index.^[11] In the energy sector, gender inequality is noticeable. Most positions within the energy sector are technical roles, and traditionally, majority of women have not considered these types of roles as viable career paths nor have they been encouraged to pursue these roles by their employers. The Pacific Power Association benchmarking 2017 (2015 data) reports that 21.3 percent of the total workforce employed in Pacific power utilities are women, with 4 percent of female representation at technical levels. SIEA has 21 percent female employee base and 6 percent female employees at technical level. This places the organization at the top of Pacific regional statistics. However, SIEA is committed to improving gender equality within the power sector.
3. SISEP was prepared in 2008 when design and documentation of gender tag related aspects in projects was not required. However, at the time of AF approval, the project explicitly considered the relationship between improvements in access to reliable, efficient, and affordable electricity and the empowerment of women by reducing their time and labor burdens and providing opportunities for enterprise and capacity building. Consultations with the Solomon Islands Women in Business Association were carried out, which identified issues relating to the quality of power supply and the performance of

E. OTHER OUTCOMES AND IMPACTS (IF ANY)

Gender 

SIEA. The design of the AF addressed these issues. The provision of reliable and more economical electricity services through upgrades to the power network, as supported by the AF, was in several ways also gender neutral—because ‘lights staying on’ benefits all consumers. 

1. Strengthened management capacity has meant that SIEA is now committed to tackling gender inequality within its organizational structure. The World Bank supports SIEA’s commitment to improving gender equality through energy sector operations approved after SISEP. In particular, the Solomon Islands Electricity Access and Renewable Energy Expansion Project (SIEAREEP) supports the transformation of women’s employment in three ways: (a) implementation of a program to employ rural women in maintaining solar panels and sites, (b) assessment of the main barriers for women to take technical and managerial roles and designing measures to address these, and (c) support to SIEA to implement genderbased violence policies and to develop respectful and supportive workplaces.

Institutional Strengthening 

75. SISEP was designed as a project to strengthen management, increase financial sustainability, and improve reliability, which was especially important in an environment of low capacity. As such, the entire project was expected and proceeded to strengthen SIEA. SISEP financed several senior staff positions in SIEA, including expatriate specialists who infused their knowledge into SIEA operations. Some positions were required to have candidates with relevant experience—the commercialization manager, for example, was expected to be experienced in World Bank procedures. There were also many local staff with excellent and deep knowledge of their country and SIEA operations. The combination of local knowledge with international know-how greatly enhanced project operations. Project components also included training in technical and financial topics to increase capacity of staff where needed.

Mobilizing Private Sector Financing 

1. As mentioned earlier, SISEP was approved in 2008 at a time when SIEA’s financial position was precarious. This had led to chronic underinvestment in generation, transmission, and distribution infrastructure. Therefore, network reliability was inadequate and access to electricity among households was extremely low. Investment needs were high and private sector solutions needed to be catalyzed to bridge the investment gap. However, there was limited private sector interest. Private entities required a counterpart that could partner with them to design and implement energy sector projects, a role that SIEA found difficult to play at the time of approval.
2. SISEP was instrumental in improving the financial and operational performance of SIEA. Regulations and pricing were analyzed by a tariff review study supported by the project. Gains brought about by SISEP made partnering with private entities feasible. A case that demonstrates SIEA’s success in partnering and implementing such projects is the Tina River Hydropower Development Project (TRHDP) which is expected to generate 15 MW of electricity and significantly reduce the country’s dependency on diesel and improve the reliability of power supply. The TRHDP, cofinanced with Australia, the Republic of Korea’s Economic Development Cooperation Fund, the Green Climate Fund, the Joint Abu Dhabi Fund for Development and International Renewable Energy Agency, and the ADB, is a good example of the maximizing finance for development (MFD) approach. The financing package was optimized with the private sector providing the majority of the equity and the SIG, multilateral development banks, and donors providing the rest of the equity and all the debt. This structure has helped achieve the lowestpossible electric tariff considering the high cost of the project. SISEP created the appropriate environment for private sector involvement. Figure 4^[12] shows the MFD approach for the TRHDP and SISEP’s role in making it feasible.  

Figure 4. SISEP and MFD Approach Used in the TIna River Hydro Development Project 

Poverty Reduction and Shared Prosperity 

1. Poverty analysis. The most recent poverty assessment^[13] showed that based on the Household Income and Expenditure Survey, 12.7 percent of the population in the Solomon Islands lives below a Solomon Islands-specific poverty line and are classified as ‘poor’. This poverty line is defined as the minimum expenditures needed to obtain basic food and non-food goods considering prevailing consumption patterns in the country. Honiara had the highest basic needs poverty line: meeting basic needs cost twice as much money in Honiara as in most other provinces due to the higher cost of both food and non-food goods.
2. A major obstacle in promoting economic development and expanding the use of electricity is the high average retail electricity tariff of approximately US$0.65 per kWh which is the highest in the Pacific region and among the highest in the world. The Solomon Islands is almost entirely dependent on imported refined petroleum fuels for national energy needs for electricity generation, transport, and lighting. Electricity is supplied to urban centers through diesel generators. In rural areas, the wide distribution of population and low densities make capital costs of connecting consumers very high relative to revenue generation. The problem had been further exacerbated by the distorted tariff methodology which did not benefit end-users appropriately when global oil prices were lower. At the end of 2016, SIEA revised the tariff methodology so that the benefit of lower generation cost will be adequately passed on to electricity users. 
3. To reduce exposure to volatile global oil prices and to enhance energy security, the SIG aims to increase the share of renewable energy to 50 percent of total installed capacity by 2020. The SIEAREEP will facilitate access to additional people to electricity networks while improving sustainability and affordability through the replacement of diesel generation with more affordable sources of power. The SIEAREEP’s economic analysis identified that the project will avoid over US$21.6 million in diesel-related costs which will facilitate tariff reduction by reducing the level of diesel dependency, generating clean and sustainable energy and subsidizing connections to over 1,500 low income families, schools and health centers.
4. The initial cost to connect to the power system in the Solomon Islands is extremely high. The World Bank approved the US$2.5 million Electricity Access Expansion Project supported by the Global Partnership for Output Based Aid in July 2016 to provide targeted subsidies to low-income households to help new customers pay the initial connection fee and basic in-house wiring for low-income households which is a major impediment to increasing the electrification rate. In 2017, SIEA advised the World Bank that the gazettal of the tariff regulation, which enacted a new retail tariff based on the cost of service study and tariff review, had occurred with new tariffs effective in January 2017. The tariff regulation resulted in a 20 percent decrease in tariff for large commercial customers and between a 4 percent and 10 percent decrease in tariff for residential customers. In addition, the tariff regulation benefited lowconsumption users by introducing a low-consumption tariff (a baseline tariff) which was lower than the prevailing tariff rate.

Other Unintended Outcomes and Impacts

1. No unintended outcomes or impacts were recorded by SISEP.
2. A primary objective of SISEP was the reform of SIEA, specifically strengthening of management as a prerequisite to achieving the SIG’s energy sector goals. There were several options that could have supported the objective of strengthening management. They included (a) award of one or more electricity supply and/or distribution concessions to private companies, (b) award of a utility management contract to an outside firm for a specified period with specific performance requirements, or (c) engagement of external senior managers and/or expert staff to support utility management and operation for a specified period and help further train local utility managers and staff.
3. Each of the three options for improving management and operational efficiency in SIEA was considered. An initial concept was to make arrangements for the electricity and Honiara water utility (SIWA) together, especially because SIWA was the largest debtor to SIEA. However, SIWA did not participate, and the management contract concept was developed for SIEA alone. Over 30 potentially interested companies were surveyed regarding their interest in purchasing these franchises, but none expressed interest in submitting bids. Five companies did express some potential interest in bidding on a management contract if suitable government guarantees were in place. 
4. However, as time proceeded, the market for a potential electricity management contract tightened, with prices for these services increasing sharply, and guarantee requirements over and above what the Solomon Islands would be able to provide under the Honiara Club agreements. In the meantime, the experience of the FEA, which had opted to appoint five expatriate managers as part of its own reorganization in 2002, continued to show strong performance. In light of the emerging FEA experience and the increasingly less-favorable results with management contracts, the SIG and the World Bank designed a package of reforms which included the hiring of several senior staff in key positions. The proposal also included a twinning arrangement between SIEA and FEA.
5. Partnership arrangements. The World Bank worked in close collaboration with partners to provide support in improving the performance of SOEs in the Solomon Islands. While there was limited interest from commercial entities to participate in the energy sector, SIEA partnered with a few development partners to further energy sector goals. RAMSI/Australian Aid supported the electricity pricing and regulation study as well as the Rural Electrification Master Plan. A study to establish the legal framework for rural electrification was also planned. The World Bank and other partner agencies worked in a complementary fashion to further development.
6. SISEP’s initial focus on strengthening management, that is, hiring of key senior staff, produced early gains which were key to achieving successful outcomes. These early gains are attributed to improved corporate governance, with appointments to the SIEA board being carried out under the SOE regulations of 2010 and improved FM and internal audit functions within SIEA. The success of the commercialization program was crucial in producing a virtuous cycle with regard to objectives—improved financial health allowed SIEA to invest in capital expenditure to improve service and increase revenue, which in turn led to a healthier balance sheet. During 2012 and 2013, the SIEA board approved a corporate restructuring that established an internal audit group focused on meter reading, billing reconciliation, and reducing theft/meter bypass and created a capital projects management team charged with the planning, oversight, and delivery of new projects.
7. SIEA’s measures in implementing the commercialization program were necessary but not sufficient to put its finances on a sustainable trajectory. An important factor was the restructuring of SIEA’s debt which was long-standing and needed government intervention without which it was unlikely that SIEA’s financial recovery could be maintained. As mentioned earlier, SIWA was SIEA’s largest debtor.

III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME

A. KEY FACTORS DURING PREPARATION

B. KEY FACTORS DURING IMPLEMENTATION

The SIG had restructured SIWA’s debt to SIEA in 2008 and it was a condition to IDA’s financing of SISEP. However, this debt settlement agreement was not successful. SIWA continued to operate noncommercially, did not have the capacity to pay its power bills, and had accumulated the SBD 36.7 million debt to SIEA in the 50-month period between January 2008 and February 2012. It was only in early 2011 that the SIG committed to reforming SIWA, recognizing that without reform at SIWA, SIEA’s largest customer, attempts to improve the financial sustainability of SIEA were unlikely to succeed. This had an impact on the development of the Tina River Hydropower Scheme which required SIEA as the power offtaker to be financially healthy.

1. In May 2012, a second SIWA-SIEA debt settlement agreement was signed between the SIG (Minister of Finance and Treasury and Minister of Mines, Energy, and Rural Electrification); SIEA; and SIWA. Full settlement of SIWA’s SBD 36.7 million was structured in a way that combined SBD 20 million in government capital injection into SIWA for onward payment to SIEA, SIEA providing SBD 7.5 million interest-free loan to SIWA to be repaid over 8 years, and SIEA writing off SBD 9.2 million of SIWA’s debt. Importantly, unlike the 2008 debt settlement, the one in 2012 worked because SIWA was financially restructured to operate on a commercial and sustainable basis. SIWA’s tariffs were adjusted so that it could cover its costs, including for electricity. The agreement increased SIWA’s tariffs over the next three years, established a mechanism for SIWA’s tariffs to be adjusted quarterly in line with increases in SIEA’s tariffs, and established a mechanism for SIWA’s tariffs to be adjusted annually in line with the consumer price index.
2. As mentioned, SIEA was substantially dependent on imported refined petroleum fuels for national energy needs. An improved financial position meant that SIEA could initiate a fuel procurement tender in 2012. High fuel costs were a critical strategic issue for SIEA as fuel purchases accounted for around 60 percent of SIEA’s operating expenditure. Past financial crises at SIEA had been related to cash flow issues relating to payment of fuel bills. A new fuel contract was negotiated for long-term supply, delivery, and management of SIEA’s fuel stocks and maintenance and replacement of fuel storage tanks at SIEA power stations. The contract provided SIEA with a price that was a significant discount on regulated fuel price.
3. The fiscal position of SIEA continues to be strong. SIEA started declaring dividends to the SIG in 2016 and has done so each year thereafter. Dividends of approximately SBD 4 million are declared each year. In 2018, SIEA invested SBD 30 million in SIG domestic development bonds. SIEA’s annual expenditure on infrastructure investments totaled SBD 140 million. The Solomon Islands’ current electricity utility is a vastly different operation than the utility of 2008 when SISEP was approved.
4. SISEP’s objectives were clearly defined and directly responded to critical issues that SIEA was facing. At approval, the PDO was complex in that it also described the activities to achieve the PDO in addition to the PDO itself. This was corrected during implementation. SISEP’s Theory of Change was logical and could demonstrate the results chain that led from SISEP’s activities leading to intermediate outcomes progressing on to PDO outcomes. SISEP’s objectives responded directly to the issue identified which was that energy sector goals of increasing access and affordability could not be addressed until SIEA was a viable and financially healthy entity.
5. At project design, there was inconsistency in describing PDO-level indicators and intermediate outcome indicators. The inconsistency appeared in different sections of the PAD, leaving an impression that the Results Framework was not well thought through. As an example, the PDO-level indicators described in the project description section in the main body of the PAD were not consistent with the

IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME

A. QUALITY OF MONITORING AND EVALUATION (M&E)

M&E Design 

PDO-level indicators described in annex 3 or in the Results Framework. In addition, inconsistencies were apparent between the PDO results indicators in annex 3 and the table describing arrangements for results monitoring which contained only one PDO indicator (SIEA will operate profitably and with PDO indicators listed as intermediate indicators).  

1. The PDO-level indicators were adequate to measure progress and achievement of the project’s three-part development objective of improving operational efficiency, financial sustainability, and system reliability of SIEA. The indicators were relevant and time bound. M&E arrangements were made for the project management team in SIEA to be responsible for M&E.
2. There was considerable variability in the structure of the Results Framework throughout implementation. The intermediate outcome indicators in the PAD’s Annex 3: Arrangements for Results Monitoring were elevated to PDO-level indicators in the first  ISR. However, four indicators were also retained as intermediate indicators leading to the same indicators being at the PDO level as well as the intermediate outcome indicator level: (a) SAIDI, (b) SAIFI, (c) revenue generated per kWh, and (d) net profit before tax. There was no indication that a formal restructuring was conducted to effect these changes in the ISR.
3. The first ISR after AF approval reflected changes brought about by AF investments. The Results Framework was amended to include new intermediate outcome indicators which corresponded to investments that were to be made for network improvements (for example, ‘Commissioning of switchboard at Ranadi’ and Kola’a ridge substation commissioned’) and the indicators for revenue generated per kWh and net profit before tax were deleted at PDO and intermediate outcome levels However, SAIDI and SAIFI remained at both the PDO level and intermediate outcome level. The indicator ‘Number of pre-paid meters installed’ was dropped.
4. The Results Framework was further refined during the third and fourth restructuring. At the third restructuring, the Results Framework was amended and the duplication of SAIDI and SAIFI was removed. After the fourth restructuring, the Results Framework was amended once again with the ‘Revenue generated per kWh’ and ‘Net profit before tax’ indicators being reinstated, the latter as an intermediate outcome indicator. The indicator that measured generator efficiency was dropped.
5. Targets for individual indicators also varied during implementation. At times, targets were made more stringent with the desire to be accountable for increased investments. The more stringent targets made sense for some indicators, for example, SAIDI and SAIFI, where one could expect an improvement in these indexes if additional investments were being made to improve reliability. At other times, a more stringent target was not advisable such as the increase in ambition from 16 percent to 12 percent at the first restructuring. An Energy Sector Management Assistance Program study^[14] suggests that system loss reductions measured as a combination of technical (for example, heat or copper losses, magnetic losses, and transformation losses) and nontechnical losses (for example, commercial losses, metering failures and theft) are difficult to separate. In SIEA’s case, technical losses of approximately 11 percent have been assumed. A residual target of 1 percent for nontechnical losses was practically not feasible for SISEP. Some restructurings were conducted with short interval periods with indicator targets amended frequently. Considering that the change in targets was not material to the project’s outcome, frequent changes in targets was inefficient.  
6. SISEP’s data was collected and analyzed in a methodologically sound manner. The methodology for most indicators was consistent from the first ISR to the end of the project. However, the methodology for the collection ratio indicator was not consistent from before project approval and continuing through project implementation. At the end of project implementation, the collection ratio was 60 percent, lower than the baseline figure of 72 percent at project approval. The ICR team could not verify that the collection ratio at the start of the project and at the end of the project was measuring what it purported to measure. There was substantial variation in collection ratio measurement leading to a situation which made comparisons at project start and end not possible, leading to the indicator being unusable. A possible explanation was that newer IT systems for billing installed as part of SISEP may have contributed to this mismatch. Systems that did the billing were not the same at project start and at project close. It would have been beneficial to revisit this target earlier in project implementation rather than at a later stage. The collection ratio was therefore not used in assessment of outcomes.
7. There were instances where the project team took proactive action to correct the stated target to one that is more appropriate and achievable due to project activities, but without compromising on the ambition of the outcome to be achieved. These actions are evident in the indicators ‘Average number of debtor days to collect billed revenue’ and ‘Number of days between due date of tariff and, if not paid, notice of arrears’. These increases show that the project team was aware that there were shortcomings in the estimation of an appropriate target and level of ambition and took action to correct it.
8. At first, the project team required assistance to conduct effective M&E implementation. ISRs reported that an increase in the quality and detail of reporting on the progress toward the project’s Results Framework indicators was required. This was to be expected with the World Bank and SIEA working together for the first time. By project close, however, M&E functions were being implemented in a sound manner and processes are likely to be sustained after project closing.
9. The project management team at SIEA produced monthly reports which reported on progress toward indicators. In addition, specific performance indicators were added to the contracts of the two professional utility managers. SIEA reported on their progress on a quarterly basis. An arrears report was mandated for each Board meeting to monitor non-paying SOEs and government entities. The general manager reported monthly to SIEA’s board on the type of routine generation and network maintenance activities carried out, including system outages and analysis and estimated costs.
10. In addition to M&E conducted to inform its operations and report to its board, SIEA also gathered information from customers through a customer survey which allowed it to recalibrate its services based on consumer demand. Customer surveys are held regularly, with the most recent being held in 2018. One example of using consumer opinion to retool its services was provided to the ICR team by project counterparts. One request that came from customers was that more information on the mobile top up system was desirable. SIEA responded by conducting an information campaign. In addition to activities at its headquarters in Ranadi, areas with heavy foot traffic were targeted, for example, at Hyundai Mall.

M&E Implementation 

M&E Utilization 

Justification of Overall Rating of Quality of M&E 

104. SISEP was successful in being able to monitor progress and providing evidence that development objectives as planned for at project start had been met. In addition to requirements for reporting to IDA, SIEA had instituted its own processes of reporting to its board, members of which were avid consumers of data provided. However, there were substantial shortcomings in the design of M&E before approval as described. Opportunities during implementation to re-examine the Results Framework were not used. The overall quality of M&E is rated as Modest. 

B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE

1. Procurement. At SISEP’s approval in 2008, assessment of SIEA’s capacity to implement procurement actions for the project rated the risk as High. SIEA’s structure and capacity was deemed insufficient and expenditure control was taking place in a fragmented arrangement. The legal and regulatory framework lacked the operational detail necessary for efficient procurement implementation. There was an absence of procurement planning and procedural tools and the limited number of local contractors increased the possibility of saturation, collusion, and nepotism.  
2. Project design included a specific action to mitigate the above risks and support SIEA which until then had no experience with implementing World Bank procurement procedures. The action plan included (a) appointment of a commercialization manager with World Bank procurement experience; (b) strengthening of the National Competitive Bidding (NCB) process with the first NCB packages; (c) implementation of a procurement planning cycle and the development and implementation of a procurement filing system; (d) finalization and implementation of audit procedures; and (e) training for SIEA staff on World Bank procurement procedures. 
3. By 2014, at AF approval, several lessons were learned, particularly from past International Competitive Bidding (ICB) contracts, and were incorporated into the AF project design. Lessons included the following: (a) qualification requirements need to be appropriate to the size and complexity of the work; (b) suitable packaging of contracts into works of sufficient scale is required to attract more international bidders to a small, unfamiliar, and remote location like the Solomon Islands; and (c) cost estimates need to be more carefully prepared and procurement planning and execution needs to be carried out in a more timely manner.  
4. The World Bank conducted a post review of signed contracts in January 2019 (two months before project closure). The review included contracts for the manager contracts, procurement specialist, and environment and social safeguards specialist. The review showed that the agreed procedures were followed, the relevant documents on the selection process were on file, and the selected consultants were all on the ground with services ongoing at the time of the review. It was recommended that SIEA should improve the filing system where procurement activities and documents are stored to make documents immediately available. 
5. FM. The FM assessment at SISEP’s approval in 2008 rated the risk as Moderate considering the total financial commitment to the program, the capacity of SIEA and the structure and complexity of the project. FM arrangements were assessed as adequate. The assessment flagged that government capacity was dependent on expatriate support but that the accountant general and auditor general were increasingly effective. SIEA had no experience in the delivery of World Bank projects. To mitigate this risk, project design included funding for finance training. The SIG hired a professional accounting firm to assist SIEA to put in place all required financial reporting systems for this project.  
6. During implementation, the FM assessment conducted at the time of AF approval noted that there had been significant improvements in SIEA’s FM processes and systems which were reflected in (a) an unqualified entity audit in 2012, (b) the 2012 entity audit being completed within the statutory time period after the end of the fiscal year, and (c) SIEA implementing a new and more robust billing and ledger system, effective January 1, 2014. 
7. An FM implementation review was conducted in March 2018. FM performance was then reassessed to Moderately Satisfactory because while accounts were well maintained, improvement was required in managing the commitments register on active projects. The commitments register is an important management tool to monitor all committed funds versus project-available funds and help identify project funds that remain uncommitted and is an effective way of monitoring contract payments. SIEA is tasked with updating the commitments register to monitor active projects. At project closing, no material issues are evident in the FM area.  
8. One year before project closure, US$3.3 million was canceled as SIEA, now financially on its feet, decided to fund some of SISEP’s activities from its own funds. At SISEP’s closing, approximately US$0.9 million is expected to remain undisbursed. On one hand, this can be viewed as a positive development— SISEP had met its objectives to make SIEA financially sound and could now fund its own capital expenditures. On the other hand, project funds remaining undisbursed at the end of the project is likely due to inexact estimates of funds needed at the time of cancellation.
9. Safeguards. At SISEP’s approval in 2008, the project’s environmental category was rated as C, which reflected the fact that proposed investments were essentially replacement of distribution feeders, upgrading of other network distribution elements including transformers to reduce network losses, and replacement of existing meters with prepaid meters. Existing generation facilities were being provided with the necessary spare parts to improve the reliability and efficiency. SISEP’s focus was on institutional strengthening, technical assistance, and commercialization through improved FM, improved accounting systems, and operational IT support. Hence, no environmental or safeguard policies were triggered by investments proposed in the loan approved in 2008. 
10. The environment category for SISEP changed from Category C under the original project to Category B under the AF as new activities that were being financed triggered OP/BP 4.01 (Environmental Assessment). Activities financed by the AF took place within the confines of existing facilities on land leased by SIEA. There was no land acquisition or involuntary resettlement arising from AF activities. SISEP had an urban context and no indigenous peoples as defined under OP 4.10 (Indigenous Peoples) were located in the project’s area of influence. The project’s ESMF stated that the proposed new subprojects would cause no major social or environmental impacts and that minor impacts could be readily mitigated and resolved.  
11. During implementation of AF activities, SIEA’s contractor managed environment and social matters during construction of capital works with oversight by SIEA. As part of the capital works, SIEA managed the planned temporary closure of a Honiara road for approximately one week. The closure of an approximate 60 m section of road (30 m on either side of the site of work) restricted the entrance to several houses and canteens. SIEA and the contractor notified residents and maintained pedestrian access during the majority of construction so as to minimize disruption. The details of any compensation of the businesses along the section of road were shared with the World Bank before construction.  

C. BANK PERFORMANCE

Quality at Entry Rating: Satisfactory

1. SISEP was conceptualized, designed, and approved at a time that was critical for SIEA. The agency was close to insolvency and had difficulty in obtaining fuel to maintain its operations. Strengthening SIEA in operational, financial, and quality of service areas was critically important for SIEA to perform basic functions of a power utility. SISEP was the first financial engagement undertaken by the World Bank in the energy sector in the Solomon Islands. Emerging from conflict, needs were huge, but no financiers would partner with SIEA as they needed a viable and healthy power utility to do business with. An IDA grant to restore the health of SIEA was the right choice. SISEP was therefore highly suited to support SIEA at that point in time.  
2. While SISEP was the World Bank’s first financing package in the Solomon Islands, support in the form of technical assistance and expertise had been ongoing since 2005. The initial World Bank engagement in 2005–2007 involved conducting diagnostics on both the power and water utilities and providing expertise on financial recovery plans for SIWA and SIEA. This made sense because the performance of both utilities had a substantial impact on each other. One proposed reform was a management contract/concession covering both SIWA and SIEA in 2007 which was not supported. A power management contract was tendered in 2007, but there was not enough interest. Regarding restructuring SIWA, there was no political or board or management support in 2007. Reform efforts then focused on SIEA and SISEP was approved with IDA financing in 2008. 
3. SISEP was designed to place the energy sector of the Solomon Islands on a sustainable footing. Key operating aspects that helped neighboring Pacific Island states, for example, the FEA, achieve success were considered and largely incorporated in the design of SISEP. These included (a) the adoption of a strong FM system, with a focus on collection, with customers who are late in paying their tariffs receiving notices within 2 to 3 days after missed payments; (b) the introduction of prepaid meters, for which prepaid cards could be bought through local retail stores; (c) commitment from the Government to exercise due diligence in payment collections and, if necessary, cut off non-paying customers including SOEs; (d) outsourcing of maintenance and repair services while inspecting the level of services provided by their contractors; and (e) an active long-term human resource planning methodology, focusing on on-the-job training for both management and operators. 
4. At approval, SISEP met readiness criteria for implementation. Procurement Plans had been formulated for the first 18 months and a General Procurement Notice was published. Advertisements and Expressions of Interest notices had been placed to procurement of the commercialization component. Procurement packages for IT systems had been defined and a Request for Expressions of Interest was ready to be published as soon as the project had been approved by the Board.  
5. Project design acknowledged and mitigated for critical risks. Two substantial risks were identified. The first included a lack of capacity in the Government which was mitigated by making sure that the commercialization manager was appointed with qualifications acceptable to IDA. This was a condition of effectiveness. A second significant risk was a highly volatile political environment and the lack of commitment in commercializing SIEA. To mitigate this risk, the SIG agreed to restructure SIEA’s debt before negotiations commenced for SISEP. 

Quality of Supervision Rating: Moderately Satisfactory

1. Project supervision was substantial after project effectiveness. Supervision missions were carried out regularly, averaging every four months, including field visits and physical checks of investments. The project’s task team leaders were based in the Sydney office during the entire life of the project. This resulted in well-facilitated client engagement. The World Bank office in Honiara also provided support as needed. Critical issues were identified early and collaborative solutions were found with SIEA. The project record shows evidence of detailed ISRs and Aide Memoires.  
2. Project teams were sensitive to needs that arose during implementation and accordingly restructured as needed. This ICR could not find evidence of a midterm review (MTR) though it is likely that frequent restructuring played the same role as would an MTR. The project was restructured four times, one of which also included the AF. The last two restructurings were at the tail end of the project—one and two years before closure. It could have been useful to consolidate these two restructurings. The project was extended thrice, which provided time needed for completion of activities without compromising the project’s performance.  

Justification of Overall Rating of Bank Performance 

Overall Rating of Bank Performance: Moderately Satisfactory 

123. The quality of entry and quality of supervision aspects have been assessed to be Satisfactory and Moderately Satisfactory, respectively. A few shortcomings as described above were not sufficiently severe to compromise the project. The World Bank team and government counterparts worked to keep the project on track and brought the project to a satisfactory closure.  

D. RISK TO DEVELOPMENT OUTCOME

1. The main risk to a sustainable development outcome is government commitment to the SOE Act of 2007 and regulation of 2010. However, it is important to note that SIEA’s performance in turning things around was strongly predicated on using provisions in the SOE Law. Improved corporate governance followed from appointments to the SIEA Board being carried out under the SOE Law. SIEA’s road to financial sustainability was helped by the SOE Law which required SOEs to operate profitably. SIEA was able to disconnect non-paying consumers, including government agencies. Today government commitment to the SOE Act appears to be firm. If the government’s commitment wavers, the risk of utilities falling back into insolvency is real. 
2. There is also a risk that affordability and access goals will remain a challenge. The risk to their alleviation is mitigated by the fact that ongoing efforts by the SIG and other development partners are directly tackling these issues, including the World Bank through its SIEAREEP project. SISEP has achieved its objective in strengthening SIEA’s position to contribute to holistic sector development. It is likely that financial sustainability will persist despite investments in improving access and affordability based on financial projections. SIEA is now in a better position to strike and maintain the right balance of the different sector objectives embodied in Sustainable Development Goal 7 (Ensure access to affordable, reliable, sustainable and modern energy for all). 
3. A robust regulatory environment is vital to successful reform of SOEs. The SOE Act of 2007 and 2010 SOE regulations provided a robust framework for SOE governance accountability and performance. The law required SIEA to operate profitably, a consequence of which is that SIEA operated as a private firm to the extent possible. The law set down corporate reporting requirements. The process to select and appoint directors needed to follow the law with members selected on the basis of technical and professional expertise rather than political appointments. The financing of community service obligations was required to be transparent following an equally open planning and costing process. The SOE law was the backbone of the effort to turn around SIEA, without which it is doubtful that the project could have succeeded.  
4. Political commitment is an essential ingredient to success in turning around SOEs. The crisis at SIEA prompted sufficient government commitment to enable reforms to proceed. The Ministry of Finance had a large role to play in removing debt from SIEA’s accounts. A deal was brokered to have SIWA’s debts, which had accumulated from 2008, paid to SIEA. Electricity bills of other government entities were also paid on time with the Ministry of Finance and Treasury making them on behalf of other ministries. Reforms were implemented at SIWA and were instrumental in improving the situation at SIEA. The Government did not continue financing poorly performing SOEs but actively worked toward finding and implementing a sustainable solution. Without this intervention, infusion of financing either the government, IFIs, donors, and so on would not have been sufficient. 
5. Technical assistance and expertise are critical components to SOE reform. SISEP provided both technical assistance/expertise as well as financing to SIEA. However, the technical assistance component played a crucial part in SISEP’s success. The component that addressed management strengthening was key in providing a foundation for SIEA’s success. Subsequent achievements in financial operations or technical improvements were dependent on having a strong and capable management structure. Building institutional capacity should be a required component of any financing that is provided to entities with low capacity as it is the only way to ensure the achievements are sustainable. 
6. Targeted assistance in low capacity environments can be essential to successful project implementation. As noted, the project experienced delays in implementing its Procurement Plan notwithstanding the World Bank providing close supervision and support to procurement activities. Project or procurement officers with experience in implementing World Bank/donor projects would have been beneficial to SISEP. The lack of a project management team was remedied in the World Bank’s follow-on SIEAREEP where key project management positions were identified—procurement officer, gender specialist, solar engineer, manager construction, and manager projects. The project management team is expected to address capacity constraints. In terms of procurement, a positive impact on timely submission and quality of bidding documents for large works contracts is expected, thereby contributing to project success. 

V. LESSONS AND RECOMMENDATIONS

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ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS 

B. KEY OUTPUTS BY COMPONENT 

The World Bank

Solomon Islands Sustainable Energy ( P100311 )

ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION 

The World Bank

Solomon Islands Sustainable Energy ( P100311 )

ANNEX 4. EFFICIENCY ANALYSIS 

ECONOMIC AND FINANCIAL ANALYSIS OF SOLOMON ISLANDS SUSTAINABLE ENERGY PROJECT

1. The project has achieved the key outcomes with high efficiency based on economic analysis and financial analysis (project level) as described herein, which is conservative and robust to sensitivity analysis. 

ECONOMIC ANALYSIS 

1. The economic analysis at completion was conducted at project level considering that major economic benefits are the joint result of implementing all project components. In sum, at completion, the project has an NPV of US$7.12 million (at a 10 percent discount rate) while Economic Internal Rate of Return (EIRR) stands at 24.3 percent, which indicates great Value for Money from the project. Taking environmental benefits into consideration, the NPV increased to US$13.31 million and the EIRR improved to 27.1%. A summary of the results, assumptions and detailed analysis is presented in following sections.  

Table A4.1. Summary of Economic Benefits and Costs (US$) 

                                  ECONOMIC BENEFITS                                                                                                                                    

                                     Avoided Fuel Cost                                                                                                                     304,770

                                     Reduced Outage Cost                                                                                                       13,063,619

1. Two economic benefits considered and quantified in this ex-post economic analysis are avoided fuel cost and reduced outage cost. This is in line with the analytical framework established at project appraisal and additional financing appraisal. The first direct benefit of implementing this project is to reduce energy losses, which enables the delivery of same services from less fuel consumption. By comparing actual annual power generation to electricity sales in SIEA’s audited annual report, it was evident that incremental reduction of energy losses is achieved with the project implementation. The other key benefit is increased system reliability, in the form of reduced outage and in customer saving through reduced requirement for auto-generation backup systems. In this ex-post exercise, the reduced outage cost was estimated by using the actual outage data as well as annual average retail tariff figures. However, no information is available on the reduced back-up generation systems due to better system reliability, hence the benefit is unable to be quantified. In addition, there are several secondary economic benefits from the implementation of the project, including reduced operation and maintenance (O&M) costs, better voltage profile, better power harmonics, and more system stability. They are nevertheless less significant compared to avoided fuel cost and reduction of outage. A disproportional level of data collection and modeling efforts are requested to quantify these benefits. For these reasons, the analysis is conservative in underestimating project benefits. 

1. Avoided Fuel Cost. Economic Benefit from Avoided Fuel Cost is only US$0.3 million compared to projected US$9.0 million at appraisal. Two main reasons: 

• Much lower-than-expected crude oil price after 2008 financial crisis leads to less saving in fuel cost. 
• More importantly, our best educated estimation of non-technical losses is much higher than the baseline in the original economic analysis. Among total system losses, it was widely accepted that reduction of non-technical loss cannot be counted as economic benefit because they are mainly transfer of benefits between entities within an economy. And reduction of technical losses is the only source of avoided fuel cost in this project. However, as pointed out by Sinclair Knight Merz in its “Solomon Islands Electricity Authority - Loss Reduction Study for the Honiara Network (2011)”, in practice it is difficult to determine the balance between the technical and non-technical losses without precise measurement. Therefore, the key to calculate benefit here is to best estimate: 1) actual technical losses during the period of project implementation, and 2) the baseline of technical losses at the start of the project. Unfortunately, neither piece of information was clear. 
• The alternative approach is to determine 1) actual non-technical losses during the period of project implementation, and 2) the baseline of non-technical losses at the start of the project. Then the difference between total losses and non-technical losses is the technical losses. 
• Actual non-technical losses during the period of project implementation was able to be estimated based on datapoints provided in SIEA’s report. 
• However, there were three different sources on baseline of non-technical losses at the start of the project. As shown in the scenario analysis below, economic NPV of avoided fuel cost is very sensitive to the baseline of non-technical losses at the start of the project. And it was clear that, if 6% as implied at appraisal is used, the NPV becomes significantly larger. 

Table A4.2. NPV Scenario Analysis: Avoided Fuel Cost to Non-Technical Loss Baseline

• After careful examination, 12% was selected as the best-estimated non-technical loss rate baseline in 2010 because all other options are not sensible. As per SIEA’s annual report, the non-technical loss rate in 2012 is 12%, it’s reasonable to argue that the nontechnical loss rates in 2011 and 2010 are unlikely lower than 12%. Also, if 15% was adopted, it would leave the technical loss baseline at 6.92%, which is not practical considering the average technical loss during project implementation (2010-2018) is at a much higher level of 10.42%. 
• In conclusion, with a baseline non-technical loss of 12%, NPV of avoided fuel cost was US$0.30 million. 

1. Reduced Outage Cost. The estimated economic benefit from reduced outage cost is also lower than expected. It’s worth pointing out that annual retail tariff (customer’s willingness to pay, “WTP” hereinafter) is used to gauge the cost of outage since there is no known estimate of outage costs available for the Solomon Islands. Average annual retail tariff is US$0.76/kwh, which is lower than the assumption of US$1/kwh in the additional financing appraisal document. This can largely explain why estimated economic benefit of US$13.06 million from reduced outage cost is lower than the projected benefit of US$20.06 million at additional financing appraisal. In addition, during project implementation, SIEA installed several generators using its own capital and findings from ADB and other sources. However, it’s hardly possible to distinguish what percentage of reduced outage results from our project or generator addition. Also, one important reason that SIEA was able to deploy its own funds and attract new external funding in growing its generation capacity is the implementation of this project, which put SIEA in sound financial footing and better operational efficiency. 

Table A4.3. Customer’s Willingness to Pay (WTP) Estimate

1. Data is based on actual IDA grant and credit disbursement as well as operating data reported by SIEA from 2010 to 2018. Key assumptions are listed below.  

• Total capital investment was US$11.72 million, 68.94% of planned original and additional financing.  
• 10% discount rate. 
• Operation and maintenance (O&M) costs are estimated at 1% of investment costs considering improvement of efficiency after project implementation.  
• Load factor at 62%. 
• Grid emission factor for the Solomon Islands is 0.31 tCO² per KWh per UNDP data.^[16]
• Price for Carbon at 30 USD/tCO2. 

1. Base case results.  

• As detailed in the table below, SIEA experienced substantial growth of both power generation and sales. Thanks to the reduction of system losses, SIEA achieved high sales growth (19%) with lower generation growth (14%). 

Table A4.4 System Generation, Losses, and Sales Comparison

2008         2008

2009         2009     78,152,447   n.a.

2010         83,623,118                      20,063,519            23.99%       63,559,599              2010     83,623,118     20,063,519.0            23.99%     63,559,599

2011         83,867,254                      20,122,094            23.99%       63,745,160              2011     83,752,049     20,006,889.0            23.89%     63,745,160

2012         83,558,695                      20,048,062            23.99%       63,510,633              2012     84,565,616     21,054,983.2            24.90%     63,510,633

2013         82,267,333                      19,738,228            23.99%       62,529,105              2013     81,101,391     18,572,286.0            22.90%     62,529,105

2014         86,620,779                      20,782,742            23.99%       65,838,038              2014     84,911,433     19,073,395.3            22.46%     65,838,038

2015         88,283,458                      21,181,664            23.99%       67,101,793              2015     86,840,961     19,739,167.6            22.73%     67,101,793

2016         93,634,068                      22,465,425            23.99%       71,168,643              2016     92,687,032     21,518,390.0            23.22%     71,168,643

2017         97,751,965                      23,453,424            23.99%       74,298,541              2017     94,282,936     19,984,395.0            21.20%     74,298,541

2018         99,617,534                      23,901,026            23.99%       75,716,508              2018     94,979,593     19,263,084.9            20.28%     75,716,508 2019     105,257,578                     25,254,229                23.99%       80,003,348              2019     99,176,436     19,173,087.9            19.33%     80,003,348

2020         111,872,781                    26,841,401            23.99%       85,031,380              2020    104,170,008    19,138,628.5            18.37%     85,031,380

2021         118,867,113                    28,519,537            23.99%       90,347,577              2021    109,398,442    19,050,865.3            17.41%     90,347,577

2022         122,723,551                    29,444,804            23.99%       93,278,747              2022    111,686,028    18,407,280.5            16.48%     93,278,747

2023         126,089,325                    30,252,347            23.99%       95,836,978              2023    113,457,655    17,620,676.8            15.53%     95,836,978

• As discussed at project appraisal, the main economic benefit to be quantified is the fuel saving from reduction of system technical losses and increased reliability from reduction of outage. Below is a detailed table to shown economic benefits and costs year by year. 

Table A4.5. Project Net Economic Benefit Evaluation

                                        (1)                        (2)                          (3)                       (4)                     (5)                          (6)                       (7)                 (8)                  (9)

2009                    -                      -                      -                 -                   -                   165,429          1,654      167,083        (167,083) 2010                    -                      -                      -                 -                   -                   992,093        11,575   1,003,668     (1,003,668) 2011            (677,377)                      -                      -          232,670            232,670                   764,002        19,215      783,217        (550,547)

2012             369,290                      -                      -         (132,186)           (132,186)                   543,934        24,655      568,588        (700,774) 2013         (1,104,409)         (11,114,013)           (9,674,206)          386,725        (9,287,481)                1,229,067        36,945   1,266,012   (10,553,493)

2014            (132,847)            4,644,712            4,307,657            45,227         4,352,884                    (57,539)        36,370      (21,170)      4,374,053 2015          1,119,844            7,099,887            6,344,283         (249,319)         6,094,964                   220,323        38,573      258,896      5,836,068

2016                 2,312,335                            3,749,470                       2,948,506                    (420,963)         2,527,543                             762,836               46,201      809,037       1,718,505

2017                 1,217,917                            7,817,071                       6,144,952                    (221,641)         5,923,312                          2,065,368               66,855    2,132,223      3,791,088

2018                 1,283,483            7,059,596            5,274,538         (315,859)         4,958,679                3,482,464      101,680   3,584,144      1,374,536 2019             362,568            7,059,596            5,080,146           (82,604)         4,997,542                1,556,003      117,240   1,673,243      3,324,299 2020            (649,393)            7,059,596            4,960,296          143,477         5,103,773      117,240      117,240      4,986,534

2021                (1,762,897)            7,059,596                   5,010,852                     377,770                         5,388,622                    117,240       117,240       5,271,383

2022                (2,872,801)            7,059,596                   5,059,408                     614,209                         5,673,617                    117,240       117,240       5,556,377

2023                (4,028,822)            7,059,596                   5,110,479                     863,679                         5,974,158                    117,240       117,240       5,856,918

2024                (5,174,304)                      1,114,396                         1,114,396                    117,240       117,240          997,156

    NPV  @

                         10%                                                                           13,063,619              304,770           13,368,389                    5,879,352          366,066      6,245,418           7,122,971

                         Economic Rate of Return                                                                                                                                                                                                       24.3%

8. Base Case with Environmental Benefit. Below is the breakdown of costs and benefits with environmental benefits. 

Table A4.6. Project Net Economic Benefit Evaluation (Including Environmental Benefit)

                                      (1)                      (2)                       (3)                     (4)                    (5)                        (6)                     (7)               (8)                (9)                 (10)

2009                                      -                         -                                         -                                   -                         -                             -                     165,429             1,654              167,083          (167,083) 2010                                 -                         -                            -                                   -                        -                             -                    992,093           11,575          1,003,668       (1,003,668)

2011                  (677,377)                       -                                           -                            232,670                             6,306,092                                 6,538,762                 764,002           19,215              783,217        5,755,545

2012                  369,290                       -                         -          (132,186)         (3,437,929)                  (3,570,115)       543,934        24,655          568,588      (4,138,703) 2013           (1,104,409)          (11,114,013)              (9,674,206)           386,725         10,281,571                     994,090    1,229,067        36,945       1,266,012         (271,922) 2014             (132,847)              4,644,712              4,307,657             45,227           1,236,749                  5,589,632        (57,539)        36,370          (21,170)        5,610,802

2015            1,119,844             7,099,887               6,344,283          (249,319)        (10,425,267)                 (4,330,303)       220,323        38,573          258,896      (4,589,199) 2016            2,312,335             3,749,470               2,948,506          (420,963)        (21,526,841)               (18,999,299)       762,836        46,201          809,037    (19,808,336) 2017            1,217,917             7,817,071               6,144,952          (221,641)        (11,338,280)                 (5,414,969)    2,065,368        66,855       2,132,223      (7,547,192) 2018            1,283,483              7,059,596              5,274,538          (315,859)        (11,948,677)                 (6,989,997)    3,482,464      101,680       3,584,144    (10,574,141) 2019              362,568               7,059,596              5,080,146            (82,604)          (3,375,352)                  1,622,190    1,556,003      117,240       1,673,243           (51,053)

2020                  (649,393)             7,059,596                             4,960,296                        143,477                             6,045,566                               11,149,340                117,240              117,240       11,032,100

2021                  (1,762,897)                              7,059,596                            5,010,852                        377,770                           16,411,812                                21,800,434                117,240              117,240       21,683,194

2022                  (2,872,801)                               7,059,596                           5,059,408                        614,209                           26,744,543                                32,418,160                117,240              117,240       32,300,920

2023                  (4,028,822)                              7,059,596                            5,110,479                        863,679                           37,506,601                                43,480,759                117,240              117,240       43,363,519

2024                  (5,174,304)                          1,114,396                                   1,114,396             1,030,064           1,030,064             84,331

    NPV  @

                        10%                                                                      13,063,619               304,770               6,182,994                   19,551,383        5,879,352          366,066          6,245,418         13,305,965

                         Economic Rate of Return                                                                                                                                                                                                           27.1%

9. Base case comparison. It’s very important to point out that the economic analysis at appraisal only quantified the net economic benefit from avoided fuel cost while the economic analysis at additional financing appraisal only focused on reduced outage cost. Therefore, in order to compare ex-ante and ex-post net economic analysis, the two ex-ante analyses need to be harmonized and consolidated. Harmonized total ex-ante NPV is roughly estimated at US$18.07 million. In comparison, ex-post NPV is lower at US$7.12 million. Two driving factors are the lower-than-expected oil price and reduction of capital investment from US$17.00 million to US$11.72 million. Harmonized ex-ante ERR has not been calculated due to methodological constraints and lack of sufficient supporting data. However, the EIRR calculated at completion nevertheless demonstrates comparable economic viability of the project broadly consistent with expectations at appraisal and at the stage of additional financing. 

Table A4.7. Comparison of NPV and EIRR 

                                                                                Appraisal       AF Appraisal          Harmonized                   ICR 

                                                                                                                                                                       Ex-ante Total 

10. Sensitivity analysis.

•  A sensitivity analysis has been performed on annual project O&M cost, in order to evaluate the impact of variation in O&M on economic viability of the project. The results are presented in the table below and it shows that the economic rate of return of the project is resilient to future changes in the generation facilities. 

Table A4.8. Sensitivity Analysis 

• Another sensitivity analysis has been performed on the discount rate. 10% was used according to the old guidance note on “Discounting Costs and Benefits in Economic Analysis of World Bank Projects”. However, according to the new guidance note (2016), a discount rate of 2 times the GDP growth rate is recommended. Therefore, the GDP growth rate of the Solomon Islands in 2018 and geometric mean of the past 10 years are used as the other cases. It also indicates that the economic rate of return of the project is resilient to the discount rate used. 

Table A4.9. Sensitivity Analysis 

FINANCIAL ANALYSIS 

11. An ex-post financial analysis of the project (not the Solomon Power as an enterprise or a sector) was also carried out using the same method of evaluation “cost-benefit analysis” with the same discount rate of 10%. In sum, at completion, the project has a Financial NPV of US$5.63 million while Financial Internal Rate of Return (FIRR) stands at 21.8 percent, which far exceeds the estimated project Weighted Average Cost of Capital (WACC) of 3.6%. A summary of the results, assumptions and detailed analysis is presented in the following sections.  

Table A4.10. Summary of Financial Benefits and Costs (US$) 

                                        FINANCIAL BENEFITS                                                                                                                  

                                           Incremental revenue from reduction of loss                                         6,793,190  

                                            Incremental revenue from reduction of outage                                 12,520,779 

                                        FINANCIAL COSTS                                                                                                                        

                                            Capital Investment                                                                                           9,991,496  

                                            Incremental Fuel & Oil Consumption                                                       3,072,026  

                                            O&M                                                                                                                          622,100  

1. The main financial benefits considered in this analysis are tariff revenue from incremental power consumptions by the customers due to reduction of energy losses and reduction of outage, which is in line with the two economic benefits examined in economic analysis. However, it’s important to point out that financial benefit from reduction of non-technical losses is included here since it’s the transfer payment from the customers to SIEA. 

1. On the other hand, three main financial costs contributed to achieve the above-mentioned financial benefits: total project capital investment, fuel and oil cost for the incremental power consumption, and the extra O&M cost. Here the capital investment included the IDA grant, IDA credit, and the US$8.20 million equity invested by SIEA. Since the year-by-year breakdown of SIEA equity invested to different components of the project is not available, it was proportionally pegged to the actual disbursement by the World Bank. In addition, only incremental revenue from reduction of outage will result in incremental fuel & oil consumption. 

1. Key assumptions are listed below.  

• Total World Bank capital investment was US$11.72 million, 68.94% of planned original and additional financing.  
• 10% discount rate. 
• Operation and maintenance costs are estimated at 1% of investment costs considering improvement of efficiency after project implementation.  
• Load factor at 62%. 
• 0% corporate income tax per Electricity Act 1969. 

1. Below please find the year-by-year breakdown of the financial analysis. 

Table A4.11. Detailed Financial Benefits and Costs 

                                  (1)                    (2)                    (3)                   (4)                     (5)                   (6)                   (7)                   (8)                  (9)                 (10)

2009             -                 -             -                -               -       281,134              -         2,811      283,945     (283,945) 2010             -                 -             -                -               -    1,685,983              -       19,671   1,705,654  (1,705,654) 2011     784,834                 -     530,072                -        530,072    1,298,361              -       32,655  1,331,015     (800,943) 2012    (443,692)                 -    (358,217)                -      (358,217)       924,372              -       41,898      966,271  (1,324,488)

2013           2,640,224              (11,619,937)   2,298,186               (10,114,588)    (7,816,402)    2,088,702           (3,998,492)       62,786                  (1,847,004)  (5,969,398)

2014           1,626,512                 4,486,594                 1,508,480                        4,161,013                    5,669,493                        (97,784)    1,499,995                     61,808   1,464,019                      4,205,474

2015           847,908       6,939,924     757,670      6,201,344     6,959,014       374,421    1,562,977       65,552   2,002,950    4,956,064 2016    (411,889)       3,496,193    (323,901)      2,749,334     2,425,433    1,296,380       630,630       78,516   2,005,525      419,908

2017           1,299,818                 8,097,635                 1,021,779                        6,365,502                    7,387,281                    3,509,931                     1,472,008                      113,615    5,095,554                      2,291,728

2018           2,036,450                 6,664,223                 1,521,522                        4,979,138                    6,500,660                    5,918,173                     1,669,814                      172,797    7,760,784                    (1,260,124)

2019           2,280,349                 7,059,596                 1,640,959                        5,080,146                    6,721,105                    2,644,304                     1,669,222                      199,240    4,512,766                      2,208,339

2020           2,488,333                 7,059,596                 1,748,382                        4,960,296                    6,708,678                    1,618,605                      199,240    1,817,845                      4,890,833

2021           2,758,330                 7,059,596                 1,957,844                        5,010,852                    6,968,696                    1,569,761                      199,240    1,769,001                      5,199,695

2022           3,475,872                 7,059,596                 2,491,057                        5,059,408                    7,550,465                    1,566,054                      199,240    1,765,294                      5,785,171

2023           4,317,098                 7,059,596                 3,125,170                        5,110,479                    8,235,649                    1,570,120                      199,240    1,769,360                      6,466,289

                                                                                                           -                                                            199,240          199,240         (199,240)

    FNPV  @

                   10%                                                           6,793,190        12,520,779      19,313,969        9,991,496        3,072,026         622,100      13,685,622       5,628,347

               Financial Rate of Return                                                                                                                                                                                                         21.8%

1. Base case comparison. It’s clear that the project generated a positive FNPV of US$5.63 million, which indicates that the project is financially viable. Also, FIRR far exceeds the WACC of 3.6%.  

1. In order to calculate WACC, the cost of IDA grant, credit and SIEA equity are all needed. However, cost of equity of SIEA is not available nor disclosed in SIEA’s annual report. There are several ways to estimate such cost of equity. Since SIEA is a 100% SOE of SIG, 6.5%^[17] interest rate of the $150 million Domestic Development Bonds issued by SIG to the Solomon Islands National Provident Fund Board (SINPFB) in 2017 could be used as a benchmark, resulting in a WACC of 3.6%. On the other hand, if we use the SIG long-term government bond yield of 3.24%^[18], the WACC will further decrease to 2.3%. In either case, FIRR is far larger than the WACC, which made the project financially viable and attractive. Detailed calculation of WACC is illustrated in Table A4.11.

Table A4.11. SISEP - Weighted Average Cost of Capital (WACC) 

18. Sensitivity analysis.

• A sensitivity analysis has been performed on annual project O&M cost, in order to evaluate the impact of variation in O&M on financial viability of the project. The results are presented in the table below and it shows that the financial rate of return of the project is resilient to future changes in the O&M cost.

Table A4.12. Sensitivity Analysis against O&M Cost 

• Another sensitivity analysis has been performed on the discount rate. 10% was used according to the old guidance note on “Discounting Costs and Benefits in Economic Analysis of World Bank Projects”. However, according to the new guidance note (2016), a discount rate of 2 times the GDP growth rate is recommended. Therefore, the GDP growth rate of the Solomon Islands in 2018 and geometric mean of the past 10 years are used as the other cases. It also indicates that the financial rate of return of the project is resilient to the discount rate used.

Table A4.9. Sensitivity Analysis against Discount Rate 

Financial Sustainability Analysis of Solomon Islands 

Electricity Authority (SIEA) 

Financial Performance and Sustainability 

1. SIEA financial performance has considerably improved since 2006, becoming profitable in 2011. The SIEA incurred losses of SBD13 million and SBD37 million, in 2006 and 2007 respectively. In April 2008 when losses were SBD17 million, the Government agreed to a debt restructuring scheme through which approximately SBD200 million owed by the SIEA to the Government was written off. In return, the SIEA wrote off SBD32 million owed to SIEA by other government entities in 2009. This was the main contributor to the loss of SBD9 million that year. In 2010, losses were SBD70 million because the escalation of the outstanding receivables from government entities, mainly Solomon Islands Water Authority (SIWA), resulted in SIEA making a provision for bad debts of SBD57 million. In May 2012, a debt settlement agreement was signed between the two parties for SIEA to convert SBD7.5 million of outstanding dues into a loan to be repaid by SIWA over a period of eight years commencing 1 January 2013 at an interest rate of 0%. SIEA turned profitable in 2011 with a reported profit of SBD53 million. At the same time, the Solomon Islands Government (SIG) committed to reform and restructure SIWA, to place it on more commercial footing, and allow its water prices to be adjusted for changes in the electricity prices. This reform of SIWA, strongly supported by the SIG, the new SIWA Board and Management team – with financial support from Australia and Japan, is what was missing when the 2008 debt restructure was implemented. The reforms to SIWA have been crucial to the improved performance of SIEA since SIWA is SIEAs largest single customer. This was a condition precedent for the IDA Grant that established SISEP (P100311). This debt restructure followed years of payment difficulties between SOEs in the Solomon Islands, with several SOEs, particularly SIWA, owing considerable debts to SIEA. In 2012, the SIEA had an operating income of SBD414 million, net profit of SBD68 million, and had an asset base of SBD516 million.
2. By 2018, the SIEA had an operating income of SBD469 million, net profit of SBD80.1 million, and had an asset base of SBD1292 million.
3. The projected financial performance of the SIEA following the implementation of the SISEP (detailed in Table 1) shows that the project has a positive impact on SIEA’s performance. Throughout the life of the project and beyond, total revenues, operating income and net profit are projected to increase. Liquidity remains high with a current ratio well above 1 (lowest point is 8.5 in 2019). The debt to equity ratio never approaches 30:70, given the SIEA’s aversion to debt, peaking at just 18:82 in 2018, before falling over the remainder of the project. The profitability of the SIEA is projected to increase gradually over the life of the project, with net profit margins increasing from 17% in 2013 to 44.9% in 2033 and an average annual net profit of 37.0% over 20 years.
4. This analysis concludes that the SIEA is more than capable of servicing its current level of debt, which comprises just the US$6.0 million IDA Credit. Furthermore, the profitability of the SIEA is projected to increase significantly over the life of the program.

Conclusion 

1. Based on the current financial projections, it appears that there is scope for SIEA to take on additional debt to finance its current capital expenditure program, including SISEP and other priority projects (the construction of a new powerhouse at Lungga Power Station and installation of four 2.5 MW diesel generators) worthy SBD350.0 million (US$47.6 million). There also appears to be scope for the SIEA to further extend the size of its capital expenditure program, and further expand access to electricity services across the Solomon Islands. 
2. It is understood that a further tariff review is planned, which will take into account future investment requirements to increase access to electricity, improve reliability and quality of supply, and reduce operating costs by increasing the use of renewables in the power generation (i.e., solar, hydro) and reduce the heavy reliance on diesel-fired generation. That review should ensure the tariff methodology is set to more affordable levels over time.  

Table 1 – Projected financial performance of the SIEA, including CAPEX projects to be funded through ID