Report and Recommendation of the President

to the Board of Directors

Sri Lanka
Project Number: 44469
May 2013

Proposed Loans
Federated States of Micronesia: Yap Renewable
Energy Development Project
 CURRENCY EQUIVALENTS

The currency of the Federated States of Micronesia is the United States dollar.

ABBREVIATIONS

ADB – Asian Development Bank

ADF – Asian Development Fund
EIRR – economic internal rate of return
ENPV – economic net present value
FIRR – financial internal rate of return
FNPV – financial net present value
FSM – Federated States of Micronesia
LCOE – levelized cost of energy
LIBOR – London interbank offered rate
NPV – net present value
OCR – ordinary capital resources
PMU – project management unit
SDR – special drawing right
YSPSC – Yap State Public Services Corporation

WEIGHTS AND MEASURES

GWh – gigawatt-hour
km – kilometer
kW – kilowatt
kWh – kilowatt-hour
MW – megawatt
MWh – megawatt-hour

NOTE

In this report, "$" refers to US dollars.

Vice-President S. Groff, Operations 2
Director General X. Yao, Pacific Department (PARD)
Director R. Guild, Transport, Energy and Natural Resources Division, PARD

Team leader A. Maxwell, Senior Energy Specialist, PARD

Team members P. Hattle, Energy Specialist, PARD
S. Lee, Principal Social Development Specialist (Gender and Development),
PARD
N. Sapkota, Safeguards Specialist, PARD
A. Syed, Counsel, Office of the General Counsel
M. Tonizzo, Young Professional, PARD

Peer reviewer L. George, Energy Specialist, South Asia Department

In preparing any country program or strategy, financing any project, or by making any
designation of or reference to a particular territory or geographic area in this document, the
Asian Development Bank does not intend to make any judgments as to the legal or other status
of any territory or area.
 CONTENTS
Page
PROJECT AT A GLANCE
I. THE PROPOSAL 1
II. THE PROJECT 1
A. Rationale 1
B. Impact and Outcome 2
C. Outputs 3
D. Investment and Financing Plans 3
E. Implementation Arrangements 5
III. DUE DILIGENCE 6
A. Technical 6
B. Economic and Financial 6
C. Governance 7
D. Poverty and Social 8
E. Safeguards 8
F. Risks and Mitigating Measures 9
IV. ASSURANCES AND CONDITIONS 10
V. RECOMMENDATION 10

APPENDIXES
1. Design and Monitoring Framework 11
2. List of Linked Documents 14
 PROJECT AT A GLANCE

1. Project Name: Yap Renewable Energy Development Project 2. Project Number: 44469-013
3. Country: Federated States of 4. Department/Division: Pacific Department/Transport, Energy and Natural Resources Division
Micronesia
5. Sector Classification:
Sectors Primary Subsectors
Energy √ Renewable energy
Energy efficiency and conservation
6. Thematic Classification:
Themes Primary Subthemes
Economic growth √ Promoting macroeconomic stability
Environmental sustainability Natural resources conservation
6a. Climate Change Impact 6b. Gender Mainstreaming
Adaptation Low Gender equity theme (GEN)
Mitigation High
Effective gender mainstreaming (EGM) √
Some gender benefits (SGB)
No gender elements (NGE)
7. Targeting Classification: 8. Location Impact:
Targeted Intervention National High
Geographic Income Urban High
General Millennium
dimensions of poverty at
Intervention development
inclusive household
goals
growth level
√
9. Project Risk Categorization: Complex

10. Safeguards Categorization:

Environment B
Involuntary resettlement B
Indigenous peoples C
11. ADB Financing:
Sovereign/Nonsovereign Modality Source Amount ($ Million)
Sovereign Project loan Asian Development Fund 4.4
Sovereign Project loan Ordinary capital resources 4.7
Total 9.0
12. Cofinancing:
No Cofinancing available.

13. Counterpart Financing:

Source Amount ($ Million)
Government 2.1
Total 2.1
14. Aid Effectiveness:
Parallel project implementation unit Yes
Program-based approach No
 I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on proposed loans
to Yap State, to be guaranteed by the Federated States of Micronesia (FSM), for the Yap
Renewable Energy Development Project.1

2. The project will reduce fossil fuel consumption in Yap through the development of
renewable energy and stronger supply-side energy efficiency of the current electricity grid. The
project will include (i) construction of about 1.4 megawatts (MW) of wind power, (ii) construction
of about 300 kilowatts (kW) of grid-connected solar power, (iii) installation of a 1.8 MW diesel
generator to improve the efficiency of the current power generation facilities, and (iv) capacity
building within the Yap power utility and communities.2

II. THE PROJECT

A. Rationale

3. The project will support the development of the power system in Yap so as to reduce
dependency on imported diesel. This will be achieved through expanding renewable power
generation and improving the supply-side efficiencies of power delivery.

4. Yap, with a population of 11,400, is one of four states within the FSM with a total
population of 107,000. Currently, Yap is 100% dependent on imported diesel for power
generation on the main island (referred to as Yap proper). Power generation is supplied by Yap
State Public Services Corporation (YSPSC), which is a 100% state-owned corporatized utility.
Each state in the FSM has a separate utility corporation with separate tariff structures. About
65% of the population of Yap lives on Yap proper, the others live on the outer islands. There is a
single power grid on Yap proper with an installed capacity of 8.3 MW and peak load 2.4 MW,
serving about 1,500 residential customers. Access to electricity at an estimated 97% is high on
Yap proper.3

5. Due to remoteness and high diesel transportation costs, power tariffs are high and the
Yap economy is very vulnerable to fuel price shocks. In 2011, the electricity tariff reached $0.35
per kilowatt-hour (kWh) for residential customers, $0.42/kWh for commercial customers, and
$0.77/kWh for public institutions. The late 2011 total cost of energy generated and delivered
was $0.54/kWh.4 In 2008, the value of diesel fuel imported by Yap was the highest single import
cost item with over 80% of imported diesel fuel used for power generation. Fuel imports
represented about 15% of Yap’s gross domestic product in 2008. Power tariffs currently allow
for full cost recovery for YSPSC to undertake required operation and maintenance activities and
service long-term debt. YSPSC has a project in the water sector financed by the Asian
Development Bank (ADB), and has been maintaining the repayments to the state government
satisfactorily.5

1
The design and monitoring framework is in Appendix 1.
2
Asian Development Bank (ADB) technical assistance supported the preparation of the project. ADB. 2009.
Technical Assistance for Strengthening the Capacity of Pacific Developing Member Countries to Respond to
Climate Change. Manila. (TA 7394-REG).
3
As a result, there is very limited private installed backup generation and limited unmet demand on Yap proper.
4
The tariff structure includes a lifeline tariff to support low-income households.
5
ADB. 1996. Water Supply and Sanitation Project (L1459-FSM). Manila. ADB has also supported the Yap State
through ADB. 2004. Omnibus Infrastructure Development Project. Manila (L2099-FSM (SF) and L2100-FSM;
implementing agency: Gagil-Tomil Water Authority).
2

6. The power supply in Yap is relatively stable and YSPSC pursues a well-defined program
of preventive maintenance, which ensures reliable power supply to a relatively compact power
system.6 As a result there are relatively high efficiencies on the supply side for transmission and
distribution. But the diesel generators are oversized, resulting in low supply-side efficiencies for
generation.7 Due to a predominance of traditional buildings, residential electricity consumption is
low at about 180 kWh/month per residential meter, and relatively efficient; however, power
usage by government offices is rather high.8 Due to low terrain and small catchments, Yap does
not have potential for hydropower. There is currently no wind power generation in Yap, but there
are several solar power mini-grids in the outer islands that YSPSC manages. Wind and solar
power are the only forms of renewable energy currently considered suitable for Yap. As a result
of its operation of the outer-island solar installations, YSPSC has experience in installation and
operation of grid-connected solar power.

7. The project is proposing to support the (i) development of grid-connected wind power
generation of about 1.4 MW, (ii) development of grid-connected solar power of about 300 kW,
(iii) improvement of generation efficiencies in existing diesel generation through a new, more
efficient 1.8 MW diesel generator, and (iv) provision of project management support and
capacity building for YSPSC. It is estimated that the project will enable Yap to convert 22.2% of
its power generation to renewable energy. Additional fuel savings through stronger supply-side
energy efficiency will lower diesel consumption for power generation by 25%.9 Conversion to
renewable energy will stabilize power tariffs by reducing the transient impact of fluctuating diesel
prices, and enable YSPSC to control tariff increases through partial hedging against rising
diesel prices. Grid analysis has indicated that grid integration of this level of intermittent
renewable energy will not cause grid instability.

8. The project is in line with ADB’s country operations business plan, 2012–201410 for the
FSM, which prioritizes energy as a key area of support, and with the FSM’s draft National
Energy Policy, 11 which includes the draft Yap State Energy Action Plan. The draft National
Energy Policy sets a national renewable energy generation target of 30% by 2020. All project
outputs are listed in the Yap State Energy Action Plan as priority activities. The project will
enable the State of Yap to meet about 74% of its contribution to the national energy target.

B. Impact and Outcome

9. The impact of the project will be that Yap's energy security has improved. The outcome
of the project will be that YSPSC supplies more clean, renewable energy to Yap.

6
The distribution system consists of 124 kilometers of 13.8-kilovolt overhead lines. There is no high-voltage
transmission line.
7
Current generator configuration is 2 x 3.3 MW Deutz, 2 x 0.5 MW White Superiors, and 1 x 0.7 MW Alco diesel
generators. Power is primarily supplied by the Deutz engines. The White Superiors and the Alco are suitable for
backup but not for baseload generation. Peak demand of 2.4 MW and night load of around 1.5 MW mean that the
Deutz engines are generally operated at low loading and low efficiencies. Generation was installed to support
industrial demand, which has subsequently declined.
8
Demand-side energy audits are being finalized for government buildings, and the European Union is proposing to
support implementation of the audit reports.
9
Due to current high levels of access to electricity (an estimated 97%), the project will not increase energy access
on Yap proper. Access rates on the outer islands are lower. However, the European Union is assisting Yap in
installing solar-based mini-grids throughout the outer islands.
10
ADB. 2011. Country Operations Business Plan: Federated States of Micronesia, 2012–2014. Manila.
11
Approval of the Draft National Energy Policy is anticipated by June 2013.
 3

C. Outputs

10. The project will have the following outputs:

11. Wind power. YSPSC installs generation of about 1.4 MW to be constructed in two
phases (about 0.5 MW in phase 1 and about 0.9 MW in phase 2). The wind farm will be built on
a ridgeline adjacent to the main urban center (Colonia) on Yap proper. The wind farm will
include (i) wind turbines with anticipated height of about 60 meters high, and capacity of 100–
300 kW each, designed to withstand typhoon conditions; (ii) underground power lines and
electrical systems; (iii) about 800 meters of above-ground distribution connection, including
transformer, to the local grid; (iv) 2 kilometers (km) of access road, and (v) a communication
system. Both stages of the wind farm will be tendered through a single design–build–operate–
transfer contract. The wind farm is anticipated to generate 2.12 gigawatt-hours (GWh) per
annum, equal to 18.2% of the current energy delivery in Yap.12

12. Solar power. YSPSC installs generation of about 300 kW through grid-connected solar
panels on government building roofs on about 21 buildings at four sites across Yap. It will own
and operate the installations. This output will include installation of solar panels, inverters, and
related electrical equipment to connect to the grid. Training will be provided to local companies
for construction of the solar installations and to establish local maintenance capacity. Solar
power is expected to provide 0.46 GWh/annum to the grid, equal to 4.0% of current energy
delivery in Yap.

13. Diesel power. YSPSC improves the efficiency of diesel power generation by installing a
new high-efficiency, medium-speed diesel engine of 1.8 MW capacity, providing
9.9 GWh/annum. During off-peak hours of operation, the generator will run at significantly higher
fuel efficiency of 15.0kWh/gallon, than the existing diesel generators which operate at 13.8
kWh/gallon.

14. Efficient project management services. This means establishing a project

management unit (PMU) that will provide efficient technical design, management, and
construction supervision services. The output will finance consultants to undertake training
activities for PMU staff and YSPSC management, including technical capacity training, project
management training, and gender awareness training.

D. Investment and Financing Plans

15. The project is estimated to cost $11.16 million, as shown in Table 1.

12
The maximum combined phase 1 wind and solar grid integration is anticipated to peak at 40%. The grid will be
analyzed during phase 1 to determine system constraints for the development of phase 2 wind generation.
4

Table 1: Project Investment Plan

($ million)
a
Item Amount
b
A. Base Cost
1. Wind farm 5.23
2. Solar installations 1.13
3. Diesel generator 2.43
4. Project management and capacity building 0.90
Subtotal (A) 9.69
c
B. Contingencies 1.44
d
C. Financing Charges During Implementation 0.03
e
Total (A+B+C) 11.16
a
Includes taxes and duties of $0.35 million to be financed from government resources.
b
In mid-2011 prices.
c
Physical contingencies computed at 10% for solar and diesel components; and 15% for wind farm design–build–
operate–transfer contract.
d
Includes interest and commitment charges. Interest during construction for ADB’s ordinary capital resources loan
has been computed at the 5-year forward London interbank offered rate plus a 0.4% spread, 0.2% maturity
charge and a commitment charge of 0.15% per year. Interest during construction for the ADB Special Funds
resources has been computed at 2.0% per annum.
e
The ADB loans may finance transportation and insurance costs.
Source: Asian Development Bank.

16. The national and state governments have requested a sovereign-guaranteed loan of
$4,680,000 from ADB’s ordinary capital resources (OCR). The OCR loan will have a 25-year
term, including a grace period of 5 years, an annual interest rate determined in accordance with
ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of
0.15% per year, and such other terms and conditions as are set forth in the draft guarantee and
loan agreements. The national and state governments have requested that repayment will
follow the custom-tailored repayment option, and that the repayment dates will be 1 June and 1
December. Based on the above loan terms and these repayment option and dates, the average
loan maturity is 16.67 years, which means that the loan will be subject to a 0.20% maturity
premium. Under the custom-tailored repayment method each installment is calculated as a
percentage of the total loan amount as follows: 1% from the 1st to the 6th principal repayment
date; 2% from the 7th to the 14th principal repayment date; and 3% from the 15th to the 40th
principal repayment date.

17. The national and state governments have also requested a sovereign-guaranteed loan
in various currencies equivalent to SDR2,896,000 from ADB’s Special Funds (ADF) resources
to help finance the project. The loan will have a 25-year term, including a grace period of 5
years, an interest rate of 2.0% per annum, and such other terms and conditions as are set forth
in the draft guarantee and loan agreements.13

18. The Government of the FSM will provide a sovereign guarantee for the OCR loan and
the ADF loan, in form and substance satisfactory to ADB, as a condition precedent to the
effectiveness of the OCR loan and ADF loan. The Yap State Government will onlend the
proceeds of the OCR loan and the ADF loan to YSPSC under subsidiary loan agreements
acceptable to ADB. The terms for onlending the proceeds of the OCR loan and ADF loan will
include the same respective interest rates and repayment periods as those of the OCR loan and
ADF loan.

13
Financing charges during implementation under the ADF loan will be capitalized .
 5

19. The Yap State Government will finance the remainder of the total project cost in the
amount of $2.12 million, including local taxes and duties. The financing plan is in Table 2.

Table 2: Financing Plan

Source Amount ($ million) Share of Total (%)
Asian Development Bank
Special Funds resources (loan) 4.36 39.1
Ordinary capital resources (loan) 4.68 41.9
Yap State Government 2.12 19.0
Total 11.16 100.0
Source: Asian Development Bank estimates

E. Implementation Arrangements

20. YSPSC will be the executing agency for the project. A PMU will be established within
YSPSC and will be responsible for implementing the project. YSPSC will provide a PMU project
manager (senior technical manager), accounting support, and a lands officer. The project will
finance additional staff, equipment, and office furnishings to support the PMU in implementing
the outputs. The additional staffing will consist of an electrical engineer (solar), electrical
engineer (wind), environment specialist, social specialist (to oversee implementation of the
gender action and resettlement plans), structural engineer, procurement specialist and wind
monitoring specialist. Consulting firms will be engaged using the quality- and cost-based
selection method with a quality–cost ratio of 90:10, which is considered justified due to the
technical complexity of the wind and solar components. Consultants may also be recruited
through individual consultant selection, which is considered justified due to the difficulties in
finding consulting companies that have on staff the broad technical spread of required
specialists, and owing to the limited pool of consultants with the required technical and country
expertise. ADB financing for PMU strengthening is an integral part of ADB’s support for capacity
development output. All consultants will be recruited in accordance with ADB’s Guidelines on
the Use of Consultants (2010, as amended from time to time). The PMU will be responsible for
engaging all consulting services, equipment, and civil works contracts. A project steering
committee will oversee implementation, monitor progress, and provide guidance to the
executing agency. The committee will meet at least quarterly and will be chaired by the
lieutenant governor of Yap. YSPSC will host the project steering committee and will act as the
secretariat.

21. The project will be implemented over 4.5 years, with completion estimated by June
2017. To expedite implementation, the Yap State Government has requested and ADB has
approved advance procurement action for the engagement of design and supervision
consultants. ADB has informed the Yap State Government that approval of advance
procurement action does not commit ADB to finance the project. The implementation
arrangements are summarized in Table 3 and described in detail in the project administration
manual.14

Table 3: Implementation Arrangements

Aspects Arrangements
Implementation period June 2013–December 2017
Estimated completion date 30 June 2017
Management

14
Project Administration Manual (accessible from the list of linked documents in Appendix 2).
6

Aspects Arrangements
(i) Oversight body Yap Renewable Energy Development Project Steering Committee
Lieutenant governor of Yap State (chair)
Department of Works and Transportation, Historical Preservation
Office, Environmental Protection Agency, Office of Planning and
Budget, Division of Land Resources, Federated States of
Micronesia Department of Resources and Development Energy
Division (members)
(ii) Executing agency YSPSC
(iii) Key implementing agencies Not applicable
(iv) Implementation unit The project management unit will be established within YSPSC,
supported by 3 YSPSC staff and 7 international consultants
(intermittent)
Procurement International 5 contracts $7,630,000
competitive bidding
Shopping 6 contracts $295,000
Consulting services QCBS and ICS 25 person-months $900,000

Retroactive financing and advance Advance contracting for design and supervision consultants
contracting
Disbursement The loan proceeds will be disbursed in accordance with ADB's Loan
Disbursement Handbook (2012, as amended from time to time) and
detailed arrangements agreed between the government and ADB.
ADB = Asian Development Bank, ICS = individual consultant selection, QCBS = quality- and cost-based selection,
YSPSC = Yap State Public Service Corporation.
Source: Asian Development Bank estimates.

III. DUE DILIGENCE

A. Technical

22. The proposed wind, solar, and diesel generator components have been assessed to be
technically viable. For the wind farm design, wind resource modeling was carried out to
determine the most suitable site, and site-specific wind measurements helped assess financial
viability based on a conservative 90% exceedance probability scenario. 15 Data will be
reconfirmed through a site-specific wind monitoring mast that will be installed for monitoring
over a full year. For the solar installations, available panel technology was reviewed before
selection. Specifications tailored to the Pacific were prepared to improve system sustainability.
For the diesel generator component, the design was based on extensive experience in Yap in
operation and maintenance of diesel generators. Alternative designs were assessed to ensure
least-cost design. The proposed solar and wind technology is installed across the Pacific and
has a proven track record of reliability in Pacific conditions. Standard equipment of known
design was selected to increase the availability of parts.

B. Economic and Financial

23. Economic. The economic internal rate of return (EIRR) of the consolidated project is
12.9%, with an economic net present value (ENPV) of $0.57 million. At the 90% wind speed
exceedance level, the two-stage wind project produces 2.1 GWh/year. At that output, the EIRR
is 11.5%, and the levelized cost of energy (LCOE) is $0.39/kWh. If only the first stage is

15
This is the probability that the wind resource used in the design will be achieved 90% of the time.
 7

considered, at the 90% exceedance level the EIRR is 8.9% and the LCOE is $0.44/kWh.16 The
300 kW grid-connected solar component, producing 0.44 GWh of energy annually, has an EIRR
of 11.4% and LCOE of $0.40/kWh. The 1.8 MW diesel generator will produce 9.9 GWh of
energy annually and will have an EIRR of 15.6%, ENPV of $0.79 million, and LCOE of
$0.40/kWh, including initial cost and fuel and maintenance costs calculated over its 25-year life
cycle.

24. Financial. The financial economic internal rate of return (FIRR) of the consolidated
project (all three energy components combined, under the 2-stage wind case) is 13.0%, with a
financial net present value (FNPV) of $15.8 million. This compares favorably to the weighted
average cost of capital of 1.86%. The full two-stage wind energy component has an FIRR of
11.4% and a FNPV of $7.3 million. 17 The financial LCOE from the two-stage wind project,
calculated over its 25-year life cycle, is $0.22/kWh. If only the first stage is considered, the wind
farm has an FIRR of 8.7% and an FNPV of $2.3 million. The financial LCOE from the single-
stage wind project is $0.26/kWh. The grid-connected solar component has an FIRR of 11.6%
and an NPV of $2.0 million. The LCOE from the solar installation, calculated over its 25-year life
cycle, is $0.20/kWh. The diesel generation component has an FIRR of 15.9% and an NPV of
$6.7 million. The LCOE, including initial cost and fuel and maintenance costs calculated over its
25-year life cycle, is $0.42/kWh.

C. Governance

25. Financial management. A financial management assessment was completed for

YSPSC, including a review of the accounting and reporting system, internal and external
auditing, fund disbursement, and information system.18 The assessment indicated that existing
accounting policies and procedures are adequate to accommodate the management
requirements of the project and that there are no significant weaknesses in YSPSC’s accounting
policies, information systems, or accounting and reporting procedures. The YSPSC has well-
developed capacity in financial management, and its qualified personnel includes an accounting
manager, a comptroller’s consultant (the position of comptroller is currently vacant), a payroll
accountant, a purchasing and supply accountant, and a customer service manager, supported
by clerks and other subordinate personnel. The accounting manager carries out internal audits
on an ongoing basis, with reporting to the board of directors, as the utility is too small to warrant
the creation of a separate internal auditing section. YSPSC utilizes the commercial software
package Peachtree for all accounting functions and financial reporting. A policies and procedure
manual guides accounting and other management functions. Staff qualifications and job
descriptions are contained in a personnel manual. The financial management assessment
indicated that YSPSC has adequate capacity to manage loan repayments and maintain
separate project accounts suitable for auditing purposes.

26. Procurement capacity. A procurement capacity assessment was completed for

YSPSC, which indicated that YSPSC has an established procurement unit with considerable
procurement experience. However, the experience is largely related to procurement of small
equipment packages, and YSPSC has limited experience in managing large contract packages
during either tender preparation or construction supervision. Additionally, while the capacity of
individual staff is relatively high, there is limited depth of capacity. There is also limited
16
The relatively low EIRR is considered justified due to the unquantified economic benefits related to reduced
maintenance costs and environmental benefits.
17
Based on a 90% exceedance level.
18
ADB. 2005. Financial Management and Analysis of Projects. Manila; ADB. 2009. Financial Due Diligence A
Methodology Note. Manila.
8

experience with ADB standard procurement documents. Based on this risk evaluation the PMU
was designed to include an international procurement specialist who will train YSPSC staff in
preparing tender documents for the design–build–operate–transfer contract for the wind farm,
and manage preparation of ADB standard tender documents.

27. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed
with the national and state governments and YSPSC. The specific policy requirements and
supplementary measures are described in the project administration manual.19

28. Private sector. Because of the small size of the Yap power system and the marginal
financial viability of the subprojects under commercial lending conditions, the state government
does not currently consider development of generation assets through independent power
producers. Due to the highly technical nature of wind power generation, the private sector will
be involved in long-term maintenance contracts for the wind farm. A long-term maintenance
contract will also be established for the new diesel generator, as is current practice for the
existing diesel generators. Capacity building activities will also be undertaken for local private
sector companies to support construction of the solar power generation.

D. Poverty and Social

29. The project will help reduce poverty by (i) stabilizing power tariffs for commercial and
domestic power consumers in Yap proper, including low-income households; (ii) engaging low-
income households, including landowners, to undertake construction projects; (iii) encouraging
private sector growth through stabilized power tariffs; (iv) providing technical training for local
contractors to develop a support industry for the solar installations; and (v) facilitating income
generation opportunities through wind farm designs that ensure tourism access to World War II
heritage sites and viewing points.

30. The project is categorized as effective gender mainstreaming. A gender action plan has
been developed based on gender analysis and community consultations, and includes specific
measures related to the construction of the wind farm and solar installations. Measures include
(i) women’s engagement in consultation activities, (ii) provision of gender awareness training to
target groups, (iii) training of women to participate in income generating activities (including
tourism activities related to the wind farm site), (iv) actions to encourage women’s participation
in project related contracts, and (v) collection of gender-related data for monitoring purposes.

E. Safeguards

31. Environment. The project has been classified as category B for environment following
ADB’s Safeguard Policy Statement. An initial environmental examination has been prepared for
the project. The main potential environmental impacts identified include (i) noise from the wind
turbines, (ii) impacts on flora and fauna during construction of the wind farm, and (iii) soil
erosion during construction of the wind farm. A heritage survey was conducted at the proposed
wind farm site, and sites to be avoided during construction were specified. Adequate mitigation
measures were incorporated into the environmental management plan as part of the initial
environmental examination. The plan will be included in the wind farm construction contract. A

19
Project Administration Manual (accessible from the list of linked documents in Appendix 2).
 9

climate change adaptation risk evaluation was conducted and will be incorporated in
infrastructure detail design.20

32. Involuntary resettlement and indigenous peoples. The project has been classified as
category B for involuntary resettlement and category C for indigenous peoples following ADB’s
Safeguard Policy Statement. The project does not involve physical displacement of people or
structures. There will be no impact on distinct and vulnerable indigenous peoples. The wind
farm to be built on Kabul and Madeqdeq ridges, however, requires acquisition of 7.5 hectares of
land. A resettlement plan has been prepared. YSPSC will update and finalize the plan during
project implementation after detailed design and survey of the wind farm. YSPSC will coordinate
with the state government, the Division of Land Resources, and other relevant government and
nongovernment agencies to implement and monitor the land acquisition and compensation
activities.

33. Safeguard documents have been endorsed by the Yap State Government, disclosed to
affected persons and local stakeholders, and posted on ADB's website. The project will support
capacity within YSPSC to manage safeguard aspects through international and national
environment, and social safeguard specialists who will be working within the PMU. They will
organize and conduct trainings on safeguards and other necessary skills to the relevant staff of
YSPSC, the Division of Land Resources, and other agencies that will be involved in the project’s
safeguard activities.

F. Risks and Mitigating Measures

34. Major risks and mitigating measures are summarized in Table 4 and described in detail
in the risk assessment and risk management plan. 21 The risks of the project have been
assessed and the benefits are expected to outweigh the costs.

Table 4: Summary of Risks and Mitigating Measures

Risks Mitigating Measures
Low capacity of local contractors results in Local contractors will be trained on the construction of solar
reliance on high-cost external contractors. installations. Outreach to contractors prior to bidding will
provide dialogue on perceived issues and development of
options to address perceived risks. Meetings will be held
with potential contractors to encourage engagement in
bidding process, in order to increase competition and lower
prices.
Insufficient procurement capacity within the International procurement specialists will be included in the
implementing agency to manage ADB PMU. PMU staff will be trained on ADB procurement
procurement procedures. procedures by June 2013.
Insufficient financial management capacity Measures will include (i) monitoring of financial
within the implementing agency. management during implementation, (ii) not using imprest
accounts, (iii) inclusion of financial specialists within the
PMU, (iv) capacity raining in financial management, (v)
requirement for submittal of annual project account audited
by an independent auditor, and (vi) PMU maintaining
separate project records and accounts.

20
Application for Clean Development Mechanism financing is not considered warranted as the transaction costs
would exceed the estimated revenue from CO2 emission reductions.
21
Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).
10

Risks Mitigating Measures

Landowner disputes delay implementation. The PMU will include international consultants to ensure
that landowner issues are monitored and managed.
Poor technical input at specification The PMU will be adequately staffed with technical expertise
preparation phase leads to technical to prepare satisfactory technical specifications for
failure. tendering.
Source: Asian Development Bank.

IV. ASSURANCES AND CONDITIONS

35. The Government of the State of Yap and YSPSC have assured ADB that
implementation of the project shall conform to all applicable ADB policies, including those
concerning anticorruption measures, safeguards, gender, procurement, consulting services, and
disbursement as described in detail in the project administration manual and loan documents.
The national and state governments and YSPSC have agreed with ADB on certain covenants
and specific assurances for the project, which are set forth in the loan, guarantee, and project
agreements. In particular, no withdrawals shall be made from the Loan Account until YSPSC
has executed license agreements for use of the 21 roof top sites identified for the installation of
the solar power generation panels. In particular, no withdrawals shall be made from the Loan
Account until YSPSC has executed license agreements for use of the 21 roof top sites identified
for the installation of the solar power generation panels.

V. RECOMMENDATION

36. I am satisfied that the proposed loans would comply with the Articles of Agreement of
the Asian Development Bank (ADB) and recommend that the Board approve

(i) the loan of $4,680,000 to Yap State, to be guaranteed by the Federated States of
Micronesia, for the Yap Renewable Energy Development Project, from ADB’s
ordinary capital resources, with interest to be determined in accordance with ADB’s
London interbank offered rate (LIBOR)-based lending facility; for a term of 25 years,
including a grace period of 5 years; and such other terms and conditions as are
substantially in accordance with those set forth in the draft loan, guarantee, and
project agreements presented to the Board; and

(ii) the loan in various currencies equivalent to SDR2,896,000 to Yap State, to be

guaranteed by the Federated States of Micronesia, for the Yap Renewable Energy
Development Project, from ADB’s Special Funds resources, with an interest charge
at the rate of 2.0% per annum during the grace period and thereafter; for a term of 25
years, including a grace period of 5 years; and such other terms and conditions as
are substantially in accordance with those set forth in the draft loan, guarantee and
project agreements presented to the Board.

Takehiko Nakao
President
28 May 2013
 Appendix 1 11

DESIGN AND MONITORING FRAMEWORK

Performance Targets and Data Sources and Assumptions and

Design Summary Indicators with Baselines Reporting Mechanisms Risks
Impact Risk
Energy security of Diesel imports to Yap for FSM annual national Reduction in diesel use
Yap has improved power generation reduced import–export statistics, by power sector is offset
by 25% (245,000 gallons) Yap State Office of by an increase in use in
by December 2019 Statistics other sectors e.g.,
(January 2012 baseline: transport
980,000 gallons)
Outcome
YSPSC supplies an Renewable energy YSPSC annual board
increased amount of generation increased as a report
clean and renewable percentage of the Yap
energy to Yap power generation to 22.2%
by December 2019
(January 2012
baseline: 0%)

Diesel generation YSPSC monthly board

efficiencies improve to report
14.6 kWh/gallon by June
2018 (January 2012
baseline: 13.8 kWh/gallon)

CO2 emissions reduced by YSPSC monthly board

3,000 tCO2e annually by report
December 2017 (January
2012 baseline 12,000
tCO2e)

Outputs Assumption
1. YSPSC installs YSPSC generates YSPSC annual board Tariff reform is
wind power 2.1 GWh per annum of report implemented to allow
generation wind power by December power system
2016 (January 2012 maintenance
baseline: 0.0 GWh)
Risks
The wind farm layout YSPSC annual board The utility does not
incorporates income report maintain sufficient
generation design technical staff to
(supporting tourism operate and maintain
through better access to renewable energy
WWII historical sites and technology
viewpoints) by January
2014 (including at least Land ownership and
50% participation by environmental issues
women as tour guides) delay feasibility studies.
(January 2012 baseline:
no tourism activity) Grid integration issues
prevent integration of
available intermittent
wind energy
12 Appendix 1

Performance Targets and Data Sources and Assumptions and

Design Summary Indicators with Baselines Reporting Mechanisms Risks
2. YSPSC installs YSPSC generates YSPSC annual board Risk
solar power 0.44 GWh per annum of report The utility does not
generation solar power by December maintain sufficient
2014 (January 2012 technical staff to
baseline: 0.0 GWh) operate and maintain
renewable energy
technology
Training activities for local Contractor training
participation in solar records, YSPSC as
construction contracts updated in the annual
(including 30% female YSPSC board report
participation in training and
construction) undertaken
by December 2014
(January 2012 baseline:
no such training done)

3. YSPSC improves YSPSC uses YSPSC annual board Assumption

efficiency of diesel 58,000 gallons less diesel report
YSPSC has adequate
power generation per annum for diesel-
staff to properly operate
generated power (5.9%
and maintain generator
less consumption) by June
to realize efficiency
2015 after improving diesel
improvements
generation efficiency.

4. Efficient project PMU meets annual target Project administration

management for contract awards and manual
services disbursements

Training activities for PMU

staff and YSPSC
management, including
gender awareness
training, conducted by
January 2013
 Appendix 1 13

Activities with Milestones Inputs

Asian Development Bank (ADF) $4.36 million
1. YSPSC installs wind power generation Asian Development Bank (OCR) $4.68 million
1.1 YSPSC completes detailed design of wind farm by Yap State Government $2.12 million
March 2014, including design to encourage tourism
(World War II heritage sites and viewing points)
1.2 YSPSC completes land acquisition by June 2013
1.3 YSPSC commissions phase 1 wind power by
December 2014
1.4 YSPSC commissions phase 2 wind power by
December 2016

2. YSPSC installs solar power generation

2.1 YSPSC completes detailed design of solar plant by
December 2013
2.2 YSPSC completes roof access agreements by
December 2012
2.3 YSPSC undertakes training of local contractors by
February 2014
2.4 YSPSC commissions solar plant by December
2014

3. YSPSC improves efficiencies of diesel power

generation
3.1 YSPSC completes detailed design of new
generator by January 2014
3.2 YSPSC commissions new generator by January
2015

4. Efficient project management services

4.1 PMU established within YSPSC by August 2013
4.2 Short-listing of consultants by October 2013
4.3 Award consulting contract by January 2013
4.4 Fielding of implementation consultants by February
2013

ADB = Asian Development Bank, CO2 = carbon dioxide, FSM = Federated States of Micronesia, kWh = kilowatt-hour,
GWh = gigawatt-hour, PMU = project management unit, tCO2e = tons of CO2 equivalent, YSPSC = Yap State Public
Service Corporation.
Note: 1 gallon = 3.785 liters.
Source: Asian Development Bank.
14 Appendix 2

LIST OF LINKED DOCUMENTS

http://adb.org/Documents/RRPs/?id=44469-013-3

1. Loan Agreement: Ordinary Operations

2. Loan Agreement: Special Operations
3. Guarantee Agreement
4. Project Agreement
5. Sector Assessment (Summary): Energy
6. Project Administration Manual
7. Contribution to the ADB Results Framework
8. Development Coordination
9. Financial Analysis
10. Economic Analysis
11. Country Economic Indicators
12. Summary Poverty Reduction and Social Strategy
13. Gender Action Plan
14. Initial Environmental Examination
15. Resettlement Plan
16. Risk Assessment and Risk Management Plan