World Bank to provide US$30 million loan for the Power Sector Financial Recovery Program- for-Results (PforR) for Armenia

ArmInfo. Armenian Parliament is discussing the Agreement with IBRD signed on May 12 2016, under which the World Bank will provide a US$30 million IBRD loan of variable spread (approximately 1.8%) with a 14.5-year grace period and the total repayment term of 25 years.

On April 28, the World Bank Board of Executive Directors approved a US$30 million loan for the Power Sector Financial Recovery Program-for-Results (PforR) for Armenia. This Project will support the Government's efforts to maintain adequate and reliable electricity supply by improving the financial condition and governance of the state-owned power generation companies and the private power distribution company, according to the WB website.

Submitting the document for ratification Deputy Minister of Energy and Natural Resources Areg Galstyan said the main part of the loan will be repaid in 2030-2040. The tranches will be issued in the period of 2016 up to July 31 2030. The loans will be provided to the Armenian NPP ($8.5mln) and Yerevan TPP ($21.5mln). Both the facilities must re-register the loans previously raised from the local commercial bank under high interests. In addition, the Yerevan TPP will redeem its debt to Gazprom Armenia for the gas supplied. The deputy minister said that no privatization of the state facilities is planned in the mid-term outlook. Consequently, the burden of the debt will be on the given two companies under the subcontract with the Finance Ministry. 

On April 28, speaking at a news conference in Yerevan, Laura E. Bailey, World Bank Country Manager for Armenia said: "Improvement of the financial standing and governance of the state-owned power generation companies, and a better managed financial relationship with the private power distribution company is critical for maintaining adequate and reliable electricity supply at affordable tariffs. "The Government is committed to improving the financial governance of these companies, and has already undertaken a number of steps in that direction as reflected in the Program for Financial Recovery of the Power Sector."

In her words, throughout the last five years, the state-owned generation companies have been experiencing a shortage of cash to finance key expenditures, because of lending and spending for purposes not related to their core business of generating and supplying energy. This is how the Armenian Nuclear Power Plant (ANPP) and Yerevan Thermal Power Pant (YTPC) have accumulated large cash deficits amounting to US$104 million which accounts to 80 percent of their total estimated revenues for 2015. If the financial difficulties of the ANPP and YTPC are not overcome, it will have significant impact on their ability to maintain the current levels of generation with resulting negative consequences on the cost and adequacy of electricity supply in the country. In 2012-2014, those two plants accounted for 42 percent of total annual electricity generated for domestic needs.  Inability of ANPP and YTPC to generate power at current levels could push up the average cost of electricity supply and possibly cause an electricity deficit, the source reports.

There are four results areas which this Program will achieve: elimination of cash outflows of state- owned power generation companies for non-core business related reasons; reduction of expensive commercial loans, recovery of receivables, and repayment of YTPC's payable for natural gas; setting of tariffs reflecting changes in the cost of electricity supply, and maintaining the generation capacity of the gas turbine at YTPC's Combined Cycle Gas Turbine (CCGT) plant. Since the end of January 2016, the generation companies were able to start repaying the loans because of the recovery of receivables from Electricity Network of Armenia (ENA), the only company operating the power distribution network. The recovery of receivables from ENA will allow financing the backlog of expenditures for critical repairs and maintenance, however, additional cash injection is needed to help YTPC and ANPP as they regain their solid financial condition. In 2012-2014, ENA suffered a cumulative loss of around US$50 million due to revenue shortfall, accumulated for reasons not under its control (e.g. dry years in terms of hydrology, longer-than- planned recurrent repair of ANPP). In addition, the existing regulation did not allow Public Services Regulatory Commission (PSRC) to adjust ENA's tariff margin to reflect the full amount of difference between the actual and forecast cost of purchased electricity in subsequent tariff period. The tariff margin was revised in 2015 to compensate for those losses incurred during previous years. Going forward, PSRC will be revising the methodology to allow reflecting in ENA's tariff margin the 100 percent of loss (profit) plus interest cost (profit) due to the above highlighted difference. "The beneficiaries of the Program are all electricity consumers in Armenia along with the state- owned generation companies and the private power distributer. Financial health of ANPP and YTPC, as well as ENA, will ensure they have enough resources to spend on maintenance and finance some of the new investments required for reliable supply of electricity.

Moreover, 140,000 businesses and other legal entities connected to the network will also benefit because the Program will help to fully meet their demand for electricity in a reliable manner," said Arthur Kochnakyan, World Bank Task Team Leader of the Project.  He said the loan will be provided through tranches, as the companies implement the World Bank's requirements. Auditor companies to be selected through a tender will be supervising the implementation of the requirements. The winner of the first tender will become known within two months and the auditor supervising the non-purposeful expenses will be named by December, 2016. Most of the funds will be provided throughout the coming 2.5 years (once in every 6 months), and starting from the third year - once in a year. After undergoing all the interstate procedures connected with ratification and enforcement of the agreement, the power generation facilities will receive the first US$17 million. These funds along with the payment of the accumulated debt by August 1 2016 will help the facilities avoid new shocks and reduce the deficit. Among the WB's requirements, Kochnakyan said non-purposeful expenses, including payment of the arrears of wages to the Nairit Plant by the YTPC. Another requirement is reduction of the period for compensation of the power networks from low water and too long suspension of the Armenian NPP and other risks from the current 3 to 1 tariff year. In addition, refinancing of expensive commercial loans should be made at the expense of a preferential loan.

The methodology of calculating the tariff of heat power plants must be revised. In particular, the gas tariff for the heat power plants is fixed in terms of USD, while payments are made in terms of the national currency on the basis of the Central Bank's exchange rate for the 20th of every month. The plants have to pay more and suffer losses that are not recompensed even in the following tariff year. Kochnakyan insists that these expenses of the companies should be recompensed. He said all these issues are being discussed with the Public Services Regulatory Commission. He hopes the new methodology will be approved within the nearest future. Kochnakyan said the service of the loan will not affect the tariffs for consumers. The interests will be paid from the companies' profits fixed in the tariff.

To recall, on February 18, the Government of Armenia adopted a decision to raise a US$30 million loan from the WB, of which 4 million 183 million drams for the NPP, 10 billion 717 million drams for YTPC so that the plans to redeem their depts. As for the Electric Networks of Armenia, the government recalled that last year's rise in the electricity price included the 22.4 billion drams debt of the state organizations in the energy field. Since joining the World Bank in 1992 and IDA in 1993, the total IDA and IBRD commitments to Armenia amount to around US$2.3 billion.