Page 1 7 41670 Document of The World Bank GEF PROJECT DOCUMENT ON A PROPOSED GLOBAL ENVIRONMENT FACILITY GRANT IN THE AMOUNT OF US$4.5 MILLION TO THE REPUBLIC OF GUINEA FOR AN ELECTRICITY SECTOR EFFICIENCY IMPROVEMENT PROJECT May 31, 2007 Energy Team Finance, Private Sector and Infrastructure Network Africa Region Page 2 8 CURRENCY EQUIVALENTS Exchange Rate Effective May 4, 2006 Currency Unit = Guinean Francs (GNF) GNF 4500 = US$1 US $ 1.4 = SDR 1 FISCAL YEAR January 1-December 31 ABBREVIATIONS AND ACRONYMS AFD Agence Française de Développement (French Agency for Development) AMR Automatic Meter Reading ATC Aggregate Technical and Commercial Losses BAD Banque Africaine de Développement (African Development Bank) BT Build, Transfer BOT Build, Operate, Transfer CAS Country Assistance Strategy CDM Clean Development Mechanism CFAA Country Financial Accountability Assessment CIDA Canadian International Development Agency CPAR Country Procurement Assessment Report CPS Country Partnership Strategy CQ Consultants Qualifications CREST Commercial Reorientation of the Electricity Sector Toolkit CT Current Transformer DNA Designated National Authority DSM Demand Side Management EDF Electricité de France (French Electricity Company) EDG Electricité de Guinée (Guinean Electricity Company) EE Energy Efficiency ENELGUI Electricité Nationale de Guinée (National Electricity Company of Guinea) EIRR Economic Internal Rate of Return ESCO Energy Service Company ESEIP Electricity Sector Efficiency Improvement Project ESMF Environmental and Social Management Framework ESPP Electricity Strategy and Policy Paper EU European Union FM Financial Management FMR Financial Monitoring Report FMS Financial Management System FPM Financial Procedures Manual FR Financial Regulations GDP Gross Domestic Product GEF Global Environment Facility GIS Geographic Information System GOG Government of Guinea GNI Gross National Income GPS Global Positioning System HFO Heavy Fuel Oil HIPC Highly Indebted Poor Countries (Initiative) Page 3 9 HR Human resources HT High Tension HV High Voltage HVDS High Voltage Distribution Systems IAS Internal Audit Section ICB International Competitive Bidding ICR Implementation Completion Report IDA International Development Association IDB Islamic Development Bank IFC International Finance Corporation IPP Independent Power Producers ISA International Standards of Auditing ISO Independent System Operator ISR Implementation Status Report KVA Kilo-Volt Ampere KW Kilo Watt KWh Kilo Watt hour LNG Liquefied Natural Gas LT Low Tension LV Low Voltage LVDS Low Voltage Distribution Systems MBC (Retail) Metering, Billing and Collection MEH Ministry of Energy and Hydraulics MDG Millennium Development Goal MIGA Multilateral Investment Guarantee Association MIS Management Information System NCB National Competitive Bidding NEPAD New Partnership for Africa’s Development PIM Project Implementation Manual PIU Project Implementation Unit PLF Plant Load Factor PRS Poverty Reduction Strategy PRSP Poverty Reduction Strategy Paper PT Potential Transformer PVI Performance Verification Index RPF Resettlement Policy Framework SBD Standard Bidding Document SCADA Supervisory Control and Data Acquisition SIL Specific Investment Loan SOE Statement of Expenditures SRFP Standard Request for Proposals TA Technical Assistance TOR Terms of Reference UNDB United Nations Development Business WAPP West Africa Power Pool Vice President: Oby Ezekwesili Country Director: Mats Karlsson Sector Manager: S. Vijay Iyer Task Team Leader: Prasad Tallapragada Page 4 10 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. GUINEA ELECTRICITY SECTOR EFFICIENCY IMPROVEMENT PROJECT TABLE OF CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE............................................................12 1. Country and sector issues......................................................................................12 2. Rationale for Bank and GEF involvement............................................................19 3. Higher level objectives to which the project contributes......................................22 B. PROJECT DESCRIPTION ...........................................................................................23 1. Lending instrument ...............................................................................................23 2. Project development objective and key indicators................................................23 3. Project components...............................................................................................24 4. Lessons learned and reflected in the project design..............................................27 5. Alternatives considered and reasons for rejection.................................................27 C. IMPLEMENTATION.....................................................................................................29 1. Institutional and implementation arrangements....................................................29 2. Monitoring and evaluation of outcomes/results....................................................29 3. Sustainability.........................................................................................................30 4. Replicability:.........................................................................................................30 5. Critical risks and possible controversial aspects...................................................31 6. Grant conditions and covenants:...........................................................................35 D. APPRAISAL SUMMARY..............................................................................................36 1. Economic and financial analyses ..........................................................................36 2. Technical...............................................................................................................37 3. Fiduciary................................................................................................................38 4. Social.....................................................................................................................39 5. Environment..........................................................................................................40 6. Safeguard policies.................................................................................................40 7. Policy Exceptions and Readiness..........................................................................41 8. Compliance (checklist)..........................................................................................41 Annex 1: Country and Sector Background ..............................................................................42 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies .................46 Annex 3: Results Framework and Monitoring.........................................................................47 Annex 4: Detailed Project Description......................................................................................53 Annex 5: Project Costs................................................................................................................63 Annex 6: Implementation Arrangements .................................................................................64 Annex 7: Financial Management and Disbursement Arrangement......................................68 Annex 8: Procurement Arrangements ......................................................................................77 Page 5 11 Annex 9A: Economic Analysis...................................................................................................87 Annex 9B: Sector Financial Summary......................................................................................91 Annex 10: Safeguards...............................................................................................................103 Annex 13: Project Preparation and Supervision...................................................................122 Annex 14: Documents in the Project File...............................................................................123 Annex 15: Statement of Loans and Credits...........................................................................124 Annex16: Country at a Glance.................................................................................................125 Page 6 12 GUINEA A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues Introduction 1. Key development issues : Despite Guinea’s generous endowment in natural resources (half of the World’s known bauxite reserves, iron ore, gold, and diamonds), its relative political stability and a strategic location that favors trade, 50% of Guineans are still living in poverty. Real GDP growth has stagnated at the low level of 2.8 percent on average over the last 5 years, jeopardizing the social and economic gains reaped during 1990’s when courageous structural reforms were undertaken. GDP per capita stands at US$ 370 with the UN Human Development Index (HDI) ranking Guinea 156th out of 177 countries. 2. Socio-economic indicators compare poorly with countries with a similar income structure for a variety of reasons: · Growth has not been widely shared. About 50% of the population lives on less than US$ 1 a day, with large income disparities between urban and rural populations 1 and vast discrepancies between regions. · A highly centralized public sector is plagued by widespread corruption and numerous disincentives which undermine the investment climate; · Revenue collection is insufficient and public expenditure is inefficient; and, · The country’s infrastructure base is weak and access to social services is poor. 3. The instability of the sub-region (4 of Guinea’s 6 neighbors have seen substantial strife or war in the last decade: Sierra Leone, Guinea-Bissau, Liberia and Côte d’Ivoire), a high influx of refugees and deteriorating terms of trade have further constrained Guinea’s performance. 4. Guinea’s macroeconomic environment remains weak and its performance is characterized by poor governance practices. Dysfunctional institutional structures and predominant rent-seeking practices compound high inflation. According to the 2004 Diagnostic Study on Governance and Corruption 2 commissioned by Government and carried out with the support of WBI, there was a modest improvement in voice, accountability, and political stability indicators between 2002 and 2004. However, rule of law and control of corruption indicators have slipped by 10 ranks or more, and Government effectiveness and 1 Roughly 60 % of subsistence farmers live in poverty as opposed to 24% of urban dwellers 2 The study consisted of three in-depth nation-wide surveys at the public, private and household levels. It aimed at documenting the experiences of citizens on poor governance and corruption in both the public and private sectors; analyzing the phenomenon of poor governance; its extent and costs for citizens ; and create a data base on the quality of governance and institutions to monitor progress and performance in the fight against corruption over the next few years Page 7 13 regulatory quality have declined over the same period. The study’s key finding: corruption affects all sectors, including security, justice and financial control institutions, as well as service delivery. Over 40 percent of households report paying bribes to obtain basic public services and lower income citizens pay a larger share of their income in bribes to obtain public services than wealthier citizens. Over 40 percent of private business managers polled report paying a bribe to obtain a license or a permit and over half report paying bribes to secure public contracts. Around 40 percent of public officials report that bribes are frequently used to alter legal decisions, over one third report that purchasing public sector positions is common, while about one fifth state that mismanagement of public funds is frequent. 3 Against this backdrop, the sustainability of infrastructure development faces immense risks from the political economy. The fact that harnessing revenues from natural resource exploitation is the key to generate resources for investment in infrastructure and services, further increases these risks. Investment needs of the electricity sector must be viewed in this context. 5. Macroeconomic track record and outlook : Political change in 1984 paved the way for a series of important institutional and policy reforms with some degree of success. Since the late 1990s, however, deteriorating terms of trade and socio-political instability further constrained sustainable and equitable development. 6. In 2002, the 2001 IMF Poverty Reduction and Growth Facility (PRGF) arrangement of US$81.1 million was cancelled when Government significantly increased defense spending to address spill over from the war in Liberia and missed fiscal deficit targets. Very poor growth outcomes in 2003 and 2004 (1.2 and 2.7 percent respectively) together with fiscal profligacy resulted in high inflation rates (average inflation stood at 17% in 2004 and 31% in 2005) and continued depreciation of Guinea’s currency. 7. In 2005 however, efforts to improve economic management resumed and a one-year Staff Monitored Program was concluded with the IMF. Government tightened fiscal and monetary policy, took measures to enhance the business environment (especially in the mining sector), implemented measures to improve governance in public finance and banking supervision and to fight corruption. GDP growth recovered, the fiscal deficit was reduced to sustainable levels and inflation begun to decline. The SMP was satisfactorily completed in April 2006 and the terms of a PRGF are under discussion. 8. The macro economic situation in Guinea has further deteriorated with the recent civil strife in Guinea, Though the situation has stabilized now, the new Government’s plans to put the economy back on track are only now taking shape. A considerable burden, Guinea’s debt stock (US$3.2 billion) is almost equivalent to its GNP. Agreement on a PRGF supported program is key for Guinea to access permanent debt relief under the Highly Indebted Poor Country initiative (HIPC) and become eligible for the Multilateral Debt Reduction Initiative which, under current assumptions, could relieve the treasury of obligations in the amount of approximately US$100 million per year, including bilateral debt relief. 9. The Government’s Strategy : In 2002, a participatory process led to Guinea’s adoption of a new poverty reduction strategy articulated around three pillars: (a) fostering sustainable and equitable growth, (b) improving access and quality of basic social services, 3 The number of surveyed units is 2887. Page 8 14 (c) strengthening governance, institutional and human capacity. The Bank’s 4 2003 Country Assistance Strategy (CAS) supports the Government’s efforts under these pillars. The Second Annual Progress Report on the Poverty Reduction Strategy (PRS March 2006, covers 2004 essentially) shows that the PRS plays an important role fostering development policy discussion in Guinea and enjoys strong ownership. It also finds that weak administrative capacity and the fragile nature of Guinea’s political situation hampered PRS implementation and identifies improving governance and reducing corruption as key objectives. 10. One of Government’s key objectives under the new dispensation is to improve delivery of electricity and water services. This includes reforming the water and electricity sectors to improve service delivery and make the utilities financially sustainable. The Government's strategy includes: (i) restoring budget discipline and fiscal orthodoxy, (ii) defining and implementing a strategy for good governance and fight against corruption, and (iii) improving the management of public utilities by adopting an anti-fraud action plan, under which EDG revenue collection has increased by 30% in the period January to June 2006. Recognizing that the financial vulnerability of the Government-owned and operated public utility, Electricité de Guinée (EDG), poses a latent risk to the macro-economy, and that a functional electricity sector is essential for growth, the Government has actively sought to redress the sector. In September 2004, tariffs were adjusted and in January 2005, a pilot operation to improve revenue streams was initiated. The World Bank provided guidance to this process, at the request of the Government. Results since 2004 have encouraged the Bank to partner with the Government in these efforts through this pilot investment operation. The tariffs were again adjusted with regard to industrial consumption by 20% in July 2006. Electricity Sector 11. Over 80% of Guinea’s population of 8.4 million does not have access to electricity and the existing network is subject to perpetual power outages. 12. The Government owned and operated Electricité de Guinée (EDG) is the principal electricity sector entity in Guinea which is responsible for generation, transmission and distribution. Currently, EDG has 1,563 employees and generates 662 Gwh annually serving 115,978 customers, almost 80% of whom are located in Conakry, the capital of Guinea. The senior management consists of a Director General and nine directors. 13. Besides the generation in public domain, there is considerable private generation including the mining companies that self-generate most of their electricity needs. Such captive generation accounts for almost half of the electricity generation in Guinea. While EDG currently has approximately 250 MW of installed capacity, it is expected that rapid growth in the mining and aluminum sector will drive future demand to 1,100MW by 2020; the growth in future demand will outstrip the ability of the mining companies to self- generate. 14. As far as EDG is concerned, as illustrated in Table 1 below, thermal and hydropower contribute to 35% and 65% of available capacity in Guinea, respectively. The main thermal 4 Unless otherwise specified in the document, “Bank” refers to the World Bank. Page 9 15 and hydro plants are Tombo and Garafiri with 115MW and 75MW of installed capacity, respectively. Page 10 16 Table 1: EDG - Installed and available electricity generation Installed capacity Available capacity % of installed capacity used % of total available capacity Thermal 126.8 55.0 43% 35% Hydroelectric 122.0 104.3 85% 65% Total 248.8 159.3 64% 100% Source: EDG, 2005 15. EDG experiences significant operating losses. EDG suffers nearly 60% Transmission and Distribution (T&D) losses and 80% Aggregate Technical and Commercial (ATC) losses (See Table 2). These losses, characterized by pilferage of electricity and non-payments, are further exacerbated by a frozen tariff schedule. Electricity generation and distribution have worsened in recent years as a result of mismanagement, and the lack of a clearly defined reform program for the sector as a whole. In the absence of adequate investments in repairs and maintenance, the existing asset base is rapidly deteriorating and is in dire need of repair and maintenance. 16. Many outstanding issues associated with an aborted private sector concession continue to plague the sector. Prior to the establishment of EDG in 2001, the Enterprise Nationale d’Electricité de Guinée (ENELGUI) was responsible for energy generation and distribution, and was organized as a conventional state-owned public utility. In 1994, in an attempt to attract private sector investment, the GOG leased out ENELGUI’s assets to SOGEL, which was a consortium of firms led by Hydro Quebec and Electricité du France (EDF). ENELGUI, which remained under State ownership, bought a stake in SOGEL by contributing a third of the equity. Through this arrangement, GOG could raise substantial capital for ENELGUI, through several donors led by AFD, CIDA, IDB, and others, including the general public, to construct more hydro and thermal facilities. 17. This arrangement, which lasted from 1994 to 2001, did not perform as expected. Several reasons contributed to the failure of SOGEL, which started facing bankruptcy from 1998 onwards. These include: (i) the slow progress in payment of electricity bills due from State agencies; (ii) inadequate Government support to ENELGUI and SOGEL in financial and tariff matters as well as in implementation of sector reforms and (iii) SOGEL’s inability to make critical investments, control cost and improve customer relations; and its inability to capture efficiency gains through key loss reduction and anti-fraud programs. As a result, relationship between SOGEL and ENELGUI deteriorated, ending with the termination of the private concession of SOGEL in October 2001 . 18. Subsequently, Societé Electricité de Guinée (EDG) was created in its present form by GOG in December 2001. This was done by sale of the consortium’s shares to GOG, which then liquidated ENELGUI and transferred its assets to EDG. The outstanding issues from this aborted private concession arrangement, such as claims from the former concessionaires and the dues to several donors who provided soft loans to ENELGUI (such as AFD and CIDA) were resolved through an agreement, only in late 2005. Subsequent to the resolution of the outstanding issues related to the concession, there is now willingness in GOG to seek renewed private sector engagement in the sector. However, GOG recognizes that the sector will have to be brought to a reasonable level of operational and commercial efficiency to Page 11 17 whet private sector appetite. Thus, GOG has indicated its strong commitment to facilitate and support the sector in achieving an operational and financial recovery in the medium term. 19. EDG financials mask the actual extent of commercial losses. The debt service cost associated with Garafiri and other capital assets has been borne by the Government and is not reflected in EDG financials. The Government has an allocation of 30 billion GNF (equivalent to US$ 7.5 million) in the national budget for EDG. This cash transfer serves to compensate EDG for the electricity consumption charges of various Government agencies as well as subsidize EDG operations. The proportion of Government payments towards electricity consumption and subsidy in this cash transfer is not transparent as almost all the Government electricity connections do not have meters, and the bills issued to them are estimated 5 . The subsidy involved in this cash transfer coupled with substantial debt service costs borne by the Government, is inflicting severe fiscal burden on the Government, diverting scarce resources away from critical development activities, such as in the area of health and education, and is also resulting in severe macroeconomic imbalance, as evidenced by the high rates of inflation. EDG’s burdensome financial losses have been aggravated by its lack of adequate management controls and requisite investment in the distribution sector to reduce technical and commercial losses. However, in a positive step that would make it better equipped to access commercial borrowing, EDG issued, in 2006,0 an audited opening balance sheet for the year 2001 with Government approval, and have also issued un audited balance sheets for the subsequent years. 20. There is a high incidence of technical and non-technical transmission and distribution losses that currently stand at approximately 60%. Hence, only about 40% of the generated energy is billed of which only 75% is collected. At an aggregate level, EDG lost 107 billion GNF of potential revenues in 2004 (equivalent to US$ 42 million at 2004 exchange rate) through technical and non-technical losses, a significant portion of which could have been retained if critical investments and strong business culture had been in place to ensure a high level of operational and commercial efficiency at EDG. Table 2: EDG Operational Status as of 2004-05 Annual net generation delivered 662 GWh Energy lost due to technical and non-technical losses 393 GWh % Transmission and distribution (T&D) losses 59.3% Energy billed to consumption 269 GWh Value of power billed to customers GNF 64 billion Amount collected against above billing GNF 48 billion % Collection rate (collection/billing) 75% Amount lost annually including non-technical losses** GNF 107 billion Result: Nearly 60% T&D losses and 80% Aggregate Technical and Commercial (ATC) losses 21. GOG seeks to improve the capacity and viability of the electricity sector through a mix of interventions that include improving EDG’s operational performance, and financial 5 The project will address this issue squarely by providing metering, particularly to all Government agencies on a priority basis. Page 12 18 recovery of the sector while increasing generation capacity. GOG has initiated a number of steps to galvanize the deteriorating electricity sector. These include (i) changing the management team at EDG; (ii) supporting EDG in reducing staff strength; (iii) resolving the dispute with former private operator; and (iv) increasing average tariff rates by 74% in September 2004 to GNF 260/kWh (US cents 5.77/kWh), the first such increase since 1996. The current tariff schedule is presented in Table 3 below. Table 3: Social, commercial, and government tariff structure, 2006* Categories GNF Social tariffs 1-90 KWh 90 91-420 KWh 232 Above 420 KWh 265 Tariffs for commercial enterprises, embassies, and NGOs (1-420 kWh) 492 Tariffs for commercial enterprises, embassies, and NGOs (Above 421 kWh) 763 Tariffs for National government enterprises 505 Tariffs for other public enterprises 900 Industry 763 *Source: EDG, 2006 These tariffs are effective as of July 2006. 22. The significant increase in tariff rates has not translated into better commercial results. The combination of large technical losses, poor billing and collection rates have led to continued financial hemorrhage, pushing the sector into a vicious cycle. Poor performance of the distribution business has led to inadequate maintenance investments on the generating side, leading to further load shedding and revenue losses. In early 2005, load shedding stood at 700-800 MWhs per day, equivalent to around 40% of the total electricity generated by EDG. The high rate of inflation is also eroding the real tariff levels and reducing the capacity of customers to make their electricity payments. The rapid rise in global oil prices have added to EDG’s financial woes, with EDG spending on fuel purchases for its thermal plants increasing by 88% from 2004 to 2005. This has greatly tempered the salutary effects of the rise in tariff levels to its financial position. The situation has been further exacerbated by below average rainfall and low level of water reserves at Garafiri which has forced EDG to rely more on thermal generation. To stem these financial losses, EDG has had to resort to severe load shedding schedules. A Tariff Study has been launched to evaluate EDG’s Sector Financial Recovery Trajectory which will assess the financial implications of a mix of efficiency interventions being implemented by EDG, including activities planned under this Project, and tariff adjustments. The Study will, within the framework of the Recovery Trajectory (i) analyze the real cost of electricity supply in Guinea, (ii) review current tariff levels and policies, (iii) recommend a tariff structure, and (iv) assess the financial impact of the proposed tariff structure. 23. GOG has outlined several general strategies to expand poor access rates. At present, Guinea’s access rate of 18.8% applies mostly to major urban settlements such as Conakry, Page 13 19 Labia, and Kindia, and the countryside is literally living in the dark. Even among the 2.0 6 million people who live in Conakry, large sections do not have access to electricity. The Electricity Policy and Strategy paper that is to be issued by GOG is expected to articulate its access expansion strategy. The strategy will draw lessons from the innovative access expansion mechanisms that are being attempted under the ongoing IDA/GEF Decentralized Rural Electrification project, a Learning and Innovation Loan (LIL) operation. The project attempts to encourage small concessionaires to provide power supply from Pico thermal, Pico hydro and small renewable sources. The concessionaires are supported by a mix of subsidy and credit that is disbursed through a commercial bank, which acts as a financial intermediary and conducts the whole process of identifying, evaluating and supporting the concessionaires. The project implementation unit (PERD) performs the overall coordination, support and oversight role including development of software tools and training modules. The project is beginning to implement the first concessions and the experience from this project is expected to provide rich inputs to the overall access expansion strategy in the country. 24. Plans to expand access, however, will have to be preceded by efforts to strengthen the existing generation, transmission and distribution systems. The entire network that is presently supplying power to the country is experiencing severe load shedding, mainly on account of the lack of adequate power and a dysfunctional distribution system. The distribution system requires immediate remedial measures as EDG’s distribution business is currently not generating enough revenue to sustain existing generation in terms of cash required for fuel other recurrent costs and to service debt. The large incidence of system losses (the aggregate technical and commercial losses are estimated to be at a staggering 80%) renders even existing generation capacity unsustainable. Hence, it is critical that the distribution system be improved before embarking on generation capacity additions. Also, efforts are being made through the West Africa Power Pool (WAPP) project to provide new transmission interconnections that would facilitate cross-country energy flows. However, these transmission investments will also require reasonable distribution performance if they are to be sustainable. 25. This Project aims at improving the existing distribution grid and customer interface as well as streamlining business processes and strengthening institutional capacity at EDG, thus paving the way for financial recovery and future interventions to tackle issues of generation, transmission and access. Results from the World Bank assisted pilot project in Kaloum area of Conakry have been encouraging. While prior to the project, only 3,200 of an estimated 17,000 customers were listed in EDG’s accounts, the pilot has managed to identify and enlist an additional 8,500 previously unbilled customers. The effective conversion of illegal customers to legal, billable customers not only expands EDG’s revenue base but also leads to more efficient electricity consumption, enabling better service quality in the current network. 2. Rationale for Bank 7 and GEF involvement 26. The electricity sector's performance is intrinsically linked to the country’s failing macro-economy. The sector, given its high loss making operations is draining the economy 6 As per 2002 census 7 Unless otherwise specified in the document, “Bank” refers to the World Bank Page 14 20 instead of fuelling it. Highly unreliable and scarce supply of electricity stunts business investments, forces reliance on uneconomical captive generation, and deprives access to basic services. Reducing the sector’s burden on the overall economy in the short run and restructuring the sector to be a net cash contributor to the economy in the long run is critical to growth and poverty reduction. Plans to add much needed generation capacity 8 should be preceded by immediate steps to improve the commercial and operational performance of the sector. In the medium to long term, interventions made to improve the quality of electricity services will make a reasonable impact only if they are complemented by assistance to improve the generation capacity, especially by harnessing the country’s large hydro potential of 6,400 MW (in 129 identified sites). 27. Urgent improvements in the distribution and generation side are needed as are an appropriate institutional framework and sector capacity. The Bank has a comparative advantage in supporting government’s development of a coherent and comprehensive sector strategy. Although other donors have shown interest in the sector, they have relied on the Bank’s analysis and preparation process for this project to solidify their commitments. 28. With these objectives in mind and highlighting in particular, the imminent collapse of the sector, the GOG requested Bank assistance for its electricity sector in a letter dated January 11, 2005. In February 2005, a Bank mission discussed an emergency program with EDG and the GOG. Subsequently, a Commercial Re-orientation of the Electricity Sector Toolkit (CREST) efficiency improvement program was conceived with Bank team assistance, and is under implementation by EDG in the Kaloum area in Conakry, Guinea. Implementation of some of the CREST efficiency measures has led to early improvements in billing and customer services in Kaloum (see Table 4). It must be highlighted that all these improvements have taken place without any new capital investments and have been achieved primarily by reengineering business processes and management improvements. 29. This Project leverages the knowledge gained from the initial experience in Kaloum and will integrate a larger pilot program to further enhance efficiency improvement activities in the Kaloum area of Conakry. Kaloum consumes a significant part of the energy produced by the EDG and is the last service area to be load shed. Most of the revenues and losses of EDG occur in this area. Hence, this area provides the most logical part of the network to optimize gains from an efficiency improvement program. Table 4: Summary Results of the Kaloum Pilot initiative 8 WAPP master plan 2004. Guinea’s Hydropower Potential Guinea is endowed with several major rivers, including the Gambia and Niger Rivers, offering large hydropower potential. Estimates show that Guinea has a (technically feasible) hydroelectric potential estimated at 19,400 Gwh per year. How ever, currently, only about 1% of Guinea's technically feasible hydroelectric potential has been developed. For instance, the 75- MW Garafiri hydroelectric facility, on the Konkoure River, was commissioned in 1999; and an 80-MW project is planned 60 miles ( 100 km) downstream at Kaleta. Page 15 21 Before Kaloum Pilot Current System losses 55% 45% Number of customers 3,200 11,700 Bill collection (%) 70% 93% Support from the GEF further enhances the energy efficiency impact achieved through this IDA operation. In particular, the operation would be strengthened through specific project components and sub-components targeted at improving end-use energy efficiency and Demand Side Management (DSM). These components which bring significant GHG reduction benefits would not be implemented without GEF support. GEF support is also critical in enhancing some of the other energy efficiency components funded primarily by IDA to ensure that adequate locally capcity is built. Under this operation, GEF is providing support for capacity building relating to the introduction of new technological options such as the High Voltage Distribution System (HVDS) in Guinea. 30. CAS and PRSP links: The PRSP (2002) identified infrastructure as among the most important impediments to poverty reduction and growth. The CAS (2003) seeks to facilitate and nurture sustainable and equitable growth, improve access and quality of basic social services, and strengthen governance along with institutional and human capacity. Accordingly, the CAS ranks the Energy sector as a high Country and a high Bank priority. The CAS emphasizes on improving governance and developing innovative approaches to re- engage the private sector. 31. Although the CAS foresees an Electricity Support Program in the high case scenario, this project is consistent with objectives under the current low case. These include supporting the establishment of the minimum infrastructure services required for growth, with a focus on government and private sector participation in the electricity sector. The project is fully consistent with these objectives as it will support critical measures to preserve minimum service delivery and help improve sector governance. In order that much needed investments lead to sustainable electricity production and dist ribution, the project aims to set EDG’s overall functioning on a sound footing. 32. The project aims to lay the foundation for improved governance of the utility and clarify its financial and regulatory relationship with Government. ESEIP has been designed to: (i) improve revenue streams to sustain capital investments in the sector and reduce the burden the sector imposes on the macro-economy and (ii) introduce commercial best practices and technical inputs to improve the sector’s operations and service delivery. The project has also played a catalytic role as other donors have expressed keen interest in building on the activities of this operation. 9 Without this operation, EDG’s assets will be further depleted and its drain on Government resources will continue to increase, resulting in further deterioration in the very limited services it now provides to the population. 9 The AfDB is seeking to engage in the sector through a possible US$ 35 million credit, by building on the Bank’s strategy in this project; the IDB has a strong presence in the sector through significant support to generation capacity expansions. The EU has expressed interest in engaging in the sector. Page 16 22 33. The project aims to jumpstart the process of sector recovery in the short term, and seeks to be a building block for a long term governance and efficiency improvement initiative. It will serve as a significant entry point in the context of the 18 month transitional strategy for Bank Assistance which is scheduled to be submitted to the Board for consideration before end CY2006. This two pronged transitional strategy will (i) focus on obtaining concrete improvements in governance in economic management, mining and electricity with a pragmatic and progressive approach, and (ii) continue to channel resources to the poor and enhance their capacity to manage local development through community driven mechanisms in the rural and the urban sector. The transitional strategy will include heightened scrutiny on the implementation of the portfolio, which includes substantial investments in the education and health sectors, as well as targeted analytical work to underpin key questions for the next full CAS, scheduled for FY09. 34. The project will make concrete contributions to improvements in governance by (i) developing a comprehensive tariff and regulatory framework; (ii) periodically publishing the names of defaulters; and (iii) publicly disclosing all EDG contracts above US$ 10,000; (iv) encouraging Government to clearly define its financial relationship with the utility; (v) right- size EDG’s staffing structure and (vi) facilitating the implementation of a staff incentive scheme (including appropriate rewards and deterrent actions) to increase productivity and reduce corruption. 3. Higher level objectives to which the project contributes 35. In addition to reducing the fiscal burden the sector imposes on Guinea’s economy and improving the sector’s commercial viability and quality of service delivery, the Project will also contribute to a reduction in carbon dioxide (CO 2 ) emissions. Avoided generation due to targeted reduction of system losses will lead to these emission reductions. Page 17 23 B. PROJECT DESCRIPTION 1. Lending instrument 36. The instruments are a Specific Investment Loan (SIL), and a GEF Full-Sized Project grant. The project aims to achieve the desired outcomes by leveraging the GEF grant along with IDA assistance. The GEF grant is thus partially blended with the IDA project. However, the project has been designed in such a manner that the outcomes from IDA assistance would be achieved on a stand alone basis also. Together with GEF assistance, these outcomes are achieved in larger measure. 2. Project development objective and key indicators 37. The Project’s principal objective is to support GOG’s current effort in improving the operational and commercial efficiency of its power sector with the goal of turning around this ailing sector in the medium-term to a viable level of performance in preparation for a longer- term reform plan. Through critical investment support and capacity building assistance, it is expected that the Project will improve the financial viability of the sector, which in turn would be instrumental in reducing the power sector’s current large and negative fiscal burden on the economy. The resulting macroeconomic and quality of service improvements, though modest given the scope of this project, is expected to contribute to creating an enabling environment for sustained economic growth and development in Guinea. The medium-term efficiency enhancements in combination with institutional strengthening are necessary steps to create value in the Guinean electricity business, demonstrate its viability in a replicable manner and to facilitate private sector engagement in the electricity sector. The project-term outcomes include operational and commercial distribution efficiency enhancements, improvement in reliability of the Garafiri hydropower plant and the Tombo thermal generation plant, customer service improvements, and strengthening of institutional capacity to manage and sustain the efficiency enhancement programs. A baseline of the indicators will be established, against which the Project outputs and outcomes will be evaluated. 38. Progress toward outcomes will be measured by: (i) Operational and commercial efficiency enhancement results on the distribution front will be measured by tracking energy loss reductions (technical and non-technical), and increases in revenues and bill collection rates. By limiting energy losses and boosting revenue collection, these efficiency gains are expected to improve the financial health and thus the long-term sustainability of EDG. To assess progress, reduction in transmission and distribution losses, increase in revenues, and the expected increase in revenue base will be tracked. (ii) Gains in generation reliability are critical to both improving service access and quality, and to strengthening EDG’s financial position. Generation reliability improvements would be measured by improvement in plant availability factor of the Tombo and Garafiri generation facilities. (iii) Service delivery improvements will be measured by improvements in tail end voltage, and by monitoring progress in terms of introducing better customer interface in the form of customer care centers, spot billing, rapid response vehicle systems and other customer- Page 18 24 centric services. Periodic customer satisfaction surveys will help to further ascertain progress. (iv) The development of robust IT, financial and accounting systems is key to measuring and improving the operational and commercial efficiency improvements, and an essential platform for effective management of EDG. Installation of and training on relevant technologies and systems , and the publication of EDG’s audited financials will be monitored during the Project period. (v) The Project also seeks to improve institutional capacity for implementation of end-use energy efficiency programs. Under the Technical Assistance component, the Project will identify possible approaches for private sector participation, including Energy Services Companies (ESCOs) and facilitate implementation of pilot Energy Efficiency programs. The Project will assist through training and strategy work to implement a program for energy conservation, including through DSM. 2.1 Global Development Objectives 39. The Project will be instrumental in containing CO 2 emissions by improving the efficiency of the electricity distribution system, and by introducing end-use energy management practices. 3. Project components 40. The Project will support investments that aim at improving (i) energy efficiency of distribution networks and generation capacity for reliable supply, (ii) commercial character, and (iii) customer interface of the electricity sector including introduction of end-use energy efficiency programs. The Project will also facilitate the development of capacity at EDG in terms of technical, commercial and personnel systems. The Project will increase access in terms of grid intensification through conversion of illegal consumers into regular EDG customers. Since the Project focuses on Conakry, the principal urban settlement of Guinea, expansion of access is expected to follow initial grid intensification, in later interventions. The Decentralized Rural Electrification Project , currently under implementation, would help facilitate appropriate policies, institutional mechanisms and incentive structures, and lay the ground for future access expansion plans in rural and peri-urban areas. Implementation of the Project will be structured along the following three components: 41. Component 1: CREST- Distribution efficiency improvement: The efficiency improvement program referred to as the Commercial Reorientation of the Electricity Sector Toolkit (CREST), comprising a set of best practice interventions, is designed and implemented by EDG with active support from the Bank team. The program reengineers core business processes (with a pronounced focus on the retail metering, billing and collection (MBC) functions) and deploys innovative technology solutions in order to improve service delivery to reduce technical and commercial losses. The Project also supports investments in goods and services related to implementation of the following initiatives under the CREST efficiency improvement program: Page 19 25 Table 5: CREST Initiative Components CREST Initiatives Rationale a) High voltage distribution system (HVDS) · Increase energy efficiency through significant technical loss reductions and improvements in reliability of supply (improve voltage profile) and reduce commercial losses by deterring theft b) HT Trivector meters for HV loads c) LT Trivector meters (CT operated) for LV commercial loads above 20KW d) Single phase and three phase meters (whole current) for LV loads below 20KW with AMR facility/prepayment meters · Enhance the coverage and quality of metering for HT and LT customers · Better revenue collection through proper metering and billing, and reduced scope for pilferage e) Reactive power compensation through the installation of online capacitors · Reduce technical losses and improve customer satisfaction through voltage enhancement f) Establish customer care centers · To improve MBC customer interface and provide mechanism for timely response to customer grievances g) Introduction of appropriate business processes dovetailed to metering systems (such as spot billing) · Improve billing coverage and collection · Improve cash flow and business process efficiency h) Launch of rapid response vehicles · Reduce outage time and improve response to customer complaints These investments will strengthen the distribution infrastructure, improve quality of supply and customer satisfaction, and reduce losses. 42. Component 2: Rehabilitation (Repair and Maintenance) of Critical Generation. Investment support would be provided to EDG, through this Project to improve the reliability and efficiency of the existing Garafiri hydroelectric plant and the Tombo thermal power plant. This will be in the form of assistance for critically required equipment and spare parts and technical assistance for operations. Lack of maintenance and rehabilitation in the thermal and hydro facilities is contributing to further deterioration of the generation scenario in Guinea. Efforts to improve generation availability would complement and reinforce GOG ’s initiative to improve commercial discipline and operational performance of EDG. Component 2 will also involve technical studies to better analyze and understand the current condition of the generation facilities; and required upgrades to improve generation capacity. 43. Component 3: Institutional Strengthening through Technical Assistance: A strong institutional base is fundamental to the sustained financial success of the power sector in Guinea. There is a clear and urgent need to develop a robust and modern technical, financial and accounting infrastructure base to support the efforts of EDG to improve its managerial, financial and operational performance. Further, opportunities for efficiency enhancements from private sector partnerships and demand side management (DSM) will be identified and explored. The following is a description of specific TA components: Page 20 26 44. 3.1 Energy efficiency and conservation. The Project recognizes the need to sustain and scale up efficiency gains that will occur in the sector through energy efficiency and conservation investments by promoting DSM measures. The assistance under this component will include pilots involving identification and implementation of corrective measures based on energy audit of industrial and commercial establishments, buildings and other significant energy consumption facilities and prudent load management. Activities envisaged under this initiative include development of tariff, fiscal and other incentives for energy efficiency; a strategy for participation of private sector (energy service companies) in design and implementation of energy efficiency and conservation programs; development of institutional capacity in the Ministry of Energy and the EDG for implementation along with the development of a policy framework for implementation of these programs and a communication strategy for purposes of creating awareness of energy conservation. 45. 3.2 Business plan preparation and Private sector partnerships. The Project will assist the EDG and the Ministry in preparation of a sector Business Plan that would address issues related to financial recovery in the short and medium terms, peg annual fiscal gaps, and identify the right mix of tariff increases, subsidy interventions, investment infusions and efficiency gains that would address the identified financial gaps. This exercise would also look at staff right sizing and gradual involvement of private sector in utility/sector operations. Accordingly, this exercise will involve the identification and development of areas where the private sector can intervene with the aim of improving the electricity sector's financial viability. These could include outsourcing of various distribution functions and Energy Service Companies (ESCOs) type approaches. 46. 3.3 Sector policy preparation. The Government through a number of recent steps, including the resolution of outstanding issues with the previous concessionaire, new management at EDG, and an increase in tariff rates, has shown renewed commitment to revamp the power sector in Guinea. The Project will assist in the formulation of a clear and coherent sector policy and strategy to create actionable plans to push the sector reform forward. 47. 3.4 Financial and accounting systems. It is essential that EDG ring fences the generation, transmission and distribution businesses and in turn identifies the real costs for each of those functions. This will facilitate improvement of operational efficiencies through a profit center approach on the one hand and efficient tariff setting on the other leading to commercial efficiencies. The Project will assist in capacity building and provision of appropriate infrastructure for development of financial and accounting systems towards achieving this objective. 48. 3.5 MIS and operational IT support. The Project will support initiatives leading to capacity building and infrastructure support through installation of and training on innovative technologies geared towards areas such as anti-theft measures, energy audit, remote metering techniques, Management Information Systems (MIS) such as customer billing, HR databases, etc. 49. 3.6. Monitoring and evaluation . To measure progress in Project implementation and in achieving the intended results, it will be critical to create reliable baselines and provide Page 21 27 adequate monitoring and evaluation support. The Project will assist an independent agency in establishing the baseline information, and monitor performance over time to assess the Project’s development outcomes. 4. Lessons learned and reflected in the project design 50. Lesson 1: The current financial and operational status of EDG clearly points to the need for improvement of commercial and technical efficiencies before any substantial investments can be made in generation. Initial results of the implementation of the CREST program by EDG as well as similar experiences in other countries in Africa such as Nigeria have demonstrated that the underlying value in the distribution business can be significantly realized through investment support. Based on these encouraging experiences, the Project has incorporated CREST as one of its key component. However, the Project has also allocated assistance to the generation business so that improvements in the distribution segment are complemented by securing reliable generation, which is currently in a fragile state. 51. Lesson 2: The short lived experience with private sector participation in the electricity sector points to the need for a careful analysis of the business environment, viable options for privatization and the necessary investor risk mitigation strategies to prepare the ground for private sector participation. This Project seeks to address these concerns by moving the sector towards financial viability. On one hand, private sector participation would be explored in the implementation of various distribution improvement initiatives and on the other, viable options for private sector participation would be explored through studies conducted under the TA component., 52. Lesson 3: EDG and the sector in general do not have a credible track record of implementation of investment activities. This issue has also come to fore in the implementation of the Decentralized Rural Electrification Project, which is being restructured. This risk would be mitigated in two ways: (i) resorting to approaches such as BT/Technical Support Services arrangements with the involvement of private sector in implementation; (ii) support to be provided to EDG in the preparation, selection and implementation of bid packages, through an expert implementation support consultant. 53. Lesson 4: Global experience from other countries such as Thailand, Sri Lanka, Uruguay and Argentina shows that countries facing power scarcity need to adopt robust DSM strategies along with efforts to rehabilitate and expand existing infrastructure. The Project seeks to assist EDG and the Ministry of Energy and Hydraulics to develop institutional capacity and an appropriate framework for energy efficiency programs. 5. Alternatives considered and reasons for rejection 54. Consideration for alternative lending instruments: Initially, the adaptable program loan (APL) instrument had been considered since the Project has been designed as a pilot project to be scaled up in the future with requisite sector reforms. However, the use of an APL is constrained by a number of factors. A larger APL lending program would raise issues regarding Guinea’s absorptive capacity for significant infusions of technology and capital to revive the sector. Macroeconomic issues such as low economic growth, a large fiscal deficit, high inflationary pressures and a low tax base limit the appropriateness of the Page 22 28 macro-climate for an APL. Moreover, there are concerns about the sustainability of the reform process and the underlying political commitment for continued reform. Guinea needs to demonstrate a longer, consistent and credible track record to satisfy the criteria for a larger and longer-term resource commitment. There is a need for the GOG to develop a comprehensive and coordinated strategy for sector reform, and to generate the policy environment for a phased-program. Finally, this Project, while a pilot, does not have specific triggers for phasing in to subsequent projects, typical for an APL. Therefore, the SIL is a more appropriate instrument where specific investments and action plans to ensure the viability of the investment is required. 55. Implementation of project activities through multiple agencies: The Ministry of Energy and Hydraulics (MEH) had earlier implemented energy efficiency programs and has the mandate to pursue DSM objectives and renewable energy programs. The option of separating this component from the implementation of other activities in the Project was considered and rejected. During pre-appraisal it was found that EDG also had been implementing some DSM measures. Since EDG is the sole sector utility, it would be difficult to mainstream energy efficiency activities independent from implementation of other related activities. Hence, further discussions concluded that MEH would implement these activities through the project team of EDG. 56. Including larger role for private sector in the Project: The team explored the possibility of a larger role for the private sector in this project against the backdrop of concerns surrounding governance and capacity issues. However, given the earlier negative experience with privatization, renewed attempts to involve private sector should be gradual and systematic. These should follow after various associated investor risks and governance issues are appropriately addressed. The Project seeks to identify viable strategies for larger private sector engagement through studies to be undertaken in the TA component. 57. Rural Access Expansion: Given Guinea ’s low rate of electricity access, options to include initiatives on access were considered and rejected. The reasons for rejection of this alternative are (i) given the severity of electricity sector crisis, the need to focus the project on one targeted activity, and (ii) rural access to electricity is already being assisted under the ongoing IDA/GEF Decentralized Rural Electrification project, a Learning and Innovation Loan (LIL) operation. This project encourages small concessionaires to provide power supply from pico-thermal, pico-hydro and small renewable sources. The concessionaires are supported by a mix of subsidy and credit that is disbursed through a commercial bank, which acts as a financial intermediary and conducts the whole process of identifying, evaluating and supporting the concessionaires. The project implementation unit (PERD) performs the overall coordination, support and oversight role including development of software tools and training modules. The project is beginning to implement the first concessions and the experience from this innovative project is expected to provide rich inputs to a future overall access expansion strategy in the country. Page 23 29 C. IMPLEMENTATION 1. Institutional and implementation arrangements 58. The main counterpart for implementation will be EDG where a team has been created to implement this Project. GOG, through the Ministry of Energy will provide policy guidance and also take an active part in project implementation. EDG will also implement the technical assistance component involving DSM and energy efficiency activities, in coordination with a corresponding team at MEH. 59. The Counterpart Project Implementation Team will work under the supervision of the Director of Planning, EDG and will be responsible for identification of specific investment networks, related initial surveys, preparation, evaluation and award of bid packages. While the concerned departments/agencies of EDG will undertake on site implementation, the Project Implementation Team in the directorate of planning will have a monitoring and coordinating role for the entire project implementation. It will also collect baseline data, develop monitoring indicators and evaluate the developmental impact of the investments. 60. Component-wise details of departments/agencies within EDG responsible for implementation under the overall coordination of the Directorate of Planning/project team are detailed in Annex 6. 61. Rationale for the Institutional Arrangements. Project implementation will be carried out through a team formed within EDG, so that various project activities are well coordinated in terms of identification, implementation and ownership. Hence, a separate Project Implementation Unit (PIU) is not contemplated; instead the project implementation team will be an integral part of the Directorate of Planning of EDG to identify, plan and execute all investments. This is in line with the current thinking in the Bank to avoid establishing project-specific stand alone PIUs. However, the experience from implementation of other Bank projects, particularly the ongoing Decentralized Rural Electrification Project has demonstrated that implementation capacity is very weak in several Government and parastatal agencies in Guinea. Moreover, EDG itself does not have a track record of implementing Bank projects or for that matter, any major investment program. Against this backdrop, implementation support is required in all areas of preparation, evaluation and award of bids, supervision, and fiduciary diligence. Hence, an experienced consultant with an established track record in these matters would provide implementation support services to the Project Implementation Team. 2. Monitoring and evaluation of outcomes/results 62. Performance monitoring of the proposed Project would include: (i) the performance indicators as included in Annex 3; (ii) progress of the technical assistance components in terms of deliverables of each of those components; and (iii) quarterly progress reports on preparation of investment programs and in the execution of contracts. The Project will have a 3-year implementation period. There will be no Mid-Term Review (MTR) in view of the relatively short time frame for implementation. Instead there will be two annual reviews and an Implementation Completion Report (ICR) at the end of the Project, to be jointly prepared by IDA and EDG. Page 24 30 63. The Project’s developmental objective is to improve sector operational and commercial efficiency, and sustainability. The sector level outcomes are to: (i) build technical, human and financial capacity to reduce technical and non-technical losses; and (ii) undertake preparations for achieving increased private participation in the Guinean electricity market. The outcome information would be useful for (i) evaluation of longer-term prospects of the sector and its economic and fiscal impact; (ii) drawing lessons to improve institutional performance in delivering service; and (iii) evaluating progress towards power sector reform. 64. The intended intervention and intermediate results by project component are outlined in Annex 3. The monitoring of project implementation activities are to be carried out through the normal review procedures for procurement, regular supervision missions, the Financial Monitoring Reports (FMRs), the quarterly reports to be provided by EDG, independent annual financial audits of the project and of the financial statement of EDG, and reports prepared under the technical assistance components. 3. Sustainability 65. In order to ensure that the activities funded by the project are sustainable in the long term, several dimensions have to be considered. The sector has not demonstrated the ability to recognize the “real costs” of electricity supply and have not been able to translate them into cost reflective pricing. EDG has not attempted segregating generation and transmission costs from distribution costs and no attempts have been made to establish cost by customer categories. Resultantly, tariff setting is not done efficiently and the market lacks proper incentives to reduce self-generation, contain theft and provide appropriate payment behaviors from customers. Apart from cost-reflective tariffs, the other elements required for project and sector sustainability include creation of a suitable policy and regulatory environment, rationalization of subsidies provided by the GOG, and utilization of innovative financing options such CDM. 66. This IDA/GEF operation will the build a solid foundation for project and sector sustainability by initiating actvities in the above areas. Specifically, the project will support the implementation of a tariff study and a sector policy study. A business plan for the EDG will also be prepared from the project proceeds. As attempted in another Bank project in Nigeria, opportunities for leveraging carbon finance for energy efficiency gains in the energy sector can also be explored. 10 4. Replicability: The initial success of the Kaloum initiative has to be built upon in order to effectively demonstrate to stakeholders and donors that these interventions can be replicated and that the results can then be leveraged to attract private sector participation, increase access, and provide quality services. The total needs of investments for the distribution sector are immense indicating a significant potential for replication. The GOG has prepared an investment plan for about 44 million and is seeking donor assistance for the investment plan, following the successful 10 The team conducted exploratory meetings and held a workshop for carbon finance opportunities. It is expected that these opportunities would be harnessed in due course Page 25 31 implementation of this Project. The other donors keenly interested in the Guinea power sector and closely working with the Bank are the African Development Bank, the Islamic Development Bank, and the European Union. The African Development Bank is contemplating a major operation through activities that complement and harmonize with those planned in this project. The Islamic Development Bank are extending significant support expansion of thermal generation capacity, particularly with respect to Tombo unit V. The Government of France through AFD and the Government of Canada through CIDA have been involved in significantly assisting the sector earlier before the failure of the SOGEL concession arrangement. 67. The CREST program proposed in this Project has wide potential for replication beyond Guinea in Africa. Countries such as Ghana, Nigeria, Mozambique and Zambia are also in the initial phase of instituting CREST within their systems and lessons from the implementation of this Project would greatly benefit these other efforts in Africa to improve the energy efficiency of distribution systems. 5.Stakeholders All stakeholders have to be involved in implementation of efficiency improvement interventions undertaken by EDG. At the same time stakeholders must also recognize that EDG can only serve paying customers who adhere to commercial discipline. Effective stakeholder communication will ensure customer buy in that is critical for survival of the sector. This in turn will sustain the efficiency interventions that will lead to cost recovery that is essential for EDG and for the development objectives of this project. As such, a communication strategy that includes stakeholders from the private sector, and civil society, is vital to understan ding particular concerns and communicates EDG’s reform strategy effectively. Positive social impacts will be triggered by improved electricity services. More efficient and reliable service, coupled with more transparent billing mechanisms, will increase customer satisfaction, and increase EDG’s revenues, leading to better service delivery in the long run. The Project also involves a Demand Side Management component that focuses on energy efficiency. It is critical to generate stakeholder ownership for these initiatives. It is also important to more closely examine the potential negative impacts of the Project on different stakeholder groups and mitigate them through effective stakeholder communication. Nearly 50% of Guineans live on less than US$1/day, and expected tariff hikes could price poor consumers out of the market. The Project aims to mitigate this negative effect through programs to enhance energy efficiency among consumers that include introduction of a Compact Fluorescent Light bulb (CFL) program. Stakeholders will be involved in design and implementation of these initiatives. 5. Critical risks and possible controversial aspects Page 26 32 68. Political commitment to reform and governance issues: To revive the electricity sector in Guinea from its presently poor operational and commercial conditions, it is critical that the GOG remains politically committed to a long-term reform vision with a coherent sector wide strategy. The success of this pilot Project depends on the continued commitment of the political leadership in Guinea and the support of EDG management, and their willingness to replicate the lessons learned at the sectoral level. The Project seeks a phased approach with short-term focus on efficiency enhancements as a means to engage in Guinea’s electricity sector and build confidence for longer term engagement for sector reform. 69. There is no credible track record of political commitment for reforms in Guinea. In the electricity sector itself, the country once had a sector that was functioning efficiently and was a model for the entire region. It had a vibrant private sector that was performing reasonably well. However, due to lack of sustained political support, those gains made by the earlier privatization exercise were not sustained and consolidated. The current GOG has shown its commitment to bring about reforms in the country. It has made electricity a priority area given its critical position as a key driver of growth. Recognizing that private sector involvement is key to sustained progress in the sector, GOG has also moved to resolve the long outstanding issues regarding the financial settlements with the private sector partners, EDF and Hydro Quebec. Given the fragile state of the sector and its entrenched problems, there is a compelling need to innovate and seek new solutions with private sector support. To demonstrate Government commitment and prepare the groundwork for private sector re- engagement, sustained political commitment in terms of appointing professionally competent managers in EDG and allowing them to function independently along commercial lines should be facilitated. GOG should also support the creation of a legal and regulatory framework and allow EDG to move towards cost reflective tariffs. In addition GOG has to ensure that its agencies pay their bills to EDG when due. 70. Despite the major risk of wavering political support of the sector, GOG has undertaken some encouraging steps: (i) the Finance Ministry has put in place a system where receivables due to EDG from various government agencies are paid centrally in a consolidated manner on the first of every month and on a recurring basis; and (ii) GOG has been servicing the debt of some major capital projects undertaken in the electricity sector in the past. While these government initiatives provide the right signals, it needs to reinforce and scale up its support of the sector. EDG has been facing difficulties in its efforts to contain electricity pilferage and revenue collection. Laws enacted against electricity theft should, for example, be strictly enforced and violators vigorously prosecuted to deter pilferage. GOG could also reinforce this with enabling legislation and adopting a policy of zero tolerance against theft. GOG should support EDG’s efforts in this direction by providing special police and tribunals. The Government should also assist EDG in collection of its receivables against sale of electricity from all sections of consumers in general and the powerful “VIP” consumers in particular. It should support EDG’s initiatives such as its move to publish the list of all defaulters and take legal action against them. All these measures require strong political commitment and improved governance, which is a prerequisite for the survival and sustenance of the sector. 71. To articulate its vision and commitment to policy reforms and governance, and to strengthen its long term sector strategy, GOG is currently preparing a detailed Electricity Page 27 33 Strategy and Policy Paper (ESPP). This strategy would be monitored through the framework of the Joint Bank Fund SMP which is expected to focus on the GOG's long term vision along with enabling strategies for the power sector. The ESPP would articulate the GOG's plans in terms of: (i) tariff adjustments which take account into operational costs, inflation and commercial profitability; (ii) institutional and policy framework for investment in generation, transmission and distribution, aligning distribution efficiency enhancements to generation expansion so that downstream revenue collections finance upstream capital and operating costs, (iii) the access agenda, and (iv) efficiency improvements (in commercial, financial and operational performance). The monitoring and assessment of appropriate indicators such as tariff adjustments vis- à-vis inflation, and revenue collected per KWh injected into the system, as well as the evaluation of regulatory mechanisms and fiduciary track record (both in terms of controls and remedies leading to improved fiduciary management, cost reduction and staff rationalization) would be incorporated in the SMP to facilitate monitoring. 72. Limited institutional capacity: The electricity sector in Guinea suffers from poor technical and human resources, and proper institutional arrangements which constrains the ability to implement the reform agenda. The urgent need to build basic institutional and management capacity of the sector should be explored with private sector participation in training and capacity building. The lessons learned from the implementation of the Decentralized Rural Electrification Project would also provide relevant valuable inputs. 73. Recognition and transfer of “real costs”: While GOG, in its effort to improve the viability of the electricity sector, adjusted tariffs in 2004 (after a long hiatus since 1997), high inflation has eroded real tariffs in Guinea. The current environment of high fuel prices has put additional pressure on the sector to align real tariffs with actual costs of electricity supply. While politically challenging, the move towards cost-effective tariffs should be an integral part of any reform package. GOG also understands that tariff increases have to take place in step with improved service delivery. The Project ’s focus on improving operational and commercial efficiency through enhanced service delivery should bolster GOG’s ability to implement an appropriate tariff regime in the future. The improvement in financial performance, which is expected from the Project activities, will partly mitigate the financial burden arising from below-cost tariffs levels. 74. Private sector involvement: While the abrupt end of the previous concession and the consequent negative signal to the investor community poses a risk to achieving Project objectives, the GOG’s renewed commitment to the sector demonstrated by the change in management, staff reductions at EDG, tariff adjustment, and commitment to resolving all outstanding issues related to the earlier concession should send a strong positive message to the market and thus entice future private sector participation. The Project’s goal to improve the commercial efficiency of the sector will also enhance the sector’s attractiveness to various models of private sector involvement. Risks Risk Mitigation Measures Risk Rating with Mitigation To Project Development Objective GOG commitment to reinvigorate the power sector with a long - term vision Phased and flexible engagement with focus on efficiency S Page 28 34 for reforming the sector enhancements in the short to medium-term as preparation for long-term reform Limited institutional capacity to expand beyond the pilot phase, and to absorb larger investments and reform a) Training and capacity building are integral parts of the Project b) Potential for private sector involvement through turn key/outsourcing S Recogniti on and transfer of “real costs” Phased approach with initial focus on improved service delivery S Lack of private sector participation a) Project will improve operational and commercial efficiency, enhancing sector attractiveness b) Technical assistance component to explore avenues for private sector participation M Page 29 35 To Component Results Planned HVDS investments delayed due to customer densities Use of taller poles, insulated cables and deployment of other technical solutions M Implementation delays in replacement of critical generation equipments Turn-key contracts to private sector providers with penalties for delay N Difficulties in mitigating rent-seeking prevalence in metering, billing and collection processes a) Staff training on effective communications and customer interface b) Deployment of technical solutions like automated meter-reading, spot billing, pre-paid meters c) Efficient management of business processes through outsourcing d) Interventions such as threat of disconnecting power supply to provide incentive for customer compliance S Overall Risk Rating Substantial 6. Grant conditions and covenants: 75. The GEF grant for the Guinea Electricity Sector Efficiency Improvement Project will be on-lent by the Republic of Guinea to EDG on the following terms: 5 years grace period, and 15 years of lending period. Ahead of negotiations the following conditions for negotiations were complied with the following project triggers : (i) the General Statement by the Ministry of Energy and Hydraulics on the Sector’s Policy; (ii) a letter by the Ministry of Energy and Hydraulics confirming the issuance of an opening balance sheet for EDG by 15 May 2006 (completed); and (iii) a letter of acceptance by the Ministry of Energy and Hydraulics of the conditions of effectiveness and covenants as agreed during project appraisal. The detailed list of conditions for effectiveness and covenants are given in pages 3- 6.. Page 30 36 D. APPRAISAL SUMMARY 1. Economic and financial analyses 76. Project Economic and Financial Analysis. The economic analysis of the Project is based on a cost-benefit analysis of the main investment sub-components. A range of benefits is evaluated for each sub-component. For the distribution component benefit analysis focuses on reduced losses (technical and non-technical), increased sales, and improved revenues. For the generation analysis, the benefit analysis focuses on retained generation capacity (kWh). The economic analysis excludes costs of financing. The financial analysis uses similar input, but includes the cost of financing investments. 77. The Project produces a robust EIRR of 27% as compared to the opportunity costs of capital at 12%. The project’s FIRR is sound at 29%. The distribution component of the Project produces an EIRR of 25% and an FIRR of 27%. The generation component produces an EIRR of 30% and an FIRR of 30%. Table 1 below summarizes the key indicators. The NPV is sensitive to changes in the tariff levels. Especially a marked decline in tariff in real terms could put the economic viability of the Project at risk (see Annex 9A). 78. The Project will bring about greenhouse gas emission reductions through avoided fossil fuel generation. The measures implemented, including the reduction in system losses and DSM activities, are expected to result in a reduction of approximately 752,200 tons of CO2 over the 10 year lifetime of the investment. This translates into incremental costs of approximately US$ 6.0 per ton of carbon. Table 6: Key Economic Indicators of Project (in million US$) Distribution Efficiency Improvement Generation Improvement Total Economic Benefits 10.12 21.56 31.68 Investment Costs (including taxes and financial charges) 5.90 2.60 8.50 O&M Costs 2.58 17.00 19.58 Economic NPV 2.29 1.96 4.25 Financial NPV 1.64 1.22 2.86 EIRR 25% 30% 27% FIRR 27% 30% 29% Note: Discount rates of 12% and 16% respectively are assumed to calculate the present values for the economic and financial analysis. 79. Financial Performance: The electricity sector is in a critical situation. EDG, whose management was taken over by the State following the termination of a private concession contract, is facing enormous financial difficulties. Since 1994, the electricity sector was managed by two different entities: ENELGUI (the asset holding company) and SOGEL (the operating company). ENELGUI was formed in 1988 as a financially autonomous public Page 31 37 corporation with its own board of directors, replacing Societ é Nationale d’Electricité (SNE), as the owner and operator of all electric assets previously held by SNE. 80. In 1994, ENELGUI was transformed into a state-owned enterprise, and its supply facilities were transferred to the private operator SOGEL via a 10-year concession contract awarded following an international tender. In October 2001 the concession contract was terminated prematurely by the consortium after it became apparent that SOGEL was unable to operate the facilities as successfully as had been expected. The consortium’s shares in the company were sold to the Guinean state, which then liquidated ENELGUI and transferred its assets to EDG, which was founded in December 2001. The dissolution of the SOGEL partnership was not amicable and a dispute ensued with the foreign partners who sought remedies from the GOG. It was only in October 2005 that a compromise agreement was reached between the parties for a settlement of their differences. 81. As a relatively newly formed entity with a history of management deficiencies and changes, and poor accounting and financial infrastructure, EDG is severely constrained in providing detailed and reliable historical and projected consolidated financial information. As part of the effectiveness package for the associated IDA credit, EDG provided fully audited consolidated financials which are compliant with international accounting standards and consisting of the complete income statement, balance sheet and cash flow statement for the past three years. 82. EDG recorded net losses in each of its full year of operation (FY03, FY04 and FY05) at US$ 13.0 million, $2.8 million and $5.0 million, respectively. The reduction in net losses was supported by a 74% tariff increase in September 2004 as well as due to EDG’s efforts at significantly reducing O&M, and sale of electricity and administrative expenses as a percentage of total revenues from 55% in FY03 to 39% in FY04 to 23% in FY05. EDG has also been effective in bringing down transmission and distribution (T&D) losses from around 65% in 2003-04 to about 60% in 2004-05. The working ratio declined from greater than unity in FY03, which indicates that EDG’s cash operating expenses exceeded operating revenues, to 0.94 in FY05. This indicates that the utility generated cash operating profit in FY04, although the ratio was forced above unity in FYO5 due to higher fuel expenses. The marked increase in fuel prices forced EDG to increase spending on fuel purchases (diesel and HFO) by 21% from 2004 to 2005, which has dampened the otherwise positive operating improvements (see Annex 9 B). 2. Technical 83. The investments under the Project have been designed to support the recovery of the electricity sector in Guinea. In view of the limited resources available, three main themes have been identified as critical to jumpstart the process of the sector recovery. They are: distribution efficiency improvement, urgent rehabilitation of the generation facilities and Technical Assistance. The technical assistance component includes support for development of institutional framework and capacity for energy efficiency programs, identification and development of viable approaches for private sector participation, financial and accounting systems, MIS and IT systems for operations. The key operational and commercial objectives are highlighted below: Page 32 38 · Remove immediate bottlenecks in the generation and distribution system by improving efficiencies in selected generation plants and distribution areas. · Improve power quality by investments in system reactive power compensation equipment. · Increase supply reliability of the distribution network in identified areas. · Reduce energy losses in the system. · Improve cash flows through higher revenue collection. 84. These investments under the Project were identified by the EDG team based on the initial results of the implementation of the CREST efficiency development program. In order to complement the efforts being made for improvement of operational and commercial efficiencies, EDG identified the need for support for critical rehabilitation/repairs required for the generation facilities and strengthening of institutional capacities in specific areas. The technical feasibility and viability of these investments has been appraised in the context of the results of initial implementation of the efficiency development plan by EDG and global experience of these investments delivering the desired results and objectives (See Annex 4 and 5). 3. Fiduciary 85. A full financial management assessment has been carried out in accordance with the Financial Management Practices Manual issued by the Financial Management Sector Board on November 3, 2005. This report is a record of the results of the assessment of the related project implemented by the Electricité de Guinée (EDG) through its financial management unit. The main objectives of the assessment is to determine: (a) whether EDG has adequate financial management arrangements to ensure that project funds will be used for purposes intended in an efficient and economical way; (b) EDG financial reports will be prepared in an accurate, reliable and timely manner; and (c) the entities’ assets will be safe guarded. 86. The CFAA conducted in 2003 shows that Guinea continues to make progress in the modernization of its public financial management process and structures. Over the last three years there has been a noticeable improvement in many of the basic elements of public financial management. The impact of the improvements is, however, mitigated by (a) the lack of a reliable and predictable revenue stream, (b) excessive government expenditures outside the commitment control systems, and (c) the weak linkages between various elements of public financial management processes. 87. The public financial management systems and processes in Guinea are not yet at a level that would provide reasonable assurances to the Bank or other donors that the government’s own systems can be used to channel funds to donor funded projects or programs. It is, however, not unreasonable to believe that if the current progress in improvements is sustained and deepened, the objective of using the government’s own systems for channeling donor funds could be realized in the medium term. 88. As mentioned in this annex, the project’s Financial Management will be carried out within the EDG Unit. The accounting unit will be in charge of maintaining the books of accounts and records of this project in any time. The project accountant and his assistant will Page 33 39 report to the Finance and Administrative Director. The accounting unit will be computerized and will use the project software “TOMPRO”. The FM unit will prepare the Interim Financial Report on a quarterly basis and submit them to the IDA for appreciation and comment. 89. All actions highlighted in Financial Management action plan will be implemented by the EDG to enhance their Financial Management System. The actions that have been done during negotiation are as follows (i) Agreement with IDA on the Interim Financial Report (IFR) formats; (ii) Selection of external auditor to ensure that the project accounts are audited and submitted to the Bank in time. These conditions will strengthen the Financial Management System and should be accomplished within four months after negotiation 90. In order to ensure that the project is effectively implemented, the EDG has already appointed the fiduciary team; these persons should be maintained in place throughout the life of the project. The Project’s financial Statement will be audited in accordance with statutory requirement, and suitable Terms of Reference have been drafted. 91. In conclusion the assessment is that the Financial Management arrangement satisfies the Bank’s minimum requirements under OP/BP/10.2 and therefore is adequate to provide, with reasonable assurance, accurate and timely information on the status of the project required by IDA. With the implementation of the action plan, the Financial Management arrangement will be enhanced. The overall FM risk rating is moderate. 92. Procurement for the proposed project would be carried out in accordance with the World Bank’s "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The overall project risk for procurement is rated high. Annex 8 summarizes the proposed risk mitigation measures as well as details of various items to be procured under different expenditure categories. A detailed procurement plan for at least the first 18 months of project implementation prepared by the Borrower was discussed and finalized during negotiations. The agreed plan will be updated on a yearly basis and sent to IDA for approval. The plan will be reviewed by IDA supervision missions. It will available in the Bank’s external website. 4. Social 93. Improvement of the electricity sector’s service delivery, efficiency, and billing will have a positive social impact. For example, prior to the CREST pilot program, 80% of the customers in Kaloum, were given estimated bills, facilitating fraud and corruption. Customer dissatisfaction with EDG is high and pilferage of electricity is common. More efficient and reliable service, coupled with more transparent billing mechanisms, will increase customer satisfaction, and increase EDG’s revenues, leading to better service delivery in the long run. 94. Evidence from the CREST pilot program in Kaloum has shown that increased customer satisfaction through better management resulted in collection levels rising from 70% to 93%, recorded customer connections increasing to 11,700, and system losses decreasing from 55% to 45%. These improvements took place with no new capital investment, but through enhanced business processes and management improvements. The Page 34 40 Project is directly addressing customer dissatisfaction through better quality of supply, efficient support services, more transparent billing, reduction in fraud and a DSM component that focuses on energy efficiency. 95. While better service delivery, transparency in billing and greater efficiency of management will improve the sector as a whole, it is important to more closely examine the potential negative impacts of the Project on different stakeholder groups. Nearly 50% of Guineans live on less than US$1/day, and expected tariff hikes could price poor consumers out of the market. The Project aims to mitigate this negative effect through programs to enhance energy efficiency among consumers. Specifically, the Project has earmarked funds for a Compact Fluorescent Light bulb (CFL) program. These light bulbs replace the 100 watt bulb with 32 watts, resulting in energy savings to offset the tariff hike. 96. Finally, while cost recovery is key to the Project and to EDG in the short run, in the long term, reduced non-payment and customer buy-in is important to the survival of the sector. As such, a communication strategy that includes stakeholders from the private sector, and civil society, is vital to understanding particular concerns and communicates the reform strategy effectively. 5. Environment 97. The Project is rated Environmental Category C . The Project principally involves pilot initiatives such as rehabilitation of existing distribution infrastructure using the CREST approach, funding goods and services such as HT trivector meters or the introduction of efficient billing procedures. Existing generation facilities are being provided with the necessary spare parts to improve the reliability and efficiency of the existing Garafiri Hydropower plant and the 98. Tombo Thermal generation plant. The operation also focuses on institutional strengthening and technical assistance such as support for accounting systems, identification of areas for future private sector involvement, and operational IT support. 99. This operation is essentially a pilot operation designed to assist the electricity sector to improve commercial and operational efficiencies. Thus, the intention is to use the US$7.2 million under this pilot operation to fix the most urgent problems, and to address significant environmental issues in the context of a larger, follow-on project. Towards this end, such a follow on project will proceed with appropriate environmental mitigation measures and build on the sector-wide environmental assessment work undertaken by EDG. 6. Safeguard policies Page 35 41 Safeguard Policies Triggered Yes No TBD Environmental Assessment (OP/BP 4.01) X Natural Habitats (OP/BP 4.04) X Forests (OP/BP 4.36) X Pest Management (OP 4.09) X Cultural Property (OPN 11.03) X Indigenous Peoples (OP/BP 4.10) X Involuntary Resettlement (OP/BP 4.12) X Safety of Dams (OP/BP 4.37) X Projects on International Waterways (OP/BP 7.50) X Projects in Disputed Areas (OP/BP 7.60) X 7. Policy Exceptions and Readiness The Project complies with all World Bank policies and no exceptions are necessary. 8. Compliance (checklist) 100. These investments do not have any environmental or social safeguard implications as such, by themselves. Hence no environmental or safeguard policies are triggered by the current project. Page 36 42 Annex 1: Country and Sector Background GUINEA: ELECTRICITY SECTOR EFFICIENCY IMPROVEMENT PROJECT Geography, population and politics Guinea, a country of 8.44 11 million, is located in the west coast of Africa, and bordered by Guinea Bissau, Senegal, Mali, Ivory Coast, Sierra Leone, and Liberia. Guinea received its independence from France in 1958. Guinea is a constitutional republic with a presidency that rules with an appointed council of ministers. The last elections were held in June 2002, when President Conte’s party –Unity and Progress Party and its associated parties, won 91 of the 114 seats 12 . Economic conditions, poverty, and human development Guinea’s GNI per capita declined since 1999 and now stands at US$460. Due to the concentrated nature of its growth in extractive industries and agriculture, 50% of Guineans live below the poverty line. Despite being a country with abundant natural resources (mineral deposits and hydropower) and maritime access, gross economic mismanagement has meant that the country has had to suffer through a long period of poor growth and stagnant economic conditions. As opposed to a benign inflation rate of 4.3% during the 1996-2000 period, Guinea experienced inflation rates of 14.8% and 27.6% in 2003 and 2004, respectively. Guinea’s human development also lags behind, in the recent Human Development Report (2005), Guinea ranked 156 among 177 countries. A significant percentage (44%) of the population is below 15 years of age with life expectancy currently at 53.7 years. Less than half of its adult population is literate and only 58% of the girls are enrolled in primary school (Human Development Report, 2005 13 ). Figure 1: Annual GNI and GNI per capita growth % Annual GNI and GNI Per Capita Growth % -4 -2 0 2 4 6 8 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Annual GDP Growth % Annual GDP Per Capita Growth % Source: World Development Indicators, 2005 11 As per 2002 census 12 http://www.state.gov/r/pa/ei/bgn/2824.htm 13 UNDP, 2005. Human Development Report, 2005: International cooperation at a crossroads: Aid, trade and security in an unequal world. Page 37 43 To improve the poor living conditions of millions of Guineans and to bring the country into a sustained growth path, GOG adopted a ‘Guinea – Vision 2010’ in 1996-98. GOG aims to embrace an integrated approach to combat the problem of rising poverty. One of the critical components of this approach is the equitable provision of infrastructure, electricity being one of the key sectors. Similarly, GOG has made poverty reduction and improving the lives of its poorest as the main themes in its Poverty Reduction Strategy Paper (PRSP), 2002. The goal of the PRSP is to reduce headcount poverty from 63% recorded in 1995 to 20% in 2010. Guinea has identified provision of basic infrastructure such, as electricity and water, as one of the components of its ‘acceleration of growth’ pillar. While the PRSP objective was to increase the rate of access to electricity to 39% by 2005, it had only reached 18.8% of its residents. Weak and unreliable supply of electricity has imposed a severe cost on businesses since 2000, which have resorted to captive generation of electricity. Improving electricity provision will be critical for diversifying Guinea’s economy that depends primarily on bauxite and mining revenues. This would lead to improving the investment climate for private sector development. Selected PRS Outcomes in Guinea Objectives/Indicators Benchmark Goals set in the PRSP Outcome recorded 2002 2003 2004 Reduce the incidence of income poverty Incidence of poverty nationwide 62.6% (1995) 20% (2010) 49.2% 50.0% 50.1% Increase incomes GDP growth (% per year) 3.7% (1996/00) 5.2% (2002/05) 4.2% 1.2% 2.7% GDP growth per capita (% per year) 1.01% (1996/00) 1.9% (2002/05) 1.1% -1.7% -0.4% Investment rate (% of GDP) 16.2% (1996/00) 18% (2002/05) 12.8% 16.1% 8.9% Preserve macroeconomic and financial stability Inflation rate (%, average) 4.3% (1996/00) 3.5% (2005) 3.0% 14.8% 27.6% Overall fiscal balance (on a commitment basis, excluding grants, % of GDP) -5.4% (2000) -3% (2005) -6.2% -7.9% -5.9% Sectoral objectives Gross primary enrolment ratio (%) 56.7% (1999/00) 70% (2004/05) 72% 74% 77% Infant mortality rate (per mil) 98 (1999) 70 (2005) 91 (2005) Population with access to drinking water (%) 49% (1999) 80% (2005) 64.3% Rate of access to electricity (%) 16.4% (1999) 39.4% (2005) 18.8% Source: IMF, Guinea: Poverty Reduction Strategy Second Annual Progress Report, April 2006 Electricity sector Page 38 44 The electricity sector in Guinea is currently a major burden on the economy given that, about 107 billion GNF (US$42 million at 2004 exchange rate) is being lost on operations alone annually. In addition, the high cost of captive generation and the substantial, yet inadequate, budgetary support (30 billion GNF in the current fiscal year, which includes payments due to EDG on account of electricity consumption by Government agencies) are causing severe macroeconomic imbalances. High rates of inflation (31% in 2005) erode the real tariff levels and the capacity of customers to pay their bills. While the world-market prices for Guinea's main export articles have continued to stagnate, oil prices have risen dramatically. For instance, cost of oil imports rose by 80% during 1999-2003. Rising oil prices in the past year have entailed more severe load shedding schedules. Further, below average rainfall in 2002 and 2003 led to additional power shortages. The outstanding debt payments for Guinea's hydropower facilities are not factored into the commercial operation of EDG, and are entirely borne by GOG, imposing a heavy burden on GOG's budget. Electricité de Guinée (EDG) is the principal electricity sector entity in Guinea that annually generates 662 Gwh. Guinea was among the first countries in Sub-Saharan Africa where the power sector was managed by a private firm with major capital expenditure (Izzaguire, 1998). Following the departure of the private concessionaire in 2001, EDG has been operating as a public utility. However, EDG’s financial situation is highly vulnerable. The commercial indicators suggest that unless substantial interventions are undertaken to check the technical and commercial losses, improve billing, and efficiency, the company will continue to slide further into financial losses. Commercial indicators, 2005 14 % 1998 1999 2000 2001 2002 2003 2004 Oct 2005 Billing 38.4 36.68 39.21 39.08 43.38 39.27 39.63 44.52 Collection 80.88 85.76 88.44 88.62 74.62 73.43 73.44 73.92 Productivity 31.06 31.46 34.68 34.63 32.37 28.83 29.84 32.91 Output – network distribution 42.3 40.61 43.98 41.40 47.06 43.56 44.78 48.06 Output – production transport 90.64 90.33 89.15 94.39 92.18 90.14 90.85 92.63 Technical loss 45.10 46.82 43.49 42.41 38.11 42.22 41.86 36.97 Distribution loss 16.50 16.50 17.30 18.51 18.51 18.51 18.51 18.51 Source: EDG, 2005 As EDG is forced to cope with the worsening situation of reduced generation, the widening demand-supply gap could lead the electricity sector to collapse in the foreseeable future. Since 2004, GOG has highlighted the importance of electricity for the economic well-being of the country and has sought to improve the sector's financial health, performance, and service 14 These commercial indicators are estimated by EDG for several reasons: 1. 90% of EDG’s customer base is unmetered; 2.The segregation of technical losses and commercial losses is done by assigning an assumed figure for commercial losses. The project will address these issues through metering and system energy audits Page 39 45 delivery. GOG has addressed the governance and financial problems in the electricity sector by setting the path to improve the financial viability of EDG. Further measures are needed to attract the required investment to this economically vital sector in order to meet demand and improve service quality. To this end, GOG plans to adopt the following measures: (i) a rigorous implementation of the anti-fraud plan adopted in June 2005; (ii) adoption of a medium term action plan laying out the measures which will further strengthen the financial viability of the electricity company; (iii) resolving the issue of all remaining cross debts and confirming on an opening balancing sheet for EDG, and (iv) making timely payment of its bills to EDG while EDG honors regularly its obligations towards the state. The opening balance sheet, which will resolve all outstanding issues with the former managing firm in the sector, will allow EDG to come out with its own financials which is a key step in attracting private investment into the sector. Demand forecast and hydro potential . While increase in access to electricity as well as increased use of electricity among existing customers will lead to higher electricity demand, it is expected that the growth in the mining sector and associated industry will be the key driving factor for electricity demand growth in Guinea. As the table below presents, while peak demand was estimated at only 147MW in 2003 with only 4MW attributed to the mining sector, the Nexant study estimates that peak demand will grow to 1,098MW in 2020, with 59% of that demand coming from the mining and related industry. Guinea Peak Demand Forecast (MW) 2003 2007 2011 2015 2020 Forecast, excluding mining and related industry 143 186 248 341 453 Mining and related industry 4 18 148 609 645 Total 147 204 396 949 1,098 % peak demand from mining and related industry 2.7% 8.8% 37.4% 64.2% 58.7% Source: Nexant “West Africa Regional Transmission Stability Study”, 2004 Guinea, due to its mountainous terrain and heavy rainfall, has substantial hydropower potential that can be economically harnessed. The West Africa Power Pool master plan study estimates that the country can develop 129 sites, ranging in size from 3MW to 750MW, to generate a total of 6,000MW of electricity, enough to more than meet the expected demand growth. There is a real opportunity for the country to leverage the WAPP transmission network to sell electricity to neighboring countries in the region and thus build the sector as a significant contributor to the economy. Page 40 46 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies GUINEA: ELECTRICITY SECTOR EFFICIENCY IMPROVEMENT PROJECT Sector Issue Project/Financier Ratings (Bank financed projects only) Completed projects OED Ratings Outcome Sustainability ID Impact Second Energy Project World Bank (closed in 1998) Unsatisfactory Unlikely NA First Power Project World Bank (closed in 1986) Did not achieve main objectives Second Engineering and TA Project World Bank (closed in 1990) Did not achieve main objectives Ongoing Decentralized rural electrification project The World Bank (Approved July, 2002) Page 41 47 Annex 3: Results Framework and Monitoring GUINEA: ELECTRICITY SECTOR EFFICIENCY IMPROVEMENT PROJECT Results Framework Project Development Objective/Global Environmental Objective Outcome Indicators Use of Outcome Information Improve operational and commercial efficiency in the sector Reduce Greenhouse Gas (GHG) Emissions Sector-level outcomes (a) improve the financial profitability and sustainability situation of EDG (b) undertake preparations for achieving increased private participation in the Guinean electricity market (c) reduce total GHG emissions To evaluate longer-term prospects of the sector and its economic and fiscal impact. To draw lessons to improve institutional performance in delivering service. To evaluate progress towards power sector viability. Page 42 48 Intermediate Results One per Component Results Indicators for Each Component Use of Results Monitoring Component One: CREST - Distribution Efficiency Improvements. Intermediate Results: (a) Reduction in technical losses. Technical losses are a measure of energy efficiency in distribution operations and reduction in system losses indicates a direct improvement in financial viability. (b) Reduction in non-technical commercial losses through increased metering, billing and collection (MBC). (c ) Improvement in customer satisfaction. Component One: (a1) Reduction in technical losses by 8% over baseline. (b1) Increase in billing, revenues and collection of 10% over baseline. (b2) 15% increase in the Performance Verification Index (PVI) over baseline. 15 (c1) Improvement in tail-end voltage of 10% over baseline. (c2) Launch customer care center, spot billing as applicable and rapid response vehicle systems. (c3) Improvement in customer satisfaction from Project implementation, as determined by customer surveys. Component One: Measured by EDG, and progress will be documented and updated on quarterly reports produced by the EDG. Assess the progress in improving energy efficiency and financial sustainability in the distribution system. To plan the potential for scaling up such efficiency enhancements. Component Two: Improve generation efficiency Intermediate Results: (a) Increased capacity utilization of the Garafiri hydropower plant and the Tombo thermal generation plant. Component Two : (a) Plant availability factor of each plant increases by 10% over baseline. Component Two: Evaluate the progress in rehabilitating generation and improving capacity utilization. Use the experience to create confidence and build value in the business model for potential investors. Measured by EDG, and progress will be documented and updated on quarterly reports produced by the EDG. Intermediate Results Results Indicators for Each Use of Results Monitoring 15 PVI is calculated as total energy sales revenues (GNF) divided by the product of total energy generated (kWh) and the average tariff rate (GNF/kWh). Page 43 49 One per Component Component Component Three: Institutional Strengthening through Technical Assistance Intermediate Results: (a) Promotion of energy efficiency and conservation. (b) Private sector capacity development. (c) Strengthening financial and accounting system. (d) Building MIS and IT support. Component Three: (a1) 20 energy audits of customers completed. (a2) reduction/substitution of peak load demand by 12.15 MW from DSM related activities. (b) 3 training programs on private sector participation. (c) Production and disclosure of annual audited financial statements with international accounting standards. (d) Launch technologies that assist in remote metering, anti- theft and customer service. Component Three: Assess capacity building for sustained energy sector reform. Serve as inputs to policy and regulation development. Semi-annual progress reports by the EDG. Planning of long-term DSM/energy efficiency strategy and programming. Diligent management of Utility finances to improve availability of resources for energy efficiency, improved service delivery, and reduce sector’s dependence on external fiscal support Energy Audit and Balance leading to Energy efficiency and loss reduction Page 44 A r r a n g e m e n t s f o r r e s u l t s m o n i t o r i n g T a r g e t V a l u e s D a t a C o l l e c t i o n a n d R e p o r t i n g O u t c o m e I n d i c a t o r s B a s e l i n e Y R 1 Y R 2 Y R 3 F r e q u e n c y a n d R e p o r t s D a t a C o l l e c t i o n I n s t r u m e n t s R e s p o n s i b i l i t y f o r D a t a C o l l e c t i o n R e s u l t s I n d i c a t o r s f o r E a c h C o m p o n e n t P r o j e c t d e v e l o p m e n t o b j e c t i v e / G l o b a l e n v i r o n m e n t a l o b j e c t i v e : · I m p r o v e m e n t i n u t i l i t y ’ s p r o f i t a b i l i t y · I d e n t i f i c a t i o n o f p r i v a t e s e c t o r o p p o r t u n i t i e s t h r o u g h s t u d i e s · R e d u c t i o n i n C O 2 e m i s s i o n 2 0 0 5 n e t l o s s o f 1 8 b n G N F N o n e T o b e e s t i m a t e d a t s t a r t o f p r o j e c t 0 % 0 0 % 5 % S t u d i e s c o m p l e t e d 1 0 % o f e s t i m a t e d r e d u c t i o n 1 0 % 1 o p p o r t u n i t y d e t e r m i n e d 2 0 % o f e s t i m a t e d r e d u c t i o n A n n u a l A u d i t e d f i n a n c i a l s , O p e r a t i o n a l e f f i c i e n c y g a i n s i n d i s t r i b u t i o n a n d g e n e r a t i o n t r a c k e d E D G , W o r l d B a n k C o m p o n e n t O n e : ƒ R e d u c t i o n i n t e c h n i c a l l o s s e s ƒ I n c r e a s e i n b i l l i n g 5 9 % 4 5 % o f e n e r g y b i l l e d 0 % 0 % 4 % 5 % 8 % 1 0 % Q u a r t e r l y N o n - a u d i t e d a n d a u d i t e d f i n a n c i a l s , M & E r e p o r t , c u s t o m e r s u r v e y s E D G , W o r l d B a n k Page 45 5 1 T a r g e t V a l u e s D a t a C o l l e c t i o n a n d R e p o r t i n g O u t c o m e I n d i c a t o r s B a s e l i n e Y R 1 Y R 2 Y R 3 F r e q u e n c y a n d R e p o r t s D a t a C o l l e c t i o n I n s t r u m e n t s R e s p o n s i b i l i t y f o r D a t a C o l l e c t i o n ƒ I n c r e a s e i n r e v e n u e s ƒ I n c r e a s e i n c o l l e c t i o n ƒ I n c r e a s e i n t h e P e r f o r m a n c e V e r i f i c a t i o n I n d e x ( P V I ) ƒ L a u n c h c u s t o m e r c a r e c e n t e r , s p o t b i l l i n g a n d r a p i d r e s p o n s e v e h i c l e s y s t e m s ƒ I m p r o v e m e n t i n t a i l - e n d v o l t a g e ƒ I m p r o v e m e n t i n c u s t o m e r s a t i s f a c t i o n 2 0 0 5 e n e r g y s a l e s r e v e n u e s o f 8 1 . 5 b n G N F 7 5 % 5 3 % N o n e 1 8 0 V o l t s 2 0 % ( s a t i s f i e d c u s t o m e r s b a s e d o n s u r v e y s ) 0 % 0 % 0 % 0 0 % 1 0 % 5 % 5 % 7 % 1 5 % 1 0 % 1 0 % 1 0 % 1 5 % 1 1 0 % 1 0 % c u s t o m e r s u r v e y s Page 46 5 2 T a r g e t V a l u e s D a t a C o l l e c t i o n a n d R e p o r t i n g O u t c o m e I n d i c a t o r s B a s e l i n e Y R 1 Y R 2 Y R 3 F r e q u e n c y a n d R e p o r t s D a t a C o l l e c t i o n I n s t r u m e n t s R e s p o n s i b i l i t y f o r D a t a C o l l e c t i o n C o m p o n e n t T w o : ƒ I m p r o v e d a v a i l a b i l i t y o f G a r i f i r i a n d T o m b o P o w e r P l a n t s 4 2 % 0 % 5 % 1 0 % Q u a r t e r l y D a t a g a t h e r e d f r o m t h e G a r a f i r i a n d T o m b o p o w e r p l a n t p e r f o r m a n c e r e c o r d s E D G , W o r l d B a n k C o m p o n e n t T h r e e : ƒ # o f e n e r g y a u d i t s o f c u s t o m e r s c o m p l e t e d f o r D S M ƒ R e d u c t i o n / s u b s t i t u t i o n i n p e a k l o a d d e m a n d o f 1 2 . 1 5 M W ƒ 3 t r a i n i n g p r o g r a m s o n p r i v a t e s e c t o r p a r t i c i p a t i o n ƒ P r o d u c t i o n a n d d i s c l o s u r e o f a u d i t e d f i n a n c i a l s t a t e m e n t s ƒ L a u n c h t e c h n o l o g i e s t h a t a s s i s t i n r e m o t e m e t e r i n g , a n t i - t h e f t a n d c u s t o m e r s e r v i c e 0 0 0 0 0 4 0 1 1 0 1 0 6 2 2 1 2 0 1 2 . 1 5 3 3 2 A n n u a l D a t a g a t h e r e d f r o m t h e M i n i s t r y , E D G , a n d p r i v a t e s e c t o r i m p l e m e n t a t i o n a g e n c i e s D a t a g a t h e r e d f r o m t h e M i n i s t r y , E D G , a n d p r i v a t e s e c t o r i m p l e m e n t a t i o n a g e n c i e s M i n i s t r y o f E n e r g y a n d H y d r a u l i c s , E D G , W o r l d B a n k M i n i s t r y o f E n e r g y a n d H y d r a u l i c s , E D G , W o r l d B a n k Page 47 53 Annex 4: Detailed Project Description GUINEA: ELECTRICITY SECTOR EFFICIENCY IMPROVEMENT PROJECT Component 1: Distribution Efficiency Improvement (Total US$ 7.43 million, IDA US$ 5.23 million, GEF US$ 2.20 million) This component aims at improving the commercial and operational efficiency of the distribution network in order to: · Reduce system losses, both technical and commercial · Improve revenue billing and collections · Improve cash flows through reengineered business processes · Improve customer satisfaction through improved utility interface and better outage management; and · Contribute to reduction of GHG emissions on account of reduced technical losses in the distribution network This component will support investments that aim at improving the distribution business in terms of: (i) networks for reliable supply to be measured by better voltage and reduced outage times as well as energy losses; (ii) commercial character of the business as measured by enhanced billing and increased revenues; and (iii) customer interface measured by time required to respond to complaints, customer services, etc as well as offering DSM programs. The Project will also facilitate development of capacity in EDG in terms of technical, commercial and personnel systems and capabilities. The main rationale of the se investments is to create value in Guinea’s electricity business and demonstrate its viability in a replicable manner. Guinea has large investment requirements. In view of this, any investment influx would not demonstrate the desired impact unless the same is directed to achieve specific outcomes in identified areas. In order to address this concern, the Project would adopt a cluster approach. Clusters would be a group of customers that are served by an electrically demarcated distribution and sub transmission network. The CREST program and related investments would be implemented in these clusters to create “islands of excellence”. Hence efforts would be made to develop these clusters in such a way that measurable and tangible improvements would be targeted in these clusters in terms of improved distribution sector performance that would lead to improved revenues, reduced losses and enhanced customer satisfaction in terms of quality of supply, reduced fault redressal times, and reduced billing complaints. Features of a typical cluster: The electrical network that is part of a single 11 KV feeder would be defined as a cluster. Thus a cluster would be a part of the electrical network served by a 33/11 KV substation. Typically, such a substation would have up to six 11 KV feeders. These 11 KV feeders, the distribution transformers (that would step down the voltage from 11 KV to 415/220 V), the LT network along with the metering and related arrangements at the customer points would together constitute the distribution network. The incoming 33 KV feeder would constitute the sub transmission network. These clusters would be serving around 10,000 consumers or less or a population of Page 48 54 50,000 or less in each case. The clusters are demarcated thus to facilitate measurement of energy input into the network fed from the 33/11 KV substation into each 11 KV feeder. Typical investments in a cluster Investments will be made in goods and services related to implementation of the initiatives illustrated below: a. Improved reliability of supply for customers through reduction of losses by investment in High Voltage Distribution Systems (HVDS). b. Enhancing the coverage and quality of metering for HT and LT customers. Better revenue collection by metering for Max Demand (MD) consumer premises and metering non-MD consumer premises. c. Improved quality of supply for customers through reactive power compensation by installation of online capacitors. d. Addressing customer concerns through set up of customer care centers. e. Better cash flow management and the MBC process by introduction of cash collection cards/ spot billing etc. f. Improved attention to customer concerns through launch of rapid response outage management program. These investments will strengthen the distribution infrastructure, improve quality of supply and customer satisfaction and facilitate realization of potential in the sector to be a net cash generator instead of being the burden that it is currently on the economy. These investments are targeted to improve quality and continuity of supply, curb pilferage of electricity, and raise the standards of customer service. Sub-component detailed description (a) Reconfiguration of the LV distribution system into a HV distribution system Quality of supply (Voltage) : Voltage profiles in general are very poor and consumers get 180 V or even lower at times instead of the standard 220 V. As a result, household consumers cannot run appliances at all or are at considerable risk and industrial customers find it very difficult to carry out industrial and commercial activities efficiently. The CREST program will address the voltage problem by upgrading the distribution lines to an HVDS to replace the traditional low voltage distribution system. The current system, typically a 500 KVA transformer, transports the electricity from a distance at 220 V (phase to neutral) and serves around 400 customers. By the time the customer is served, it is at LV through long, sometimes sagging lines that are prone to breakdown or being tapped into by theft. With a number of smaller capacity transformers replacing such large transformers under the HVDS, voltage is stepped down from 11 KV to 220 V at several points along a supply line instead of at one point. As a result, the transformation occurs closer to the consumption point limiting voltage drop and dramatically improving the voltage profile. In HVDS projects already implemented in other countries, actual measurements of Page 49 55 voltages at consumer points show vast improvement – from 160 V in some cases to the desired level of 220 V. The higher voltage lines also deter theft, while also dramatically reducing technical losses by reducing the amount of current output in the system. 16 Technical loss reduction increases energy efficiency and creates reductions of global carbon emissions that can generate revenues. Pilferage of electricity : A long LT line facilitates theft as it is relatively simple to pilfer electricity from an LT line. It is practically impossible to pilfer electricity from a distribution system that is configured under the HVDS that uses insulated aerial bunched cables to connect the consumption point from the distribution transformer . (b) Enhancing the coverage and quality of metering for HT and LT customers It is important that all the energy flows are appropriately measured at all the interface and network nodes in the grid. Meters should be of appropriate class of accuracy and should be calibrated and sealed properly to avoid under billing and bypassing the meter and subsequent pilferage. Special precautions also need to be taken in case of different classes of meters. LV meters are used to measure energy consumed by the connected premises, if the connection to the premises is on the downstream side of the LT distribution transformer, i.e. the customer is connected to the grid at 220 V. In the case of LV electro- mechanical meters, it has to be ensured that the jewels of the discs are not worn out and that they are within the prescribed time limit. In case of LV electronic meters it has to be ensured that the counters do not stall or slow down due to the influence of external magnetic fields. LV meters should be sealed and should be housed in an appropriate enclosure to avoid tampering and pilferage of electricity. On the other hand, HV meters are built with tamper proof features. They have an inbuilt RS 232 port that can be used for communication purposes. A remote reading of HV customer premises using this facility and interfacing it with a telephone line would be undertaken. HT meters are positioned on the 11 KV side of the transformer and the customer is responsible for the step down transformer. It is observed that 80% of the customers in Kaloum do not have meters and are given estimated bills. This apart from adversely affecting the revenues of EDG, is also facilitating fraud and corruption. It also leads to customer dissatisfaction with the system. Under this component it is proposed to procure HV and LV meters (including prepayment meters) and install them at various locations, giving priority to high revenue yielding customer premises. 16 These losses are calculated as the square of the current multiplied by the resistance. Hence with a 500 KVA transformer, the output current is 350 amperes resulting in losses of 350x350x resistance value of the wires. Alternatively with a 25 KVA transformer the output current is 31 amperes. In this case the losses will be 31x31x resistance value of the wires. Hence this system will lead to a dramatic reduction in technical losses. Page 50 56 (c) Improved quality of supply for customers through reactive power compensation by installation of online capacitors If the power factor in the distribution grid is below unity, it leads to generation of reactive power in the system. While this causes technical losses, it also causes customer dissatisfaction as it leads to reduction of available voltage at the customer end. This component seeks to rectify this by procuring capacitors and installing them on the distribution grid as required. (d) Addressing customer concerns through establishment of customer care centers Improving Customer service : One of the major complaints with EDG is that consumers get bills that do not reflect the actual consumption and that bills do not get delivered on time if at all they are delivered. The CREST interventions in this regard include: · Introducing efficiency in marketing, bill distribution and bill collection network by outsourcing and introduction of new business processes such as spot billing · Segregation of technical and commercial functions and creating exclusive machinery for customer interface · Establishing networked customer service centers · Internet based interface mechanisms for bill verification and payment · Broad based payment facilities by involving banks, retail outlets, and introduction of mechanisms such as cash collection cards, and · A multi level grievance mechanism to redress customer complaints. (e) Better cash flow management and the MBC 17 process. The introduction of customer friendly billing systems such as prepayment vending infrastructure or spot billing using hand held electronic machines would enhance billing coverage and collection, and improve business process efficiency. In this system, bills are printed and delivered on the spot at the customers’ premises when their meters are read, and EDG customer database is updated electronically. Customers have the additional advantage of staggered payment due dates (in case of spot billing) thus reducing crowding at cash collection centers near the due date. This vastly improves cash flow for the utility as the billing cycle is reduced to a very significant extent. (f) Improved attention to customer concerns through launch of rapid response outage management program. Continuity of Supply : One of the major concerns of consumers in Guinea is unreliable supply, caused by a variety of reasons such as the huge shortfall in generation, transmission constraints, distribution inefficiencies and discontinuities. The HVDS program adopted under Sub-component (a) described above would address this concern. To supplement this effort at the customer interface level, EDG will press into service a system of Rapid Response Units equipped with uniformed workmen and necessary toolkits/spares, stationed at major areas of Conakry (Kaloum, Matoto, Ratoma and Dixin) 17 MBC: Metering, Billing and Collection Page 51 57 on a pilot basis. These units would be available round the clock every day to respond to customer complaints of power failure. The rationale for this initiative is two fold: (i) to reduce outage time and to quickly respond to customer complaints and (ii) to prepare the customer interface system that could be scaled up into a GIS based trouble call management system in future. Component 2: Generation efficiency improvement (US$ 2.00 million, IDA US$2.00 million) This component aims at improving the reliability and efficiency of the generation plants in order to: · improve generation availability; and · complement and reinforce GOG ’s initiative to improve commercial discipline and operational performance of EDG; The Garafiri Hydro facility was commissioned in 1999. This hydro generation plant with an installed capacity of 75 MW has been the backbone of electricity production in Guinea. Of late, the plant has been facing several problems. Investment support would be provided under this component to EDG, to rehabilitate and improve the reliability and efficiency of the existing Garafiri Hydropower plant. As the generation efficiency from Garafiri improves, the dependence of EDG on the thermal facilities would be reduced and consequently the consumption of HFO, used by EDG for thermal generation, can be reduced, contributing to lower carbon emissions. The Tombo Thermal generation plant has five units at present (Tombo I-V) with a cumulative installed capacity of 67.4 MW. These plants mainly run on HFO and have developed several snags. Resultantly the heat recovery levels have dwindled and the PLF is going down. The critical incinerator system for residual HFO disposal is not functioning for lack of essential repairs. Assistance would be given in the form of critical spares to improve the PLF of the Tombo units. These efforts to improve the efficiency of the thermal generation facilities would reduce HFO consumption, due to increased efficiency, for the same level of power generation, and thus would lead to reduction of carbon emissions. Component 3: Technical Assistance for energy efficiency and Institutional and business process strengthening (US$4.27 million, IDA US$1.97 million, GEF US$2.30 million). This component aims at removing barriers for energy efficiency and operational performance in the following manner: · Develop institutional capacity and framework for energy efficiency and DSM programs; contribute to reduction of greenhouse gas emissions on account of improved institutional capacity for energy audits, implement pilot loss reduction and energy efficiency programs. · Assist in Business plan preparation, identify and develop models for private sector capacity development both in terms of energy efficiency programs and in regular utility operations Page 52 58 · Assist in Sector Policy preparation · Build capacity and systems of prudent financial and accounting practices · Design, develop and implement MIS systems and IT interventions to conduct energy audit, reduce energy theft, manage energy sales through customer data bases and improve operations through data management such as HR databases; and · Assist in developing and implementing a monitoring and evaluation system A strong institutional base is fundamental to the sustained financial success of the power sector in Guinea. There is a clear and urgent need to develop a robust, modern technical, financial and accounting infrastructure base to support EDG in improving its managerial, financial and operational performance. Further, opportunities for efficiency enhancements from private sector partnerships and DSM will be identified and explored. The following is a description of specific TA components: (a) Energy efficiency and conservation As Guinea faces a severe power shortage in terms of unmet demand and protracted load shedding, it needs to implement energy efficiency and demand side measures urgently. The EDG system is small with an installed capacity of 143 MW, but there is an almost equivalent (known) captive generation at about 120 MW. These enterprises and households are incurring high energy expenditures due to the use of small, inefficient generators. The DSM program will be targeted at these enterprises and individuals to offer them options to reduce their energy consumption. The current project will build on earlier efforts by the Ministry of Energy to initiate an energy audit program for the commercial and industrial sector. EDG itself has an interest in controlling the consumption of commercial and industrial sector enterprises in the interest of developing its customer base. With the current high level of consumption of these enterprises, it is difficult for the EDG to accommodate them, but it would be possible to do so once the energy consumption comes down. For the EDG, a broader customer base has wide ranging positive impacts such as improved revenues, lower revenue risks and better system stability. In the case of the EDG’s own customers, close link of the DSM initiatives with EDG business objectives such as the system peak shaving benefits and distribution loss reduction rationale are the key drivers of this effort. Even EDG’s most valuable industrial and commercial customers are causing higher system losses due to poor power factors in their facilities and by stretching EDG’s peak demand. In order to launch activities discussed above, the sector would undertake the following: · Implementation of EE/DSM measures following an energy audit of industrial and commercial establishments, buildings and other facilities where significant energy consumption occurs and dovetail these efforts with prudent load management targeting about 12.15 MW in peak demand reduction/substitution and initial implementation of pilot projects will be undertaken in the areas of efficient lighting for public and private buildings as well as efficient motors in industries; Page 53 59 · Develop appropriate incentives for energy efficiency through tariffs and other mechanisms such as appliance standards and labeling initiatives · Involve private sector in design and implementation of these programs through ESCOs · Develop institutional capacity in the MEH and EDG for these programs · Develop a policy framework for implementation of activities leading to energy efficiency and conservation · Implement a communication strategy for generating awareness for energy conservation. The Project recognizes the need to sustain and scale up the efficiency gains that will occur in the sector through these investments by promoting DSM measures. Accordingly, it would assist in the development of an appropriate framework and institutional capacity for energy efficiency and conservation programs, and develop viable strategies for participation of ESCOs to undertake this work. In view of the limited resource under this Project, several energy efficiency initiatives detailed above cannot be followed up in this Project and would be taken up in future Bank projects. It is however, expected that due to the catalytic role played by this component, EDG, the MEH, other sector stakeholders including the private sector would carry this important activity forward. (b) Business plan preparation and private sector partnerships. The project will assist EDG and the Ministry in the preparation of a sector Business Plan that would address issues related to financial recovery in the short and medium terms, peg annual fiscal gaps, and identify the right mix of tariff increases, subsidy interventions, investment infusions and efficiency gains that would help bridge the identified financial gaps. This exercise would also look at staff right sizing and gradual involvement of the private sector in utility /sector operations. The Project would assist in development of private sector capacity through identification and development of areas where the private sector can intervene with the aim of improving the electricity sector's financial viability. 18 These could include outsourcing of various distribution functions and ESCOs. This component would essentially deliver a report detailing possible strategies for private sector participation. The Bank’s energy team has identified two possible public private partnerships in this context. The first concept of Distribution Function Outsourcing involves the private sector in the implementation of the project components. In case of the second concept of Distribution Business Outsourcing, a detailed study needs to be conducted before assessing its viability and private sector interest. The TA under this component would help examine this issue apart from exploring the viability of other approaches of private participation in the sector. 18 This could imply, for example, the outsourcing of an area to the private sector for supply and billing of electricity. Page 54 60 Private Sector Participation Options and Strategy for Guinea’s Electricity Sector The active participation of the private sector is important for the long-term growth and efficient management of Guinea’s electricity sector. Private participation will be important in harnessing Guinea’s vast hydropower potential and capitalizing on regional developments such as the WAPP. In the short-run, the private sector has a role to play in improving the electricity sector's financial viability. Two feasible options can be explored: 1. Distribution Function Outsourcing · The private sector can be engaged in selective function role, for example, to implement parts of the CREST program. While private players can Build-Transfer (BT) the HVDS network, they can also be engaged through a Build-Operate-Transfer (BOT) arrangement to provide services such as meter reading, bill generation, etc. 2. Energy Service Companies (ESCOs) · Private ESCOs can provide knowledge and business process assistance to conduct energy audits of industrial and commercial establishments, and strategy for achieving great efficiency improvements and DSM. The potential for Distribution Business Outsourcing in Guinea requires further study. Under this arrangement, there is an opportunity for the private sector to essentially manage part of the distribution system. The MBC and customer service functions for a designated network or cluster area can be fully outsourced to the private sector, under a management contract or a concession , involving greater risks (and rewards) to the private party. Such an arrangement would prove to be a fertile learning ground for the GOG in formulating a longer-term strategy to encourage greater private sector involvement, and provide an opportunity for interested private players to build country presence and local knowledge. In the longer-term, as the requisite institutional capacity and regulatory environment develops in Guinea, there is possibility for the private sector to be engaged on a much larger scale. Within the right institutional framework, which might include the unbundling of the vertically integrated utility, opportunities for contracting or concessioning out all or significant parts of the generation and distribution businesses can be contemplated. Private investors could also be involved in building generation capacity through long-term power purchase agreements (PPA). The development of the country’s hydropower potential and the WAPP network can provide ample opportunity for further bold reforms to encourage competitive generation and distribution systems, although considerable milestones need to be achieved before reaching this stage in the long winded path of Guinea’s electricity sector development. (c) Sector policy preparation. The Government through a number of recent steps, including the resolution of outstanding issues with the previous concessionaire, new management at EDG, and an increase in tariff rates, has shown new commitment to revamp the power sector in Guinea. The Project will assist in the formulation of a clear and coherent sector policy Page 55 61 and strategy to create actionable plans to push the sector reform forward. Through this component, assistance will be provided for developing the Guinea-Electricity Strategy and Policy Paper that would articulate Government’s vision for the sector and spell out its strategies to achieve it. The ESPP will, among other things, deal with a long term financial recovery strategy for the sector, investment plans for generation, transmission and distribution segments, tariff and regulatory policy. The Government has provided the Bank with a letter of sector policy that outlines this initiative. (d) Financial control and accounting systems. EDG's internal control policies and procedures and accounting system are inappropriately set up and not operating well. Although it has launched some initiatives as a piece-meal approach to improve its commercial system, the financial resource crunch has hampered efforts to strengthen financial management. Essential to an effective financial management is the development of the following monitoring and tracking systems: by EDG (i) Inventory Management; (ii) Budget Control; (iii) Treasury and Cash Management; (iv) Loan Management; (v) Customer Service; (vi) Accounts Receivable; (vii) Fixed Assets; (viii) Billing and Collection; (ix) Accounts Payable; (x) Procurement Contract Management Information; (xi) Records Management and Financial Reporting; and (xii) Project Financial Management. These should be complimented by good information technology support and integrated into an executive management information system. This project component would assist in capacity building and provision of appropriate infrastructure for development of financial management and accounting systems. The objectives are to initiate steps that would overhaul EDG's accounting systems and procedures, establish effective internal controls, and strengthen its financial management capacity through staff training. Technical assistance would be provided on the following: · Conducting an Institutional Strengthening Assessment that would provide the overall management perspective towards EDG's commercialization · Developing a Financial Accounting and Management Information System using selected hardware and software (a single software or a combination of software applications), to install and put this system into operation at EDG and to provide staff, the knowledge and skills necessary to operate, maintain the system successfully. The target system would be the main instrument for modernizing and commercializing EDG's financial management system. · Re-stating of EDG's balance sheet by verifying questionable entries and establishing proper opening balances of accounts · Independent audit arrangements and reporting of EDG's financial accounts · Developing a financial projection model that would be the basis for EDG's future financial projection, test sensitivities and monitor tariff requirements and compliance with key financial covenants. The model would follow financial management reporting standards and calculate the required financial ratios. Page 56 62 (e) MIS and operational IT support. The electricity utility business needs to leverage IT for a variety of functions: · The Project would support initiatives leading to capacity building and infrastructure support through installation of and training on innovative technologies geared towards areas such as anti-theft measures, energy audit, remote metering techniques, customer billing, HR data bases, etc. · Assistance would be given to the EDG in the form of training in global best practices in anti electricity theft measures in other electricity utilities which have successfully reduced incidence of pilferage of electricity. · Energy audit would be developed as a key business function in EDG through technical assistance under the Project. This would be done by selecting certain parts of the grid for energy audit, identifying critical nodes and metering them for this purpose, training for staff to acquire these capabilities and so on. · Assistance would also be given to develop capacity within EDG for remotely reading high consumption premises, in order to reduce commercial and technical losses, to supplement the energy audit function, and check theft of electricity. The focus on high consumption premises is based on the realization that this customer segment, which constitutes 20% of the customer base, contributes to 80% of revenue. Hence this initiative would optimize commercial returns and attack the most debilitating impact of electricity theft. Under this component, the utility’s central server would be connected to the RS 232 port of the HV electronic meter of the customer through a telephone line and the consumption would be monitored both for billing and energy audit purposes. The energy consumed at the premises would be balanced with the energy sent out from the sub station, thus giving a powerful tool to conduct energy audit. Due to the memory and other electrical parameters available with the meter’s software, quality of supply and tamper record such as with the CT ratio can also be monitored. · The customer database is the heart of the distribution business. It determines the revenue base and would also assist in efficient trouble call management. TA would be provided for developing a robust customer database. · In order to assess the productivity of EDG and also to introduce cost cutting measures, it is critical to have a HR database. This information would be critical for future private sector participation and also for identification of costs such as unfunded pension liabilities. The Project would assist EDG in developing a functional HR database. (f) Monitoring and evaluation . To measure progress in Project implementation and in achieving the intended results, it will be critical to create reliable baselines and provide adequate monitoring and evaluation support. The Project will assist the commissioning of an independent agency in establishing the baseline information, monitor performance over time to assess the Project’s development outcomes, and conduct customer surveys. Page 57 63 Annex 5: Project Costs GUINEA: ELECTRICITY SECTOR EFFICIENCY IMPROVEMENT PROJECT Project Description All figures in million US$ Component description Total cost IDA (GNESEIP) IDA (Cr.3685- GUI) IDA Finance GEF Finance IDA (%) 1. Distribution efficiency Improvement 1.1 a) Technical loss reduction (Conversion to HVDS) 3.65 0.74 1.21 1.95 1.70 53 b) Reactive Power compensation 0.6 0.30 0.00 0.30 0.30 50 c) Outage management: Rapid Response units 0.05 0.05 0.00 0.05 0.00 100 d) Metering 2.00 2.00 0.00 2.00 0.00 100 e) Customer Care Centers 0.05 0.05 0.00 0.05 0.00 100 1.2 Engineering supervision, implementation support, audit and training (including support for other components) 0.78 0.49 0.09 0.58 0.20 74 1.3 System protection and coordination 0.20 0.20 0.00 0.20 0.00 100 1.4 Contingency and unallocated 0.10 0.10 0.00 0.10 0.00 100 Component 1 Subtotal 7.43 3.93 1.30 5.23 2.20 70 2. Generation efficiency enhancement 2.1 Garafiri Investment support 0.86 0.86 0.00 0.86 0.00 100 2.2 Tombo Investment support 0.86 0.86 0.00 0.86 0.00 100 2.3 Technical studies 0.18 0.15 0.03 0.18 0.00 100 2.4 Contingency and unallocated 0.1 0.10 0.00 0.10 0.00 100 Component 2 Subtotal 2.0 1.97 0.03 2.00 0.00 100 3 Technical Assistance and Pilots 3.1 Energy Efficiency/conservation/DSM 1.50 0.00 0.00 0.00 1.50 0 3.2 Sector business plan/private sector/ESCO studies 0.50 0.20 0.00 0.20 0.30 40 3.3 Policy preparation support 0.35 0.15 0.10 0.25 0.10 67 3.4 Financial and accounting support 0.60 0.60 0.00 0.60 0.00 100 3.5 MIS and IT support, Monitoring and Evaluation. 1.32 0.35 0.57 0.92 0.40 69 Component 3 Subtotal 4.27 1.30 0.59 1.97 2.30 45 Total 13.70 7.20 2.00 9.20 4.50 67 Note: 1. These costs include: IDA Resources in this project: $7.2 million; 2. GEF Resources in the associated project: $4.5 million; 3.IDA resources in the restructured Decentralized Rural Electrification Project: $2.00 million. 4. The new Country Financing Parameters for Guinea, which provide for 100% financing from IDA are pending for approval. The costs have been indicated taking the proposed country financing parameters into consideration and in the event the proposed CFPs do not receive approval, the costs indicated will be aligned to the current CFPs that are indicated in the Withdrawal table in Annex 7. Page 58 64 Annex 6: Implementation Arrangements GUINEA: ELECTRICITY SECTOR EFFICIENCY IMPROVEMENT PROJECT The main counterpart for the implementation will be EDG where a team has been created to implement this Project. The GOG, through the MEH, will provide policy guidance and also take an active part in implementation. While EDG will implement the TA component involving DSM and energy efficiency activities, it will implement part of some of those activities through the corresponding cell in the MEH. Rationale for Institutional Arrangements - Implementation would be carried out through a team formed within EDG, so that various activities under the Project are mainstreamed in terms of identification, implementation and ownership. Hence, a separate Project Implementation Unit (PIU) is not contemplated and it is proposed that the project team would be an integral part of the Directorate of Planning of EDG, which is mandated to identify, plan and execute all investments. This is in line with the current thinking in the Bank to move away from project specific stand alone PIUs. However, the experience from implementation of other Bank projects, particularly the ongoing Decentralized Rural Electrification Project has demonstrated that implementation capacity is very weak in several Government and parastatal agencies in Guinea. Moreover, EDG itself does not have a track record of implementing Bank projects or for that matter, any major investment program. In this backdrop, implementation support is required in all the areas of preparation, evaluation and award of bids, supervision of execution, procurement and fiduciary diligence as well as compliance. Hence, it is proposed that a project supervision and implementation consultant with an established track record in these matters would be engaged under the project. This consultant would provide support to the implementation team. The Counterpart project implementation team would work under the supervision of the Director of Planning, EDG. It will be responsible for identification of specific investment networks, related initial surveys, preparation, evaluation and award of bid packages. While the concerned departments/agencies of EDG would be responsible for on site implementation, the project implementation team would discharge a monitoring and coordinating role for the entire project implementation. It would also collect base line data, develop monitoring indicators and evaluate the developmental impact of the investments. Component-wise details of departments/agencies within EDG responsible for implementation under the overall coordination of the Directorate of Planning/project team are: Component I – Distribution Efficiency Improvement (CREST) This component would be implemented by EDG and associated business process improvements will be implemented essentially by the concerned distribution agencies of EDG’s regional distribution directorates of Kaloum, Dixin, Matoto, and Ratoma. Page 59 65 The Cluster approach and the implementation strategy Determination of size of the cluster: A cluster could comprise of any of the following alternatives: · The network of a distribution transformer and its downstream infrastructure. · A 11 KV feeder emanating from a 33/11 KV substation. · A 33/11 KV substation and the down stream network. While each of these alternatives facilitate ring fencing and energy audit, a 11 KV feeder is selected here as it has specific advantages over other alternatives in the context of this project area. Given that an 11 KV feeder caters to substantial load with well organized metering, it would be possible to conduct energy audit and conduct proper monitoring and evaluation of the results. Distribution operations can be carried out with reasonable overheads and some economies of scale, if the cluster size is optimal. This would also facilitate private participation and cluster based outsourcing. Rationale behind the cluster approach : In contrast with conventional investment approach to electrical infrastructure, the cluster approach would facilitate the following advantages in Guinea’s context: 1. Given that the country’s power sector in general and the distribution sector in particular, require large investments for reasonably efficient operations, there is an imminent risk that the resource envelope available under the Project may not demonstrate clear impact if it is too thinly spread across the country. Making concerted investments as per a result specific strategy in a demarcated area would facilitate directing these investments to specific tangible and measurable impacts. 2. This approach would facilitate establishing a base line on key performance indicators such as quality of supply (tail end voltage), distribution losses (technical and commercial), billing and collections, response and resolution times for various activities that involve customer interface and so on. The impact that would come through investments in these clusters can then be appropriately measured and evaluated. 3. The measurement of impacts brought about by investments in clusters would also facilitate economic and financial cost benefit analysis of investments made in the Project. 4. This would facilitate replication and scale up of distribution performance improvements by increasing the number of clusters gradually given availability of resources. Horizontal and vertical investment components : Even though investments would be principally fashioned as vertical components targeted to improve distribution in specific clusters, certain investments would have to be system wide that would strengthen improvements across all the clusters on a country wide basis. It is expected that after implementation of the GNESEIP, the number of such clusters (“islands of excellence”) would be replicated and scaled up substantially, eventually covering more of Guinea by this approach. For this goal to be realized, it is essential that some system wide measures, such as developing Local and Wide Area Networks, customer database and Page 60 66 related software, standardizations required for design and safety and so on, are also essential so that clusters would emerge in the targeted manner. The GNESEIP would therefore incorporate certain investments that would have a horizontal system wide implication as against the essentially vertical cluster interventions. This would help realize the overall objective of the distribution efficiency improvement component of the GNESEIP by leveraging investments in the clusters in order to improve customer service, quality of supply and financial viability of the sector in the short- and medium-term. This would also have the value enhancing benefit of creating conducive conditions for a transition to a privately owned and operated distribution sector to sustain these improvements in the long run. Horizontal components would be investments that would facilitate development of a universal billing system and software, accounting and financial systems and related hardware and software, wide area networks and IT infrastructure and so on. Vertical components would be billing machines, meters, transformers, cables and other equipment that would go in for development of the distribution infrastructure and related business processes in a given cluster. Bulk of the goods and services to be procured under this project would essentially be vertical investment components that are focused on a cluster. Outsourcing of the operation of these components would also be required by the utility after implementation of these initiatives. The following is an illustrative list of components that would be covered by this approach. · Customer Service centers · Rapid Response vehicles Typical horizontal investment components that would be implemented on a system wide basis for improvements across all the clusters include: · Development of a universal billing system and software, and · Accounting and financial systems and related hardware and software. Wide area networks and IT infrastructure : In order to integrate the cluster approach with various initiatives that are sought to be funded under the distribution component of the project, it is proposed to follow an initiative implementation based disbursement approach. This approach would establish the linkages between performance and disbursement on one hand and enhance the involvement of regional distribution directorates of EDG in preparation of proposals with the project implementation team of EDG. Component II: Rehabilitation of Generation This component would be implemented by the concerned managers of the Garafiri Hydro and Tombo Thermal facilities. Page 61 67 Component III: Technical Assistance These six sub components would be implemented by the following: i) Energy efficiency and conservation: a. Development of a policy and strategy for energy efficiency, conservation and renewable energy activities would be implemented by MEH b. Training and capacity building for concerned staff in MEH and EDG for energy efficiency, conservation and DSM activities would be implemented by the project implementation team c. Identifying ESCOs and preparing the framework for conduct of DSM/ energy conservation activities (such as energy audits for industrial, commercial, government and residential consumption points including building audits) would be implemented by the MEH. ii) Business plan preparation and private Sector capacity development: MEH and the project implementation team would implement this task. iii) Sector Policy Preparation: This component will be implemented by the MEH iv) Financial and Accounting support (For utility business operations): This TA component would be implemented by the Finance Directorate of EDG and the project implementation team. This support would enable the Utility to improve its business operations and maintain fiscal diligence and discipline. v) MIS and IT support: This TA component would be implemented by the IT Directorate and the project implementation team. This component would introduce improved business practices into the Utility’s operations through information technology applications. vi) Monitoring and Evaluation: This TA component would be implemented by the IT Directorate and the project implementation team. The project implementation team is represented by all the line and staff departments of EDG. While the Directorate of Finance of EDG will be responsible for managing the financial affairs of the Project, it will exercise its monitoring role through its representation in the project implementation team and through regular diligence. Among other things, the Finance Directorate and the project implementation team would be responsible for ensuring compliance with fiduciary requirements of the Bank and GOG. Support to GOG ’s transition strategy GOG ’s transition strategy is to seek to improve the sector’s financial health, performance, and service delivery while still under public ownership, and lay the foundations for public-private partnership in the medium term . The project seeks to support this transition strategy and facilitate private participation in EDG’s operations in the distribution sector through demonstrating value in the distribution business. The Project seeks to assist the sector in investments that are required for implementation of the CREST program identified by EDG as a necessary short- and medium-term intervention to achieve sustainable private participation. Page 62 68 Annex 7: Financial Management and Disbursement Arrangement GUINEA: ELECTRICITY SECTOR EFFICIENCY IMPROVEMENT PROJECT Executive Summary As part of the Electricity Sector Efficiency Improvement Project preparation, a full financial management assessment has been carried out in accordance with the Financial Management Practices Manual issued by the Financial Management Sector Board on November 3, 2005. This report is a record of the results of the assessment of the related project implemented by the Electricité de Guinée (EDG) through its financial management unit. The main objectives of the assessment is to determine: (a) whether EDG has adequate financial management arrangements to ensure that project funds will be used for purposes intended in an efficient and economical way; (b) EDG financial reports will be prepared in an accurate, reliable and timely manner; and (c) the entities’ assets will be safe guarded. The CFAA conducted in 2003 shows that Guinea continues to make progress in the modernization of its public financial management process and structures. Over the last three years there has been a noticeable improvement in many of the basic elements of public financial management. The impact of the improvements is, however, mitigated by (a) the lack of a reliable and predictable revenue stream, (b) excessive government expenditures outside the commitment control systems, and (c) the weak linkages between various elements of public financial management processes. The public financial management systems and processes in Guinea are not yet at a level that would provide reasonable assurances to the Bank or other donors that the government’s own systems can be used to channel funds to donor funded projects or programs. It is, however, not unreasonable to believe that if the current progress in improvements is sustained and deepened, the objective of using the government’s own systems for channeling donor funds could be realized in the medium term. Internal audit is not fully effective despite the extensive audit system in place. There is an elaborate internal audit function in the executive branch of government as well as an external audit unit of the Supreme Court. Unfortunately, these units lack adequate resources and training to carry out their functions: the government has been increasing resources with the assistance of the EU. Moreover, inspection reports are not systematically followed up and the Chamber of Account needs more professional staff and required independence to perform appropriate audits. Summary of the Project The main objective of this project is to enhance the efficiency of the electricity sector. The implementation of the project will be structured along three components. Component 1. CREST –Distribution efficiency improvement. The component aims to strengthen the distribution infrastructure, improve quality of supply and customer satisfaction, and reduce losses. Private sector would be encouraged to take up these Page 63 69 initiatives individually on turnkey basis for a pre-specified part of the distribution network or a customer cluster. Component 2 Rehabilitation of critical Generation It aims to improve the efficiency of the existing Garafiri Hydropower plant and the Tombo Thermal Generation plant. Component two will also involve technical studies to better analyze and understand the current condition of the generation facilities; and required upgrades to improve generation capacity. Component 3: Institutional Strengthening through Technical Assistance. This project will assist the EDG to improve its managerial, financial and operational performance. Further opportunities for efficiency enhancements from private sector partnership and demand side management will be identified and explored. The technical assistance will consist of the following: Energy efficiency and DSM, business plan preparation and private sector partnership, Sector policy preparation, Financial and Accounting System, MIS and operational system, Monitoring and evaluation. Risk Assessment Overall, the Electricity Sector Efficiency Improvement Project financial management assessment should be rated as of moderate risk. The principal objective of the Project’s Financial Management system is help highlight the areas of risk and come up with an action plan to mitigate them. The following are necessary features of a strong financial management system: The EDG should have an adequate number and mix of skilled and experienced staff; · the internal control system should ensure the conduct of an orderly and efficient payment and procurement process, and proper recording and safeguarding of assets and resources; · the accounting system should support the project’s requests for funding and meet its reporting obligations to fund providers including Government of Guinea, IDA, other donors, and local communities; · the system should be capable of providing financial data to measure performance when linked to the output of the project; and · an independent, qualified auditor should be appointed to review the Project’s financial statements and internal controls. · an independent qualified Fiduciary Agency should be selected through a transparent process to ensure sound FM system as suggested above. The following table below shows the results of the risk assessment from the Risk Rating Summary. This identifies the key risks project management may face in achieving project objectives and provides a basis for determining how management should address these risks. Page 64 7 0 I N H E R E N T R I S K S L e v e l o f R i s k R i s k M i t i g a t i n g M e a s u r e s C o u n t r y L e v e l S - T h e 2 0 0 3 C F A A a c t i o n p l a n i s b e i n g i m p l e m e n t e d ; - T w o I D F g r a n t s f o r s t r e n g t h e n i n g p r o c u r e m e n t a n d r e i n f o r c e m e n t o f p u b l i c e x p e n d i t u r e m a n a g e m e n t h a v e b e e n a p p r o v e d a n d w i l l b e i m p l e m e n t e d . - T h e I D F g r a n t s f o r e n h a n c e m e n t o f e x t e r n a l a u d i t o r ’ s c a p a c i t i e s h a s b e e n a l s o a p p r o v e d a n d w i l l b e i m p l e m e n t e d . E n t i t y L e v e l L P r o j e c t L e v e l M - T h e p r o j e c t f i d u c i a r y s t a f f a r e a l r e a d y o n b o a r d a n d a r e a d e q u a t e l y q u a l i f i e d a n d e x p e r i e n c e d - f u n d s f l o w a r r a n g e m e n t i s a d e q u a t e . O v e r a l l I n h e r e n t R i s k M C O N T R O L R I S K S B u d g e t i n g M T h e p r o j e c t h a s a w e l l f u n c t i o n i n g b u d g e t i n g s y s t e m ( b u d g e t a r r a n g e m e n t a r e i n p l a c e ) A c c o u n t i n g M T h e p r o j e c t w i l l u s e t h e S Y S C O A s y s t e m a n d t h e p r o j e c t p e r s o n n e l h a v e a l r e a d y b e e n t r a i n e d i n u s i n g t h a t s y s t e m I n t e r n a l C o n t r o l M T h e p r o j e c t h a v e o n e d e p a r t m e n t o f i n t e r n a l c o n t r o l w h i c h h a s h e l p e d t o d r a f t a p r o j e c t f i n a n c i a l m a n u a l o f p r o c e d u r e s F u n d s F l o w M F u n d f l o w a r r a n g e m e n t i s a c c e p t a b l e t o t h e B a n k , t h e r e w i l l b e o n l y o n e d e s i g n a t e d a c c o u n t l o c a t e d a t t h e B I C I G U I F i n a n c i a l R e p o r t i n g M F o r m a t c o n t e n t a n d p e r i o d i c i t y o f F M R h a v e b e e n a g r e e d d u r i n g n e g o t i a t i o n . T h e F M R G u i d e l i n e s h a v e b e e n p r o v i d e d t o t h e p r o j e c t m a n a g e m e n t t e a m . A u d i t i n g M T h e e x t e r n a l a u d i t o r w i l l b e s e l e c t e d b e f o r e p r o j e c t e f f e c t i v e n e s s , T e r m s o f r e f e r e n c e s h a v e b e e n d r a f t e d d u r i n g p r o j e c t a p p r a i s a l / n e g o t i a t i o n . O v e r a l l C o n t r o l R i s k M T h e p r o j e c t s t a f f w i l l b e t r a i n e d c o n t i n u o u s l y d u r i n g t h e w h o l e l i f e o f p r o j e c t a s n e c e s s a r y , t h e p r o j e c t s o f t w a r e a n d m a n u a l o f p r o c e d u r e a r e i n p l a c e a n d w i l l b e u p d a t e d o r u p g r a d e d a s n e c e s s a r y O V E R A L L R I S K R A T I N G M H – H i g h S – S u b s t a n t i a l M – M o d e s t L – L o w Page 65 7 1 Page 66 72 Weakness of Financial Management System The project financial management is weakened by the following salient features:- ƒ The accounting personnel have been appointed but they will need additional training on Bank fiduciary procedures. ƒ Internal auditing arrangements are not yet adequate. The existing internal auditor department will need to improve its skills. ƒ .The project unit doesn’t have a functional software for this project. ƒ There is inadequate understanding of the Financial Reporting requirements given that the Project Accountant has not yet implemented World Bank projects before and has not had training in Financial Management and Disbursement Guidelines for the World Bank. Institutional and Implementation Arrangement The Guinea Electricity Sector Improvement Project will be implemented by EDG under the supervision of MEH. The counterpart Project Implementation team would work under the supervision of the Director of Planning EDG and would be responsible for identification of specific investment networks, related initial surveys, preparation, evaluation and award of bid packages. Based on project implementation arrangements, the overall responsibility for the consolidation of financial statements will be carried out within that unit. However, the experience from implementation of other Bank financed projects has demonstrated that implementation capacity is very weak particularly in the area of fiduciary aspects. In that regard, implementation support is required; qualified persons in charge of financial management and procurement will be appointed to carry the activities. The objectives of the Fiduciary team are: · to ensure that funds are used only for their intended purposes in an efficient and economical way; · to ensure that funds are properly managed and flow smoothly, adequately, regularly and predictably in order to meet the objectives of the project; · to enable the preparation of accurate and timely financial reports; · to enable project management to monitor the efficient implementation of the project; Accounting Arrangement and Information System The EDG will maintain similar books of accounts to those for other IDA funded projects. The books of accounts to be maintained should include: a Cash Book, ledgers, journal vouchers, fixed asset register and a contracts registers. The books of accounts will be maintained on a computerized system. A list of accounts codes (Chart of Account) for the project should be drawn up. This should match with the classification of expenditures and sources and application of funds indicated in the Grant Agreement. The Chart of accounts should be developed in a way that allows project costs to be directly related to specific work activities and outputs of the project. Books of Accounts to be used for the project will be opened and a Chart of Accounts will be completed in accordance with the requirement in the Grant Agreement. Page 67 73 With regard to information systems, the project will be using the accounting software namely “TOMPRO”. Funds have been provided to procure that software. Staffing It is proposed to provide implementation support services by putting in place a fiduciary team which will comprise of a procurement specialist, financial management specialist and an accountant. These staff have been already designated by the management of EDG. They need to imparted with relevant training and skills in order to familiarize them with Bank procedures and requirements. The Bank procurement and FM specialists have already facilitated two such training sessions for the project implementation staff during the appraisal of this project. Persons in charge of the project’s components and their respective focal points will be appointed within GOG. The Project Financial Management Specialists will work closely with the Bank’s Financial Management Specialist (FMS) during the whole life of the Project. Reporting At least two sets of financial reports will be prepared by the implementing team within EDG (The quarterly FMRs, as required by the Bank and the annual project’s financial statements). The quarterly FMRs, agreed upon appraisal, will be prepared and submitted to the Bank 45 days after closing of the quarter following the date of effectiveness. The FMRs will be based on formats developed in the Bank’s Guidelines on FMRs, agreed with the Administrator and the accountants with some adjustments. The FMRs will include financial, physical progress and procurement information that is useful to the Borrower while also providing the Bank with sufficient information to establish whether: (i) funds disbursed to the Project are being used for the purpose intended; (ii) project implementation is on track; and (iii) budgeted cost will not be exceeded. A copy of the FMR Guideline will be provided to the team before project effectiveness by the Bank FMS. Project Financial Management Capacity Strengthening Action Plan: To ensure that the above mentioned financial management system requirements will be met in due time to declare the Credit effective, an action plan is proposed hereafter with tasks to be performed as well as target completion date. The expectation that the targets set for completion by effectiveness can be reasonably achieved is based on the following reasons: a) The three month time frame for effectiveness after project approval would be sufficient; b) Two training sessions have already been held for the project implementation team; c) The provision for retroactive financing under the project could be leveraged for expenditures related to building capacity for fiduciary risk mitigation and d) the resources already available with the project implementation unit of the Decentralized Rural Electrification project ( a Bank project currently under implementation) will be utilized for this purpose. The staff of the PIU of this project will provide training to EDG staff and similarly the FM system and the associated software of this project will be used as a prototype. Action Tasks Target completion date Conditionality 1- Appointment of fiduciary staff Appoint/recruit key financial staff within EDG 05/07/2006 (Completed) Effectiveness 3- Designated Accounts Open Designated and project Bank Accounts 06/30/2006 Effectiveness 4- Accounting procedures manual to be provided Establish the Project Administrative, Finan cial and 09/01/2006 Effectiveness Page 68 74 Accountant Manual. 5- Recruitment of external auditor Appropriate terms of reference (TOR) for the external auditor to b e developed and agreed. 08/01/2006 Effectiveness Prepare a shortlist of firms of qualified auditors to be invited to submit proposals for c onducting the external audit on approved TOR acceptable to the Bank. 09/01/2006 Effectiveness Reporting Agreed on format for FMRs and ability to prepare FMRs demonstrated 09/15/2006 Effectiveness Installation of the integrated financial and accounting system Design, installation, configuration testing and training of staff 09/15/2006 Effectiveness Audit Arrangements. EDG’s consolidated financial accounts and the project’s consolidated financial statements will be audited annually by an independent auditor acceptable to the Bank in accordance with auditing standards also acceptable to the Bank. Audit reports of reasonable scope and detail will be submitted to the Bank within six months of the end of the audited period. The auditor will provide an audit opinion on: (i) EDG’s financial statements (ii) the project financial statement of expenditures (SOE); and (iii) the Designated Account (SA); The auditor will also issue a separate management report on internal and operational procedures, outlining any recommendations for improvements to internal accounting controls and operational procedures identified as a result of the financial statement audit. Detailed terms of reference for the selection of the auditor should be prepared, discussed and agreed on or before effectiveness. The Audit Scope will be tailored the project’s specific risks in accordance with Bank’s requirements and agreed with the Borrower. The selection of an auditor acceptable to the Bank is a condition of effectiveness. Disbursement arrangements. Disbursements under the Electricity Sector Efficiency Improvement Project will be made by project components. The Country Financing Parameters (CFPs) for Guinea have not been approved to date. Expenditures will therefore be claimed by sub-categories i.e. goods, works, training and services under each component following the applicable disbursement percentages. Designated Account: To facilitate project implementation and reduce the volume of withdrawal applications, EDG will open a designated account in US dollars in a local commercial bank in Conakry, on terms and conditions acceptable to IBRD. The Designated Account will be used to finance the cost of IBRD eligible activities under the Project. The advance would have a ceiling of US$400,000. This amount has been calculated to represent about six months of projected expenditures during the first year of implementation. Upon effectiveness, EDG may claim a first advance based on project needs not to exceed US$400,000. Any balance will be claimed if and as needed to ensure sufficient liquidity and facilitate a smooth project implementation. The designated account will be used for all payments inferior to 20% of the advance and replenishment applications will be submitted on a monthly basis. Additional advances to the designated account will be made by IBRD against withdrawal applications supported by appropriate documents. The designated account will be audited annually by external auditors acceptable to IBRD, as part of the overall project audit. Page 69 75 A project account will be opened at the same commercial bank to hold counterpart funds for the Project. Disbursements from the Special Account would initially be transaction-based for incurred eligible expenditures (transaction-based disbursements). Another acceptable method of withdrawing funds from the Financing will be the direct payment method, involving direct payments from the Financing to a third party for works, goods and services upon the Borrower’s request. Payments may also be made to a commercial bank for expenditures against a special commitment issued by IBRD and covering a Letter of Credit opened by the borrower in a commercial bank for the payment of imported goods. Statements of Expenditures. Disbursements for all expenditures should be made against full documentation except for contracts valued at less than: (a) US$150,000 for goods; (b) US$100,000 for consulting firms; (c) US$50,000 for individual consultants as well as civil works, training and operating costs, which will be reimbursed on the basis of Statements of Expenditures (SOEs). All the supporting documentation for SOEs will be retained at EDG and will be readily accessible for review by periodic Bank supervision missions and external auditors. TABLE OF WITHDRAWAL OF PROCEEDS Project Description All figures in million US$ Component description Amount to be disbursed Percentage of Expenditure to be financed 1. Distribution efficiency Improvement (Goods, Works, Training, and Consultant Services) 1a: Goods and Works: 1.92 100% 1b Training: 0.06 100% 1c Consultant Services 0.23 80% 2. Generation efficiency enhancement(Goods, Works, Training, and Consultant Services) 1 a: Goods and Works: 1c Consultant Services 3 Technical Assistance and Pilots (Goods, Works, Training, and Consultant Services) 1 a: Goods and Works: 0.86 100% 1b Training: 0.18 100% 1c Consultant Services 1.05 80% 4. Operating Costs Contingency and Unallocated 0.20 Total 4.5 Note: These costs include: GEF Resources in this project: $4.5 million Financing parameters adopted are: Goods and Works (100%), Training (100%), and Consultant Services (80%) The amounts to be disbursed add up to 4.5 million. Page 70 76 Conclusion : The Financial Management arrangement satisfies the Bank’s minimum requirements under OP/BP/10.2 and is therefore adequate to provide, with reasonable assurance, accurate and timely information on the status of the project required by IDA. With the implementation of the action plan, the Financial Management arrangement will be enhanced. The overall FM risk rating is moderate. Page 71 77 Annex 8: Procurement Arrangements GUINEA: ELECTRICITY SECTOR EFFICIENCY IMPROVEMENT PROJECT A. General Procurement for the proposed project would be carr ied out in accordance with the World Bank’s "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need based estimated costs, prior review requirements, and the respective time frames are agreed between the Borrower and the Bank in the Procurement Plan. The thresholds in this annex are those agreed with the borrower for the first eighteen months of project implementation. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Where applicable, the Bank’s Standards Biddings Documents for goods and works and Standard Request for Proposals for Consultants, as well as all standard evaluation forms, will be used throughout project implementation. Other bidding documents which do not follow Bank standards, including national bidding documents, may also be acceptable, provided they are reviewed by the Bank, prior to their first use. Advertising: A comprehensive General Procurement Notice (GPN) will be prepared by the Borrowers and published in the United Nations Development Business online (UNDB online) and in the Development Gateway Market (dgMarket) to announce major consulting assignments and any ICB. 19 The GPN shall include all works under ICB, all goods contracts under ICB, and all large consulting contracts (i.e., those estimated to cost US$200,000 or more). In addition, a specific procurement notice is required for all goods to be procured under ICB and request for expression of interest for contract expected to cost more than US$200,000 shall be advertised in UNDB online and in dg Market. An Expression of Interest (EOI) is required in the national gazette or a national newspaper or in an electronic portal of free access for all consulting firm services regardless of the contract amount. In the case of NCB 20 , a specific procurement notice will be published in the national gazette or a national newspaper or an electronic portal of free access. Contracts awards will also be published in UNDB and dg Market, in accordance with the Bank’s Procurement Guidelines (para 2.60) and Consultants Guidelines (para 2.28). Procurement Plan : A detailed procurement plan for at least the first 18 months of project implementation prepared by the Borrower was discussed and finalized during negotiations. The agreed plan will be updated on a yearly basis and sent to IDA for approval. The plan will be reviewed by IDA supervision missions. It will available in the Bank’s external website. Procurement of Goods and Works : Goods and Works procured under this project would include supply and installation for conversion of LVDS lines to HVDS, critical distribution network maintenance materials, HT and LT metering equipment, and rehabilitation of Tombo and Garafiri generation plants. These contracts estimated to cost about US$5.3 million will be 19 ICB: International Competitive Bidding 20 NCB: National Competitive Bidding Page 72 78 procured following International Competitive Bidding (ICB) procedure s, using the bank’s standard bidding documents (SBDs). Selection of Consultants : Consulting services will include financial audit, technical services support for MIS and IT, technical services support for generation efficiency enhancement, policy preparation support, sector business plan and services support for energy efficiency. An estimated amount of US$1.1 million will be utilized for this procurement. Consultant Services financed by IDA will normally be selected through competition among qualified short-listed firms in which the selection will be based on Quality-and-Cost-based Selection (QCBS) method by evaluating the quality of the proposal before comparing the cost of the services to be provided. For audits of a standard nature, the least Cost Selection (LCS), in accordance with paragraph 3.1 and 3.6 of the consultants Guidelines , will be the most appropriate method. The Standard Request for Proposal (RFP) will be used for requesting proposals and selection and appointment of consulting firms. Retroactive Financing : Independent auditors/advisors, engaged under procedures acceptable to the Bank, would be financed under retroactive financing to value, review, verify and confirm the opening balances of EDG’s accounts and balance sheets as required. Retroactive financing in an aggregate amount not to exceed US$200,000 and accounting for 2.7% of the expected IDA credit amount, would be provided for anticipated expenditures incurred after January 1, 2006 . Operational Costs: The operating costs amounting to a maximum of US$140,000 shall be financed by the Project. This was agreed during negotiations and contained in the Financing Agreement (Development Credit Agreement). Relevant procedures acceptable to the Bank will follow those outlined in the Project Implementation Manual. Training, Workshop and Study tours : Training, workshops and study tours will be carried out on the basis of approved annual programs that identify the general framework of training and similar activities for the year, including the nature of training/study tours, the number of participants, and cost estimates. An estimated amount of US$196,000 will be utilized for these activities. Where ever possible, training and advisory services estimated to cost less than US$100,000 will be contra cted using Selection based on Consultant’s Qualification (CQ). B. Assessment of the agency’s capacity to implement procurement Procurement activities will be carried out by EDG (Project Implementation Team). Recommendation for strengthening the Project Implementation Team and EDG ’s procurement staff have been made following procurement capacity assessment reviews conducted by Bank’s procurement accredited staff. The key issues and risks concerning procurement for implementation of the project have been identified and used to prepare an action plan (see Table below). The overall project risk for procurement is high. Risk Mitigation measures In view of the high procurement risk the project is facing, the following migration measures will be implemented. It is expected that these measures would ring fence the implementation of the project from external governance risks. Page 73 79 1. An independent project implementation consultant will be engaged, through international competition, under the credit to oversee the entire procurement and fiduciary/FM processes, and ensure their quality, apart from providing engineering design and implementation support to the project team. The Consultant will be required to have an established track record of utility experience as well as in fiduciary and procurement matters. The consultant will be engaged through out the implementation period and shall be responsible for comprehensive implementation support. 2. The Project Implementing Agency is required to publicly disclose all contracts/investments under the credit, that are of US$10,000 and above in value. 3. The Project Implementation Team does not send IDA credit procurement matters to the Project Implementing Agency (EDG) for approvals. 4. The primary and only role of the Project Implementation Team should be to implement the project and that it should not be burdened with any other tasks. 5. The Project Implementation Team will be staffed with personnel of suitable qualifications and if necessary, the Project Implementing Agency will be required to recruit staff from the open market. 6. Two training sessions have already been held for the project implementation team; 7. The provision for retroactive financing under the project could be leveraged for expenditures related to building capacity for fiduciary risk mitigation and 8. The resources already available with the project implementation unit of the Decentralized Rural Electrification project ( a Bank project currently under implementation) will be utilized for this purpose. The staff of the PIU of this project will provide training to EDG staff and similarly the FM system and the associated software of this project will be used as a prototype. 9. All substantive contracts under the project have been proposed for prior review by the Bank 21 . Apart from all these measures; the project design itself has incorporated the following risk mitigation measure: In the first component, the project aims to improve distribution networks, improve commercial efficiency and quality of supply. A conventional method of implementing this task is to procure electricity distribution and related equipment on a case to case basis (for each of the sub components as given in the project document) and install them through separate contracts. This method can lead to leakages, and substandard quality due to corrupt practices. Instead, the project proposes to engage, through an ICB, a single vendor who takes the comprehensive responsibility of providing all related goods and services that are required for providing a particular outcome; and this vendor also ensures that the commissioned goods and services are operationalized in such a manner that would deliver the desired outcomes. This essentially involves a Build and Transfer (BT) mechanism. This approach will result in the following outcomes: 1. Ensure adequate transparency and competition as the process is an ICB 2. Draw vendors with international utility experience into the process; and 3. Provides for a direct link for the procurement process with the project outcomes A similar approach will be followed by going in for a comprehensive bid for the repair works of the generation facilities, through an ICB, and here too the procurement process will require the 21 Given that all substantive contracts planned for the initial eighteen months of implementation, as per the procurement plan, are above the prescribed thresholds, they will be subject to prior review of the Bank Page 74 80 bidder to transfer the completed works to the implementing agency in a state that will ensure the project outcomes. Hence bulk of the project assistance will only be through these three ICBs, two in case of Distribution and one in case of Generation. The rest of the bids are for technical assistance and are related to different categories. Page 75 8 1 A s s e s s m e n t R i s k A s s e s s m e n t A c t i o n s P r o p o s e d P r o p o s e d C o m p l e t i o n D a t e S u p e r v i s i o n C o u n t r y P r o c u r e m e n t U n i t I t e m A s s e s s e d Null Poor Fair Satis. M a j o r W e a k n e s s Low Moderate Substantial O r g a n i z a t i o n X X F a c i l i t i e s a n d C a p a c i t y X X T r a i n i n g f o r t h e P I T ; e f f e c t i v e m o n i t o r i n g s y s t e m s B y e f f e c t i v e n e s s S t a f f i n g X X T h e P r o j e c t w i l l f i n a n c e a p r o j e c t i m p l e m e n t a t i o n a n d s u p e r v i s i o n c o n s u l t a n t w i t h p r o c u r e m e n t e x p e r i e n c e u n d e r t h e c r e d i t 1 0 / 1 5 / 2 0 0 6 P r o f e s s i o n a l E x p e r i e n c e X X R e c o r d k e e p i n g a n d f i l i n g s y s t e m X X P r o j e c t I m p l e m e n t a t i o n T e a m i n E D G s h a l l d e v e l o p a s p e c i f i c r e c o r d k e e p i n g s y s t e m f o r p r o c u r e m e n t d o c u m e n t s B y e f f e c t i v e n e s s Guinea Elec tricité de Guinée (EDG) P r o c u r e m e n t p l a n X X E D G s h a l l p r e p a r e a p r o c u r e m e t p l a n f o r a t l e a s t t h e f i r s t 1 8 m o n t h s o f p r o j e c t i m p l e m e n t a t i o n B y n e g o t i a t i o n E v e r y 6 m o n t h s Page 76 82 C. Details of the Procurement Arrangements I.Distribution Efficiency Improvement (Total US$ 7.43 million, IDA US$ 5.23 million, GEF US$ 2.20 million) (a) Conversion of LVDs Lines to HVDs (i) supply and installation of 50, 25 & 15 KVA CSP transformers; (ii) supply and erection of HT poles; (iii)supply of cables (AB cables, AAC & 3 Core Cables + neutral); (iv) supply of OH 100 mm AA conductor for re-conductoring; and (v) supply and installation of 11 kV automatically switched capacitor banks. (b) Supply and installation of Critical Distribution Network Maintenance Materials (i) supply of HT poles; (ii) supply of cables (of various sizes 70 - 185mm2 3-core HT Cables); (iii)supply of OH 100 – 150 mm AA conductors; (iv) supply of cable jointing kits of various sizes; and (v) supply of fuses, feeder pillars & RMUs. (c) Supply and installation of HT Metering Equipment (i) supply and installation of HT Panel Meters. (d) Supply and installation of LT Metering Equipment (i) supply and installation of single phase whole current meters/prepayment meters; (ii) supply and installation of three-phase whole current meters; and (iii)supply and installation of LT maximum demand, trivector meters/accessories. (e) Distribution relays (f) GIS Mapping of distribution network (g) Rapid response vehicles (h) Customer service centers Page 77 83 (i) System protection and coordination (e) Project Engineering Design, Implementation and supervision support II. Generation efficiency improvement (US$ 2.00 million, IDA US$2.00 million) would include one supply and installation contracts for all the items mentioned below: a) Critical spares and repair works for the Tombo Thermal plant (800000 US$) such as repair of incinerator, repair of alternators, control panels etc. b) Critical spares and repair works for the Garafiri Hydro plant (800000 US$) such as repair of the communication system, reapir of control panels, provision of control panel battery systems, restoration of air conditioning in the power house, plugging leakages in the penn stock etc. c) Technical studies for generation support (0.4 million) III.Technical Assistance for energy efficiency and Institutional and business process strengthening (US$4.19 million, IDA US$1.89 million, GEF US$2.30 million). The activities that will be taken up under thus component have been described in Annex IV Details of procurement methods and bid wise estimates of individual subcomponents are as follows: 1. Goods, Works, and Non Consulting Services (a) List of contract Packages which will be procured following ICB and Direct contracting: 1 2 3 4 5 6 7 8 9 Ref No. Contract (Description) Estimated Cost (US 000) Procurement Method P-Q Domestic Preference (yes/no) Review by Bank (Prior / Post) Expected Bid- Opening Date Comments 1 Supply and installation conversion of HVDs, reactive power, rapide responde units and compensation, and system protection and coordination 4,500 ICB No Prior 02/01/2007 2 Supply and installation of metering and customer care centers 2,050 ICB No Prior 02/15/2007 3 Rehabilitation for Tombo and Garafiri thermal plant 1,720 ICB No Prior 03/01/2007 Page 78 84 (b ) ICB Contracts estimated to cost above US$200000 equivalent or more per contract in case of goods and US$500,000 equivalent or more per contract in case of works and all Direct Contracting will be subject to prior review by the Bank. 2. Consulting Services (a) List of consulting Assignments with short-list of international firms. 1 2 3 4 5 6 7 Ref. No. Description of Assignment Estimated Cost (US$ in millions) Selection Method Review by Bank (Prior / Post) Expected Proposals Submission Date Comments 1 Project implementation and supervision consultant 0.300 IC Prior 10/15/2006 The consultant will supervise the preparation of other bid packages and provide implementation support 2 Technical services support for generation efficiency enhancement 0.180 QCBS Prior 02/10/2007 . 3 Technical support for MIS and IT support 0.800 QCBS Prior 01/01/2007 4 Project financial audit 0.080 QCBS Prior 09/01/2006 This is required for Fiduciary compliance 5 Monitoring and evaluation 0.490 QCBS Prior 12/01/2006 6 Policy preparation support 0.300 QCBS Prior 11/01/2006 7 Sector business plan 0.500 QCBS Prior 11/01/2006 8 DSM Capacity Building Program (EDG) 1.000 QCBS Prior 12/15/2006 9 Energy efficiency Capacity Building Program (Ministry) 0.500 QCBS Prior 12/15/2006 (b) Consultancy services estimated to cost US$100,000 equivalent or above per contract in case of Firms and US$50,000 equivalent or above in case of individuals will be subject to prior review by the Bank. (c) Short lists compose of entirely of national consultants: Short lists of consultants for services estimated to cost less than US$100,000 equivalent per contract, may be composed entirely of national consultants in accordance with the provision of paragraph 2.7 of the Consultants Guidelines. D. Frequency of procurement Supervision In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the implementation Agency has recommended supervision mission to visit the field at least twice a year to carry out post review of procurement actions. Note : ICB = International Competitive Bidding Page 79 85 LIB = Limited International Bidding NCB = National Competitive Bidding DCT = Direct Contracting IAPSO = Inter Agency Procurement Services Office SHOPPING = International/National Shopping QCBS = Quality- and Cost-Based Selection SBCQ = Selection Based on Consultants’ Qualification IC = Individual Consultants LCS = Least Cost Selection SS = Single Source UNDB = United Nations Development Business dgMarket = Development Gateway Market Page 80 86 DETAILS OF THE PROCUREMENT ARRANGEMENT INVOLVING INTERNATIONAL COMPETITION Prior Review Threshold : Procurement Decisions subject to Prior Review by the Bank as stated in Appendix 1 to the Guidelines for Procurement: Procurement Method Prior Review Threshold Comments 1. ICB and LIB (Goods) >=200,000 All Contracts 2. ICB (Works/Supply & Installation) >=500,000 All Contracts 3. ICB (Non-Consultant Services) >=200,000 All Contracts 4. Direct Contracting All Values All Contracts 5 Consultant Services Firms >=100000 All Contracts 6 Consultant Services Individuals >=50000 All Contracts . Page 81 87 Annex 9A: Economic Analysis GUINEA: ELECTRICITY SECTOR EFFICIENCY IMPROVEMENT PROJECT Background The Project has both a distribution and generation component. However, it focuses on the enhancement of business processes and supporting investments with the aim of returning distribution to its function of a revenue generating business. The Project increases the distribution business by focusing on (i) the High Voltage Distribution System (HVDS); (ii) meters; (iii) rapid response vehicles; and (iv) customer service centers. In addition, key investments in generation capacity are envisaged, which will enhance the available electric capacity in the system. The envisaged investments in generation capacity are key to keeping generation operational. The analysis here deals with the investment components of the project only. Alternatives The alternatives to the measures suggested under this Project would be a “do nothing” approach, which would be likely to lead to the final erosion of the viability of EDG. The costs of this option would be the costs of alternative supply of electricity through small diesel generators, batteries and kerosene (for lighting). The cost of such unserved energy has been estimated for Senegal at US$ 1.82/KWh and as an average for the entire ECOWAS region at US$ 0.15/KWh (ECOWAS West Africa Power Pool Master plan, 2004). Current costs of energy generation in Guinea have been estimated by EDG at GNF 416.88 or about US$ 0.09/KWh. Although there is significant uncertainty regarding these data, they are sufficient to conclude that the proposed Project constitutes the least cost course of action. Key Assumptions All values are of the year 2006 and where appropriate have been discounted to 2006 at the rate of 12%. For the conversion of investment and O&M costs from Euro into US Dollar a rate of 0.831 US$/ was applied. For the purposes of the economic analysis, appropriate costs and benefits have been estimated for a ten year period, as most of these equipments require replacement in that time frame. The current average tariff of 3.9 cents/ kWh has been used for quantifying the energy gains that result due to these investments. A number of assumptions were made in order to evaluate the costs and benefits of the various distribution investments. The basis for these assumptions is drawn from an analysis of the historically established distribution costs and benefits in Nigeria, another West African country, on measured empirical data emanating from CREST pilot projects under implementation, and on the basis of experience gathered in India. The table below details the key assumptions made for the economic and financial analysis of the HVDS and meters under the distribution component. Page 82 88 Initiative Assumptions on direct Benefits Assumptions on other Benefits Assumptions on O & M HVDS · Technical loss reduction resulting in energy saved: 8%; · 60% load factor. · Voltage improvement resulting in substitution of energy from captive generation to grid supply: 3%; · Cost of captive energy US$ 0.10 · 5% of the cost of investment; · 2% associated other cost for marketers and meter readers. Metering, spot billing, customer care and rapid response vehicles. · Increase in billing 5%; · 50% load factor. · Installation of about 100 HV meters and 66,000 LV meters; · Increase in energy sales on account of new customers: 2%; · Financial benefits due to segregation of customer premises: 1% · 3% of the cost of investment; · 2% associated cost for marketers and meter readers. Project Benefits and Costs The economic analysis of the Project is based on a cost-benefit analysis of the main investment sub-components. A range of benefits is evaluated for each sub-component. For the distribution component benefit analysis focuses on reduced losses (technical and non-technical), increased sales, and improved revenues. Table 3 gives an overview of the types of benefits that are generated under the distribution process. Given the small amounts allocated for rapid response vehicles and customer service centers, benefits are only quantified for investments in HVDS and meters. For the generation analysis, the benefit analysis focuses on increases generation (kWh) and increased sales. A minimum value of the incremental demand has been computed on the basis of a load growth of 4% per year, and the average tariff of 3.9 cents/kWh (2004 revised average EDG tariff). The evaluation of economic and financial benefits differs in that the economic benefits evaluate the benefits of the Project to the economy as a whole, while the financial benefits evaluate the benefits of the Project to the company itself. The two main differences are (i) reduction of commercial losses; and (ii) segregation of meters. In the context of (i) the reduction of commercial losses does not bring about economic benefits as currently this electricity is being consumed and benefits for Guinea’s economy are derived. Reduction in commercial theft will merely “relocate” this benefit to the utility EDG. Similarly, the segregation of meters from one meter serving a number of households to one meter per household will not yield an economic benefit. However, EDG will financially benefit as each of the households would now have to pay a minimum connection fee, rather than one connection fee paid by the group of previously jointly connected households. The main economic and financial costs are the total investment costs, the O&M costs and various other costs. The investment costs include spare parts for the generation component and distribution equipment such as transformers, meters and conductors for the distribution component. The O&M costs include mainly repair and maintenance costs. Economic and financial costs differ as the economic costs do not include taxes or financial charges. Economic Page 83 89 costs are also net of price contingencies, which are included in the financial costs. A detailed cost breakdown is presented in Annex 5. The Project produces a robust EIRR of 27% as compared to the opportunity costs of capital at 12%. The project’s FIRR is sound at 29%. The distribution component of the project produces an EIRR of 25% and an FIRR of 27%. The generation component produces an EIRR of 30% and an FIRR of 30%. Table 1 below summarizes the key indicators. Table 1:Key Economic and Financial Indicators of Project (in US$ in million) Distribution Efficiency Improvement Generation Improvement Total Economic Benefits 10.12 21.56 31.68 Investment Costs (including taxes and financial charges) 5.90 2.60 8.50 O&M Costs 2.58 17.00 19.58 Economic NPV 2.29 1.96 4.25 Financial NPV 1.64 1.22 2.86 EIRR 25% 30% 27% FIRR 27% 30% 29% Note: A discount rate of 12% and 16% is assumed to calculate the present values for the economic and financial analysis. Input data will be confirmed at appraisal. Sensitivity analysis The net present value (NPV) for the economic analysis at a 12% discount rate yields approximately US$4.25 million. The NPV is sensitive to changes in the tariff levels. Especially a marked decline in tariff in real terms could endanger the economic viability of the project as a whole. Table 2: Results of sensitivity analysis on the economic and financial rate of return Scenario EIRR (in %) FIRR (in %) Economic NPV (in US$ million) Higher Average Tariff (+10%) 30 32 4.73 Lower Average Tariff (-10%) 25 25 3.49 Page 84 90 Table 3: Benefits by Category I. High Voltage Distribution System: (a) Technical loss reduction; (b) Non technical loss reduction (on account of reduced theft of electricity); (c) Enhanced energy billing due to enhanced loads; (d) Increase in sales owing to load growth on account of increase in distribution capacity. II. Meters (a) Enhanced energy billing due to efficient metering (b) Increase in sales due to metered new customers (who would have been supplied energy without metering in the absence of this investment) (c) Higher energy sales due to segregation of customer premises III. Rapid response vehicles (a) Increase in billing due to decrease in outage times (b) Reduced energy losses due to detection and elimination of illegal connections IV. Customer Service Centers (a) Higher recoveries induced by better customer outreach (b) Increase in sales due to ease of obtaining new connections to the grid Page 85 91 Annex 9B: Sector Financial Summary GUINEA: ELECTRICITY SECTOR EFFICIENCY IMPROVEMENT PROJECT Past Financial Performance and Present Financial Position The electricity sector is in a critical situation. EDG whose management was taken over by the State following the termination of a private concession contract is facing enormous financial difficulties. Since 1994, the electricity sector was managed by two different entities: ENELGUI (the asset holding company) and SOGEL (the operating company). ENELGUI was formed in 1988 as a financially autonomous public corporation with its own board of directors, replacing Societ é Nationale d’Electricité (SNE), as the owner and operator of all electric assets previously held by SNE. The same legislation and corporate statutes which enabled the formation of ENELGUI also offered it broad latitude for the planning and execution of its investment program while defining and narrowing the role of the Ministry of Energy and Hydraulics to undertake sector policy formulation and regulatory oversight as opposed to its previous full planning and day-to-day control of the utility. However, despite the statutes, government intervention in ENELGUI’s business continued unabated. Contrary to expectation, ENELGUI also failed to make significant improvements in its financial position compared to SNE. It continued to operate at a loss, reflecting poor management practices and the unwillingness of GOG to grant regular tariff adjustments. Low levels of metering, billing and collection, and high level of bad debts persisted, essentially bankrupting ENELGUI. In 1994, ENELGUI was transformed into a state-owned enterprise, and its supply facilities were transferred to the private operator SOGEL via a 10-year concession contract awarded following an international tender. ENELGUI bought a stake in SOGEL by contributing one-third of the equity, and a consortium headed by HydroQuebec contributed two-thirds. In October 2001 the concession contract was terminated prematurely by HydroQuebec after it became apparent that SOGEL was unable to operate the facilities as successfully as had been expected. The consortium’s shares in the company were sold to the Guinean state, which then liquidated ENELGUI and transferred its assets to EDG, which was founded in December 2001. The dissolution of the SOGEL partnership was not amicable and a dispute ensued with the foreign partners who sought remedies from the GOG. It was only in October 2005 that a compromise agreement was reached between the parties for a settlement of their differences. A summary of EDG’s consolidated un-audited, provisional financial accounts and performance is presented in Table 1. As a relatively newly formed entity with a history of management deficiencies and changes, and poor accounting and financial infrastructure, EDG is severely constrained in providing detailed and reliable historical and projected consolidated financial information. The analysis henceforth is based on the limited amount of financial information supplied by EDG thus far and is provisional in nature. Given the lack of capacity in furnishing proper financial data, the Project has established, as part of its technical assistance component, assistance for the development of a robust financial and accounting system to capture necessary information that is critical for the proper management and future growth of EDG. As part of the effectiveness package, EDG would be required to provide fully audited consolidated financials which are compliant with international accounting standards and consisting of the complete income statement, balance sheet and cash flow statement for the past three years to be made available by end of December 2006. During the Page 86 92 Project implementation period, EDG will also make available to the World Bank and the public, audited financials on an annual basis. Detailed historical and projected financial performance is available in the project files. Key Financial Issues and Remedial Measures As presented in Table 1 below, EDG recorded net losses in each of its full year of operation (FY03, FY04 and FY05) at US$ 13.0 million, $2.8 million and $5.0 million, respectively. The reduction in net losses was supported by a 74% tariff increase in September 2004 as well as due to EDG’s efforts at significantly reducing O&M, and selling and administrative expenses as a percentage of total revenues from 55% in FY03 to 39% in FY04 to 23% in FY05. EDG has also been effective in bringing down transmission and distribution (T&D) losses from around 65% in 2003-04 to 60% in 2004-05. The working ratio has declined from greater than unity in FY03 which indicates that EDG’s cash operating expenses exceeded operating revenues to 0.94 in FY04 which indicates that the utility generated cash operating profit in FY04. The marked increase in fuel prices forced EDG to increase spending on fuel purchases (diesel) by 21% from 2004 to 2005, which has dampened the otherwise positive operating improvements. These effects are even more pronounced when viewed in local currency terms. While EDG receives revenues in GNF, it has to make fuel and equipment purchases in hard currency. Thus, in local currency terms, while revenues rose 35% in FY04-05 (driven by an increase in tariff), spending on fuel purchases increased by 94% (both due to increase in fuel prices and the significant depreciation of the GNF), augmenting fuel expenses as a percentage of energy sales to 55% in FY05 from 42% in FY04, and thus driving the working ratio to over unity again. Two things should be noted in the summary income statement below: (i) it is an estimate made by EDG as it does not have audited financial accounts; and (ii) it masks the true financial picture of EDG as GOG provides direct subsidy for maintenance investments, and bears the debt servicing obligations of the Garafiri and Tombo power plants. Page 87 93 Table 1: Key Income Statement Results Fiscal Year ending 31 December Provisional (thousands of US$) 2003 2004 2005 Average Exchange Rate during the Year (GNF/US$) 1,986 2,268 3,640 Electricity Sent Out (GWh) 583.2 661.9 591.6 T&D Losses 60.7% 59.4% 55.0% Electricity Billed (GWh) 229.0 268.8 266.0 Average Tariff (USC/KWh) 8.93 9.05 7.12 Electricity Sales Revenues 20,458 24,322 22,390 Total Operating Revenues 24,420 27,292 23,555 Operating Costs Fuel Cost 11,083 9,833 11,552 Power Purchase 76 88 33 Operation and Maintenance 7,618 4,399 3,071 Salaries & Wages 5,826 4,828 2,415 Fuel and Import Taxes 368 273 681 Provision For Bad Debts 5,902 6,142 7,830 Depreciation 6,193 3,998 2,626 Total Operating. Costs 37,065 29,562 28,209 Net Operating Income (Loss) (12,645) (2,270) (4,654) Interest and other expenses (income) (403) 476 296 Net Profit (Loss) (13,048) (2,746) (4,950) Working Ratio Cash operating expense/ 1.26 0.94 1.09 Operating revenue Operating Ratio Operating expense/ 1.52 1.08 1.20 Operating revenue Page 88 94 Table 2: Key Balance Sheet Results Fiscal Year ending 31 December Provisional (thousands of US$) 2002 (Opening) 2003 2004 2005 Average Exchange Rate during the Year (GNF/US$) 1,992 1,986 2,268 3,640 Accounts Receivables 6,827 7,452 10,318 13,733 Other Current Assets 5,271 5,186 3,880 2,359 Current Assets 12,098 12,638 14,198 16,092 Net Fixed Assets 128,414 124,371 118,215 73,654 Total Assets 140,512 137,009 132,413 89,746 Current Liabilities 16,667 18,429 16,138 8,933 Long-Term Debt 753 3,021 3,307 2,060 Other liabilities 301 201 661 412 Equity 122,791 115,358 112,307 78,340 Total Liabilities and Equity 140,512 137,009 132,413 89,746 Return on Operating income/ Av Invested Capital Net Invested Capital -10.7% -2.0% -5.8% Current Ratio Current Assets/Current 0.69 0.88 1.80 Liabilities Debt/Capital Ratio LT Debt/Invested Capital 2.6% 2.9% 2.6% Days Receivable 365* (Receivables/Sales) 111.4 138.0 212.8 Since its creation, EDG claims that the GOG had not provided direct budgetary support except for new investment needs and bearing the debt service obligations of the power plants. While EDG was established as a public company and a separate commercial entity, the objective will be to attain financial independence, through scale, financial discipline and tariff adjustments that are ultimately cost- reflective. Given the precarious state of EDG’s finances, utmost priority should be to given to establishing EDG’s accounts and ensuring its viability to continue operating to a stage where it could pay a dividend to GOG and generate enough cash from operations for reinvestment. Page 89 95 Insufficient Electricity Tariffs: The poor financial performance of EDG is in part due to the inadequacy of tariffs to recover operational costs. Tariffs have remained unchanged until September 2004 when GOG approved an increase of 74% in electricity tariffs, the first such increase since FY96. While electricity tariffs have been relatively high (USc 8.93/kWh in 2003 and USc 9.05/kWh in 2004, tariff levels have not kept in pace with the high inflation and currency depreciation in Guinea. Current average rate of GNF 260/kWh, at current US$ to GNF exchange rate of 4,505, translates into an average tariff rate of only USc 5.77/kWh. The rapid erosion of tariff rates on a US dollar basis is very worrisome since over 75% of EDG’s cash operating expenses are on fuel purchases and plant maintenance equipments which has to be imported and payable only in US$ or Euros. With respect to the US$, the GNF has depreciated by over 140% from 2003 to today. The lack of tariff adjustment in line with cost increment, combined with steep technical and non-technical commercial losses driven by poor generation and transmission efficiencies as well poor collection record on the distribution side have caused EDG to run a large cash deficit, covered by GOG. GOG subsidy to EDG was in the amount of GNF 30 billion in FY04, equivalent to about US$7.5 million. The sector has been pushed into a vicious cycle where non-performance of distribution has adversely affected generation by minimizing repair and maintenance, leading to ever increasing load shedding and loss of revenues. In early FY05, load shedding stood at 700-800 MWhs per day. The proposed Project aims to close the financial gap that EDG currently faces by improving generation capacity, commercial and technical distribution efficiency, thereby reducing technical and non-technical losses to a more reasonable level. A combination of increased generation driving electricity sales, and higher levels of billing and collection enhancing revenue realization is expected to curb losses and generate positive cash flows. However, efficiency enhancements alone will not be sufficient to achieve full financial recovery. Notwithstanding commercial and operational efficiency gains, unless proper tariff adjustments are made to reflect cost recovery levels, the electricity sector in Guinea will continue to be burdened by its inability to cover costs and make necessary investments to sustain and grow the sectoral capacity. A Tariff Study has been launched to evaluate EDG’s Sector Financial Recovery Trajectory which will assess the financial implications of a mix of efficiency interventions being implemented by EDG and tariff adjustments. The Study will, within the framework of the Recovery Trajectory (i) analyze the real cost of electricity supply in Guinea, (ii) review current tariff levels and policies, (iii) recommend a tariff structure, and (iv) assess the financial impact of the proposed tariff structure. High electricity losses: EDG incurs huge commercial financial losses due to its lack of adequate management and infrastructure in the transmission and distribution sector. By the end of FY05, EDG reported that energy lost due to technical and non-technical losses amounted to 55% (326 Gwh) of total annual generation, equivalent to about GNF 84 billion (US$ 18.6 million at today’s exchange rate of GNF 4,505/US$). Exacerbating the situation of overall losses are the non-collection losses. (the total losses have been valued at about GNF 107 billion). With such unparalleled levels of overall system losses, substantial amounts of expensive electricity are being wasted, representing the biggest “consumer” of available energy in the country. Under these conditions, EDG’s operations are clearly not sustainable and any plans to add much needed generating capacity without immediate steps to address distribution losses untenable. The CREST program which is being proposed under the current Project is expected to provide strong impetus in driving down commercial losses through the realization of higher metering, billing and collection rates. The results from the pilot program in Kaloum area in Guinea have Page 90 96 been promising. Collection rates in Kaloum have gone up from 70% to 93%. The number of customers connected to the grid has been identified to be at 11,700 instead of the earlier figure of 3,200. System losses have gone down from 55% to 45%. All these improvements have taken place without any new capital investments and have been achieved mainly by re-engineering business processes and management improvements. There is real potential for EDG to realize rapid and significant financial improvement through the wider application of the CREST program. Commercial Practices of EDG: EDG is a very weak utility that lacks skilled management and technical staff, and is at the same time, overstaffed. It also is constrained by the difficulty of operating on a purely cash transaction basis, with very little stocks or materials in inventory to enable smooth operations. For instance, because of the history of predecessor entities (SOGEL and ENELGUI ) and resultant lack of confidence in EDG’s credit, suppliers have refused to offer short-term credit terms to EDG for purchases of diesel, insisting that supplies be paid in advance or with cash on delivery (COD). Also, the lack of spare parts and a shortage of skilled technicians have resulted in widespread operational problems. Maintenance is inadequate and work is often substandard, although the quality is improving. A large part of the problem stems from government policy which treats the power sector as a public service instead of a commercial operation; for instance, EDG has been obliged to assume important service charges for previous years. Meanwhile, government bureaucratic systems and rigorous controls are being applied to EDG. The situation has yet to improve. GOG is seeking to improve the supply of electricity through a mix of interventions that include improving performance and financial recovery of the sector while increasing generation capacity. It has initiated a number of steps to galvanize the deteriorating electricity sector. These include: (i) changing the management team of EDG; (ii) supporting EDG in reducing staff strength (556 positions terminated out of 2008); (iii) making significant progress in the dispute with the former private operator; and (iv) adjusting tariffs (in FY04) since the last one in FY96. Accounts Receivable: Collection performance of EDG is poor and worsening; collections are only 75% of sales revenue. Accordingly, unpaid accounts are estimated to have increased from GNF 13.6 billion (US$7.4 million) at the end of FY03 to GNF 50 billion (US$13.7million) at the end of FY05, representing 58% of revenues in 2005. Likewise, days receivable have increased from 111 days in 2003 to 213 days in 2005. While the 74% increase in tariff in September 2004 improved the revenue potential for EDG, the rate of bill collection did not improve commensurately and with deteriorating service quality, customers were less eager to pay their higher electricity bill on time, thus leading to a large increase in accounts receivable. In addition, EDG also had difficulties in collecting unpaid government bills, with current back payments of GNF 24.8 billion. Government agencies are the primary debtors, followed by the municipality, and then residential consumers. EDG faces significant liquidity problems on account of weak collections. A significant position of accounts receivables, even after reconstituting EDG’s balance sheet and implementing tariff adjustments, is cause for serious concern, arguably since there is no point in raising revenues that could not be collected. The issue of EDG’s collection performance was discussed with GOG and is being addressed in the context of Guinea’s Financial Sector Trajectory Plan. The Project is taking two major steps to enhance EDG’s revenue potential: (i) reducing technical losses in the distribution system and thereby increasing the percentage of energy available for billing; and (ii) increasing the number Page 91 97 of customers who are metered and billed by increasing access to electricity and converting illegal customers to legal, paying customers. In order to increase the % of revenue (bills) that is collected, the Project will focus on: (i) improving collection rates through the use of modern meters, including prepaid meters, which are hard to tamper with; (ii) disconnection of service to customers who are not paying their bills; (iii) public disclosure of names of customers who are in arrears for more than three months for amounts in excess of GNF 150,000; (iv) stricter enforcement of the anti-fraud law; and (v) improvement in quality of electricity service through improved voltage profile, continuity of service, customer care centers, rapid response vehicles which would induce customers to pay their bills in a timely manner. Financial Prospects of EDG Performance Covenants and Financial Forecasts : Improvements in EDG’s financial performance would require the following: (i) the capacity to meet demand for increased quantities of electrical energy; (ii) improved generating and distribution efficiencies; (iii) cost- reflective tariffs to be adjusted on a regular basis; and (iv) better collection performance. The proposed Project will provide EDG with the necessary generating capacity, reduce EDG’s electrical losses, implement reasonable tariffs and improve collection through the implementation of a modern billing and collection system. A Minimum Cash Requirement covenant (revenues to cover no less than the sum of cash operating expenses and other cash requirements) and a Debt Servicing Covenant have been agreed as the key financial covenants. As per the Financing Agreement, EDG will maintain: (a) a minimum cash requirement as agreed with the MEH to maintain adequate liquidity to meet its normal business requirements. In the event of a shortfall, which is not linked to imprudent management by EDG, from the minimum cash reserve requirement, the Government will make all reasonable efforts to support EDG maintain its minimum cash reserve through the provision of new or additional Government subsidy, appropriate tariff adjustments or other mechanisms mutually agreed upon by the Government and EDG; and (b) a debt service coverage ratio of 1.5x. Forecast Assumptions. The financial forecast of EDG has been analyzed under two scenarios: (i) Base Case – assuming business as usual scenario with current operational parameters going forward; and (ii) Project Case – assuming revenue improvements resulting from operational and commercial efficiency gains resulting from the Project. (i) Base Case (no Project) scenario Key Base Case assumptions include: · Tariffs are maintained at the 2005 levels and no tariff increases are assumed from 2006 to 2010 · Plant utilization factor (actual energy generated vs. rated generation capability) assumed to remain at 2005 levels · Transmission and distribution losses remain at the 2005 levels · Days receivable are assumed to remain at 2005 level, assuming no improvement in collection efficiency Page 92 98 An Operational and Financial Summary for the Base Case is presented below in Table 3. This “business as usual” forecast illustrates the worsening financial situation of EDG which is unsustainable with cumulative cash deficits in excess of US$48 million by the end of 2010. The forecast would be even worse if the debt service burden on all existing debt were to be assumed by EDG. The projected financial outlook for EDG looks untenable without operational efficiency improvements to reduce system losses; higher rates of metering, billing and collection; cost- reflective tariffs; and a recapitalization to provide balance sheet flexibility. Page 93 99 Table 3: Operational and Financial Performance Indicators (Base Case) F Y ending 31 December 2004 2005 2006 2007 2008 2009 2010 (thousands of US$) Provisional Provisional Forecast Forecast Forecast Forecast Forecast Monthly average available capacity (MW) 159.3 159.3 159.3 159.3 159.3 159.3 % Plant utilization factor 41.9% 41.9% 41.9% 41.9% 41.9% 41.9% Energy sent out (GWh) 661.9 591.6 591.9 591.9 591.9 591.9 591.9 % T&D losses 59.4% 55.0% 55.0% 55.0% 55.0% 55.0% 55.0% Energy billed (GWh) 268.8 266.0 266.4 266.4 266.4 266.4 266.4 % growth in energy billed -1.0% 0.2% 0.0% 0.0% 0.0% 0.0% Average electricity tariff GNF/KWh 205.2 259.1 259.1 259.1 259.1 259.1 259.1 Usc/KWh 9.05 7.12 5.56 5.29 5.14 5.04 4.94 Gross Margin 62.6% 47.9% 24.2% 24.7% 25.2% 25.8% 26.4% Working ratio (cash op expense / operating revenue) 93.7% 108.6% 136.9% 140.9% 145.4% 150.6% 156.6% Days receivable 138.0 212.8 212.8 212.8 212.8 212.8 212.8 Return on fixed assets - Historical basis -2.0% -6.6% -13.8% -15.2% -16.6% -18.1% -19.6% Net cash balance 970 392 (6,281) (15,310) (25,050) (36,131) (48,072) Page 94 100 (ii) Project Case scenario Key Project Case assumptions include: · Tariffs increase by 20% in 2006 from 2005 levels and 10% tariff increase assumed thereafter · Plant utilization factor increase by 10 percentage points between 2007 and 2009 (Project implementation period) · Transmission and distribution losses decrease by 8 percentage points between 2007 and 2009 · Days receivable decrease to 100 days by the end of 2010 · Increase in capital expenditure for repair and maintenance for the 2007-2010 period of approximately US$ 6.5 million versus the Base Case, and · Provision for bad debt decreases from 33% prior to the Project to 15% by the end of 2010 (as stricter bill payment enforcement reduces the number of defaulters) The Operational and Financial Summary for the Base Case is presented below in Table 4. The results from the Project Case show a marked improvement across all indicators, both operational and commercial. Under this scenario, EDG is able to generate revenues that exceed their cash operating costs (working ratio of less than 1) and thus significantly reduce cash losses, despite higher investment spending which while being a cash drain in the short-run, is critical for improving asset quality and system efficiencies in the long-run. If the Government acts on the tariff increase and if the efficiency gains from the Project are realized, EDG and thus ultimately the Government will benefit from estimated fiscal savings of US$ 36 million by the end of 2010. As has been reinforced by the experience from the SOGEL concession, it will be very important to transform EDG into a commercially viable entity with the ability to generate positive net profits and returns on invested capital if the Government is to seek private sector re-engagement in the electricity sector in Guinea. Page 95 101 Table 4: Operational and Financial Performance Indicators (Project Case) FY ending 31 December 2004 2005 2006 2007 2008 2009 2010 (thousands of US$) Provisional Provisional Forecast Forecast Forecast Forecast Forecast Monthly average available capacity (MW) 159.3 159.3 159.3 159.3 159.3 159.3 % Plant utilization factor 41.9% 41.9% 46.9% 51.9% 51.9% 51.9% Energy sent out (GWh) 661.9 591.6 591.9 661.7 731.4 731.4 731.4 % T&D losses 59.4% 55.0% 55.0% 50.0% 45.0% 45.0% 45.0% Energy billed (GWh) 268.8 266.0 266.4 330.8 402.3 402.3 402.3 % growth in energy billed -1.0% 0.2% 24.2% 21.6% 0.0% 0.0% Average electricity tariff GNF/KWh 205.2 259.1 310.9 342.0 376.2 413.8 455.2 Usc/KWh 9.05 7.12 6.67 6.99 7.46 8.05 8.68 Gross Margin 62.6% 47.9% 36.2% 44.3% 51.6% 56.0% 60.0% Working ratio (cash op expense / operating revenue) 93.7% 108.6% 115.1% 103.0% 87.7% 84.2% 81.1% Days receivable 138.2 212.8 200.0 150.0 125.0 100.0 100.0 Return on fixed assets - Historical basis -2.0% -6.6% -8.6% -5.4% 2.3% 4.5% 6.7% Net cash balance 950 392 (5,196) (9,984) (11,860) (11,868) (12,178) Page 96 102 Table 5: Base Case vs. Project Case Net Cumulative Cash Balance -50,000 -40,000 -30,000 -20,000 -10,000 0 10,000 2004 2005 2006 2007 2008 2009 2010 N e t C u m u l a t i v e C a s h B a l a n c e ( i n $ 0 0 0 s ) Base Case Project Case Page 97 103 Annex 10: Safeguards GUINEA: ELECTRICITY SECTOR EFFICIENCY IMPROVEMENT PROJECT There are no safeguards triggered. The Project's Environmental Category is C, which reflects the fact that the proposed investments are essentially for replacement of and/or improvement on existing equipment. Moreover, this project is essentially in the nature of a pilot operation focusing on improvement of commercial and technical efficiencies, mainly in Conakry, the main urban/peri urban settlement of the country. These investments do not have any environmental or social safeguard implications as such, by themselves. Hence no environmental or safeguard policies are triggered by investments proposed in the current project. However, recognizing the possibility that substantial environmental or social concerns may be incumbent on existing facilities, the borrower has completed work on environmental assessment of the existing facilities. This work is expected to provide appropriate guidance for follow up action in this regard . The "C" classification of this project, from an environmental safeguards point of view, is in acknowledgement of the fact that the investments under the project do not, by themselves, generate adverse any environmental impact and that the investments are essentially supporting a pilot operation. The GEF operation is mainly targeting two broad areas- one for improving the distribution business process efficiencies such as reduction in losses and reliability of supply, and the second for building capacity for energy efficiency and Demand Side Management activities with some demonstrative initiatives. These activities do not trigger any environmental concerns by themselves. On the other hand, the operation is a pilot in the sense that the project is attempting to demonstrate best practice interventions with meager resources in a limited area (Kaloum area of Conakry). It is expected that the project activities can then be scaled up and replicated by the EDG/Government of Guinea when resources are available internally or with donor assistance. With respect to the environmental concerns with regard to the existing electricity facilities in the country, the task team flagged them and have recommended to the Government, as part of the sector dialogue, that an environmental assessment be undertaken in order to gauge the extent of these hazards and to identify possible mitigation measures. Though this issue is outside the scope of the project in a strict sense, the utility went ahead and implemented this recommendation by undertaking an assessment of the environmental hazards arising from the existing facilities along identification of mitigating actions. The Government is currently reviewing this work and it can be reasonably expected that it will approve this work as a guiding document for environmental risk mitigation actions that the utility and the Ministry need to undertake in this regard. Page 98 104 Annex 11 Incremental Cost Analysis Introduction Since 2004, GOG has particularly stressed the important role electricity plays for the economic well-being of the country. GOG has initiated a number of steps to galvanize the deteriorating electricity sector . By early 2005, the following measures had been taken: (i) change of management team of the utility; (ii) support extended to the management team to reduce significantly excess of staff (556 out of 2008); (iii) addressing the judicial dispute with former private concessionaires; and (iv) implementation of the first tariff adjustment (77%) since 1997, which took effect in September 2004. Baseline Scenario GOG seeks to improve efficiency of supply of electricity through a mix of interventions that include improving performance, and financial health of the sector and at the same time increase generation capacity. Though GOG is currently engaged in resolving outstanding issues related to the earlier concession that withdrew in 2001, it is actively scoping renewed private sector engagement in the sector. However, the GOG recognizes that the sector will have to be brought to a reasonable level of operational and commercial efficiency to whet the private sector appetite. GOG has thus indicated its strong commitment to facilitate and support the sector in achieving an operational recovery in the medium term. While GOG’s capacity to sustain the sector cannot be stretched further to absorb recurring and substantial financial losses, there is a significant opportunity to improve the performance of the sector introducing efficient and modern management practices that blend sound business processes with innovative technological applications particularly in the operations of the utility to reduce system losses. Besides EDG, there are mining companies that self-generate almost half of the electricity demand in Guinea. Projections based on mining and aluminum sector growth indicate that peak demand is expected to grow from 149 MW in 2003 to 1,098 MW in 2020. The following table captures EDG’s business performance. Annual generation 659 GWh Energy lost due to technical and non-technical losses 391 GWh Energy billed to consumption 268 GWh Monetary value of power billed to customers GNF 63 billion Amount collected against above billing GNF 48 billion Monetary value of power lost GNF 92 billion Amount lost annually including non-technical losses** GNF 107 billion Specific Revenue Billed (SRC)* GNF 95 /KWh Specific Revenue Collected (SRC)** GNF 73 /KWh Result: Nearly 60% T&D losses and 80% Aggregate Technical and Commercial (ATC) losses * SRC=Revenue billed in GNF/KWH input;**SRC=Collections made in GNF/KWH input. The foregoing analysis illustrates that electricity operations are not sustainable with such a high level of aggregate commercial and technical losses. Hence, plans to add much needed generation Page 99 105 capacity 22 should be preceded by immediate steps to improve the commercial and operational performance of the sector. The high technical and non-technical losses imply that thermal capacity is generated in excess of what would be needed in the absence of such losses; CO 2 emissions induced by these losses are therefore high. While GOG’s capacity to sustain the sector cannot be stretched further to absorb recurring and substantial financial losses, there is a significant opportunity to improve the performance of the sector introducing efficient management practices that blend sound business processes with innovative technological applications particularly in the operations of EDG to reduce system losses. EDG has committed to undertake a new approach to enhance the efficiency of its distribution system through the Commercial Reorientation of the Electricity Sector Toolkit (CREST). GOG requested World Bank assistance for its ailing electricity sector as per its letter dated January 11, 2005. In its letter, it highlighted the need to rapidly begin addressing the key issues surrounding the crisis faced by the sector. In February 2005 an Energy Mission of the World Bank discussed an emergency program with EDG and the relevant Ministries. Subsequently, a CREST 23 efficiency improvement program was adopted and implementation thereof begun by EDG. It has led to improved energy efficiency, billing and customer services without additional financing provided by the World Bank. EDG and GOG have thereby demonstrated their earnestness in taking action in the sector. At this juncture, the implementation of this program needs to be ramped up with critical investment support. These attempts notwithstanding, EDG continues to face some key barriers in the implementation of the CREST. These include: Lack of technical capacity : While there is a basic level of capacity in EDG with respect to design, implementation and O&M of distribution systems, a lack of technical capacity in the area of new technological applications such as remote metering and HVDS, as well options such as DSM to manage energy. There have been few and scattered efficiency efforts and the DSM/energy efficiency capacity is low. Similarly, EDG has adequate skills in the area of basic power plant operations, but lacks technical capacity related to optimization and efficient operation of power plants. Lack of regulatory and policy capacity to encourage energy efficiency: Currently Guinea does not have a conducive policy and regulatory environment to encourage energy efficiency in utility operations, especially with respect of electricity distribution and end-use. High first cost of efficiency measures : Though they bring significant benefits, one of the barriers to the adoption of energy efficiency measures in EDG is due to their high initial cost. There is inadequate experience within Guinea to understand and evaluate the benefits of such measures. Lack of private sector involvement : The private sector interest in the area of energy efficiency improvement is low, given the current conditions. Past energy efficiency efforts (industrial energy audits) were undertaken by GOG. Consequently, the capacity of local consultants and the private enterprises in the area of energy efficiency is limited. ESCOs are virtually non-existent 22 Nexant study under WAPP 23 CREST stands for “Commercial Reorientation of Electricity Sector Toolkit” and is a customized action plan to improve commercial and operational efficiencies of the Utility. Page 100 106 today, but there is some level of interest in the private sector to undertake utility functions such as metering and billing. Lack of awareness to information : The level of information available on energy efficiency concepts and applications in electricity distribution system is very limited. Exposure to international best practices in the area is also limited. In the past, the MEH has conducted energy audits among a few large consumers of electricity but an energy audit program has not been instituted. There is also little information available regarding whether or how the audit recommendations were implemented. GEF Alternative The proposed Project seeks to assist the sector in investments that are required for implementation of the efficiency improvement program identified by EDG as a necessary short and medium term intervention to achieve sustainable private participation in future. The main objective of the GEF project is to reduce carbon dioxide (CO 2 ) emissions by improving energy efficiency through a comprehensive approach that addresses efficiency in power generation, reduced losses in the distribution system as well as DSM/efficiency programs designed for end- use customers. Support from the GEF further enhances the energy efficiency impact achieved through this IDA operation. In particular, the operation would be strengthened through specific project components and sub-components targeted at improving end-use energy efficiency and Demand Side Management (DSM). These components which bring significant GHG reduction benefits would not be implemented without GEF support. GEF support is also critical in enhancing some of the other energy efficiency components funded primarily by IDA to ensure that adequate locally capcity is built. Under this operation, GEF is providing support for capacity building relating to the introduction of new technological options such as the High Voltage Distribution System (HVDS) in Guinea. Component 1 of the project on Distribution Efficiency Improvement includes funding specifically for capacity building activities in this area such as hiring of a Project Implementation Consultant (PIC) to help the EDG in the supervision of the implementation of this component. The measures implemented will result in a reduction of approximately 216,750 tonnes of CO2 reductions over the 10-year life of the investments. Based on total GEF funding of $4.5 million, this translates into $20.8 per ton of carbon. Including the CO2 emission reduction from improved plant load factor at the Garifiri hydro plant (Component 2) which is not being funded by GEF, the total CO2 emission reduction for the 10 year period equals 752,200 tonnes, which translates into a cost of $6.0 per ton of carbon. One of the key interventions of the alternative scenario is the HVDS. The conventional Low Voltage Distribution System (LVDS) employs large transformers (typically 500 KVA) to carry power at the 400 V level and serve roughly 400 consumers. This configuration results in high losses due to the higher current being carried on the line and is also often characterized by poor voltage profile at the tail-end of the line due to losses and electricity theft. This technological configuration is widely used but is proven to be inefficient. The alternative (HVDS) brings in a new mindset that utilizes a different technological configuration and associated materials and equipment. A new planning and technical design process is followed resulting in a technical configuration where technical losses are reduced substantially due to the lower current carried on the line. In this case, the power is distributed at the 11 kV level and small-sized high-efficiency transformers are utilized for transformation close to the consumption point. The HVDS therefore Page 101 107 institutes new mindset, new planning and technical design skills and brings new higher efficiency oriented material and technology choices . While all technology and material choices are aligned to achieving EE objectives, in particular, this utility efficiency program will introduce high efficiency transformers in the Guinea market and begin the market development process. The technical comparison between the conventional and the alternative efficient distribution transformer is presented in the table below: Baseline Distribution transformer Alternative high efficiency transformer Conventional Core Amorphous core Aluminum wound Copper wound Oil based Dry External switchgear Self-protecting 4.5 % transformation losses 1.5 % transformation losses Tail –end voltage achieved = 180 V Tail-end voltage = 210-220 V 350 Amp line current 31 Amp line current HVDS forms part of the broader CREST program which addresses distribution efficiency measures in a comprehensive manner. The short term efficiency improvement strategy, referred to as the Commercial Reorientation of the Electricity Sector Toolkit (CREST), comprises a set of best practice interventions and is being designed for EDG, Guinea, with active support from the World Bank’s team. This approach seeks to improve the performance and efficiency in the transition phase by providing support for private participation through value creation in the electricity business. The key components of CREST, which has been designed to operate in tandem with the Government’s longer term generation expansion and privatization programs, are: • Innovative deployment of technology and improving quality of supply (normative voltage and reduced outage times), • Reengineering the core business processes with a customer focus, • Focusing on the retail MBC functions for increased revenues and loss reduction, • Stemming financial losses of EDG The Project will support investments that aim at improving (i) distribution efficiency for reliable supply to be measured by better voltage and reduced outage times; (ii) commercial character of the business as measured by enhanced billing and increased revenues; (iii) customer interface measured by time required to respond to complaints, customer services, etc.; (iv) power plant efficiency to demonstrate the viability of rehabilitation through interventions at two sites and (v) the capacity of the EDG and MEH in designing and implementing DSM and energy efficiency programs. The CREST itself would involve the following interventions: · Improved reliability and quality of supply for customers, firstly through High Voltage Distribution Systems (HVDS), involving investments in small capacity transformers, HT and aerial bunched cable, insulators, poles and other accessories, and secondly by reactive power compensation by installation of online capacitors.. · Mechanisms to facilitate efficient metering would include enhancing the coverage and quality of metering for HT and LT customers involving HT trivector meters, LT trivector Page 102 108 meters (CT operated) for LV commercial loads above 20 KW, single-phase and three- phase (whole current) meters for other LV loads apart from other metering equipment. Modern metering options such as Automatic Meter Reading, prepaid metering, spot billing with hand-held terminals and others will be suitably deployed. This arrangement will also facilitate Demand Side Management initiatives for the EDG. Metering of Maximum Demand consumer premises and that of non-Maximum Demand consumer premises, through use of modems and other accessories for remote reading would be introduced where required. · Better cash flow management by introduction of spot billing which involves hand-held terminals, printers, modems and associated accessories. In addition, collections would be improved through opening up alternate avenues for customers to pay their bills. · Addressing customer concerns through set up of customer care centers, and improved attention to customer concerns through launch of rapid response program involving appropriate vehicles with GIS, GPS facilities and equipment, fault repair kits, wireless sets and any other required accessories. These interventions are designed to strengthen distribution infrastructure, improve energy efficiency and quality of supply, and increase cash generation. The main operational impact of investments would be in the areas of quality of supply, pilferage of electricity, customer service, and improving distribution business processes. (a) Quality of supply: Voltage profiles are generally poor, with consumers receiving 180 volts or even lower instead of the standard 220V supply. At such low voltages, household consumers risk ruining appliances if used- often times these cannot be used at all. Business applications for industrial and commercial customers are similarly affected. The CREST initiative will address the voltage problem through reconfiguration of distribution lines to a High Voltage Distribution System (HVDS). Under the current system, large capacity transformers are the norm, serving numerous of customers from one transformation point. Typically a 500 KVA capacity transformer would supply around 400customers. This configuration requires electricity at low voltages (LV) of around 400 volts to be transported over long distances. Because of long line lengths, customers at the far end of the line experience low voltages. Furthermore, such long lines sag, and are therefore prone to frequent breakdowns and easy theft, besides being unsafe. The HVDS remedies these shortcomings by: x Replacing each such large transformer by several smaller capacity transformers to step-down from 11kV to 220 V at several points along a supply line instead of at one terminal point. As a result, transformation occurs closer to the consumption point, i.e. fewer consumers are served per transformer, thereby limiting voltage drops and dramatically improving the supply profile. In pilot HVDS projects implemented under CREST, actual measurements of consumer-end voltages show vast improvement – from 160 volts in some cases to the desired level of 220 volts. Page 103 109 x The higher voltage lines also deter theft, while also dramatically reducing technical losses by reducing the amount of current output in the system 24 . Technical loss reduction results in higher energy efficiency and in lowering of carbon emissions that can be monetized into revenues through sale of carbon credits. (b) Pilferage of electricity. · A long LV line invites theft as it is relatively simple to tap into. On the other hand, HV lines are placed higher from the ground, and are practically impossible to tap into. Furthermore, a HVDS configuration employs insulated aerial- bunched cables to connect the transformer to distribution points, which eliminates all possibility of theft . · Remote reading of industrial and high revenue yielding customer premises also reduces pilferage of electricity significantly, while facilitating monitoring the quality of supply to such customers who are critical to the business. (c) Improving Customer service and distribution business processes. Poor customer service is one of the major complaints against EDG. The most frequent ones relate to wrong billing, undelivered or late delivery of bills, improper accounting of paid bills and apathy to consumers reporting faults or interruptions in supply. Also, weak business processes result in inefficiencies apart from customer dissatisfaction. The CREST interventions that address these issues include: · Introduction of customer friendly billing systems such as spot billing, using hand held electronic machines. In this method, bills are printed and delivered on the spot at the customers’ premises when their meters are read, and EDG’s customer database is updated electronically. Customers have the additional advantage of staggered payment due dates thus reducing crowding at cash collection centers on or near the due date. Apart from improving customer service, this intervention compresses the cash flow cycle, introduces electronic data recording facilitating diligence on this critical revenue generating part of the business. · Expansion of the marketing, bill distribution and bill collection network by outsourcing these activities. Some mechanisms would be internet based interface mechanisms for bill verification and payment, open-access bill information and payment facilities such as through banks, retail outlets and mobile phone service providers. · Segregation of technical and commercial functions to improve efficiencies in the business and creating exclusive machinery for customer interface, such as establishment of multi-level grievance redress systems, email complaint facility and toll-free complaint lines. 24 These losses are calculated as the square of the current multiplied by the resistance. Hence with a 500 KVA transformer, the output current is 350 amperes resulting in losses of 350x350x resistance value of the wires. Alternatively with a 25 KVA transformer the output current is 31 amperes. In this case the losses will be 31x31x resistance value of the wires. Hence this system will lead to a dramatic reduction in technical losses. Page 104 110 · In order to address customer interface issues and complaints rapidly and effectively, CREST will facilitate establishment of “networked” customer service centers with trained staff. These networked customer service centers would also facilitate data mining and tracking the revenue streams more efficiently · Assets and facilities management would be strengthened through standard software and infrastructure provision as necessary. This would help reduce the O & M and other costs in the business · Performance monitoring mechanisms that draw upon the HR database would be introduced. · Critical Data base and data mining initiatives (for billing and other business processes) including GIS/GPS techniques To promote end-use and distribution system efficiency, a DSM/EE cell will be created under the project to coordinate activities and build design and implementation capacity. The cell will undertake energy efficiency audits starting with key industrial and commercial customers and guide them in the implementation of energy efficiency measures. The cell will serve as a repository of energy efficiency related knowledge and skills within EDG. Component 1: Distribution Efficiency Improvement This component aims at improving the commercial and operational efficiency of the distribution network in order to · Reduce system losses, both technical and commercial, to improve operations; · Improve revenue billing and collections · Improve cash flows through reengineered business processes; · Improve customer satisfaction through improved utility interface and better outage management; · Contribute to reduction of green house gas emissions on account of reduced technical losses in the distribution network leading to avoiding generation required/load served thereby reducing consumption of HFO used for thermal generation Investments will be made in goods and services related to implementation of the following initiatives: · Improved reliability of supply for customers through reduction of losses by investment in High Voltage Distribution Systems (HVDS). · Enhancing the coverage and quality of metering for HT and LT customers. Better revenue collection by metering for MD consumer premises and metering non-MD consumer premises · Improved quality of supply for customers through reactive power compensation by installation of online capacitors. . · Addressing customer concerns through set up of customer care centers. · Better cash flow management and the MBC 25 process by introduction of spot billing. 25 MBC: Metering, Billing and Collection Page 105 111 · Improved attention to customer concerns through launch of rapid response outage management program. These investments will strengthen the distribution infrastructure, improve quality of supply and customer satisfaction and facilitate realization of potential in the sector to be a net cash generator instead of being the burden that it currently imposes on the economy. These investments are targeted to improve quality and continuity of supply, curb pilferage of electricity, and raise the standards of customer service. Component 3: Institutional Strengthening and Technical Assistance 3.1 Energy efficiency and conservation As Guinea faces a severe power shortage in terms of unmet demand and protracted load shedding, it needs to implement energy efficiency and demand side measures urgently. The EDG system is small with an installed capacity of 143 MW, but there is an almost equivalent (known) captive generation at about 120 MW. These enterprises and households are incurring high energy expenditures due to the use of small, inefficient generators. The DSM program will be targeted at these enterprises and individuals to offer them options to reduce their energy consumption. The current project will build on earlier efforts by the Ministry of Energy to initiate an energy audit program for the commercial and industrial sector. EDG itself has an interest in controlling the consumption of commercial and industrial sector enterprises in the interest of developing its customer base. With the current high level of consumption of these enterprises, it is difficult for the EDG to accommodate them, but it would be possible to do so once the energy consumption comes down. For the EDG, a broader customer base has wide ranging positive impacts such as improved revenues, lower revenue risks and better system stability. In the case of the EDG’s own customers, close link of the DSM initiatives with EDG business objectives such as the system peak shaving benefits and distribution loss reduction rationale are the key drivers of this effort. Even EDG’s most valuable industrial and commercial customers are causing higher system losses due to poor power factors in their facilities and by stretching EDG’s peak demand. In order to launch the above discussed efficiency/DSM program, DSM capacity will be created within the EDG and within the Ministry of Energy and Hydraulics to build expertise in the following areas 1) Initiate an audit program through EDG/MoE focused on industrial and commercial customers. Provide technical assistance to the customers in the implementation of corrective measures following an energy audit of industrial and commercial establishments, buildings and other facilities where significant energy consumption occurs and dovetail these efforts with prudent load management- the targeted peak reduction will be in the order of 12.15 MW and initial implementation of pilot projects will be undertaken in the areas of efficient lighting for public and private buildings as well as efficient motors in industries.; 2) To develop appropriate incentives for energy efficiency through tariffs and other mechanisms Page 106 112 3) Provide training to ESCos to build private sector capacity in design and implementation of these programs 4) To provide support to the Ministry of Energy to develop a policy framework for implementation of activities leading to energy efficiency and conservation 5) Implement a communication strategy for generating awareness for energy conservation The project recognizes the need to sustain and scale up the efficiency gains that will occur in the sector through these investments by promoting demand side management (DSM) measures. Accordingly it would assist in the development of an appropriate framework and institutional capacity for energy efficiency and conservation programs and develop viable strategies for participation of ESCOs to undertake this work. In view of the limited resource envelope under this project, other energy efficiency initiatives detailed above cannot be followed up in this project and would be taken up in future Bank projects. It is however, expected that due to the catalytic role played by this component, the EDG, the Ministry, other sector stakeholders including the private sector would carry this important activity forward. 3.2 Private sector partnerships: The project would assist identification and development of areas where the private sector can intervene with the aim of improving the electricity sector's financial viability. 26 These could include outsourcing of various distribution functions and Energy Service Companies (ESCOs) among other approaches. This component would essentially deliver a report detailing possible strategies for private sector participation. The Bank’s energy team has identified two possible public private partnerships in this context. The first concept of Distribution Function Outsourcing involves the private sector in implementation of the project components. The second concept of Distribution Business Outsourcing, was explored and it was felt that a detailed study needs to be conducted before assessing its viability and private sector appetite for it. The report to be delivered under this component would examine this issue apart from exploring the viability of other approaches of private participation in the sector. 3.3 Financial and accounting systems: It is essential that the EDG ring fences the generation transmission and distribution businesses and in turn identifies the real costs for each of those functions. This would facilitate improvement of operational efficiencies through a profit center approach on one hand and efficient tariff setting on the other leading to commercial efficiencies. The project would assist in capacity building and provision of appropriate infrastructure for development of financial and accounting systems towards achieving this objective. 3.4 MIS and operational IT support: The project would support initiatives leading to capacity building and infrastructure support (in various areas such as anti theft measures, energy audit and remote metering techniques), MIS systems, customer billing and HR data bases etc. GEF funding is sought for overcoming the market barriers to implementation of efficient distribution technologies and practices. Attached is an incremental cost matrix which demonstrates the specific areas where there is a justification for GEF support over and above the developmental baselines efforts underway as part of the CREST program. Incremental Cost Matrix Benefits Baseline Alternative Increment 26 This could imply, for example, the outsourcing of an area to the private sector for supply and billing of electricity. Page 107 113 Local benefits (1) Distribution Efficiency improvement : (a) T &D System Improvements: Undertake re- conductoring and rehabilitation of the network and reconfigure the network to take transformation points close to the load center Re-conductoring and rehabilitation of the 110 KV and 20 KV network as well as implementation of HVDS in selected areas. Also, design and implement reactive power compensation plan to reduce losses further. Implementation of the HVDS System to reduce losses in the distribution system. Preparation and implementation of training modules for HVDS replication throughout the country. Capacity building and training on reactive power compensation options in distribution systems. (3) DSM and Energy conservation: No current program at EDG Creation of an appropriate framework and institutional capacity in the area of DSM and energy conservation within EDG Development of DSM groups at the Ministry of Energy and within EDG to serve as the institutional focal point for DSM and Energy conservation work. Develop and implement DSM programs for industrial and commercial sectors Global Benefits Distribution system is improved, but relies largely on conventional loss reduction approaches. T&D system improvements based on innovative technical and institutional approaches results in offset of additional GHG emissions. 216,750 tonnes of C02 emission reduction over the life of the investments (from distribution efficiency enhancements and DSM activities). Total global benefits of 752,200 tonnes of CO2 emission reduction including the benefits from increase plant load factor at the Garifiri hydropower plant. Page 108 114 Cost by GEF Component (US$ million) 1. Distribution Efficiency Enhancement 3.DSM and Energy Efficiency Total 5.1 2.0 7.1 7.3 4.3 11.6 2.2 2.3 4.5 Page 109 115 Annex 12A STAP P ROJECT R EVIEWS UNIVERSITY OF CALIFORNIA, BERKELEY BERKELEY DAVIS IRVINE LOS ANGELES RIVERSIDE SAN DIEGO SAN FRANCISCO • • • • • • SANTA BARBARA SANTA CRUZ • E N ERGY AND R E SOURCES G R OUP D A NIEL M. K A MMEN 310 B ARROWS H ALL C LASS OF 1935 D ISTINGUISHED C HAIR IN E NERGY U NIVERSITY OF C ALIFORNIA P ROFESSOR IN THE E NERGY AND R ESOURCES G ROUP B ERKELEY , CA 94720-3050 P ROFESSOR OF P UBLIC P OLICY WWW: http://socrates.berkeley.edu/~rael P ROFESSOR OF N UCLEAR E NGINEERING T EL (510) 642-1139 D IRECTOR F AX (510) 642-1085 R ENEWABLE AND A PPROPRIATE E NERGY L AB (RAEL) C O -D I RECTOR , B E RKELEY I N STITUTE OF THE E N VIRONMENT E M AIL : kammen@berkeley.edu March 3, 2006 To: Cgovindarajalu@worldbank.org Ph: 202-458-1211 Ph: 202-522-2130 Re: ELECTRICITY SECTOR EFFICIENCY IMPROVEMENT PROJECT Overall Assessment and Major Comments: This project addresses the most basic, and hence most difficult aspects of revitalizing the electric power sector in a poor nation with a marginal local physical and human resources infrastructure on which to build. This project offers a serious dilemma of need versus the capacity to make implementation a reality. Not without significant concerns, I recommend that this project be approved and implemented. On one hand, the opportunities are tremendous, with major generation, transmission and distribution and then immense payment problems at the end of the supply chain. The detail provided in this project plan, for work at all stages of the supply plants, the distribution network, and opportunities for efficiency in the end-use as well as financial management innovations. The project team is to be commended for these excellent plans, many of which make perfect sense in this context, and should be supported. The savings from refurbishing the Tombo Thermal generation plant alone would appear to be worth the investment, a would the imposition of a far more rigorous billing and collection scheme (where incredible losses to the system take place). Further, the project involved a very reasonable GEF component, and (Appendix 11) even pencils out at a reasonable Page 110 116 cost per ton of avoided carbon ($12.8/tC) (which is quite impressive given the amount of to concrete results, even though the effort is essential to good performance). On all these initiatives the project team has done an excellent job and are the basis for a recommendation that the project be supported. Counterbalancing that opportunity, however, are the severe constraints under which this project must operate. Each of the key aspects of the project, in fact, is rated by the design team as entailing significant risks. The PCD notes that (page 28), that: The abrupt end of the previous concession and the negative signals it has sent to the investor community poses a risk to the project objectives. The issues fundamental to this project that are ranked as coming with a ‘significant’ risk include: (i) Government commitment to re-invigorate the power sector with a long-term vision for reforming the sector; (ii) the limited institutional capacity to expand beyond the pilot phase, and to absorb larger investments and reform; the (iii) difficulties in mitigating rent-seeking prevalence in metering, billing and collection processes; and finally (iv) the problems of reflecting and imposing realistic/real costs. In light of their central relationship to the project plans, it is difficult to envision a more severe set of challenged and major risks In fact, a major concern of the overall project plan is the seeming contradiction – which is reflected throughout the project plan – is that a major risk identified in the project is (i), and yet the justification for conducting the project is the statement that: The government’s renewed commitment to the sector as evidenced by the change in management and staff reductions at EDG, and the tariff adjustment as well as its commitment to resolving all outstanding issues related to the earlier concession should send strong positive signals to the market and entice future private sector participation. The conflict inherent in these two views is not resolved and must be in order to move forward. Beyond that, the history of past projects (Appendix 2, page 37ff) is even worse: Sector Issue Project/Financier Ratings (Bank financed projects only) Completed projects OED Ratings Outcome Sustainability ID Impact Second Energy Project World Bank (closed in 1998) Unsatisfactory Unlikely NA First Power Project World Bank (closed in 1986) Did not achieve main objectives Page 111 117 Second Engineering and TA Project World Bank (closed in 1990) Did not achieve main objectives Ongoing Decentralized rural electrification project The World Bank (Approved July, 2002) (Color emphasis added). Under normal circumstances this could and should be enough to veto this project. However, at what point does one fund a project anyway because it is so critically needed? In my assessment, the value of doing this despite these problems warrants that the project be supported. However, the PCD does not do a sufficient job of proving evidence of that needed the local willingness (not the capacity, which is a subject of the project itself). Some evidence of improvement in local commitment does exist, such a the report that, ‘implementation of some of the CREST efficiency measures has led to early improvements in billing and customer services without additional investments. Collection levels in Kaloum area have gone up from 70% to 93%.’ (page 16). The linkage here does need discussion. Have improved energy services, i.e. lower usage rates through efficiency led to better performance and thus either increased willingness to pay, or simply has a new attention to revenue collection resulted in this change? Second, are the reasons that the collection rate increased transferable, or are they specific to the Kaloum locale (i.e. where is the analysis of the potential to expand on the Kaloum experience as suggested on page 27 ( Replicability ))? Were the collection rates accomplished through coercive activities (as has been the case in some other nations), or, ideally where they the result of perceived improved service or simply additional staffing? With 41% billing and 76% payment rates (Annex 11, page 60) the opportunity to change financial status through aggressive collection efforts is significant, particularly with this being one of the most visible means of improvement available to donor and other observers. A number of questions were listed above, and are intended to more fully explain the local changes. The reason that this is so vital is that very little concrete evidenced exists as to how and why a new culture of commitment to utility performance exists. If this can be more fully demonstrated – perhaps best accomplished through an Electricité de Guinée report to the GEF – then the overall assurance that a series of important new measures have been instituted. The energy efficiency and conservation section of this report is excellent. If the reporting capacity existed – which is unclear – it would be ideal to move to a further stage of savings reporting where utility bills listed the difference between energy use in the current (billing) period and past periods to demonstrate the monetary value of savings. These programs have been very successful in both developed and developing nations at reducing load, but they require extensive data records and reporting. Perhaps the best known such program in the U. S. state of California is the ‘20/20 program’, where 20% reductions in energy use compared to the similar month the year before result in a further 20% savings to the end-user: http://www.consumerenergycenter.org/rebate/index.html Page 112 118 Programs such as this, when combined with efforts focused on efficient devices, have successfully made the connection between energy efficiency and household savings. Minor Comments: Page 14: Wording, “However, transmission investments too beg reasonable distribution performance to be sustainable.” Replace ‘beg’ with ‘require’? Appendix D: Appraisal Summary (p. 29ff). Analysis is provided based on 12 and 16% EIRR and FIRR, which appear to simply have been derived from the 16% default rate (page 58). If so, what evidence exists that is the likely actual default rate, and not just that set, and assumed, by the World Bank project guidelines as the risk level for project of this type, and presumably in countries with utilities in a certain performance bracket? Page 113 119 Annex 12B Team Response to STAP Review Comments STAP reviewer comments Team responses 1. The conflict inherent in the following two views needs to be resolved in order to move forward. The abrupt end of the previous concession and the negative signals it has sent to the investor community poses a risk to the project objectives. The government’s renewed commitment to the sector as evidenced by the change in management and staff reductions at EDG, and the tariff adjustment as well as its commitment to resolving all outstanding issues related to the earlier concession should send strong positive signals to the market and entice future private sector participation. As articulated in the draft Project Document, the aborted private concession arrangement (in 2001) gave negative signals to the investor community and has understandably triggered high risk perceptions for the private sector. Therefore any efforts to improve the sector and its investment climate need to address this. The Government has sought to mitigate these perceptions (in 2005) by several steps as described in the draft Project Document. These proactive measures initiated by the Government are meant to reassure all the stakeholders and to move the sector forward in terms of efficiency, and required investments. In the team’s view, if these measures have not been taken, the adverse impact of earlier events would have continued to affect the sector. Hence, with the Government taking this initiative, possible conflicts and inconsistencies on account of this issue are substantially reduced. Moreover, the steps initiated by EDG confirm this conclusion as described in responses to other comments 2. 2(a) However, the PCD does not do a sufficient job of proving evidence of that needed the local willingness (not the capacity, which is a subject of the project itself) surrounding the following issues: Have improved energy services, i.e. lower usage rates through efficiency led to better performance and thus either increased willingness to pay, or simply has a new attention to revenue collection resulted in this change? The basic thrust of the pilot project is to improve efficiencies through focus on business processes and utility commercial performance improvements which have led to the encouraging results. Loss reduction and end use efficiency programs are sought to be introduced through the proposed project. However, increased revenue realization can also be attributed to a rise in willing ness to pay due to effective stakeholder communication in the Kaloum pilot. 2(b) Second, are the reasons that the collection rate increased transferable, or are they The potential for repilcability is borne out by the following : Page 114 120 specific to the Kaloum locale (i.e. where is the analysis of the potential to expand on the Kaloum experience as suggested on page 27 ( Replicability ))? 1.Though the pilot project focused on specific initiatives in Kaloum, system wide initiatives were taken up for utility performance improvements in EDG also. The improvements in performance in Kaloum (Coanakry’s downtown area) are matched by improvements in Conakry and in EDG wide results; though not on the same scale. 2. The system losses and low collection efficiency in Kaloum characterize the entire network, and as pointed out in the STAP review, provide a significant opportunity for capturing efficiency gains and service delivery improvements and the basis for replicating these interventions elsewhere in the system. 2(c) Were the collection rates accomplished through coercive activities (as has been the case in some other nations), or, ideally where they the result of perceived improved service or simply additional staffing? As already described, the improvement in collections were achieved through business process improvements and effective stakeholder communication. There was no increase in staff deployed for this purpose, and use of coercive methods was not reported. 3. Page 14: Wording, “However, transmission investments too beg reasonable distribution performance to be sustainable.” Replace ‘beg’ with ‘require’? We agree. 4. Appendix D: Appraisal Summary (p. 29ff). Analysis is provided based on 12 and 16% EIRR and FIRR, which appear to simply have been derived from the 16% default rate (page 58). If so, what evidence exists that is the likely actual default rate, and not just that set, and assumed, by the World Bank project guidelines as the risk level for project of this type, and presumably in countries with utilities in a certain The financial analysis takes into account the results of sensitivity analysis conducted for this purpose. Hence a range of results for NPV have been simulated for different discount rate scenarios. This range covers the spectrum of discount rates that are applicable to utilities within similar performance bracket in the region. Page 115 121 performance bracket? Page 116 122 Annex 13: Project Preparation and Supervision GUINEA: GEF- ELECTRICITY SECTOR EFFICIENCY IMPROVEMENT PROJECT Planned Actual PCN review 11/29/2005 11/29/2005 Initial ISDS to PIC 12/12/2005 01/13/2006 Appraisal 04/12/2006 04/12/2006 Negotiations 06/01/2007 05/04/2006 Board approval 06/28/2007 Planned date of effectiveness 09/21/2007 Planned date of mid-term review NA Planned closing date 09/20/2010 · Key institutions responsible for preparation of the project: Electricité de Guinée (EDG), MEH: Bank staff and consultants who worked on the project included: Name Title U NIT Prasad Tallapragada Team Leader AFTEG Chandra Sekhar Govindarajalu Senior Environment Specialist ENV Dana Rysankova Senior Energy Specialist AFTEG Rebecca C. Sekse Senior Financial Analyst EASEG Sameena Dost Senior Counsel LEGAF Bella Lelouma Diallo Senior FM Specialist AFTFM Zie Ibrahima Coulibaly Infrastructure Specialist AFTU2 Henri Aka Procurement Specialist AFTPC Edeltraut Gilgan-Hunt Environment Specialist AFTS2 Agnes Albert-Loth Senior Finance Officer LOAG2 Nuru Lama Young Professional IFC Sudeshna Banerjee Young Professional AFTU1 Hiranya H. Fernando Carbon Finance Specialist ENVCF Guy Massamba Consultant AFTEG Isabelle Daverne Consultant AFTEG Augustine Wright Program Assistant AFTEG Racky Dia Camara Team Assistant AFMGN Bank funds expended to date on project preparation: 1. Bank resources: US$ 62,000 2. Total: US$ 62,000 Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$ 10,000 2. Estimated annual supervision cost: US$ 100,000 Page 117 123 Annex 14: Documents in the Project File GUINEA: ELECTRICITY SECTOR EFFICIENCY IMPROVEMENT PROJECT 1. Financial Statements Electricité De Guinée 2.. Economic and Financial Analysis of investments under this project 3. Economic and Financial Analysis of distribution investment plans of EDG 4. EDG energy balance 5. Letter of Sector Policy issued by the Ministry of Energy and Hydraulics, Government of Guinea 5. Copy of Electricity Policy adopted by Government of Guinea in 2002 6. EDG network maps 7. Garafiri rehabilitation plan 8. Investment plan for Distribution 9. Diagnostic of the distribution network of Conakry 10. Aide Memoire of AfDB mission; April, 2006 11. Summary of Islamic Development Bank’s assistance to Guinea’s Electricity Sector 12. West Africa Power Pool master plan 13. Details of proposed partnership in Electricity between the Governments of Guinea and Senegal 14. Guinea Sector Programme; Power Supply in Conakry: Report by KfW Page 118 124 Annex 15: Statement of Loans and Credits GUINEA: ELECTRICITY SECTOR EFFICIENCY IMPROVEMENT PROJECT Page 119 125 Annex16: Country at a Glance Guinea at a glance 8/25/05 Sub- POVERTY and SOCIAL Saharan Low- Guinea Africa income 2004 P opulation, mid-year ( millions) 8 .1 7 19 2 ,338 GNI per capita (Atlas method, US$) 460 600 510 GNI (Atlas method, US$ billions) 3.7 432 1,184 A verage annual growth, 1998-04 Population (%) 2.2 2.2 1.8 Labor force (%) 2.1 1.0 2.1 M ost recent estimate (latest year available, 1998-04) P overty ( % of population below national poverty line) . . . . . . Urban population (% of total population) 36 37 31 Life expectancy at birth (years) 46 46 58 I nfant mortality ( per 1,000 live births) 1 04 1 01 7 9 Child malnutrition (% of children under 5) 23 .. 44 Access to an improved water source (% of population) 51 58 75 Literacy (% of population age 15+) .. 65 61 Gross primary enrollment (% of school-age population) 81 95 94 Male 92 102 101 Female 71 88 88 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1984 1994 2003 2004 GDP (US$ billions) .. 3.4 3.6 3.5 Gross capital formation/GDP .. 15.6 9.9 10.5 Exports of goods and services/GDP .. 22.6 22.0 23.1 Gross domestic savings/GDP .. 12.3 7.4 8.6 Gross national savings/GDP .. 8.3 6.6 7.6 Current account balance/GDP .. -7.3 -3.3 -2.9 Interest payments/GDP .. 1.2 0.8 .. Total debt/GDP .. 91.9 95.2 .. Total debt service/exports .. 12.7 16.4 .. Present value of debt/GDP .. .. 52.5 .. Present value of debt/exports .. .. 238.1 .. 1984-94 1994-04 2003 2004 2004-08 (average annual growth) GDP 3.7 3.8 1.2 2.6 4.8 GDP per capita 0.8 1.5 -0.9 0.5 2.8 Exports of goods and services 2.7 4.1 2.3 1.2 8.2 STRUCTURE of the ECONOMY 1984 1994 2003 2004 (% of GDP) Agriculture .. 21.7 24.6 24.9 Industry .. 28.8 36.4 36.7 Manufacturing .. 4.2 4.0 4.0 Services .. 49.5 39.0 38.4 Household final consumption expenditure .. 80.9 85.2 85.8 General gov't final consumption expenditure .. 6.7 7.5 5.6 Imports of goods and services .. 25.9 24.6 25.0 1984-94 1994-04 2003 2004 (average annual growth) Agriculture 3.6 4.5 2.9 4.1 Industry 2.6 4.7 0.4 2.9 Manufacturing 4.4 4.4 -4.0 2.0 Services 3.4 2.9 1.5 1.6 Household final consumption expenditure 4.1 3.7 4.0 3.9 General gov't final consumption expenditure -1.4 4.3 8.8 -0.5 Gross capital formation 2.2 2.1 -21.9 -5.1 Imports of goods and services 2.0 2.9 -3.0 0.0 Note: 2004 data are preliminary estimates. This table was produced from the Development Economics LDB database. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. -30 -15 0 15 99 00 01 02 03 04 GCF GDP Growth of capital and GDP (%) -5 0 5 10 15 99 00 01 02 03 04 Exports Imports Growth of exports and imports (%) Guinea Low-income group : Development diamond* : Life expectancy Access to improved water source GNI per capita : Gross : primary : enrollment Guinea Low-income group Economic ratios* Trade Indebtedness Domestic savings Capital formation Page 120 126 Guinea P RICES and GOVERNMENT FINANCE 1984 1994 2003 2004 Domestic prices (% change) C onsumer prices . . 4 .2 1 2.9 1 6.6 Implicit GDP deflator .. 2.6 12.4 16.2 Government finance (% of GDP, includes current grants) C urrent revenue . . 1 0.4 1 1.1 1 1.5 Current budget balance .. 1.0 -2.2 1.1 Overall surplus/deficit .. -7.2 -5.9 -2.5 TRADE 1984 1994 2003 2004 (US$ millions) Total exports (fob) .. 610 725 733 Bauxite .. 283 256 301 Alumina .. 88 144 157 Manufactures .. 118 98 69 Total imports (cif) .. 688 578 578 Food .. 76 89 91 F uel and energy . . 6 9 9 7 1 09 Capital goods .. 72 84 84 Export price index (2000=100) .. 102 104 99 Import price index (2000=100) .. 95 97 96 Terms of trade (2000=100) .. 107 107 103 B ALANCE of PAYMENTS 1984 1994 2003 2004 (US$ millions) Exports of goods and services 546 763 799 810 I mports of goods and services 4 88 8 75 8 92 8 78 Resource balance 58 -112 -92 -68 Net income .. -73 -32 -40 Net current transfers .. -62 5 5 Current account balance .. -247 -119 -103 Financing items (net) .. 212 120 100 Changes in net reserves -3 34 -1 3 Memo: Reserves including gold (US$ millions) .. 164 114 89 Conversion rate (DEC, local/US$) 24.1 976.6 1,986.0 2,449.8 EXTERNAL DEBT and RESOURCE FLOWS 1984 1994 2003 2004 (US$ millions) Total debt outstanding and disbursed 1,256 3,110 3,457 .. IBRD 48 0 0 .. IDA 90 773 1,212 .. Total debt service 110 97 131 .. IBRD 9 0 0 .. IDA 1 8 14 .. Composition of net resource flows Official grants 60 162 166 .. Official creditors -7 131 -32 .. Private creditors 6 -9 0 .. Foreign direct investment (net inflows) 1 0 79 .. Portfolio equity (net inflows) 0 0 0 .. World Bank program Commitments 45 48 0 .. Disbursements 20 63 33 .. Principal repayments 6 2 7 .. Net flows 14 61 26 .. Interest payments 5 6 8 .. Net transfers 10 55 19 .. Note: This table was produced from the Development Economics LDB database. 8/25/05 -8 -6 -4 -2 0 98 99 00 01 02 03 04 Current account balance to GDP (%) 0 200 400 600 800 1,000 98 99 00 01 02 03 04 Exports Imports Export and import levels (US$ mill.) 0 5 10 15 20 9 900 01020304 GDP deflator CPI : Inflation (%) G: 166 D: 661 C: 136 B: 1,212 F: 29 E: 1,253 A - IBRD B - IDA C - IMF D - Other multilateral E - Bilateral F - Private G - Short-term Composition of 2003 debt (US$ mill.) Page 121 127