Document of The World Bank
FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 29149-ER
Public Disclosure Authorized PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED CREDIT
IN THE AMOUNT OF SDR 20 MILLION (US$29.0 MILLION EQUIVALENT) AND A PROPOSED GRANT IN THE AMOUNT OF SDR 14.5 MILLION (US$21.0 MILLION EQUIVALENT)
TO THE
STATE OF ERITREA Public Disclosure Authorized FOR
ERITREA POWER DISTRIBUTION AND RURAL ELECTRIFICATION PROJECT
JUNE 4,2004
Energy Unit (AFTEG) Africa Region This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized CURRENCY EQUIVALENTS (Exchange Rate Effective May 30,2004)
Currency Unit = Eritrean Nakfa 1 ERN = US$00.07 US$1 = ERN 13.50
FISCAL YEAR January 1 -- December 3 1
ABBREVIATIONS AND ACRONYMS
WEIGHTS AND MEASURES
Kilowatt (kW) - 1,000 watts Megawatt (MW) - 1,000 kilowatt (kW) Gigawatt hour (GWh) = 1 million kilowatt hours (kWh) Kilometer (km) - 1,000 meters Meter (m) - 39.3 inches
Vice President: Callisto E. Madavo Country ManagedDirector: Makhtar Diop
' Sector Managermirector: Yusupha B. Crookes Task Team Leader/Task Manager: Paivi Koljonen FOR OFFICIAL USE ONLY ABC Aerial Bunched Cable APL Adaptable Program Loan CAS Country Assistance Strategy CEM Country Economic Memorandum CFAA Country Financial Accountability Assessment CPAR Country Procurement Assessment Review DRP Demobilization and Reintegration Program DSCR Debt Service Coverage Ratio EEA Eritrea Electric Authority EEC Eritrean Electric Corporation EIRR Economic Internal Rate of Return EMP Environmental Management Plan ESA Environment and Social Assessment ESMMP Environmental and Social Management and Monitoring Plan FMR Financial Monitoring Report FRR Financial Rate of Return GNP General Procurement Notice GoE Government of Eritrea HFO Heavy Fuel Oil IAPSO International Agency Procurement Services Office IAS International Accounting Standard IBRD International Bank for Reconstruction and Development IDA International Development Association IFRS International Financial Reporting Standard LPG Liquefied Petroleum Gas MEM Ministry of Energy and Mines NFA Net Foreign Assets NGO Non-Governmental Organization NPV Net Present Value O&M Operation and Maintenance PMU Project Management Unit PPF Project Preparation Facility RAP Resettlement Action Plan RPF Resettlement Policy Framework SBD Standard Bid Documents SCL Single Currency Loan SIDA Swedish International Development Agency SIL Specific Investment Loan SWER Single Wire Earth Return TOR Terms of Reference UNDP UnitedNations Development Program VA Village Administrator
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.
ERITREA ERITREA POWER DISTRIBUTION AND RURAL ELECTRIFICATION PROJECT
CONTENTS
A. Project Development Objective Page
1. Project development objective 2 2. Key performance indicators 2
B. Strategic Context
1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 6
C. Project Description Summary
1. Project components 8 2. Key policy and institutional reforms supported by the project 10 3. Benefits and target population 11 4. Institutional and implementation arrangements 11
D. Project Rationale
1. Project alternatives considered and reasons for rejection 16 2. Major related projects financed by the Bank and/or other development agencies 17 3. Lessons learned and reflected in the project design 18 4. Indications of borrower and recipient commitment and ownership 19 5. Value added ofBank support in this project 119
E. Summary Project Analysis
1. Economic 21 2. Financial 24 3. Technical 27 4. Institutional 27 5. Environmental 28 6. Social 31 7. Safeguard Policies 34
F. Sustainability and Risks
1. Sustainability 36 2, Critical risks 36 3. Possible controversial aspects 37
G. Main Conditions
1. Effectiveness Condition 38 2. Other 39
H. Readiness for Implementation 40
I.Compliance with Bank Policies 40
Annexes
Annex 1: Project Design Summary 41 Annex 2: Detailed Project Description 44 Annex 3: Estimated Project Costs 50 Annex 4: Cost Benefit Analysis Summary 51 Annex 5: Financial Summary for Revenue-Earning Project Entities 66 Annex 6: (A) Procurement Arrangements 70 (B) Financial Management and Disbursement Arrangements 77 Annex 7: Project Processing Schedule 84 Annex 8: Documents in the Project File 86 Annex 9: Statement ofLoans and Credits 86 Annex 10: Country at a Glance 90 Annex 11 : Monitoring and Evaluation Arrangements 92 Annex 12: Government of Eritrea Letter of Sector Policy 93
MAP(S) IBRD-33230 - Eritrea Power Distribution and Rural Electrification Project ERITREA ERITmA POWER DISTRIBUTION AND RURAL ELECTRIFICATIONPROJECT Project Appraisal Document Africa Regional Office AFTEG
Date: June 4,2004 Team Leader: Paivi Koljonen Sector Manager: Yusupha Crookes Sector(s): Power (95%), General energy sector (5%) Country Director: Makhtar Diop Theme@): Infrastructure services for private sector Project ID: PO57929 development (P), Rural services and infrastructure (P), Lending Instrument: Specific Investment Loan (SIL) other envh"It and natural ~"-ceS management (s), Decentralization (S), Regulation and competition policy (SI
[ ]Loan [XI Credit [XI Grant [ ] Guarantee [ ] Other: For LoanslCreditslOthers: Amount (US$m): 50
Proposed Terms (IDA): Standard Credit Grace period (years): 10 Years to maturity: 40 Commitment fee: 0.5% Service charae:- 0.75% Financing Plan (US$m): Source Local Foreign Total BORROWEFURECIPIENT 7.20 I 0.00 I 7.20 IDA 29.00 IDA GRANT FOR POST-CONFLICT I o'oo0.15 1 20.8529*00 I 21.00 Total: 7.35 I 49.85 I 57.20 * -=3 BorrowerlRecipient: GOVERNMENT OF THE STATE- OF ElUTREA Responsible agency: ERITREAN ELECTRIC CORPORATION Address: P.O. Box 9 11, Asmara, Eritrea Contact Person: Mr. Abraham Woldemicael, General Manager, EEC Tel: 29 1-1-122228 Fax: 291-1-12 1468 Email: [email protected] Other Agency(ies): Ministry of Energy and Mines, Department ofEnergy Address: P.O. Box 5285, Asmara, Eritrea Contact Person: Mr. Samuel Baire, Director General Tel: 291-1-121541 Fax: 29 1-1- 127652 Email: [email protected]
I I I I I Cumulative1 6.10 I 18.90 I 35.70 I 47.90 I 50.00 I I Project implementation period: 4 years Expected effectiveness date: 11/30/2004 Expected closing date: 06/30/2009
-1- A. Project Development Objective
1. Project development objective: (see Annex 1) 1.1 In support ofbroad-based economic growth, the project's development objectives are to: (a) establish a sustainable program for expanding the population's access to electricity; and (b) improve the quality and reliability of electricity supply. To meet these objectives, the project will help finance: (a) the rehabilitation and expansion ofthe Asmara city distribution system; (b) a rural electrification program; and (c) a program for power sector reform and the building ofrelated institutional capacity to increase efficiency and attract private participation.
2. Key performance indicators: (see Annex 1) The project seeks the following outcomes:
2.1 For expanded electricity access: (a) establishment ofthe Eritrean Electric Corporation (EEC) as an independent and financially self-sustaining power corporation; (b) the adoption of a modern power sector regulatory and institutional framework, conducive for future private sector participation; and (c) extension of electricity supply to about 30,000 new rural consumers, either directly or indirectly through improved public services.
2.2 For improved quality and reliability of electricity supply: (a) reduction ofvoltage fluctuations and power outages in Asmara to acceptable levels; and (b) decrease in network energy losses in Asmara from the current level of 18 percent to about 7 percent.
B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see hex1) Document number: 21152-ER Date of latest CAS discussion: November 22,2000 1.1 The Government is preparing an I-PRSP. The current draft provides the Government's initial articulation of the overall thrust ofits development strategy, medium-term plans, and priorities to achieve sustainable reduction in poverty. The crux ofthis strategy is the restoration ofeconomic growth, the maintenance ofmacroeconomic stability, and the increase in income ofthe poor segments of the population.
1.2 Building upon Eritrea's development needs, the Bank is preparing an Interim Support Strategy (ISS) Update. This Update follows the ISS approved by the Board on November 22,2000. The 2000 ISS described the Bank's strategy in response to the humanitarian crisis following the end ofthe conflict with Ethiopia focusing on emergency reconstruction and health. The ISS will update the strategy for Bank involvement in Eritrea in the next two years, designed to:
a) increase transparency in public sector policy and operations; b) initiate the transition of the national development agenda towards a sustainable macroeconomic framework; c) improve public expenditure planning and management; d) enhance public service delivery; and e) address basic human development and critical infkastructure bottlenecks.
This project is an integral part ofIDA'S assistance strategy and focuses on supporting the achievement of items (d) and (e).
-2- 1.3 Use of an IDA post-conflict grant. Given Eritrea's post-conflict situation, the project will use an IDA post-conflict grant to finance the project's rural electrification and institutional capacity building components. The grant will finance the rural electrification and institutional components because they will contribute significantly to the country's social and economic reconstruction efforts and meeting the Millennium Development Goals (MDGs) for Eritrea.
1.4 Without the grant, it would be necessary to either reduce the rural electrification and the institutional components or increase the amount ofthe Credit in order to finance them. Neither ofthese solutions is preferable to the blending offunding sources. A reduction in the scope ofthe rural electrification program would reduce opportunities to stimulate growth, increase incomes, and improve health and education services in rural areas. Increasing the amount ofthe Credit would increase the scope ofopportunity but at a higher cost to the country.
2. Main sector issues and Government strategy: Main Issues. The four main sector issues are the following:
2.1 Issue 1. Deficiencies in the Power Sector's Regulatory and Institutional Framework. The Eritrea Electric Authority (EEA) became the EEC by the Eritrean Electric Corporation Establishment Proclamation in May 2004. EEA was a branch ofthe Ethiopian Light and Power Authority (EELPA) until Eritrea's independence in 1993. For the past decade, the EEA has been the sole provider of electricity in Eritrea, operating under the Ministry ofEnergy and Mines (MEM). Its operations have been tightly integrated into the Government's administrative and budgetary framework. Although revenue collection and technical performance have been satisfactory, EEA's operations have not been very profitable. The lack of financial viability has resulted in part because some investment choices that Government has made for the EEA have been beyond the utility's financial capability. In particular, the Government has directed EEA to electrify rural areas without assurance ofcost recovery. Furthermore, EEA has not been in a position to develop a meaningful business plan or manage its finances adequately because of its weak institutional capacity and the lack ofsound sector management policy. As EEA's successor, EEC has inherited a power sector framework in an early state of transition to a legal and institutional framework that will allow the company to operate as a commercial entity and eventually attract other private operators ofpower systems. However, it will take time for the necessary changes in the framework to take place and the Government requires assistance in implementing its power sector reform program and improving the institutional capability ofEEC to operate as a company.
2.2 Issue 2. Low Access to Electricity in Rural Areas. Eritrea's total rural population is about 3.2 million or nearly triple the population in urban areas (1.1 million). However, access to electricity in rural areas is only 3 percent compared to 86 percent in urban areas and about 49 percent in semi-urban areas. Electrification in rural areas covers only 40 ofEritrea's 2,600 villages. The lack ofelectricity access limits the productivity ofexisting rural businesses and the creation ofnew businesses made possible by low-cost, reliable power supply. In addition, without electricity access, individual households lack the higher quality oflighting that electricity provides, compared to kerosene, as well as modern communications devices. The main economic activity in rural areas is agriculture. In non-electrified areas, power for rural enterprises, especially for farms, either comes from human labor or individual, small diesel-powered pumps and generators. Rain fed agriculture, the predominant economic activity for more than half the population, is a very risky enterprise since the climate ofEritrea is mostly arid or semi-arid. Annual rainfall ranges from under 20 to 75 centimeters and the country has to contend with large food deficits from year to year. The diesel-powered pumps that many farmers use for mechanized irrigation are inefficient and break down often. The maintenance ofthese is expensive and fuel costs are high because ofthe considerable cost oftransporting diesel fuel to remote areas ofthe country. Institutions in rural areas, such as schools and hospitals, either have no access to electricity or face similar problems in obtaining supply from small diesel generators.
2.3 The connection of rural villages to grid electricity will enable farmers to switch from diesel-powered pumps to electric pumps, reducing the cost ofmotive power and improving its reliability. Also, farms that currently do not use mechanized pumping will have the option of switching to laborsaving electric-powered systems with the availability ofa lower-cost source ofmotive power. Furthermore, the experience ofsimilar electrification projects in Eritrea and other parts ofthe world suggests that access to electricity will help stimulate new businesses and improve social service delivery, resulting in overall improved well being in rural areas. EEC, on its own, is financially constrained in extending electricity access to rural areas. Extensions are costly due mainly to the low customer density and small electricity demand per customer in rural areas. Therefore, in order to expand rural electrification, some initial assistance from the Government will be required to make it more viable and stimulate private sector development ofelectricity service delivery enterprises.
2.4 Issue 3. Deteriorating Condition of the Asmara Distribution System. The distribution system in Asmara is 40-50 years old and has reached the limits of its useful life. This has resulted in high technical losses and poor quality ofsupply. The obsolete distribution system also limits the number ofadditional large commercial and industrial customers that the system can accommodate. Moreover, the replacement and maintenance ofthe old equipment, which is not up to international standards, is difficult and costly. Finally, since the connection ofa thermal generating plant at Hirgigo (Massawa) to the power system in 2002, it ispossible that fault levels in Asmara could exceed the interrupting capacity of some old switchgear, setting up the potential for failure ofthe switchgear and eventual system breakdown.
2.5 Issue 4. Need for Improved Management of Generating Capacity. Following the commissioning ofthe 88 MW Hirgigo plant, consisting of four units of 22 MW each, Eritrea now has substantial excess generating capacity in the system. The total capacity is 134 MW or more than double the 46 MW peak demand of the system's 108,000 customers. Since Eritrea does not have hydro potential, all ofits generation comes from imported oil. The excess system generating capacity has resulted from the deleterious impact ofwar, which dampened demand growth and inadequate distribution system facilities. The Hirgigo plant currently utilizes only about 26 percent ofits installed capacity to meet demand. The cost ofelectricity from Hirgigo is significantly less than that ofthe older plants in the system because it uses lower-cost fuel and has a higher efficiency due to low-speed engine design. However, the large size ofits units limit the plant's utilization at the present low demand levels. Even at peak times during the day, EEC can operate only two ofthe four units at Hirgigo, while during off-peak times it is forced to operate a less efficient plant at Belesa (Asmara). However, with demand growth, as the post-conflict economy develops, the substitution ofthe new units for the older plants in the system will reduce the average variable cost ofgeneration.
Government Power Sector Strategy
2.6 Eritrea is at an early stage in establishing the necessary infrastructure for water supply, power generation, transportation, telecommunications, schools and health services. The Government recognizes that the electricity sector is one ofthe strategic infrastructure sectors that need support over the medium term to reduce poverty in Eritrea. In particular, the Government's infrastructure development strategy highlights the need for increased access to electricity in order to promote income-generating activities and social services in rural areas. These developments will improve living conditions and, in turn, reduce
-4- poverty. While the Government is yet to crystallize its longer-term vision, its medium term goals for the power sector are to:
a) Ensure the availability ofreliable, good quality electricity to a wide range of customers, in order to support economic activity;
b) Expand electricity service to rural areas, both to improve the quality of life in these areas and to provide one ofthe essential infrastructure inputs required to facilitate productive activities, especially the establishment of small businesses; and
c) Establish a regulatory and institutional framework that will facilitate and promote the financial viability of the sector and the introduction of private sector participation to relieve the financial burden on the state and extend the sector's managerial capacity.
2.7 The Government recognizes that the development ofan efficient power sector will require a move away from full government control ofpower system administration towards the establishment of a modem institutional and regulatory framework goveming electricity production, transmission, distribution and sales by efficient independent utilities. This shift will require the establishment of a transparent framework and mechanism for setting electricity tariffs for urban and rural consumers. To set in motion this "break with the past", the Government, on May 7,2004, enacted a new Electricity Proclamation, which it started to develop with the financial support ofthe Swedish International Development Agency (SIDA). The purpose of the Proclamation is to promote efficiency, safety, environmental protection and private-sector involvement in the power sector. The Proclamation makes provisions for the establishment of an Electricity Regulatory Committee to enforce the Proclamation and associated regulations and directives with respect to the commercial and safety aspects ofthe electricity business. Under this Proclamation, any public or private entity may apply for a permit to generate, transmit, or distribute electricity provided it has the financial resources to take on these activities and meet other selected criteria. At the same time the Government also approved a Proclamation for the establishment ofthe Eritrean Electric Corporation, which clarified the legal status of EEA as a corporate entity, changing its name to the Eritrean Electric Corporation (EEC). Furthermore, to facilitate the transformation ofthe sector to meet the requirements of these Proclamations, the Government has developed a substantial sector reform program. This program will address current deficiencies in power system administration and operations; increase transparency and efficiency ofthe legal and regulatory framework; and prepare the power sector for future private sector participation. As declared in its Letter of Sector Policy (Annex 12), the Government will:
Restructure EEC's financial accounts to realistically reflect the company's revenue earning assets and liabilities, make it financially self-sufficient, and to increase fiscal transparency;
Segment EECs accounts into rural and urban businesses to clearly separate EEC's commercial activities from the non-cost covering rural electrification activities, which EEC will implement with Government financing;
Establish transparent rules for the implementation and financing ofrural electrification, as this activity is not commercially viable for EEC to undertake from its own funds;
Conduct a tariff study and establish a sound mechanism for tariff setting;
Establish operational and financial performance targets for both the urban and rural businesses of
-5- EEC;
f) Strengthen EEC to enable it to fulfill its obligations under the new Proclamation, increase .efficiency, and meet its performance targets; and
g) Establish a Rural Electrification Fund to provide capital subsidies to public, cooperative, and private providers for rural electrification--from the grid or from stand alone or hybridized renewable energy technologies--based on clear criteria for the selection ofelectrification sites and financing conditions. The proceeds would be collected through a levy on electricity consumed, and donor and government contributions.
3. Sector issues to be addressed by the project and strategic choices: The project addresses the four power sector issues described above. The following sections describe the strategic choices in the selection ofproject components to resolve these issues.
Issue 1: Deficiency in the Power Sector's Legal and Institutional Framework
3.1 Strategic Choices. Given the Government's strong interest in breaking with the past structure of the power sector, the choice ofcontinuing "business as usual" was not an option in this project. The Government's key strategic choice for power sector organization is to move from a government control of all power system operations to a commercially oriented power system where the government's role is limited to policymaking and regulation. This change will make EEC independent ofgovernment authority in operational matters, allowing the company to make its own investment decisions based on sound criteria, and divest itself ofany non-profitable activities. A related strategic choice would be to build on the Government's commitment and, as part of the project, encourage the private sector to take on a more visible role in service provision. This choice would have been feasible if Eritrea had been able to mobilize private capital for the project. However, given the recent border conflict, the lack ofa clearly-defined and tested policy and regulatory framework, and the low level ofprivate investor interest in African power utilities, private investment has not been forthcoming and isnot expected to develop much in the near future. Therefore, the project's design focuses on the establishment of a financially viable electricity sector by: (a) assisting the Government in making EEC an independent, financially viable company; and (b) establishing a legal and regulatory framework for the power sector that promotes transparency and efficiency and, in the future, enables private sector participation.
Issue 2: Low Access to Electricity in Rural Areas
3.2 Strategic Choices. The main choices were to support rural electrification using the past model of government mandated access by region or to create a new program directed at poverty reduction. Given the high cost and slow development ofrural electricity access programs in the past and the Government's break with the past in its control ofthe power sector, IDA and the Government rejected the choice of continuing rural electrification according to the past model. Instead, the project's access expansion will transform rural electrification in the country. First, it introduces technologies that lower the costs of electricity distribution. Second, it proposes institutional changes that will facilitate the use oftargeted, one-time capital subsidies to encourage the development ofelectricity cooperatives or the establishment ofprivate power distribution businesses.
Issue 3: Deteriorating Condition of the Asm'ara Distribution System
3.3 Strategic Choice. The rehabilitation ofthe distribution system in Asmara was a necessary
-6- strategic choice for IDA'Sfirst power sector operation in Eritrea due to the priority the Government is giving to the upgrading ofbasic infrastructure; the extent ofdeterioration in the Asmara system; and the lack of funding for rehabilitation from other sources. Not including a component to improve distribution operations could pose serious constraints to power system operations and productivity ofbusinesses that need adequate, reliable power. The main choice was whether to focus on rehabilitation work alone or fund some expansion of the system as well. However, given the projected expansion ofthe Asmara area and the efforts ofthe Govemment and EEC to utilize surplus generating capacity, the inclusion of system extension work is a logical complement to the rehabilitation program.
Issue 4: Need for Improved Management of Power System
3.4 Strategic Choices: The inclusion ofa component to build EEC's institutional capacity is a necessary strategic choice in response to the increase in power demand expected from economic recovery and the need to improve the company's financial management in order for the company to become financially viable. It is also an integral part ofthe program for improving the power sector's institutional framework and the electricity access expansion program, which will help increase the use ofpower system assets that have been underutilized.
-7- C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): A. Asmara Distribution System Rehabilitation and Expansion (US$34 million, of which an IDA Credit willfinance US$29 million and an IDA Post-Conflict Grant willfinance US$2.4 million for technical assistance)
This component will focus on removing operating constraints on the distribution system in the city, reducing losses, and meeting the forecast increase in demand over the next 20 years.
1.1 Investments. The project will finance: (a) the complete replacement ofthe old 5.5-kV medium-voltage system by a more efficient and modern 15-kV system; (b) the elimination ofthe old-fashioned and unreliable 127/220-V low-voltage system, replacing it with an efficient 400/230-V system; and (c) the construction ofa new 66/15- kV substation at Asmara North, plus upgradinghehabilitation ofthe existing substations at Gejeret and Denden and minor works at Asmara East and Belesa substations. In addition, the project will finance the underground placement ofthe medium-voltage system in the old historic city center, where space is at premium, and the replacement of the current, dangerous, open-wire distribution systems by a safe aerial bunched cable (ABC). The project also will finance the replacement of service connections and new meters for affected consumers. These investments will significantly increase the network's load carrying capacity and drastically reduce losses as a result ofupgrading to the higher operating voltage. This upgrading will help unify EEC's city distribution standards, as other cities and the new suburbs ofAsmara are already operating at the new voltage. The preparation ofthis component isbased on previous studies by independent consultants, which were updated during the project's preparation.
Technical Assistance. The project will provide training and consulting services to EEC for project design, management, construction, and operation.
B. Rural Electrification by EEC (US$16.4 million of which an IDApost-conjlict grant willfinance US$12.4 million)
1.2 The rural electrification component will assist the Govemment to increase access to electricity in underprivileged rural areas to improve living conditions and spur economic development. It consists of the development of appropriate least cost methodologies for rural electrification in Eritrea and using these standards for the electrification ofthe selected villages.
1.3 The component includes for the electrification ofabout 28,500 households, agricultural imgation pumps and other small businesses, schools, clinics, churches, and mosques, etc. in about 80 villages around the four towns ofKeren, Barentu, Dekemhare, and Adi Keih through grid extensions. Keren and Dekemhare are already connected to the transmission grid whereas Barentu and Adi Keih will be supplied from existing diesel power plants in the towns. The capacity ofthe diesel plants is sufficient to meet the initial needs ofthe project and the EEC has plans to add additional capacity as required utilizing existing diesel units made available fiom other towns that have recently been connected to the transmission grid.
1.4 In line with rural electrification procedures in Eritrea, the villagers provide an up-fi-ont payment to meet the cost ofthe low-voltage reticulation in the village. The cost depends on the size and layout of the village. For example,- the larger and/or the more compact the village the lower the cost. As the project will finance the entire connection costs in the selected villages - to simplify implementation
-8- arrangements -, IDA agreed with the Government that the payments from the villages will be deposited in the Rural Electrification Fund to benefit future electrification. This arrangement will ensure consistency with the financing arrangement in villages that have been recently electrified. An up-front payment will also increase the villages' ownership ofthe project.
1.5 Investments: The project will finance: (a) extensions of the medium-voltage distribution lines from the larger towns to the center ofthe selected villages; and (b) distribution transformers, the low-voltage distribution lines, and service connections.
1.6 Technical Assistance: The project will finance training and consulting services to EEC on project design, management, construction, and operation. An important aspect is enabling EEC to smoothly integrate, in its operational and maintenance procedures, the requirements ofthe new low-cost distribution standards that the project will introduce, including a mixed system ofsingle phase and three phase distribution.
C. Funding for the Rural Electrification Fund (US1.4 million IDA post-conflict grant)
1.7 The Government will establish a Rural Electrification Fund to finance capital subsidies to qualifying schemes to electrify additional villages, either by EEC, village cooperatives, or private energy service companies. The project will provide, through an IDA Post-Conflict Grant, the initial resources for this Fund after the Government has established it with suitable administrative management arrangements and has developed clear selection criteria for rural electrification.
D. Sector Reform and Institutional Capacity Building (US4.7 million, of which an IDA post-conflict grant willfinance US$4.5 million)
1.8 This component will help the Government implement its power sector reform program. It will support the development of the institutional and regulatory aspects ofthe power sector. This support will include advisory services, studies, and training in order to: (a) implement the new Electricity Proclamation establishing a modem legal and regulatory framework for the power sector; (b) create a suitable regulatory function based on the framework stipulated in the Electricity Proclamation; (c) establish the institutional and regulatory arrangements for rural electrification, including the Rural Electrification Fund; (d) set up a suitable tariff setting policy and mechanism; (e) build up EEC's technical and planning capacity; (0 build institutional management capacity for the project's implementing agencies, MEM and EEC, and for private enterprises and village cooperatives interested in participating in power distribution; and (g) training and information to entrepreneurs on using electricity for increased productivity and income generation and to rural farmers on the costs and benefits of shifting to electric irrigation pumps.
1.9 For the development ofrural electrification approaches, the project will finance assistance to the Government, through the MEM, to promote cooperative and private sector participation in electricity supply. It will promote this participation through training and technical assistance for the development of business models and operational procedures for rural electricity cooperatives, private energy service companies, and individual entrepreneurs, to enable them to manage electricity services in rural areas.
1.10 The business models will promote ownership by the beneficiaries and require that they be self-supporting after construction ofthe distribution system using a one-time capital subsidy. Additionally, the project will test an altemative approach ofengaging the private sector in the management ofrural electricity services, in line with the Government's policy. This will involve training
-9- of electrical practitioners in the villages to do in-house wiring because EEC staff will not perform this service as part ofthe project. Potential trainees include the demobilized youth who were engaged in the defense ofthe country. EEC could also engage the trainees as agents to distribute and collect electric bills and conduct minor extensions to new customer sites. They could also widen the scope oftheir services by engaging in other energy systems like distribution ofLPG, kerosene, or renewable energy technologies. As rural electrification intensifies, these private practitioners could develop into rural energy service companies.
E. Environmental and Social Management (US$0.5 million of which and IDA Grant willjnance US4 0.4 million)
1.1 1 This component will finance the cost ofimplementing the Environmental and Social Management and Monitoring Plan (ESMMP) for the project. The main activities it will finance are: (a) training for EEC's Project Management Unit, MEM, and the Zoba and Village Administrators; (b) implementation ofthe M&E activities; (c) establishment ofa compensation plan for any crops or land lost due to the construction ofpower lines under the Asmara distribution rehabilitation and rural electrification components; and (d) environmental audits at the end ofthe project. EEC will finance the compensation plan.
Asmara distribution rehabilitation and expansion 34.10 59.6 31.35 62.7 Rural electrification 16.42 28.7 12.40 24.8 Rural Electrification Fund 1.41 2.5 1.41 2.8 Sector reform and institutional capacity building 4.73 8.3 4.47 8.9 Environmental management 0.52 0.9 0.37 0.7 Total Project Costs 57.18 100.0 50.00 100.0 Total Financing Reauired 57.18 100.0 50.00 100.0
2. Key policy and institutional reforms supported by the project: Power Sector Development 2.1 During appraisal, the Government agreed with the Bank on a comprehensive power sector reform program (Annex 12). The project will support the implementation ofthis program. As already discussed in Section B.2 above, the key reforms focus on introducing commercial practices to the urban power supply business, while providing a transparent mechanism to support rural electrification that is socially desirable but not viable commercially.
2.2 Urban Power Supply. The key reforms include: (a) corporatization ofEEC; (b) restructuring of EEC's financial viability; (c) approval ofa new Electricity Proclamation to promote transparency, efficiency and the future participation ofthe private sector in the power supply business; (d) establishment ofa tariff-setting regime that promotes the financial viability ofthe power supply business; (e) strengthening of EEC's institutional capacity to enable it to fulfill its obligations under the new Proclamation; and (0 establishment ofefficient arrangements for the economic and safety regulation of the power sector that are separate from both the Government's policy function and the power companies' business functions.
- 10- 2.3 Rural electrification. The sustained expansion ofrural electrification will require a clear definition ofthe institutional and regulatory framework. The design ofthis framework will encompass a number ofactivities. The first is defining what is considered rural electrification as opposed to commercially viable urban distribution, i.e., defining the criteria for rural electrification. The second is segmenting EEC's financial accounts into urban and rural businesses. The third is establishing the Rural Electrification Fund to provide transparent capital subsidies for expansion ofaccess to electricity supplies. The fourth is preparing eligibility criteria along with terms and conditions offinancing from the Rural Electrification Fund and documenting them in an Operational Manual. The fifth is creating a small unit within MEM to prepare indicative rural electrification plans. The sixth consists ofreviewing specific proposals for electrification projects; providing information and support to private sector and village cooperatives; and maintaining safety standards and to give technical and financial advice to communities operating their own distribution systems. The seventh is allowing community and privately-owned electricity distribution utilities to charge different tariffs depending on the source of generation and individual customer density characteristics, subject to regulatory review.
3. Benefits and target population: The primary beneficiaries ofthe project are the private sector, communities, and individual electricity consumers in Asmara and in rural areas.
3.1 Asmara Distribution Rehabilitation and Expansion. The target population consists of existing and new electricity consumers in Asmara and its surrounding areas. For the existing consumers, the project will significantly improve the reliability of electricity supply by reducing outages, upgrading the quality ofthe supply (fewer surges and low-voltage events) and maintaining the safety ofcontrol equipment in the distribution system. It will also reduce network losses in Asmara from about 18 percent to about 7 percent by the end ofthe project. This will contribute to reducing the cost ofsupply. The reinforcement and extension ofthe distribution network will allow EEC to add about 14,000 new industrial, commercial, and household consumers to the system (to 2012) and thus contribute to economic expansion.
3.2 Rural Electrification. The target population for the rural electrification component consists of more than 100,000 people and 1,000 small businesses located in about 80 small towns and villages. Their access to electricity will mean expanded productivity, higher earnings potential, and a better quality of life. In addition to such direct benefits, the electrification ofpublic institutions - health, education, water, street lighting - will deliver indirect benefits to the poorest strata ofthe population in the form ofimproved services. Also, multiplier effects are likely to occur with the expansion ofthe economy, such as the creation ofemployment opportunities for the poor. The project will support technical assistance and training to help entrepreneurs increase their productivity with electricity service and thereby help improve income generation and thus alleviating poverty. Local entrepreneurs will also benefit from the opportunity to invest in and manage distribution businesses.
3.3 Sector reform and institutional strengthening will help ensure the sustainability ofthe above benefits during the lifetime ofthe investments and the expansion ofthese benefits through the identification ofnew projects.
4. Institutional and implementation arrangements: Implementing Agencies
The two implementing agencies for the project are EEC and MEM.
- 11 - 4.1 =will implement the Asmara distribution rehabilitation and expansion component and the rural electrification component, including procurement ofall supply and installation equipment and works. The utility also will implement its own capacity-building activities. The EEC will manage the implementation ofits components through its Project Management Unit (PMU), headed by a full time Project Manager. Other key staff include a Technical Advisor and a General Services Advisor. To meet the needs ofthis project, EEC will complement the PMUwith an Accountant, an Environmental Coordinator, and a Public Relations Specialist. EEC will recruit a qualified accountant, while the Environmental Coordinator is a staff member ofthe Ministry ofLand, Water, and Environment, who's involvement will be part-time. EEC will assign the Public Relations Specialist before the project's implementation begins to handle, in particular, the interface with electricity consumers in Asmara. To the extent possible, the PMU will utilize existing EEC staff engaged in the normal day-to-day operations of the utility with the objective ofcapacity building.
4.2 The PMUwill work closely with the engineering consultants, already hired during the project's preparation period. Further, the PMU will coordinate the implementation of the Asmara component and to discuss any implementation issues as they arise with the advisory Technical Support Committee, EEC has established for the project (TORSavailable in project files). The committee includes officials from the Asmara Department ofInfrastructure, the Department ofWater, the Department ofEnvironment, the Telecommunication Services ofEritrea, and the National Museum. The committee will meet at least semi-annually, or as often as required. Finally, before starting any civil works that require displacement ofpeople or compensation for asset loss, EEC will prepare a Resettlement Action Plan in accordance with the guidelines in the RPF and clear it with the Bank.
Organizational Structure of EEC's Project Management Unit
GENERAL MANAGER
~ I PROJECT MANAGEMENT UNIT I
TECHNICAL SERVICE GENERAL SERVICE
- ASMARA REHABILITATION - PROCUREMENT
- RURAL ELECTRIFICATION - FINANCE
4.3 MEM will be responsible for the implementation ofthe Sector Reform and the Environmental Monitoring components. It has assigned a qualified full-time Project Coordinator (PC) who will receive support fiom MEM's existing accounting and procurement staff, and the institutional consultants it will hire during project implementation. MEM will establish an advisory Supporting Committee with
- 12- members from the Department ofEnvironment, the Heads ofthe Economic Department of the respective Zobas, and EEC’s Project Manager to oversee the implementation ofthe environmental and social mitigation measures in the rural electrification component (TORSfor the Supporting Committee are in project files). The Supporting Committee will meet at least semi-annually and as often as required to discuss issues arising from implementation. MEM will also provide training to Village Administrators (VAS)to conduct village-level environmental and social impact screening and evaluation, mitigation, and resettlement. The PC will coordinate with Zoba and Village Administrators in the project areas to ensure popular participation that includes providing initial payments for cost-sharing and securing optimum rights ofway for the network extensions.
4.4 Both EEC and MEM - through the new Rural Electrification unit - will work closely with the elected VASin implementing the rural component. The VASwill represent their communities, act as a liaisons between the local community and EEC and MEM, and organize popular participation.
Organizational Structure of the Ministry of Energy and Mines (MEM)
MINISTER I Energy and Mines I ISECRETARY PLANNING & STATISTICS
ADMINISTRATION & FINANCE
RESEARCH & MANAGEMENT & EXPLORATION & TRAINING DEVELOPMENT PROMOTION DIVISION DIVISION MANAGEMENT I
DEVELOPMENT H PLANNING 1
AFFAIRS UNIT
- 13 - Accounting, Financial Reporting, and Auditing Arrangements
4.5 IDA has assessed the financial management and accounting systems ofEEC and MEM. Both institutions have accounting systems that allow for the proper recording of financial transactions, with adequate controls for preparation and approval oftransactions. Both institutions have centralized accounting functions and qualified accountants with several years of experience head the respective accounting departments. The assessment ofthe accounting functions took place under the EEA, before it became the corporate entity, EEC. However, IDA'Sassessment ofits accounting functions has not changed. Given the size ofthe project, EEC will appoint a qualified accountant to handle all accounting, financial and reporting requirements ofthe project. The accountant will report to the Finance and Administration Manager. The project file contains the report summarizing the financial management assessment of the implementing agencies.
4.6 The EEC and the MEM will maintain accounting records for their respective components in the project and will ensure appropriate accounting ofthe funds. Each entity will be responsible for designing and preparing, on quarterly basis, appropriate Progress Reports, including Financial Monitoring Reports (FMRs) reflecting: (a) the status of implementation progress; (b) problems encountered and corrective measures envisaged; and (c) the current cost ofeach project component together with estimated costs of completion. IDA has provided a thorough presentation of the FMR requirements to the accounting staffs ofboth EEC and MEM, including the World Bank publication Financial Monitoring Reports - Guidelinesfor Borrowers.
4.7 Both EEC and MEM will ensure annual audit of the accounting records for their respective components in the project by an independent auditor acceptable to IDA using international auditing standards. The annual audits will be take place in accordance with the Guidelines: Annual Financial Reporting and Auditing for World Bank-Financed Activities (June 30, 2003). Acceptable accounting standards are: (a) International Financial Reporting Standards and International Accounting Standards (IFRSAAS) issued by the International Accounting Standards Board (IASB); or (b) International Public Sector Accounting Standards (PSAS), issued by the Public Sector Committee ofthe International Federation of Accountants (IFAC-PSC). A broad outline of the expected contents ofthe annual financial statements have already been agreed upon and has been confirmed during negotiations.
4.8 EEC is a continuing entity with an existence independent ofthe implementation ofthe operation to be financed by the IDA credit and grant. Therefore, the annual financial statements IDA requires will be for the entity as a whole, and not just for the project. In this regard, EEC will submit a full set of financial statements (balance sheet, income statement, etc.), with additional disclosure (for example, by way ofnote or supporting schedule or statement) of sufficient information on sources and uses of funds associated with the IDA-financed activities.
4.9 MEM will submit annual financial statements to reflect all activities for its components in the project. In addition to the audit reports, the auditors will prepare a management letter giving comments, observations, and recommendations for improvements to the accounting records, systems and controls that they will have examined during the course ofthe audit. Both EEC and MEM will send the audited financial statements to the Bank within six months following the end ofthe fiscal year.
Disbursement Arrangements:
4.10 The proposed project is a blend ofcredit and grant financing. The Grant category is
-14- Post-Conflict. The diagram below illustrates the expected flow offunds and reporting arrangements. To ensure that no mixing ofthe proceeds ofthe Credit and those ofthe Grant will occur, the project will require separate accounting records and bank accounts for each financial instrument by each ofthe two implementing agencies. Therefore the project will require three special accounts. EEC will maintain two accounts - one for the Credit and the other for the Grant, while MEM will maintain one account for the grant. All three accounts will be opened in a bank acceptable to IDA. Detailed funds flow and reporting arrangement will be developed for the Rural Electrification Fund and documented in an Operational Manual during the initial project implementation period.
Flow of Funds ------b Reporting Procurement Arrangements:
4.1 1 The EEC and the MEM will be separately responsible for procurement relating to their respective components of the project. They will handle the procurement requests according to agreed procurement plans.
Monitoring and Evaluation Arrangements:
4.12 The project design summary in Annex I will guide the monitoring ofoutputs and evaluation of impacts. The monitoring and evaluation will take place through: (a) quarterly progress reports; (b) Bank supervision missions; (c) project mid-term review; and (d) M&E reports by independent parties. Annex 11 discusses the monitoring and evaluation arrangements in detail.
4.13 IDA implementation review missions will review progress twice a year. A mid-term evaluation ofthe project will take place no later than 24 months after Credit effectiveness in accordance with the terms ofreference agreed upon by the Govemment and IDA. The EEC and the MEM will prepare a mid-term report detailing the achievement ofdevelopment objectives and implementation progress under all project components and identifylng implementation issues. They will submit this report to the Government and IDA no later than two months prior to the mid-term review. During the mid-term review, IDA and the Government will develop appropriate solutions to the implementation issues identified and if necessary, will modify project design to meet development objectives. Finally, the EEC and the MEM will transmit a project implementation completion report, within six months ofproject closing to IDA. D. Project Rationale 1. Project alternatives considered and reasons for rejection: 1.1 The Government ofthe State ofEritrea requested IDA assistance to improve and expand the delivery ofelectricity services. The preparation ofthe project started in 2000, but external developments, including a conflict situation interrupted is preparation. However, during the past year, the Government has made a concerted effort to anchor the project in a clear policy and reform framework for the power sector. It has focused on increasing transparency and efficiency through the corporatization ofthe power utility and the establishment ofmodem institutional and regulatory frameworks for both the urban and the rural electrification businesses. The project design supports the Government's approach to power sector issues through the provision ofinvestment financing and technical assistance that will benefit not only the urban population but also the unprivileged rural residents. The incorporation ofa power sector reform and institutional capacity-building component in the design will help ensure the project's long-term sustainability. In addition to selecting a design that frames investment financing within the context of power sector reform, the project considered the alternatives discussed below.
1.2 Distribution Rehabilitation The initial project design included only the rehabilitation ofthe old and dilapidated distribution system in the city ofAsmara. This approach would have redressed the most critical issues in the power system, namely the poor quality of electricity supply and the large energy losses that wasted the country's resources. However, it was rejected in favor ofa design that would allow for the expansion ofsupply to foster increased economic growth. Consequently, the selected design includes the expansion ofelectricity supply infrastructure to selected suburbs ofAsmara. This choice reflects the recent economic developments in Asmara, where the municipality, with the help ofUNDP, is proceeding with the development ofareas in the outskirts ofthe city for residential and industrial uses. As a result, the growth in electricity demand will intensify over the next few years and analyses indicate that the system will not be able to meet this demand. Already, despite the fact that the country has excess generation capacity available, it is difficult for EEC to accommodate requests for electricity supply from new industrial consumers in these areas because ofthe lack of distribution infrastructure. There is no engineering alternative to the rehabilitation and expansion needs ofAsmara's distribution system apart from the choices of voltage levels, transformer sizes, and conductor types and sizes. The project design has optimized the mix oftechnical and cost efficiency considerations.
1.3 Rural Electrification. In principle, there are several choices for the electrification ofrural areas. Often the choice is between individual household systems (e.g. photovoltaic systems) and grid extensions. This project has selected the grid extension approach as the primary design. This choice is based on the judgment that the Government can best achieve its rural electrification objectives -- social development and wealth-creation-- through grid extensions. Individual household systems are typically suitable only for lighting and radio applications and not for powering electric motors necessary for small-scale processing or manufacturing (i.e., grinding grain, refigeration, pumping). Therefore, the systems do not immediately enhance income-generating capacity. The proposed approach focuses on providing electricity not only for lighting but also for productive purposes in the commercial farming areas and in rural population centers close to larger towns, but not yet connected to the main grid. However, in contrast to the "conventional grid extension approach", where a national power utility will expand the service, the selected approach is innovative.
1.4 EEC will implement the first batch ofrural electrification projects but later in the project's implementation period the private sector will participate. The reason for this is twofold: (a) it was important to begin the pipeline ofrural electrification programs as quickly as possible, to redress regional
- 16- inequalities; and (b) a tested regulatory framework for private sector participation in these programs is not yet in place. The Government will provide investment financing from the IDA Post-Conflict Grant, as the project's rural electrification programs do not justify debt financing. At the same time, the analysis ofthe rural electrification program at appraisal indicated that the initial sole operation ofthe program by EEC will not compromise the utility's financial viability in the medium term, in contrast to the past rural electrification programs as the former EEA. Forecast revenues from the program will cover its related forecast operating costs as the demand in the villages matures.
1.5 To increase the longer-term sustainability ofelectrification, the project incorporates assistance for the promotion oflocal businesses and village cooperatives to become involved in the operation and maintenance ofthe programs initially and to become the owners ofthese and future programs eventually. This approach is in line with the framework for electricity cooperatives that the Government put in place in 2002. However, the Government has not yet had the funds to provide the required training and awareness creation to promote the program. Moreover, the selected design increases the sustainability and acceptability ofthe programs by requiring the villages to contribute to their financing. Finally, the project employs the "grid extension" approach over a distributed village based generation, as the selected villages are in close proximity to either the interconnected grid infrastructure or larger towns with available generating capacity. This choice, together with the use of low-cost distribution technologies, minimizes the cost of supply, making use ofthe excess generating capacity in the grid and in the larger towns.
1.6 Project Instrument. In the choice ofthe appropriate project instrument, an APL was considered as an alternative instruments to the SIL. It was, however, rejected because the pace and extent ofsector reform are not yet sufficient to justify a longer-term program.
2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned).
Sector Issue Project
Implementation Development I Progress (IP) Objective (DO) Bank-financed Eritrea: Emergency Reconstruction S S Eritrea Ports S S Health S S Other countries: Uganda Energy for Rural S S Transformation Mozambique Energy Reform S S and Access project Other development agencies SIDA Rural electrification and substation rehabilitation. SIDA TA for power sector reform Switzerland and Finland Feasibility study on Asmara distribution network voltage conversion and rehabilitation. European Union Rehabilitation ofdistribution network in Massawa.
-17- European Union Rehabilitation ofAsmara Water supply system. Kuwait Fund, Saudi Fund, Abu Dhabi Hirgigo power plant. Fund, OPEC Fund, BADEA Italy Massawa-Asmara 132 kV transmission line. IPlDO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HI I(Highly Unsatisfactory)
3. Lessons learned and reflected in the project design: Lessons from Projects in Eritrea:
3.1 Rehabilitation of the Massawa Distribution System. This project, financed by the European Union (EU), is similar to the Asmara component, though much smaller in size and with different implementation arrangements. International contractors supplied the materials and staff ofthe former EEA was in charge ofexecuting the project. It is now nearing completion and its implementation experience has provided a number oflessons that will help improve implementation ofthe Asmara component. There are at least three main lessons from this project. First, in order to avoid delays there should not be a split between supply and installation aspects ofthe project. Second the former EEA should have moved more quickly to reinstate the use ofroads and sidewalks disrupted during excavation. Three, EEA should have informed consumers of the precautions needed to prevent appliance failures after voltage conversion.
3.2 Rehabilitation of Asmara Water Supply. Although consumers were satisfied with the improvement in the supply ofwater, implementation had its challenges. According to the stakeholders, the implementing agency should have coordinated better with other utilities and the city administration. It should have speedily cleared streets from debris and wreckage remnants from the work crews, and planned the work better to avoid blockage ofroads and traffic jams.
3.3 The design of the Asmara component incorporates the aforementioned lessons it its design. To minimize delays, the implementation ofthe Asmara distribution component will take place on a supply and installation basis. International contractors will be taking responsibility for all project phases ofthe component's execution. To increase acceptance and preparedness, and to avoid the water project's problems, the former EEA held extensive consultations with stakeholders in Asmara. Because ofthe nature ofrehabilitation, it will be impossible to avoid blockage of some streets and it will also not be possible to reinstate broken-up roads and sidewalks immediately. EEC therefore has agreed to plan the works so that only one section ofthe town will be rehabilitated at a time. This should minimize nuisance and disruption to inhabitants. In addition, EEC will implement an information campaign to ease consumers' transition to the new voltage level. It will also engage a Public Relations Specialist to handle relations with affected consumers.
Global lessons:
3.4 Importance of Simplifying Design and Avoiding Implementation Arrangements Too Complex for the Borrower. The project will have four well-defined components. The MEM will implement the sector reform and the environmental components. EEC will implement the components for the rehabilitation of the Asmara distribution system and the rural electrification program with the help of international contractors through a supply and installation arrangement. For the new technology and institutional arrangements chosen, the project will provide training to EEA, MEM, and the villagers on installation and operation.
-18- 3.5 Need to Advance Procurement to Minimize Project Delays. This lesson is particularly important as the project will be the first Bank operation in Eritrea's electricity sector. To take account of this lesson, EEC has finalized the draft procurement documents for the project's major components before the project is presented to the Board for approval.
3.6 Importance of Consulting with Beneficiaries and Other Stakeholders to Ensure a Viable Project Design. As discussed in sections 5 and 6, EEC and MEM have consulted widely on the design ofthe project.
3.7 Need for Rural Electrification Projects to Meet Basic Financial, Technical, and Organizational Criteria. The project incorporates these key criteria, which are to: (a) charge right price but help with up-front costs; (b) provide subsidies that encourage, not destroy business incentives; (c) have clear specifications for selecting villages to participate in the project; (d) reduce electrification costs by promoting low-cost equipment and technical specifications; and (e) involve potential electricity customers and suppliers in project design rather than impose top-down master plans.
4. Indications of borrower and recipient commitment and ownership 4.1 A dedicated management team from the former EEA has been working with the Bank during identification and preparation ofthe project. Although the project was in abeyance for some time for external factors, EEA made a major effort to speed up the preparation ofthe project by working overtime to clear the accumulated accounting transactions and engaging young engineers to help with data gathering necessary for the final project design.
4.2 MEM has shown keen a interest in the project's preparatory work. It was in charge ofthe preparation ofthe Environmental and Social Assessment and the Resettlement Policy Framework and did an excellent job.
4.3 The Government has identified the project as one ofits priorities in its development strategy. It has also approved a new Electricity Proclamation and corporatized EEC in advance ofproject implementation.
5. Value added of Bank support in this project: 5.1 The Bank is a key development partner for Eritrea and the Government continues to recognize the importance of the Bank's program in reconstruction, rehabilitation, and infrastructure. The Bank's value added will be in the following areas:
5.2 Asmara Distribution System Rehabilitation. The project will include the introduction ofnew technology for Eritrea, but proven in other countries, that is critical to reducing the cost of infrastructure and the preservation of Asmara's cultural heritage. In addition, the Bank's knowledge ofthe sector will help to facilitate optimal use ofinvestment resources for the sector and Bank participation will increase attention to environmental issues. Finally, IDA is the only available concessionary financing source for this rehabilitation.
5.3 Rural Electrification. The project will help to introduce new technology to Eritrea, but proven in other countries, that is critical to reducing the cost ofinfrastructure in rural areas. It also will support implementation ofproper environmental and social safeguards and ensure that the integration of increased electricity access with the provision oftraining to gain the maximumbenefits from the
- 19- availability ofreliable electricity service as quickly as possible. The Bank support for rural electrification will be grant financing, which will increase the program's affordability and this contributes to the economic and social development ofthis post-conflict country. It will also support the Government's efforts to achieve poverty reduction targets and meet the related Millennium Development Goals (MDG). Given the Bank's experience and expertise in rural electrification, it is in a strong position to assist Eritrea in finding alternative institutional arrangements that promise better sustainability of results than the traditional public utility approach.
5.4 Sector and Institutional Reform. The Bank's broad experience in other countries offers a comparative advantage in giving sound policy advice to the Government in designing an improved power sector development framework for Eritrea and developing a new approach to the expansion ofelectricity access in rural areas. Furthermore, the Bank's financial and coordinating resources will help the Government to advance sector and institutional reforms initiated with bilateral support.
- 20 - E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): 0 Cost benefit NPV=US$12.3 million; ERR = 18.3 % (see Annex 4) 0 Cost effectiveness 0 Other (specify)
Asmara Distribution Rehabilitation and Expansion Component:
Least-Cost Development Findings
1.1 The Feasibility Study for the rehabilitation ofthe Asmara distribution system identified the proposed project as the least-cost alternative to reinforce and expand power supply in Asmara and its vicinity. The Study concluded that there are no other technically possible alternatives for the proposed investments. The appraisal mission confirmed that the Asmara distribution component is the least-cost option for meeting the forecast demand and isjustified for financing.
1.2 The final project design considered a number of options for the supply ofthe city in the future to optimize the design and cost ofthe project. These include the establishment ofa new 66/15-kV substation in an undeveloped area north ofthe city instead ofupgrading the old Asmara Center substation in the middle ofthe city. This new substation is the least-cost option for two reasons. First, it would be difficult and costly to upgrade the old substation. This station is located in the center ofcity with no room for expansion. The second reason is that the new substation will result in shorter medium-voltage feeder lengths and therefore lower energy losses.
1.3 In the southern part ofthe city, the project considered several design options, including supply to areas scheduled for development by the Asmara municipality. The least-cost design includes new 66/15-kV substations and medium-voltage lines for the supply of development areas where building construction has already started or where designs are at an advanced stage. There are other areas where development is definitely planned but where the starting date for the construction ofbuildings is still uncertain. For these areas, the project will provide new 66/15-kV substations but no medium-voltage network. EEC will install the networks later when the building construction starts.
1.4 For distribution line rehabilitation, the project will use both underground cable and aerial bunched cable (ABC) for the medium-voltage lines and ABC for all low-voltage lines. Underground cable is more expensive than the ABC design. However, in addition to cost, the project's design has taken into account a number of other factors including architectural considerations. For the medium-voltage lines in Asmara's historic city center, the project supports the Government's plan to replace all overhead power lines with underground cable in order to preserve the architectural integrity of this center. In other areas of the city, the project will use ABC. For the low-voltage lines, the project will replace all open-wire overhead lines in the city with ABC. ABC is the optimal solution, taking account ofcost, safety, visual considerations, and efficient use ofspace. Another advantage is that ABC uses a concentric design that makes it difficult to make an illegal connection.
Economic Benefits and Economic Internal Rate of Return (EIRR)
1.5 The estimate of the Economic Internal rate ofReturn (EIRR) is 18.3 percent and justifies the investments. A quantitative risk analysis in Annex 4 confirms that project economics are robust - the probability of the EIRR exceeding 12 percent is 94 percent.
-21 - 1.6 The Asmara distribution rehabilitation and expansion component provides a number ofbenefits. First, it will lower he1and operating costs due to the substantial loss reduction expected. The investments should reduce total losses in the Asmara system from 18 percent at present to about 7 percent on completion ofthe project. Second, the component will provide customers with better service due to improvements in voltage levels, supply capacity, and system reliability. These supply improvements are likely to encourage the expansion ofindustries and large commercial establishments that require high-quality, dependable power supply. Third, it will allow EEC to meet the forecast demand in the Asmara area for the next 20 years without further major distribution system investment. The incremental demand will come mainly from new commercial and industrial establishments and new residents, specifically returning Eritreans, in the development areas planned in the outskirts ofAsmara. Fourth, it will utilize the large spare capacity at Hirgigo power plant, which should meet generating capacity requirements through 2012.
Rural Electrification Component:
Scope of Access
1.7 The project will electrify about 28,500 households, agriculture and other small businesses, schools, clinics, churches, and mosques through gnd extensions. It will cover about 80 villages around the four major towns ofKeren, Barentu, Dekemhare and Adi Keih. Table E. 1.1 indicates the distribution of the consumers in the four areas.
Table E.l.l Planned Rural Electrification by Area and Service Category
Area Domestic Public Commercial Industry Irrigation Total
Keren 9459 48 156 74 68 9805 Barentu 3997 19 97 27 89 4229 Dekemhare 8127 12 96 29 433 8697 Adi Keih 6964 20 87 14 55 7140
Total 28547 99 436 144 645 29871
Least-Cost Development Findings
1.8 Rural electrification through grid extensions is the least-cost method of supplying the identified villages. The close proximity ofthe selected villages to existing load centers reduces the length and thus the cost ofmedium-voltage lines required. Also, the heavy clustering ofvillages allows for shorter low-voltage supply lines, making for further cost savings. Given cost savings possible due to logistics and other factors, alternative systems, such as individual solar photovoltaic systems (PV) and village-based wind applications would have difficulty competing with the proposed grid extension. Also, solar PV systems would not provide power for electric motors and would therefore not contribute to income-generating activities the grid connection will make possible, such as irrigation and small business development.
1.9 EEC, with the assistance fiom Zoba and Village Administrators, selected the villages to be electrified based on: (a) proximity ofthe site to an existing electrified area; (b) number ofpotential residential and commercial consumers interested in a grid connection; (c) socio-economic profile and economic development potential, especially the likelihood ofsupporting the development ofboth agricultural and non-farm based businesses that expand income-generating activities for the inhabitants.
- 22 - 1.10 The project considered alternative designs for rural electrification systems and adopted the least-cost alternative taking into account the forecast demand and the nature ofthe load. In areas where it is suitable, the project has adopted a low-cost single-phase design for distribution lines. This design reduces capital costs since there is only one conductor and the support structures that carry that conductor can be lighter. Single phase design is suitable for those areas with light domestic loads and where there is no significant commercial or irrigation pumping load, which would require three-phase motors. The particular single phase design the project has adopted for these areas is an innovative single-wire earth return (SWER) system, which also reduces distribution losses and thus the cost of supply. In areas where the forecast expects significant development ofirrigation pumping load, the project uses three-phase design.
Economic Benefits and EIRR
1.1 1 There is little argument that the availability of electricity has at least the potential for improving the quality oflife and increasing economic activity. The access ofrural areas to electricity will allow villages to benefit from the use of modern equipment and services that will have a number ofbenefits. These include: (a) improved business and farm productivity; (b) facilitation oftime-consuming household tasks, which will help improve the situation of women in the villages; and (c) a better quality of lighting, which is conducive to learning activities. However, measuring the benefits ofrural electrification in monetary terms is not always straightforward. The analysis ofbenefits for this project takes account ofthe findings in a study for India, entitled The Benefits of Rural Electrification in India: Implicationsfor Education, Household Lighting, and Irrigation by Douglas F. Barnes, Kevin B. Fitzgerald, and Henry M. Peskin (July, 2002), which provides a good overview ofmethodology.
1.12 The benefits ofthe rural electrification component include the incremental electricity demand served in the selected villages, both residential and commercial, and cost savings from substituting grid electricity for small diesel generators. For households, the value ofbenefits will be the cost savings from substituting electric lighting for kerosene lamps plus the estimated "consumer surplus". For industrial consumers, the value ofthe benefits is based on the cost savings that result from substituting grid-based electricity for small diesel generators and the switch from diesel-based irrigation pumps to electric pumps. The estimated ERR based on these benefits and the costs ofelectrification is 13 percent. This rate is higher than the hurdle rate of 12 percent. Thus, the component isjustified for financing.
1.13 While the EIRR is sufficient to justify the rural electrification component, it may, however, underestimate the component's true benefits. For example, it does not include complementary benefits, such as those related to the increased income and education levels that are likely to result from electrification. The findings ofBarnes, Fitzgerald, and Peskin suggest that electricity enhances the financial returns to education, particularly in households with moderate to higher levels of education. Also, they suggest that the availability ofelectricity encourages farmers that do not use any irrigation technology to adopt electric irrigation pumping, which is likely to increase net farm-based income.
1.14 A key issue in the economic analysis ofthe rural electrification component was the ability of households to afford electricity and the related connectivity rates likely to result from the villages included in the project. The experience from Eritrea's first generation access expansion program indicates that connection rates increase gradually and vary substantially. About six years after the extension ofthe grid to selected villages, these rates ranged from 45 percent to 87 percent. Furthermore, the experience indicated low average consumption levels. Monthly expenditure was around Nfa 50-75, equivalent to using about 30-50 kwh, which implies the use of electricity for lighting and radio. In the
- 23 - project areas, households currently spend between Nfa 18-141 per month on various energy sources, including firewood, paraffin, and batteries.
1.15 Taking account ofthese findings, load forecasts resulted fi-om detailed field surveys in each of the 80 villages included in the project. EECs Consultants (Africon Ltd) conducted these surveys, which identified the numbers of households; existing commercial enterprises (shops, restaurants, hotels); small industries (bakeries, grinding mills, workshops); and diesel irrigation pumps. In one area, Dekemhare, the potential electricity demand for irrigation pumping is large with over 400 existing diesel pumps. During appraisal, the Bank reviewed the load forecasts for each ofthe areas and, after some adjustments, found them to be a reasonable basis for the project.
1.16 The economic analysis also took into consideration the socioeconomic survey that the Ministry of Energy and Mines conducted, which served as the basis for the load forecast in the rural areas for the project (Asmara Power Distribution and Rural ElectriJcation Project: Environmental and Social Assessment Report, including Environmental and Social Management and Monitoring Plan, January 2004). According to the survey, households are able to afford Nfa 45 per month for basic lighting and a small radio. It also showed that 96 percent ofrespondents indicated they could afford the cost of electrification. Furthermore, to enhance affordability, EEC has agreed to allow householders to pay the installation costs over two years so that they can take advantage oftwo harvests.
2. Financial (see Annex 4 and Annex 5): NPV=US$ -4.5 million; FRR = 9.7 % (see Annex 4)
2.1 The project calculated the above financial rate ofreturn (FRR) on the Asmara distribution rehabilitation and expansion component. For the rural electrification component as a whole, the estimates ofthe NPV and FRR are -1.5 million US$ (@ 12 % discount rate) and 7.4 percent respectively. The FRR for this component varies significantly from one village to another. For example, the villages with isolated generation plants are the least financially viable with the present level ofgeneration cost. However, considering the aggregate financial picture for all four rural electrification areas together, EEC's forecast revenues from maturing consumption will cover its forecast fuel and operating costs.
2.2 The Government is mindful that the financial NPVs are negative. However, since the economic NPVs - on the basis ofeconomic costs and benefits - are positive, the project isjustified for financing. With this in mind, the project design promotes improved viability over time. In the urban areas, the project will help reduce losses and improve the operating efficiency ofgenerating plant - both ofwhich will contribute to increased viability ofpower sector operations (discussed below). In the rural areas, the low NPV results from the conservative assumptions on connection rates in the early years and the consumers' initial consumption levels. The project includes mitigation steps to improve the component's financial viability. It will conduct training and awareness campaigns to promote increased use of electricity for productive purposes. This would result in higher consumption levels and, thus, increased revenue for EEC.
Key Factors in Achieving the Financial Viability of the Sector
2.3 EEC has been operating at a loss for a variety ofreasons, including the negative impact ofthe conflict situation on the economy and electricity demand as well as financial management problems and an increasing proportion oflow volume rural consumers in its customer base. A key factor constraint to financial viability is EEC's significant number of assets on its books that do not generate revenue, the cost ofwhich the company cannot pass onto consumers. As a result, there is an urgent need to
- 24 - restructure EEC's entire financial balance sheet as well as its organizational framework. However, the implementation of the reforms in these areas included in this project, will take time and EEC is not likely to show positive financial results until 2006. For EEC the achievement offinancial viability means that the company will have the capacity to meet its on-schedule payment ofboth its operating expenses and its financial debts. In order to meet this objective, EEC needs to find ways ofimproving its financial situation without requiring large increases in tariffs, which already are quite high. Given this constraint, EEC and the Government will need to: (a) reduce operating costs through increased efficiency; (b) strengthen financial management capacity; (c) set up an effective financial management system to monitor progress; (d) restructure EEC's financial debt caused by past Government investment decisions that with today's demand growth levels are non-optimal; (e) establish policies and procedures for electricity tariff adjustments annually in order to reach EEC's planned financial results while at the same time ensure that affordable electricity is available to support economic expansion; and (f) separate commercially-oriented urban business from subsidized rural electrification, with clear rules for financing arrangements. The project supports these key strategic elements.
2.4 The project will assist in reducing EEC's operating costs through the reduction in losses and the more efficient use ofgenerating plant. Also, it will enhance the company's financial management capacity through the introduction of a management information system. In addition to these operational improvements, a key factor in improving EEC's future financial situation is to adequately reflect the company's assets and liabilities on the basis oftheir utilization. Therefore, the Government restructured EEC's financial accounts in May 2004. Since EEC is utilizing only 30 percent ofthe Hirgigo power plant, govemment will take on 70 percent of the plant's cost from EEC's balance sheet for the period that EEC will not be using that portion ofthe plant. As power demand grows and EEC begins to use additional plant capacity, the Government will retum appropriate portions ofthe assets to EEC.
2.5 Furthermore, the Government's power sector policy provides for capital subsidies for socially beneficial rural electrification while the commercial segments ofthe power market shall be cost-covering. To this end, the Government is planning to establish a specific financing mechanism (RE Fund) for rural electrification and allow transparent budget transfers for the electrification of areas that are not financially viable for EEC. The company also will separate its accounts into urban and rural markets in order to monitor the company's performance in each market.
Projected Financial Outlook
2.6 Table E.2.1 shows demand growth projections and the related financial performance ofEEC. Based on the demand projections, EEC will increase its utilization ofthe Hirgigo Plant to about 40 percent in FY 2008. The Govemment, according to the financial restructuring plan, would thus retum 10 percent ofHirgigo assets and liabilities to EEC's balance sheet during that period. In the following years, EEC will be able to generate enough resources from its operation to annually include an additional 10 percent ofHirgigo costs in its balance sheet. The Government would onlend the Hirgigo loans to EEC on the loans' original terms.
2.7 As Table E.2.1 indicates the restructuring ofEEC's assets and liabilities in May 2004, combined with efficiency improvements and adequate tariff adjustments, will significantly improve the company's financial performance. The projections show that EEC will start making an operating profit from FY 2004 onwards and beginning in FY 2006, it will start making net profits. The company's equity will become positive from FY 2008 onward and its debt to equity ratio will improve slowly from FY 2008 onwards. EEC also will be able to maintain a sound debt service coverage ratio (DSCR) of 1.3 or higher from FY 2006 onwards.
-25- For the Year Ended December 31 2003 2004 2005 2006 2007 2008 2009 2010
Increase in Sales Growth (%) 6% 4% 4% 7% 7% 8% 8% 7%
Avg Billing Rate (NFA/kWh) 1.50 1.65 1.98 2.27 2.55 2.88 3.24 3.65 Increase in Billing Rate (%) 25% 10% 20% 15% 13% 13% 13% 13%
Operating Income (Mill NFA) (24.39) 4.04 54.12 113.59 181.65 252.19 334.29 432.72 Net Income (Mill NFA) (95.15) (313.84) (21.86) 9.95 41.74 56.46 78.47 113.28
I Retum on Equity (%) -52% -ev Equity -ev Equity-ev Equity-ev Equity 325% 214% 161% Retum on Assets (%) -3.9% -86.3% -3.4% 1.1% 3.8% 3.3% 3.5% 4.1% Operating Ratio 1.07 0.99 0.89 0.82 0.76 0.72 0.69 0.67
JCurrent Ratio I 0.67 I 0.76
Debt Service Coverage Ratio I 0.32 I 0.67 I 1.10 I 1.36 I 1.86 1 1.74 I 1.83 I 1.84 Self FinancingRatio (%) I -evSF I 98% I -evSF I 6% I 21% I 21% I 46% I 59%
Expected Tariff Impact
2.8 The projections in Table E.2.1 assume that the average tariff will increase by 10 percent in 2004 and by 20 percent in 2005. The rise in the tariff level during the first two years ofthe project is necessary to keep up with the increasing operational costs and to do good for past losses. Additional adjustments will be required to take account of changes in international oil prices and foreign currency exchange rates. Due to the recent price escalation of petroleum products in the world market, the Govemment, on June 2,2004, increased the average tariff by about 16 percent. Beyond 2005, increases of about 13-15 percent per year will be necessary to keep the tariff in line with local inflation; however, the real tariff will remain the same and there will be no additional burden on the consumer. Furthermore, the Government has defined the long-term tariff policy objectives in its Electricity Proclamation and Letter of Sector Policy. In this context it will conduct a tariff study to define the cost of supply and the resulting required tariff levels for different consumer groups. This will provide the basis on which the Government will define sound price setting mechanisms for urban and rural areas. The expected completion date for this study is mid-2005.
On-lending Terms
2.9 The Government will on-lend the IDA Credit ofUS$29 million to EEC, and pass on about US$ 17 million of the IDA post-conflict Grant to EEC. The Credit will cover the IDA-financed portion ofthe Asmara distribution rehabilitation. The Grant will cover the costs of: the rural electrification component, technical assistance for project design and supervision; and capacity-building for EEC.
2.10 The process ofEEC's financial restructuring included a review ofthe on-lending terms for the IDA Credit based on the need to progressively commercialize EEC's finances so that the company will meet its revenue requirements for debt servicing within a reasonable time frame. The annual interest rate will be 3.5 percent with a total term of20 years, ofwhich 5 years, corresponding to the construction period, will be the grace period. The interest during the construction (grace) period will be capitalized. These terms would enable EEC to gradually become a financially viable corporation without unreasonably high tariff increases that would reduce the affordability ofelectricity and constrain
- 26 - development outcomes. The Government will pass the Grant portion ofthe financing on to EEC. EEC would bear the foreign exchange risk on the on-lent Credit and Grant amounts. The on-lending terms and the Grant pass through are consistent with power project financing in other developing and low-income countries.
Fiscal Impact: The fiscal impact ofthe components that the IDA Credit will finance ispositive. The net present value of the fiscal revenue accruing to the Government is US$26.9 million (Annex 4).
3. Technical:
3.1 There are no major technical issues. The project's design isbased on widely used and internationally accepted technical standards. However, some of the final designs differ fiom EEC's existing practice because they employ technical standards focused on lowering capital costs and thereby reducing the final cost ofelectricity to rural consumers. EEC's current distribution standards for rural electrification specify a three-phase distribution design. This design is expensive for rural areas with low demands. EEC's consultants have optimized the development plans for the rural component by examining various alternative design options (e.g. single-phase MV, SWER etc.). The project will provide training to EEC staff on the operation and maintenance ofthese low-cost designs.
4. Institutional:
4.1 Executing agencies: 4.1.1 The executing agencies are: the Eritrean Electric Corporation (EEC) and the Ministry ofEnergy and Mines (MEM). See Section C.4. 4.2 Project management: 4.2.1 The project's implementation arrangements are clear and have been agreed upon by IDA, the Borrower, and the implementing agencies.
4.2.2 EEC's Project Management Unit (PMU), headed by a full-time Project Manager, will implement the Asmara component, the rural electrification component and the EEC's capacity-building portion of the Sector Reform component. EEC has experience in implementing other similar projects. These include the EU-financed Massawa Distribution Rehabilitation Project, the rehabilitation ofthe Asmara network's peripheral areas, and several village electrification projects, which it has managed well. This will be its first major World Bank financed project. EEC has been closely involved during the project's preparation and has shown tremendous commitment to the project.
4.2.3 The MEM has assigned the duties ofthe Project Coordinator to the Director ofthe Energy Management and Planning Division of the Department ofEnergy. The MEM will manage the Sector Reform and the Institutional Capacity Building and the Environmental Management components ofthe project. The project will provide the PC and other MEM staff with required training in procurement and project management. MEM has experience with donor-fimded projects and has satisfactory procurement and financial management procedures. This will be their first World Bank- financed project and MEM has shown great interest on its role in the project. 4.3 Procurement issues: 4.3.1 There are no major procurement issues. A pre-appraisal mission completed a procurement
- 27 - capacity assessment, which noted that the project's procurement arrangements were ofaverage complexity. Persons familiar with IDA procedures will manage the procurement for all project components. However, the strengthening ofthe procurement planning process through external guidance and training will be a key to facilitating effective implementation ofall project components. 4.4 Financial management issues: 4.4.1 The Bank has reviewed the financial management arrangements for both EEC and MEM on several occasions starting in June/July 2001 and found them satisfactory overall. The most recent financial management assessment took place in April 2004 and followed previous assessments in February 2004, and October 2003. Annex 6 (B) provides a detailed assessment ofthe financial management arrangements for the project. EEC will implement the bulk ofthe activities under the project. The company has made progress in financial management and has addressed a number of issues the Bank had identified in order to meet the Bank's minimum requirements. EEC has provided the Bank with copies of its audited financial statements for the years ending in December 3 1, 200 1 and December 3 1, 2002. In the meantime, EEC continues to make progress in completing the draft financial statements for the year ending December 3 1, 2003 and expects them to be ready for submission to the extemal auditors in May 2004. The recruitment ofadditional staff, however, has not progressed at the same pace. EEC continues to face difficulties filling key identified positions. Annex 6 (B) discusses the status ofthe agreed action plan. In support ofmanagement improvements, the project will finance financial management training and updating EEC's management information system. 5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. 5.1.1 The Borrower has completed the Environmental and Social Assessment in full compliance with the relevant Eritrean and World Bank standards. The report consists of two volumes. One is the Environment and Social Assessment (ESA) Report, which includes the Environmental and Social Management and Monitoring Plan (ESMMF). The other is the Resettlement Policy Framework (RPF). In compliance with the Pelosi amendment, ASPEN approved all documents which were disclosed in the Infoshop, as well as in Eritrea, prior to appraisal.
5.1.2 The MEM established a multi-disciplinary Task Team to prepare the ESA report in February 2003. Public consultations commenced in March 2003. The socio-economic assessment was tendered to local consultants and the successhl bidder started fieldwork in May 2003. The main thrust ofthe fieldwork was to obtain a full understanding ofthe socio-economic environment ofthe project areas. The Task Team examined all aspects ofthe physical and biological environment in detail to establish pre-project conditions. At the same time it evaluated the degree ofimpact, assessed the design and planned for the implementation and monitoring ofmitigation measures. The Department of Geography ofthe University ofAsmara was largely responsible for compiling the sections relating to the physical and biological environment. The detailed ESA investigations took place in June/July of2003. The Borrower incorporated the recommendations from a stakeholders' workshop, which discussed both the ESA findings and the mitigation measures, into the report; specifically, into the ESMMP (Chapter 9 of the ESA report).
- 28 - Significant environmental issues:
Environmental impacts I Rating of impacts
I Excavation ofunderaound cables on urban traffic I Moderate Denial ofor restrictive access to economic resources, land, fodder, property, Moderate buildings, roadside trees, etc Private land, garden requirement for transformers Low Slow backfilling ofexcavated surface High Dust and dirt Moderate Damage to other underground systems Low Erection ofoverhead ABC cables Low The cutting of trees and branches Low
5.2 What are the main features ofthe EMP and are they adequate? 5.2.1 The ESA contains an excellent analysis ofthe potential positive and negative impacts of the urban and rural components. It resulted from extensive consultations with stakeholders and identified the following impacts and mitigation measures.
Asmara Component:
~~ Negative Impacts Mitigation Measure Insure that all areas whch require mitigation measures are Detailed engineering design identified Inadvertent disruption ofwater, sewer and Use existing maps ofburied water supply and elecom lines. sewerage and telecom cables; produce GIS in r collaboration with DeDt. ofInfrastructure and according to its regulations Interference ofelectric and telecom cables Use perpendicular crossings with enhanced insulation MV and LV specialization issues Arrange different construction crews for MV and LV
Rural Component:
]Negative Imnacts ]Mitieation Measure Vegetation damage, habitat loss and invasion by exotic Utilize appropriate cleaning techniques species along right of way, access roads and around Maintain native groundcover beneath lines substations Replant disturbed sites M&ge right ofways to maximum wild life benefits Habitat fragmentation or distribution Select right ofways to avoid important natural areas Maintain native vegetation beneath lines Run-off and sediment Avoid water bodies, flood plains and wetlands Design drainage ditches to avoid affecting nearby lands The cutting oftrees and branches Ifunavoidable. minimize
5.3 For Category A and B projects, timeline and status of EA: Date of receipt offinal draft: 10 February, 2004
- 29 - 5.3.1 Rationale for category rating: The project has received a Category B rating since there are some adverse environmental impacts from construction activities. There is also the potential for minimal resettlement impacts largely in the form of temporary land allocation for some civil works. However, the ESA has analyzed these impacts thoroughly and has addressed them in the ESMMP and RPF. The design ofinstitutional arrangements for the rural component will take into account environmental considerations throughout selection, planning, construction and operation. They will also ensure the expected social benefits by monitoring the impacts on identified sub-groups, such as the rural poor and others on whom the project is likely to have an impact. Environmental and social considerations as well as impact mitigation planning will be an integral part offeasibility and technical studies for any new infrastructure that the project constructs.
5.4 How have stakeholders been consulted at the stage of(a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms ofconsultation that were used and which groups were consulted?
5.4.1 Government: All central government ministries, Asmara city administration, Zoba representatives for the four project areas, and Village Administrators in the project areas participated in preparing the ESA, either through public consultations or specific workshops.
5.4.2 Civil society: Non-Governmental Organizations (NGOs) participated in the workshop to review the draft ESA.
5.4.3 Private sector: Representatives of rural enterprises, the Association ofHorticultural Farmers, the Asmara Chamber ofCommerce, the Association of Eritrean Engineers and Architects, and the Association ofElectrical Contractors participated in the ESA workshop.
5.4.4 Environmental and educational agencies: The Department ofEnvironment, University of Asmara, and the National Museum were involved in the preparation ofthe ESA.
5.4.5 Donors: The Govemment has consulted with all donors active in the energy sector.
5.4.6 Electricity Consumers: Electricity consumers - commercial and household - from Asmara and the villages to be electrified participated in the project by contributing to a detailed survey report on their perceptions ofthe project. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results ofthe EMP? 5.5.1 MEM with the help ofthe Supporting Committee, which includes representatives ofthe Department of Environment, will perform an enforcement monitoring role. It will also receive support from the PMU, which will self-monitor with a particular focus on the cumulative impacts ofthe construction program ofboth project components, in order to ensure the effectiveness ofindividual mitigation measures at the cumulative and national levels. Monitoring activities by the PMUwill be continuous but MEM will exercise its monitoring role on a quarterly basis. The arrangements for monitoring are in line with the overall monitoring and evaluation plan for the project.
5.5.2 The ESA has set the condition for evaluating the project's success, which is the maintenance or improvement ofthe pre-project environmental state ofnatural resources, bio-diversity, and flora and fauna.
-30- The objectives for monitoring are two-fold:
a) Alert project authorities and to provide timely information about the success or otherwise ofthe ESA process outlined in the ESMMP in such a manner that changes to the design can be made if required.
b) Make a final evaluation to determine whether the project's mitigation measures have been successful in either restoring or improving on the environmental conditions before the project, or alternatively, if the conditions are worst than before. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. 6.1.1 The project will contribute significantly to social development in underprivileged rural areas by making electricity available to more than 25,000 households either directly or indirectly. However, the socioeconomic survey that the Borrower conducted to inform the beneficiaries ofthe project's design highlighted some uncertainty about rural households' ability to meet the costs ofelectricity. The survey's objectives were to: (a) involve the communities in the identification of local priorities and needs; (b) evaluate the possibility for different social groups to meet the costs associated with electric power supply; and (c) assess how to target rural low-income households. It interviewed 50 households (30 semi-urban and 20 village dwellings) in each ofthe four project areas. The survey stratified the sample to ensure the representation ofparticularly vulnerable groups such as female heads of households, returnees and demobilized fighters.
6.1.2 The results show clearly that most of the people in the project areas are eager to get electricity service and 100 percent ofthe respondents expect electrification to change the quality oftheir life completely by reviving economic development (e.g. production expansion, new business, increase employee numbers). The majority ofthe households plan to use electricity solely for lighting and entertainment. However, a significant number ofhouseholds stated they also would use it for agriculture and other income generation. The benefits to households ofswitching from kerosene to electric lighting include greater convenience, improved safety, and better indoor air quality. The women who participated in the survey, in particular, valued highly the improvement in health care facilities that electricity access would facilitate. While most households indicated that they would be able to afford the monthly consumption bill, a significant number ofthem said it would be hard for them to meet the initial connection costs.
6.1.3 With these survey results in mind, the project will include measures to introduce lower-cost electrification standards. In addition, it will design a system that allows people the option of installment payments to cover the initial costs ofconnection over, say, two harvest seasons, and encourage meter sharing to reduce the initial costs to the individual household.
6.1.4 The poorest strata ofthe population will probably not have the possibility to connect to the electrical distribution system directly. They will, nevertheless, benefit from the project through: (a) the availability of street-lighting and improved health, education and water services and related installations; or (b) connection through their neighbors. The project also is likely to have multiplier effects due to an expansion ofeconomic activities that will create employment opportunities, which should benefit the poor.
6.1.5 For the Asmara distribution system component, the Borrower has conducted a socioeconomic survey focused on gaining an understanding ofthe benefits and possible problems associated with
-31 - voltage conversion. The study covered 116 households and firms. Of this total, 54 percent were from areas that were recently converted from 127 V to 220 V and the other 46 percent were from non-converted areas. The sample included households from upper, middle, and lower income groups. Households accounted for about 80 percent of the sample and the remaining 20 percent consisted of industrial concerns, commercial establishments, and other businesses. The survey selected the respondents at random from the streets ofthe residential areas, and from customers who frequented shops in the selected areas. The survey had several significant findings. First, it noted that the voltage conversions in previous electrification programs had improved the quality of service. Second it revealed the importance ofadequate advance notification about voltage conversion, through a formal channel rather than through word ofmouth. Third it found that in about 50 percent ofcases, conversion required an additional cost for re-wiring (about Nfa 400 per room). Fourth, it determined that damage to appliances following voltage conversion, due to the lack ofadequate information on the switch and negligence in appliance maintenance, was a significant burden to the clients. The project's design has taken all ofthese results into consideration.
Specific Social Impacts and Mitigation Measures:
Extended power cuts to customers during the Use mobile diesel generators to supply critical rehabilitation ofthe Asmara network (moderate customers andor encourage them to have risk) standby generators. Blowouts from voltage conversion (moderate risk) Extensive mass media coverage to prepare consumers. Some areas may be mined (moderate risk) Ensure mine clearance beforehand. Some areas may not get services A feasible single-wire-earth-return system has been studied by a consultant from the project funds; Incorporation of village-- and i Zobaidriven- initiatives. Local skills adapted to diesel powered TechnicaVfinancial assistance to promote shift pumpdgenerators to electricity in rural areas.
6.2 Participatory Approach: How are key stakeholders participating in the project? 6.2.1 The ESMMP has identified a consultation process to be followed during implementation. MEM will monitor the process and develop indicators to assess the degree ofparticipation of key stakeholders. The participation will take place through meetings, radio programs, public hearings and sharing of project information. The independent M&E assessments are an additional avenue for consultation at key stages ofthe project.
6.2.2 For the Asmara component, EEC will coordinate closely with the Asmara city administration and the Asmara Infrastructure Department to ensure smooth implementation. It will continue consulting with the Task Force for the preparation ofthe Asmara masterplan, which consists ofrepresentatives from the Asmara Municipality, UNDP, and MEM. Also, EEC will develop a mechanism for sharing and receiving information from its consumers on the implementation progress to minimize disruptions and it will coordinate with the National Museum on issues related to archeological structures and cultural heritage .
6.2.3 For the rural component, MEM and EEC will involve the communities to be electrified through direct consultation during design and implementation. Community participation is a key feature ofthe project for extending access. In the case ofelectric cooperatives, communities will be the owners of the sub-proj ects.
- 32 - 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? 6.3.1 A number ofNGOs in rural areas are providing access to micro-credits for income generating activities, in particular for women. The project will include these NGOs in consultations. In addition, the project will work with cooperative structures and user groups (e.g. around meter sharing) especially in the context of rural electrification accessibility for poorer and vulnerable households. Village Administrators also will have an important role to play in the targeting ofrural electrification and to ensure beneficiary participation.
6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? 6.4.1 Asmara Component. The PMU, in consultation with the Technical Committee, will implement the ESMMP and RPF and follow-up on the day-to-day activities ofthe project. EEC will collaborate with the Asmara City council to minimize impact on city life during construction and provide timely information to consumers about voltage conversion.
6.4.2 Rural Component. EEC's engineering team and an engineering consultant have studied the suitability ofinexpensive options ofrural electrification, including single-wire-earth-retum system. Based on the outcome, the least-cost design and the optimum right-of-way have been selected. Village and Zoba Administrators together with the PMU and MEM will collaborate to ensure popular participation and administration ofthe ESMMP and resettlement activities. The MEM will be the lead agency in conducting the training to VAS,energy service providers, and electrical practitioners.
6.4.3 Cultural Resources. In the context ofcultural resources, EEC and MEM have involved the National Museum in discussions with regard to any necessary rescue work. In the event that civil works encounter archaeological heritage, the PMU will contact the National Museum to make a rapid assessment survey to clear the area for development or to work with planners in suggesting mitigating alternatives to activities that will result in the destruction ofcultural heritage sites. The contracts with private companies involved in civil works will oblige them to go through this same channel. 6.5 How will the project monitor performance in terms ofsocial development outcomes? The responsibilities for monitoring and evaluation are as follows:
MEM will monitor and evaluate the project execution, quarterly, through its PC. In particular, it will be responsible for monitoring and evaluating the social outcomes in the electrified villages as well as the ESMMP and RFP processes.
EEC's PMU and the international consultants for the project will be lllyresponsible for the continuous follow-up and co-ordination ofthe monitoring and evaluation ofthe ESMMP for the Asmara component.
VASwill be responsible for quarterly monitoring of: (a) environmental and social assessment work in the individual villages; (b) implementation ofthe compensation plans; (c) the facilitation ofthe works during the construction process; and (d) the activities of EEC, the Electricity Co-operatives, and/or energy service companies, as appropriate, in the management of electricity services after electrification.
- 33 - 6.5.2 As for the environmental monitoring, discussed in Section 5.5 above, the objectives for the social monitoring are two-fold:
a) Alert project authorities and provide timely information about the implementation progress in such a manner that changes to the design can be made if required.
b) Make a final evaluation to determine the project outcomes and whether the mitigation measures designed into the project activities have been successful in such a way that the social conditions have been improved.
6.5.3 The ESA has set two major socio-economic goals by which to evaluate the project's success:
a) Improve the standard ofliving ofindividuals, households, and communities; and
b) Ensure continued support of the project by the local communities.
6.5.4 To assess the achievement ofthe above goals, the ESMMP has identified the following monitoring indicators after the project compared to before it: (a) land taken for construction; (b) number of villages/townships electrified in a Zobdsub-Zoba; (c) level ofparticipation in project activities compared to before; (d) time series statistics ofthe domestic, commercial, and industrial customers; (e) improvement in social facilities like health, clean water sources, schools; and (0 how many people employed compared to before etc.
7. Safeguard Policies: 7.1 Areany of the following safeguard policies triggered by the project? I Policy I Triggered I Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) 0 Yes 0 No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes 0 No Forestry (OP 4.36, GP 4.36) 0 Yes 0 No Pest Management (OP 4.09) 0 Yes 0 No Cultural Property (OPN 11.03) 0 Yes 0 No Indigenous Peoples (OD 4.20) 0 Yes 0 No Involuntary Resettlement (OP/BP 4.12) 0 Yes 0 No Safety of Dams (OP 4.37, BP 4.37) 0 Yes 0 No Projects in InternationalWaters (OP 7.50, BP 7.50, GP 7.50) 0 Yes 0 No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* 0 Yes 0 No
7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. EnvironmentalAssessment:
7.2.1 The Environmental and Social Assessment for the project was disclosed on February 10,2004. See Section E5.1.
Involuntary Resettlement:
7.2.2 The project has identified the possibility ofsome resettlement impacts largely in the form of temporary land allocation for some civil works. The project has prepared and disclosed a Resettlement Policy Framework (RFP) in the event that this occurs. The RPF outlines the institutional responsibilities
- 34 - for development ofresettlement plans before civil works commence. It provides a budget for training to develop such plans; describes an entitlement matrix outlining different categories of affected persons and different categories ofproperties requiring compensation; and sets out monitoring indicators and a grievance mechanism. Before any civil works that require displacement ofpeople or compensation for asset loss start, EEC will prepare a Resettlement Action Plan in accordance with the guidelines in the RPF and clear it with the Bank.
Damages to agricultural products during construction (low risk) Erection during the dry season Securing an optimum right ofway (low risk) Involve local administration and people Denial ofor restrictive access to economic resources, land, fodder, property, buildings, Limit the use ofheavy vehicles hittrees, etc (low risk) and pay compensation for damages Pole erection passing through farm lands (high risk) Limit the use ofheavy vehicles and pay compensation for damages Disruption ofpathways Lay underground cables and refill Dathwavs with urgencv
Cultural Property:
7.2.3 Eritrea has 20,000 to 40,000 heritage sites. Many of these sites have national, continental, and global importance. However, many potentially sensitive areas are not yet known because archaeologists and heritage managers are only beginning to document the presence of cultural heritage sites. The ESA has identified all the known sites. It has mechanisms in place to work closely with the National Museum with regard to any necessary rescue work. In the event that civil works encounter archaeological heritage, the National Museum will be contacted. Once contacted, museum and university personnel will make a rapid assessment survey to clear the area for development or to work with planners in suggesting mitigating alternatives to activities that threaten cultural heritage sites. Contracts ofprivate companies involved in civil works will oblige them to go through this same channel.
- 35 - F. Sustainability and Risks 1. Sustainability: 1.1 The sustainability ofthe Asmara distribution rehabilitation and extension will be improved through the implementation of an effective commercialization and reformprogram for the power sub-sector as a whole and also for EEC. A key factor in sustainability is the adjustment ofEEC's tariffs on a timely basis so as to ensure that the company fully recovers the cost of its operations.
1.2 For rural electrification, the project's design focuses on lowering the cost ofproviding service by adopting technologies that match demand and by encouraging communities and local enterprises to take on the management responsibility for local electricity distribution. The project's design addresses sustainability also by requiring the selected villages to pay a certain portion ofthe connection costs. Adequate administration ofthe Rural Electrification Fund would increase sustainability through the transparent mechanism for selecting and subsidizing qualified schemes. Finally, the project will build Govemment capacity in its role as a market facilitator to foster private sector involvement in the electricity business.
2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Rating I Risk Mitigation Measure
S - Development, by the Government ofa sector reform strategy. comprehensive power sector reform program to allow private sector entrants, which is underway. - Implementation ofEEC's financial restructuring before implementation starts. - Provision ofBank support including overall macro dialogue, to help the Govemment continue its efforts to proceed with program implementation and overcome obstacles. Government commitment to adopt new M - Adoption ofthe phased approach for the electrification approach. electrification component, including the establishment ofthe institutional framework at a pace suitable for reinforcing Government and stakeholder ownership ofthe proposed new approach. Community willingness and capacity to S - Inclusion ofoutreach activities during project implement a community-based implementation to solicit stakeholders input distribution business. and address their concerns. - Provision oftraining and awareness campaigns for communities to better understand the benefits and costs. Limited affordability or lower than H - Connection ofonly villages that have paid an expected demand in project areas up-front contribution to the connection costs. - Adjustment ofthe project scope to demand projections at appraisal. - Establishment ofthe design of the Asmara distribution extension based on firmly planned housing. and commercial develoDments.
-36- Limited response from private H . Continuous review ofthe financial terms entrepreneurs for rural electrification under the RE Fund. activities. Low-cost distribution designs and M - Continued interest ofEEC and the practices are not mainstreamed. Government in low-cost designs. - Establishment ofa system for M&E to measure the benefits. Electricity tariffs not timely and M - Financing ofa study on electricity tariffs. adequately adjusted. - Assistance to the Government in establishing a suitable tariff setting mechanism. From Components to Outputs Delays in implementing sector reform M - Government agreement with the main due to inadequate management principles ofthe program was a requirement for capability. negotiations. - Financing ofrelated technical assistance. - Involvement of stakeholders at all stages of the studies and incorporation oftheir inputs. Delays in the implementation of the M - Implementation support to EEC by project. experienced international management consultants. - Procurement and project management training for EEC and the MEM. - Coordination ofEEC with the Asmara City Council and the Infiastructure Department to optimize construction scheduling in the city center. - Regular monitoring by Bank supervision missions. - Implementation ofthe Asmara and the RE components through "supply and installation" contracts to reduce logistical and coordination problems. Low cost design and construction N - Studies on low- cost designs have been practices are not adopted. completed and incorporated in project design. S Risk Rating - H (High Risk), S (Substantial Ris M (Modest Risk), Nl Jegligible or Low Risk)
3. Possible Controversial Aspects: None identified
- 37 - G. Main Credit /Grantconditions 1. Effectiveness Condition EEC will have executed a subsidiary financing agreement (for IDA Credit and Grant) with the Borrower; EEC will have submitted its 2003 audited financial statements to IDA; The Borrower and EEC will have established an adequate financial management system, and adequate capacity to produce FMRs, in form and substance satisfactory to the Association, to ensure proper accounting and monitoring ofproject funds; The Borrower will have adopted a Financial Management Manual, in form and substance satisfactory to the Association; EEC will have issued the request for proposal for selection ofindependent auditors, in form and substance satisfactory to the Association; EEC will have appointed an accountant, having terms ofreference and qualifications satisfactory to the Association; and The Borrower will have opened a Project Account for counterpart funds and deposited the Initial Deposit therein.
2. Other [classify according to covenant types used in the Legal Agreements.] Board:
a) The Borrower will have submitted a final letter of its sector policy, acceptable to the Association.
Disbursement conditions:
a) The financing ofexpenditures for sub-projects from the Rural Electrification Fund under the community and private sector led rural electrification program will be conditional on: (a) preparation ofa detailed project Operational Manual describing the eligibility criteria and the terms and conditions for financing; (b) establishment ofsatisfactory institutional and financial arrangements for rural electrification, consisting ofthe Rural Electrification Fund and the Rural Electrification Unit; and (c) establishment ofclear criteria for the selection ofelectrification sites.
Project Specific Covenants for LegalDocuments
Financial:
a) EEC will maintain debt service coverage ratio of at least at least 1.3 from FY 2006 onwards; b) EEC will maintain a positive return on assets from FY2006 onwards; c) EEC will partially finance its investment program from FY2006 onwards; d) EEC will maintain accounts receivable less than two months equivalent oftotal billing; e) EEC will follow internationally-accepted accounting rules and use external auditors meeting international standards acceptable to IDA; and f) GOE and EEC will not make changes to the agreed restructuring ofEEC's capital structure without IDA'Sagreement.
-38- Implementation:
EEC and MEM will implement their respective project components in accordance with the agreed procurement and implementation plans; EEC and MEM will prepare annual training plans as a basis for financing under the project; EEC will separate the financial accounts relating to its rural electrification business from the accounts relating to its urban distribution by February 2005; Government will conduct a study on electricity regulation and discuss it with IDA by April 2005; Government will conduct a study on electricity tariffs and discuss the results with IDA by March 2005; Government will establish clear mechanism for electricity tariff setting by September 2005; Government will conduct a study on the institutional, administrative, and fiduciary arrangements for the RE Fund and discussed it with IDA by May 2005; Government will establish performance targets for EEC with respect to the urban distribution and rural electrification businesses and discuss these with IDA by May 2005; and EEC will carry out a study on its institutional strengthening needs and execute the key recommendations so that it can effectively fulfill its obligations under the Electricity Proclamation by June 2005.
Reporting:
a) EEC and MEM will prepare quarterly progress reports and Financial Management Reports for their respective components and review them with IDA.
- 39 - H. Readiness for Implementation El 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation, E I. b) Not applicable.
E! 2. The procurement documents for the first year's activities are complete! and ready for the start of project implementation. E 3. The Project ImplementationPlan has been appraised and found to be realistic and of satisfactory quality. IJ 4. The following items are lacking and are discussed under loan conditions (Section G):
1. Compliance with Sank Policies 1. This project complies with all applicable Bank policies, I 'I 2. The following exceptions to Bank policies are recommendedfor approval. The project complies with all other applicable Bank policies.
Paivi Koljonen Yusupha Crookes Team Leader Sector Manager
- 40 - Annex 1: Project Design Summary ERITREA ERITREA POWER DISTRIBUTION AND RURAL ELECTRIFICATION PROJECT Key Performance Data Collection Strategy Hierarchy of Objectives lndicators Critical Assumptions ,ector-related CAS Goal: Sector Indicators: iectorl country reports: from Goal to Bank Mission) upport broad-based economic . Increased reliability of, and , strong, financially sustainable rowth and encourage the access to, electricity supply. ower sector is a key element to evelopment of small and . Increased efficiency and lower upport broad-based, ledium size enterprises through Energy costs. nvironmentally sound urban and nhanced public service delivery - Increased village and rural iral growth, which will nd reduction ofinfrastructure growth and small business ontribute to poverty alleviation. ottlenecks. productivity.
Iroject Development Dutcome / Impact 'reject reports: From Objective to Goal) Ibjective: Indicators: . A sustainable progrm for 1a. EEC is meeting its financial . - EEC's corporate accounts and Macro-economic performance icreased electricity access is performance targets, e.g. its debt bperational reports. nd peace sustained. stablished. service coverage ratio is more than 1.3 from 2006 onwards. -Quarterly reports from EEC's Social budget transfers for 'MU and Ministry ofEnergy and loverty alleviation are adequate. 1b. EEC's investment program dines. and operations are based on Programs for improving sound technical, financial and Mid-term report by an griculture and other environmental criteria. ndependent party. nfrastructure services and griculture productivity in rural IC.Sector regulator is functional. Implementation completion reas are implemented. 'eport by an independent party. Id. Selection criteria for rural Other government policies electrification is applied. EEC demand and supply :onducive to private sector led itatistics. rowth. le. About 30,000 new rural consumers are connected to Bank supervision reports. power supply by the end of the project.
1f. The number ofconsumers in the Asmara system has increased to'80,OOO by the end of the project.
lg. Communities and private sector enterprises have been informed ofinvestment and management opportunities in the power sector.
!. The quality and reliability of 2a. Voltage fluctuations in l. -Quarterly reports from PMU. upply is improved Asmara are reduced to +- 5 % of supply voltage by project closing. I Demand and supply statistics ?om EEC. 2b. System losses in Asmara are reduced from current 18 % ofnet . Mid-term and implementation :eneration to 7% by project :ompletion reports by an :losing. ndependent party.
- 41 - 2c. Unplanned supply Bank supervision reports. interruptions are reduced by 90% by project closing.
htput from each Output Indicators: Voject reports: (from Outputs to Objective) :omponent: iector Reform and Institutional - Agreed sector reform studies Eritrean Gazette - Stakeholders support the Zapacity Building: and TA are carried out. long-term power sector and rural EEC's corporate accounts. electrification strategy. Agreed sector structure and - 50 staffare trained. ,trategy are implemented. Annual reports from Regulator.
Staff are adequately trained. Bank supervision reports. hral Electrification: - About 500 km of MV lines Quarterly reports from PMU and - Commercially-oriented extended from 4 major towns to nanaging consultants. community driven rural Selected rural towns and villages about 80 rural villages and towns electrification gains widespread re electrified using low cost by project closing. Bank supervision repop. acceptance. echnologies where practical. - There is no affordability - About 300 km of conventional problem and the expected demand Rural Electrification Fund is LV and 40 km of SWER lines materializes. stablished. installed by project closing. - Low-cost designs and construction practices are - The Operational Manual for the mainstreamed. RE Fund, criteria for site -Private sector is interested in selection, and the institutional participating in electrification. and financial architecture for community and private sector based electrification are established.
- ESMMP and RFP are implemented. ismara distribution rehabilitation - A new substation is constructed Quarterly reports from EEC's - Other parts of the power system md expansion: and 3 existing ones are 'MU and managing consultants operate efficiently. rehabilitated. Power distribution network in Bank supervision reports. - The expected demand ismara is refurbished and -About 30 km of 15 kV materializes. :xpanded. underground cable and 60 km of 15 kV overhead line is installed by the end ofthe project.
- About 40 km of existing 5.5 kV lines uprated to 15 kV.
- About 1,000 km of existing open-wire LV line is replaced with ABC.
- About 200 transformers are replaced with new ones or refurbished by the end ofthe moiect.
- 42 - I Environmental and Social - MEM and VA staff are trained Semi-annual monitoring reports Management: in environmental screening and rom an independent management. nvironmental and social onsultant. - M&E activities are carried out.
- Compensation is paid as stipulated in the RPF.
~~ Project Components I Inputs: (budget for each 'roject reports: from Components to Sub-components: component) Iutputs) 1 . Asmara distribution 1. US$34.1 million luarterly progress and financial Project is implemented on time rehabilitation and expansion magement reports from PMU. md budget.
Least-cost solutions are mplemented.
2. Rural electrification by EEC 3. US$ 16.4 million juarterly progress and financial Project implemented on time magement reports from PMU. md budget.
Low-cost designs and practices ue adopted.
3. Rural Electrification Fund 2. US$ 1.4 million luarterly progress and financial Funds are used for intended magement reports from MEM. urposes. 4. Sector reform and 4. US$ 4.7 million luarterly progress and financial The program of sector reform institutional capacity building ianagement reports from PMU md capacity building activities is nd MEM. :arried out in a timely manner.
Government implements equired institutional and reform neasures in a timely manner.
5. Environmental and social 5. US$ 0.5 million 2uarterly progress and financial management ianagement reports from PMU nd MEM.
-43 - Annex 2: Detailed Project Description ERITREA: ERITREA POWER DISTRIBUTION AND RURAL ELECTRIFICATION PROJECT
By Component:
Project Component 1 - US$34.10 million
Asmara Distribution System Rehabilitation and Expansion
1. The Asmara distribution rehabilitation and expansion component seeks to remove operating constraints on the distribution system in the city, to reduce losses and allow for the forecast increase in demand to be met over the next 20 years. An IDA credit will finance the foreign costs ofthis component - about US$3 1.4 million.
2. Investments. The project includes for a new Asmara North 66/15kV substation, plus upgradinghehabilitation of the existing Gejeret and Denden substation and minor works at Asmara East and Belesa substations; the complete replacement ofthe old 5.5kV medium voltage system by 15kV and for the elimination of the old 127/220V LV supplies, replacing them with a modern 400/230V system. In addition, the MV system in the old historic city center area will be undergrounded and the open-wire systems replaced by aerial bunched cable (ABC). The project also includes for the replacement of service connections and new meters for the consumers at present supplied at 127V.
The component comprises the following main elements:
0 66kV substation works, including:
the construction ofa new 66/15kV substation, at Asmara North at a site close to the existing Belesa to Asmara East 66kV overhead line. The substation will include 2x12.5MVA 66/15kV transformers, 66kV switchgear, a 17 panel 15kV indoor switchboard, civil works, protection equipment and auxiliary supplies. The new Asmara North substation will replace the old Central substation adjacent to the EEC head office which will be decommissioned; upgrading ofthe existing 66/15/5.5kV substations at Gejeret. The substation works include modifications to the 66kV switchyard to accommodate an underground cable circuit (to Denden), 2x12.5MVA 66115kV transformers, 66kV switchgear, a 13 panel 15kV indoor switchboard, civil works, protection equipment, auxiliary supplies and dismantling and removal of the existing 66kV transformers and obsolete 5.5kV switchboard and equipment; upgrading ofthe existing 66115kV substation at Denden. The substation works include refurbishment andor replacement of 66kV switchgear, structures and civil works, lx12.5MVA 66115kV transformer, one new 4 panel 15kV switchboard and cable connection to the existing 15kV switchboard, associated civil works, protection equipment and auxiliary supplies, and dismantling and removal of the existing 66/15kV transformer and all obsolete switchgear and equipment; minor works at Asmara East substation to reposition steel gantries associated with three 15kV feeder circuits, associated 15kV cabling and civil works; minor works at Belesa 66kV substation including rehbishment ofthe switchgear support structures, replacement of 3 generation control and protection panels; replacement ofthree 66kV isolators; associated cabling and auxiliary works; and dismantlinghemoval ofthe obsolete control panels.. Replacement ofthe old 66kV overhead line between Gejeret and Denden substations by 66kV underground cable, a route length of 2km; and
- 44 - (g) Dismantling and removal ofthe obsolete 66kV lines between Belesa and Asmara Central substations and between Gejeret and Denden substations.
0 Refurbishment ofexisting 15kV overhead lines and construction ofnew feeders to replace all 5.5kV feeder circuits in Asmara. The design includes for undergrounding ofall 15kV circuits in the historic central city area, plus a number ofthe circuits emanating from the Denden substation due to problems ofwayleaves for overhead lines. The Consultant’s design includes a total of:
(a) 39.3km of 15kV underground cable; (b) 62.3km ofnew 15kV overhead line (main feeders and branches); (c) 42.2km ofexisting 5.5kV overhead line uprating to 15kV by adding new cross-arms and insulators (main feeders and branches); (d) 11.6km of existing 15kV overhead line requiring new cross-arms (main feeders and branches); and (e) 17.0km ofexisting 15kV overhead line to be inspected and minor defects rectified (main feeders and branches).
0 Installation ofnew 15kV/LV distribution transformers and associated fusegear to replace all 5.5kVILV transformers and uprate existing 15kVILV transformers comprising:
(a) 79 ground-mounted transformers, total capacity 40.7MVA; and (b) 148 pole-mounted transformers, total capacity 29.6MVA.
0 Replacement of all the existing open-wire LV system using aerial bunched cable (ABC), fixed either to buildings or mounted on poles depending on the location. The Consultant’s estimate includes for the supply and installation 1,000 km ofABC.
0 Replacement of32,000 consumer meters and 59,000 service connections. Meters will be the electro-mechanical type except for 1,000 3-phase consumers, which will be fitted with electronic meters. This will allow for an additional 14,000 new consumers to be added to the system (to 2012). This element will also include for the installation ofa new meter testing laboratory to replace the existing facility which has reached the end of its useful life.
3. Technical assistance: Consulting services and training for design, implementation management, construction, and operation.
Project Component 2 - US$16.40 million
Rurul Electrification by EEC
1. The rural electrification component will assist the Government to increase access to electricity in underprivileged rural areas to improve living conditions and spur economic development. It consists of the development ofappropriate least cost methodologies for rural electrification in Eritrea and using these standards for the electrification ofthe selected villages and small towns. The foreign exchange portion ofthe component - US$12.37 million - will be financed by an IDA post-conflict grant.
2. The component includes for the electrification ofabout 30,000 households, agricultural irrigation pumps and other small businesses, schools, clinics, churches, and mosques, etc. in about 80 villages around the four major towns of Keren, Barentu, Dekemhare, and Adi Keih through network extensions.
- 45 - Keren and Dekemhare are connected to the transmission gnd whereas Barentu and Adi Keih are supplied from diesel power plants in the towns. The capacity ofthe diesel plants is sufficient to meet the initial needs of the project and the EEC has plans to add additional capacity as required utilizing existing diesel units made available from other towns that have recently been connected to the transmission grid. The Emergency Reconstruction project (Cr. 34340) financed the rehabilitation ofthe electricity distribution systems in Barentu and Adi Keih in 2002.
3. Investments: The project will finance the required MV and LV lines, transformers, and service connections to about 30,000 consumers. The total length oflines is 948km - this includes 538km of 15kV, 362km of33kV and 48km of 19kV single wire earth return (SWER).
4. The villages will be supplied at either 15kV or 33kV conventional 3-phase, or 19kV SWER, depending on the distances and the types ofloads. The Consultant has optimized the designs using innovative SWER and two-phase, double wound transformers in order to reduce the current flowing in the "earth return". The SWER is limited to parts ofthe Adi Keih system, since in the other areas there is a significant irrigation pumping load.
Keren area:
5. The electrification ofthe Keren area includes the small towns and villages ofGush, Haddish Adi, Terenque, Shieb, Debresina, Libana, Halhal, Mai Awalid, Melebso, Mensura, Shaftaque, Karotnejar, Hirkok and Aderde.
Barentu Area:
6. The electrification includes the small towns ofGogne, Tokombia, Binbina, Shambuko, Areda, Mogolo.
Dekemhare Area:
7. The electrification ofthe Dekemhare area includes the villages ofKeih-Quor, Sesah, Military Camp, Hospital, Alla, Gaden, Delu Nazo, Awli Tsoru, Azamir, Zeban Angeb, Damba, Wekerti, Adi Araada, Amhur, Arato, Korbaria, Haren, Adi Nefas, Adi Rassi, and the Villages ofTukul, Gura, Enda Deko, Ziban Seraw, Adi Nefas, Mai Edaga, Godeyti, Halibo, Mai Yaha, Kertse Kemte, Kinafna, Mai Aini, Tsorona, Akrur, Hebo, Adi Angefom, Degra, Ewanet, Digsa, Adi Hadid, Beralut, Birluto, and Adi Quita.
Adi-Keih Area:
8. The electrification ofthe Adi-Keih area includes the villages ofEmba Chilai, Tegeren, Ento, Adi Lejji, Quatit, Mirgatse, Emba Quaquat, Embeito, Ziban Zigib, Adi Wegera, Hawatsu, Mendefera, Adi Kanta, Awhine, Berhenet, Halai, Haddish Adi, Quahaito, Egla, Embalaka, Mekayih, Mai Sagla, Serha, Ambeset Geleba, Meneksoyto.
Technical Assistance:
9. The project will include financing oftechnical assistance to implement changes in the distribution standards used for rural electrification and consultancy services and training for design, implementation management, construction and operation.
-46- Rural electrification wocedure in Eritrea:
10. In line with rural electrification procedures in Eritrea, the villagers provide an up-front payment to meet the cost of the low-voltage reticulation in the village. For households electrified during 2002/2003, the average payment was 920 Nfa per household. The cost depends on the size and layout of the village. For example, the larger andor the more compact the village the lower the cost. The payment per household will vary. The Village Administrator determines it on the basis ofthe household's "ability to pay" and collects the payments directly from the consumers. Based on the 2002/2003 average payment and given the substantial variation in the reported average income ofthe project's target villages ranging from 2,119 to 19,295 Nfa, households' payment would range from 5 percent to 43 percent of annual income. However, systematic planning and the establishment oflower cost distribution standards under this project will reduce this cost. As the project will finance the entire connection costs in the selected villages, IDA agreed with the Government that the payments from the villages will be deposited in the Rural Electrification Fund to benefit future electrification. This arrangement will ensure consistency with the financing arrangement in villages that have been recently electrified with financing from the Government and SIDA. An up-front payment will also increase the villages' ownership ofthe project. The project also will help to make connection affordable by establishing an improved payment mechanism, whereby consumers can elect to pay the connection cost in annual installments.
Project Component 3 - US$1.40 million
Funding for the Rural Electrification Fund
1. The Government will establish a Rural Electrification Fund to provide grants for the capital costs of electrification ofadditional villages either by EEC, village cooperatives, or private energy service companies. An IDA post-conflict Grant will finance this component once the Fund has been established with suitable administrative management arrangements, and the Government has developed clear selection criteria for rural electrification. The expectation is that the IDA financing will catalyze additional donor financing in the future. Also, the Government plans to establish a surcharge on electricity tariffs to continually replenish the Fund. Finally, EEC will deposit to the Fund the contribution payments it will collect from the villages to be electrified under the project.
Project Component 4 - US$4.70 million
Sector Reform and Institutional Capacity Building
1. The project will finance the implementation of the Govemment's power sector reform program. The program ofactivities will help the Government to reconstruct and modemize the power sector institutions and regulatory framework to meet the challenges ofan economy emerging from a conflict situation. An IDA post-conflict grant will finance about US$4.5 million.
4.1. Sector Reform e Expert services for the: (a) implementation of the new Electricity Proclamation; (b) setting-up the Power sector Regulatory Function (c) development of a tariff setting policy and mechanism; (d) setting-up the Rural Electrification Fund; and (e) other activities as defined during the project's implementation period. b Training of EEC and MEM staff in electricity sector reform and regulation; training ofregulator and Rural Electrification Fund staff; and
- 47 - 0 Awareness campaigns for rural entrepreneurs and farmers on using electricity for increased productivity.
4.2. EEA Capacity Building
0 Establishment ofa Management Information System with required software and hardware. 0 Expert services for the: (a) separation of accounts for EEC's rural and urban businesses; and (b) strengthening ofEEC's corporate planning function; 0 Review ofEEC's institutional needs, practices, and perfonnance targets and technical assistance to enable it to fulfill its obligations under the new Electricity Proclamation; 0 Training in project management, environmental management, procurement, financial management, investment planning, customer care and demand management, tariff setting, etc.; and 0 Other technical assistance and studies as required.
4.3. MEM Capacity Building
0 Training coordinator/trainer oftrainers to review the training needs ofMEM, VA, and ZA and identify suitable national and intemational training opportunities; 0 Training to MEM, VA, ZA, electric cooperatives, energy service companies; 0 Expert services and studies for monitoring and evaluation ofthe project's outputs and impacts and other activities as required; and 0 A vehicle and a laptop computer for monitoring ofrural electrification field work.
Project Component 5 - US$0.50 million
Environmental ad Social Management
1. This component will finance the cost ofimplementing the Environmental and Social Management and monitoring Plan prepared for the project. The main activities are: (a) training and advisory services for EEA's project Management Unit, MEM, and the Village Administrators; (b) implementation of the M&E activities; (c) implementation ofa compensation plan for loss of crops during construction ofpower lines under EEA's distribution rehabilitation and rural electrification components; and (d) environmental audits at the end of the project. An IDA post-conflict Grant will finance about US$0.4 million.
2. The environmental mitigation and compensation measures for the Asmara distribution component cover the elements in the table below, which also indicates the responsibility for their implementation.
-48 - Table 2.1 Environmentalmitigation and compensation measures for the Asmara component
Meas ur e Implementation responsibility Excavation and backfilling ofall underground cable The turnkey contractor, supervised by the EEC’s trenches and making good oftiled pavements Engineering Consultants for the Asmara component and EEC. Avoiding excessive restrictions on access to land, Same as above buildings and other economic resources during the construction period Avoiding damage to other underground services Same as above. Limiting power cuts in general, and it particular to Same as above. critical consumers Limiting the economic impact on consumers ofthe voltage conversion from 127122OV to 4OOl23OV Nl
The monitoring of the measures will be the responsibility of the MEM, assisted by the PMU.
The social and environmental mitigation and compensation measures for the Rural Electrification (RE) component covers the elements discussed in the table below. The implementation responsibility is indicated in the second column.
Table 2.2 Social and environmental mitigation measures for the Rural Electrification component
Measure Implementation responsibility Limitation ofdamage to crops and natural habitats Turnkey contractors supervised by the EEC’s along line routes and substation sites Engineering Consultants and EEC, with support from the various specialist authorities, e.g. the National Museum and the National Demining Anencv ~ Avoiding cultural and archaeological sites Same as above. Avoiding areas that may be mined Same as above Securing optimum rights ofway EEC I Compensation payments EEC I Raising public awareness to the availability of micro-credits for income generating activities and self-help schemes householders may be able to engage in following electrification
Raising awareness of the benefits ofusing electricity ~ MEM and EEC for irrigation pumping Introduction ofenergy services companies andor MEM EEC billinglcollection agents in areas covered by the RE component
3. The monitoring of the mitigation measures will be the responsibility of the MEM, with the assistance of EEC and with support from Zoba and Village Administrators. The monitoring and evaluation of the project’s social impact will be the responsibility ofthe MEM, together with the Zoba and Village administrations, assisted by the PMU. EEC informed the mission that it has already informed the Zoba and Village Administrators in the project areas of their responsibilities and that it will continue to engage in dialogue with them during the project’s implementation period.
- 49 - Annex 3: Estimated Project Costs ERITREA ERITREA POWER DISTRIBUTION AND RURAL ELECTRIFICATION PROJECT
Local Project Cost By Component US $million Asmara distribution rehabilitation and expansion I 1.97 27.60 29.57 Rural electrification 2.88 10.90 13.78 Rural Electrification Fund 0.00 1.41 1.41 Sector reform and institutional capacity building 0.29 4.05 4.34 Environmental management 0.24 0.19 0.43 Total Baseline Cost 5.38 44.15 49.53 Physical Contingencies 0.41 4.09 4.50
Price Contingencies 1.56 1.59 3.15~~ Total Project Cost; 7.35 49.83 57.18 Total Financing Required 7.35 49.83 57.18
Local Foreign Total Project Cost By Category US $million US $million US $million Supply and Installation 6.75 40.28 47.03 Works 0.00 0.00 0.00 Goods 0.04 1.65 1.69 Consulting services 0.34 5.84 6.18 Training 0.07 0.65 0.72 Incremental operating costs 0.07 0.00 0.07 RE Fund 0.00 1.41 1.41 Env. compensation 0.08 0.00 0.08 7.35 49.83 57.18 Total Proiect*--- Cost: ----~ I I Total Financing Required I 7.35 I 49.83 I 57.18 I Identifiable taxes and duties are US$1.50 million and the total project cost, net oftaxes, is US$55.68. Therefore the project cost sharing ratio is 89.8%. 1 Identifiable taxes and duties are 1.5 (US$m) and the total project cost, net oftaxes, is 55.7 (US$m). Therefore, the project cost sharingratio is 89.77 % of total project cost net of taxes.
- 50 - Annex 4: Cost Benefit Analysis Summary ERITREA ERITREA POWER DISTRIBUTION AND RURAL ELECTRIFICATION PROJECT
[For projects with benefits that are measured in monetary terms]
Present Value of Flows Fiscal Impact Economic Financial Analysis' Analysis Taxes Subsidies Benefits: 47.5 34.5 US$ million
Costs: 35.1 39.0 0.7 US$ million Net Benefits: 12.3 - 4.5 US$ million IRR: 18.3 9.7 e The above flows relate to the Asmara distribution rehabilitation and expansion component, the largest component of the project. e Present values are discounted at 12%. e The value ofeconomic benefits is higher than that offinancial benefits because the economic flows include the estimated consumer surplus and savings in resource costs, while the financial benefits derive from EEC's tariffs. e The financial costs are higher than the economic costs because the financial costs include contingencies and taxes. Also, the local cost component ofthe economic cost is shadow priced.
'If the difference between the present value offinancial and economic flows is large and cannot be explained by taxes and subsidies, a brief explanation ofthe difference is warranted, e.g. "The value offinancial benefits is less than that of economic benefits because ofcontrols on electricity tariffs."
Summary of Benefits and Costs:
-51 - Summary of Benefits and Costs:
A. Asmara Distribution Rehabilitation and Expansion Component
Table 4.1. Summary of Costs and Benefits of the Asmara Distribution Rehabilitationand Expansion Component
a0 am (00: (am) (148 ao am 3.70 ao am 608 ao la5 (1.9 (am 1t62 (14 Z6 a6 am 862 3.1 35.7 14.7 a71 5.9 49.1 29.5 1.42 87 628 447 215 11.7 77.5 589 283 126 83.8 624 3.m 126 8a8 624 3.m 126 SI8 624 3.m 126 88 624 3.m 126 ma 624 3.m 126 a8 624 3.a) 126 8lS 624 3.m 126 ms 624 3.m 126 ma 624 3.m 126 SI8 624 3.m 126 Q8 Q4 3.m 126 a8 Q4 3.m 126 Rl8 624 3.m 126 ma 624 3.m 126 ma 624 3.m 126 8l8 624 3.m 126 8a8 624 3.00 126 8a8 624 3.m 126 a8 624 3.m
Main Assumptions:
Economic Benejts
1. The economic benefits of meeting incremental demand by the project are the sum of a number of elements. The first is the savings in resource cost from serving demand in the "with the project" case over the level of demand in the "without project" case. The second is the value of the incremental demand that the project will serve.
2. The analysis calculated the saving in resource cost as the avoided financial cost of self
- 52 - generation by existing industrial consumers using back-up diesel generators, which is estimated at US$ 0.16kWh (operation, maintenance and fuel cost). According to the 2002 Pilot Investment Climate Assessment, 43 percent offirms in Asmara had private generators. In addition to these cost savings from fuel switching, there is the avoided cost ofunplanned outages. EEC's consultants (PB Power, Ltd.) have valued these outages at the cost ofUS$0.20/kWh. An additional benefit included in the analysis is the savings in distribution operating and maintenance (O&M) costs resulting from the difference between the O&M costs ofoperating the old system in the "without the project" case and the O&M costs of operating the modern equipment under the project.
3. The analysis has conservatively valued the incremental residential demand served at the EEC tariff since most ofthem will be Eritreans returning from abroad now that the conflict situation has subsided. The analysis further valued the incremental industrial demand served as the avoided financial cost of purchasing and operating individual diesel generators (US$O. 18kWh, including operation and maintenance and investment).
4. The project is expected to meet the increment of demand up to 20 13. Thereafter there is a need for additional generation. Until then there is sufficient capacity at the existing Hirgigo diesel power station at Massawa to meet the forecast demand ofthe interconnected system until the peak demand reaches about 90 MW.
5. Tables 4.2 and 4.3 below show the load forecast for the interconnected system and the Asmara system respectively. Asmara presently accounts for approximately 60 percent of the total electricity demand in Eritrea. Power demand in the Asmara area has been growing at 6-7 percent over the past three years. However, there are indications that this growth has slowed down somewhat since the beginning of 2004. During project appraisal IDA and EEC, for power system planning purposes, agreed to a projected average growth of4-5 percent for the next two years rising to 7-8 percent over the following five years as the project makes more reliable supply available. This rate of increase is reasonable in the historic context and compatible with the forecast annual GDP growth ofaround 3 percent.
6. The forecast for the total Eritrea system, including both the interconnected (ICs) and isolated (SCS) systems shows growth similar to that ofthe Asmara system. A significant item in the load forecast for the total Eritrean system is the reduction in losses expected with the completion ofthe Asmara distribution system's rehabilitation and expansion component. Total system losses are expected to decrease from the current level of23 percent ofgeneration to 16.5 percent of generation by 2008, due principally to the Asmara distribution project. Additional distribution loss reductions will follow from the completion ofthe ongoing Massawa distribution rehabilitation and expansion project.
- 53 - Table 42. Load Forecast for BEA System - ICs aad SCS
I I I I I I I I I I I I I I I I I I I I
I I I I I I I I I I I I I I I I I I ICs S*rLi I &&I 71%1 6581 58148l 60648) 14kl 681 60961 6W1 60961 681 60961 60961 60961 60961 Wol 60961 6096 I I I I I I I I I I I I I I I I
Table 4.3. Asmara Sales Forecast
For theYearEnded December31 I 1999 I 2000 I 2001 I 2002 I 2003 I 2004 I 2005 I 2006 I 2007 I ZOOSl 20091 2010 IEnergy Sales (GWh) I
Large Industries I 17 I 17 I 18 I 18 I 19 I 20 Total I 66,262 I 64,939 I 65,703 I 67,283 I 70,622 I 72,080 I 73,569 I 75,708 I 77,972 I 80,283 I 82,664 I 85,117 Increment I I (1,32311 764 I 1,580 1 3,339 I 1,458 I 1,489 I 2,139 I 2,264 I 2,311 I 2,381 I 2,452
Economic Cost
7. The economic costs are the difference between power system costs for meeting the forecast demand in Asmara with this project and the system costs without the project. They include capital investment, incremental generation and O&M costs, the costs of connecting the additional consumers, and an allowance for the cost that consumers will incur for the uprating oftheir supply voltage from 127 V to 220 V under the project as well as the cost oflight bulbs and small appliances (based on an average of20 Nakfa for domestic consumers and 100 Nakfa for commercial and industrial consumers). These costs are relatively low. Consumers have been anticipating the change for some years and have been
- 54 - buying appliances suitable for both 127 V and 220 V operation. All costs are in constant 2004 US dollar prices. The local costs, which cover local labor and some civil works and amount to six percent of investment costs, are shadow priced at 80 percent ofthe market cost. The cost analysis excludes all taxes and duties but includes the costs ofenvironmental and social protection measures. As a result, the estimated average incremental cost ofthe investments is approximately US$O.O6lkWh (including fuel).
Other Assumptions:
- Oil Prices: US$ 30 per barrel ( Arabian Gulf crude oil) for the base case.
- System losses, as a share ofnet generation, as follows:
I Without the Proiect I With the Proiect I Generation: 4% 4% Transmission: 1% - 2% 1% - 2% Distribution (Asmara): 18% 6.6% - 9.4%
- Current EEC tariffs (As of2003):
-Domestic 8.2 USckWh -Commercial 10.3 USckWh -Industrial 6.3 USckWh
- Expected real increase in tariffs during project's implementation period: 10%. - Exchange rate: 19 Nakfa per US$ 1 - Electricity tariffs are not subject to tax.
- Generation costs as follows:
Hirgigo Belesa Fuel: IF0 IF0 80%/GO 20% Fuel cons (McWhg): 0.2 1 0.24 Fixed O&M (US$ million p.a.): 0.12 0.07 Variable O&M (US$kWh): 0.24 0.16
- Economic life of investments: 25 years.
Sensitivity analysis / Switching values of critical items:
Sensitivity Analysis
8. The results ofthe sensitivity analysis, shown in Table 4.4, indicate that the project outcome is particularly sensitive to demand levels. For example, a 20 percent decrease in demand each year from 2007 reduces the expected ERR from about 18 percent to 13 percent.
- 55 - Table 4.4. Results of Sensitivity Analysis
Sensitivity case I EIRR
I Basecase I 18.3% I
Investment cost +20% 15.8% Investment cost -20% 2 1.9%
Tariffs (@ current (2003) level 17.2% Tariffs +20% 19.6%
Oil price (@ 35 US$/bbl 18.5% Oil price (@ 25 US$/bbl 18.1%
Switching Values:
9. The NPV at 12% switches from positive to negative if benefits decline by 27 percent or investment costs increase by 36 percent.
Risk Analysis:
10. The quantitative risk analysis ofthe Asmara distribution component assessed the impact of uncertainty in the underlying assumptions and predictions on the EIRR ofthe component to deal with this uncertainty. The analysis assigned probabilities to the values of the key variables. These variables and the probabilities of their future values emerged from the discussions between the Bank and the Borrower. The modeling of the project’s outcome using a risk analysis program determined the expected EIRR and NPV with their probability distributions, using a “Monte Carlo” simulation process. Chart 4.1 below shows the probability distribution of the expected EIRR. Table 4.5 shows the list of the key risk variables and the probabilities assigned to them.
Chart 4.1. Frequency Distribution of EIRR
P ro bability dis tributio n of EIRR
10 0
80 =.,u E 60 3 40 h 20
0 9.5% 13.5% 17.4% 21.4% 25.4% ERR (%)
- 56 - The expected ERR is 18.2 percent, which is very close to the point estimate in the base case. The probability ofthe ElRR being above 12 percent, which is the estimated opportunity cost ofcapital in Eritrea, is 94 percent.
Variable Form of Probability Distribution Values
Investment cost Triangular -20%, Base cost, +20% Load forecast Triangular -20%, Base, +20% (from 2007) Tariffs Discrete, equal probability Present level, +lo%, +20% Crude oil price Discrete 25 US$/bbl(30%), 30 US$/bbl(50%), 35 US$/bbl(20%) One year completion delay One year delayho delay
B. Rural Electrification
Summary of Benefits and Costs
11. The rural electrification component covers the electrification ofvillages in four separate areas -- Keren, in the west ofEritrea; Barentu, in the southwest; Dekemhare, in the east; and Adi Keih in the south. Both Keren and Dekemhare are connected to the grid. Barentu and Adi Keihreceive power from local diesel power stations. The estimate ofthe component's ERR is about 13 percent. The costhenefit analysis shows that the ERR is high for Keren and Dekemhare, marginal for Barentu, and low for Adi Keih. The amount forecast irrigation pumping load in each area is the main factor accounting for the variations among the selected electrification areas. The following sections discuss the key elements of the analysis and Table 4.6 provides the details of the ERR calculation.
- 57 - Table 4.6. Summary Economic Analysis of Keren, Barentu, Dekemhare, and Adi Keih RE areas
2005 2001 2007 2001 -200I -2011 -2011 -201: -2014 -2015 -2016 -2017 -2018 -2019 -2MU -2021 2023 2M4
Totalcosb USt’000 Keren 6?0 1,710 1,591 1,256 321 333 332 341 362 372 383 395 41’1 419 432 48 472 47 Barentu 345 883 855 730 261 277 272 281 #10 310 38 331 342 354 366 392 405 419 Dekemhare 545 1,411 1,318 1,189 376 407 351 363 386 398 41 1 a 439 453 468 499 516 533 AdiKejh 3Y7 1,051 1,042 904 3n 396 40’1 419 444 457 41 481 100 514 53 %2 580 W
Total: 1,958 5,Rl 4,86 4,079 133 1,412 13 1,404 1,492 1,538 1,586 1,636 1,68’1 1,740 1,795 1,911 19’13 /036 hementalbenefits USt’MI Keren o ni j53 829 869 910 940 971 1,035 lJ70 1,105 1,141 1,179 1,218 1,258 1,343 1387 1,433 Barentu o in 248 396 426 457 473 489 524 542 561 581 mi 622 644 689 113 738 Dekemhare 0226 451 821 9n 1,040 lp17 1,115 1,195 137 1,281 1,321 1J-74 1422 lA73 1,580 1,636 1594 1,755 AdiKejh 0 In! 347 524 551 518 597 616 615 676 697 7m ?42 166 7w MI 868 8%
Total: 0 78E 1,699 ZJ7l l” 2,98! 3,086 3,19fl 3,410 $525 354.5 3J68 3,896 4,028 416! 4,41 4605 4762
Net benefits: -3,198 -1)M 1,512 i,ni 1J8t 1,918 1,987 m 2,ln 2,209 Pi 2,m 23 2,632 2,126
NPV@12% $0394 rillion
NPY@O% $2Mrillion
WR 12.62
AIC investmtnt 0.092 $m
Main Assumptions
Consumption Patterns of Expected New Customers
12. The basis ofthe economic analysis for the rural electrification component is a forecast ofdemand agreed upon with EEC, using data collected by the EEC, MEM and EEC’s consultants, Aikicon Ltd. For each village to be electrified, the data covers the households; public institutions, such as schools, churches, mosques, clinics, etc; commercial and industrial enterprises, such as stores, bakeries, grain mills, workshops, etc.; and irrigation pumps.
13. The forecast assumes that about 28,500 residential consumers (60 percent ofexisting households) plus about 1,300 commercial, public sector, and small industrial and irrigation pumping consumers will connect to the network over a three-year period from 2006 to 2008. Thereafter, the forecast shows the number of consumers growing at annual rates of between 0.5 percent and 2.0 percent. The initial consumption ofresidential consumers is estimated at 30 kwh per month, corresponding to lighting plus a small radio. The demand forecast allows for a modest growth in consumption - in the
- 58 - range of2 to 2.5 percent per year - as households gradually acquire small electrical appliances and possibly televisions.
14. Public institutions are estimated to consume 40 kwh per month mainly for lighting, with limited use of small refrigerators and computers (in schools). The analysis used conservative estimates of monthly consumption for the various consumer categories. The estimate of the initial consumption of commercial consumers is 200 kwh per month. It represents the low end of consumption for this consumer category in Eritrea, which is in the range of200- 250 kwh per month. The estimate of initial consumption for small industrial consumers is 576 kwh per month. This consumption level corresponds to a load of3 kW, eight hours per day for six days per week and is below the average level for this consumer category in Eritrea. Finally, for irrigation pumping, the initial consumption is 288 kwh per month corresponding to a 6 kW pump operating 12 hours per week. Table 4.7 provides the detailed assumptions for the demand forecast and table 4.8 provides the results ofthe demand forecasts for the rural electrification projects in all four areas.
- 59 - Table 4.7. Assumptions for RE Load Forecasts
Tariff Types of consumer Domestic Residential Commercial Shops, restaurants, hotels & fuel stations Small Industry Bakeries, flour mills, wood & metal workshops, garages and tyre workshops Small Industry (irrigation) Irrigation pumps Public Mosques, churches, schools and clinics
Domestic Public Commercial Industry Irrigation Total
Keren 9459 48 156 74 68 9805 Barentu 3997 19 97 27 89 4229 Dekemhare 8127 12 96 29 433 8697 Adi Keih 6964 20 87 14 55 7140
Total 28547 99 436 144 645 29871
Domestic Public Commercial Industry Irrigation
Keren 1.O% 0.5% 1.5% 1.5% 1.0% Barentu 1.0% 0.5% 1.5% 1.5% 2.0% Dekemhare 1.0% 0.5% 1.5% l,5% 2.0% Adi Keih 1.0% 0.5% 1.5% 1.5% 1.0%
Domestic Public Commercial Industry Irrigation
Keren 2.0% 2.0% 2.5% 2.5% 2.0% Barentu 2.0% 2.0% 2.5% 2.5% 2.0% Dekemhare 2.0% 2 0% 2.5% 2.5% 2.0% Adi Keih 2.0% 2.0% 2.5% 2.5% 2.0%
Note: assumed irrigation pumps converted progressively from diesel to electric over 5 years - 2006 to 2010
- 60 - Table 4.8 Detailed results of the demand forecasts for the rural electrification projects in all four areas
2007 2008 2009 2010 2011
t3.12 464 4.84 501 1.21 13 2.15 2.B 2.44 2.1; 262 4.44 4.91 1.41 5.M 2M 306 319 334 36
Total 9.16 1429 1524 1624 1637
Qnslutlers Keren 6,831 9,178 9,M 10,004 10,101 10,207 10,310 10,414 10j19 BWtU 2,913 4J95 4217 4,319 4,364 449 4,454 a0 4j41 Dekemhare 5,810 8,124 8,ml 8,882 8,976 9,011 9,167 9,264 9,362 AdiKeih 4,971 1,118 731 7J84 7,358 7,432 7,106 7,582 1,61S
Tital 2@66 29/15 30p48 3&489 30$02 31J18 131,437 I31160 132p86
Losses (%) 101% 10.2% 103% 10.4% 10.541 106% 10.7% 10.8% ION
3.41 517 5.40 164 5.8: 6.02 6.22 6.4 6.6. 13 235 2.11 267 2.7 2.87 297 3.08 3.1! 2.91 494 5.41 604 6.3 6.48 6.71 6.95 7.1! 2B 3.34 3.Y 366 3.1 3.91 4.04 418 43
Total 10J1 1580 1688 18M 1861 1928 1995 2064 213
PeakDed@V) Keren 088 132 1.38 1.44 1.4 13 1.19 1.64 16 BarmtU 0.40 063 0.68 0.72 0.1. 0.n 0.80 0.83 0.8 Dekemhare 0.84 1.43 1.58 1.74 18 1.87 1.94 2.W 20 AdiKeih 0.60 0.89 0.94 098 10 105 108 1.12 11
Total 522 SA0 559 57
Load Factor @) 421% 421% 421% 42.19
- 61 - Economic Bene$ts
15. The economic benefits ofthe planned electrification are related to the incremental demand served by the project for different types of consumers and savings in resource cost compared to the demand served in the "without the project" case. The economic benefits for new residential consumers result from calculations that take into consideration the observed costs ofmeeting the affordable amounts of substitutes for electricity (kerosene lighting) and the observed electricity consumption of similar consumers at the relevant EECs tariff,
16. The true shape ofthe residential consumers' demand curve isnot observable. Therefore, the analysis calculates the value of the benefits as an area under an assumed semi-log demand curve, in the form Q=A+B*lnP that passes through two hownpoints. The lower case point represents the substitution ofelectricity for existing methods of lighting and is a saving in resource costs. Field observations indicate that the majority ofnon-electrified households use kerosene for lighting. Their kerosene usage is equivalent to about 7-8 kWh/month, which translates into an average cost ofaround US$0.24 per kwh. The upper case point is the consumption rate ofan electricity consumer (30 kWmonth) at the EEC tariff equivalent to about US$O.O9 per kwh. This level of consumption at the forecast electricity tariff appears affordable at the estimated income levels. To estimate the affordability of electricity, the analysis uses income levels from available survey data. The results show that the monthly cost ofelectricity for the average household would account for between 3.5 and 11.5 percent of monthly household incomes. This estimate indicates that the switch from other forms of energy to electricity in meeting household energy needs is likely to absorb a lower share of monthly household income. Surveys show that households in the project areas currently spend between 10 and 20 percent of their incomes in meeting their energy needs from other energy sources.
17. The analysis values the benefits ofelectricity for commercial, small industrial, and irrigation consumers on the basis ofthe avoided financial cost ofusing small local diesel generators, resulting in a resource saving. The analysis also considers the salvage value ofthe old diesel driven irrigation pumps. Surveys ofpump dealerships indicate that the diesel pumps have a high salvage value in Eritrea, which is sufficient to cover the purchase of an electric pump of equivalent output.
18, The estimated average benefit values per kwh for each type of consumer are US$ 0.16 per kwh for residential consumers and public institutions and US$0.24 per kwh for commercial/small industrial consumers and irrigation pumps.
Economic Costs
19. The economlc costs cover the investment and operating costs ofthe projects in the four areas. They include the cost of household wiring and the cost ofpurchasing electric irrigation pumps. The local currency portion ofthe investment costs, which covers local labor and civil works and amounts to about 12 percent oftotal investment costs, is shadow priced at 80 percent ofthe market cost. The analysis excludes all taxes and duties but includes the costs ofenvironmental and social protection measures. The estimated average incremental investment cost is approximately US$O.O9 per kwh, which isreasonable for electrification investment. The following are the assumptions for costs that the economic analysis uses in the EIRR calculation. They are all in constant 2004 US dollar prices.
Table 4.9. Economic Costs
- 62 - I Cost Item Value Annual O&M cost 1% of capital investment Grid supply cost (Keren and Dekemhare) US$0.05 per kwh Isolated grid supply cost (Barentu and Adi Keih) US$O.O9 per kwh Distribution losses 8% to 13% (with increasing demand) Cost of electric irrigation pump US$750 Salvage value of diesel pump US$750 [house wiring I US$21 I Base oil price forecast US$30 per barrel I ~ I I I Economic life of investments I 20vears US$ 13.24 million* Total investment cost *This includes connection to the grid, or isolated grid diesel power station; MV and L V systems and consumer connection costs
Sensitivity Analysis / Switching Values of Critical Items:
20. The results ofthe analysis, shown in Table 4.10, indicate that the project outcome is most sensitive to demand levels. A 20 percent decrease in demand each year from 2007 onward takes the EIRR significantly below 10 percent. Therefore, as a precaution, the assumptions used to derive the forecast demand are conservative, as explained above.
Sensitivity Analysis
Table 4.10. Results of Sensitivity Analysis
Sensitivity case EIlZR
IBase case I 12.6% I
Demand -20% (from 2007) 6.7% Demand +20% (from 2007) 17.7%
Investment cost +20% 9.9% Investment cost -20% 16.3%
Tariffs @ current (2003) level 9.7% Tariffs +20% 15.3%
Oil price @ 35 US$/bbl 10.7% Oil price @ 25 US$/bbl 14.1%
Switching Value:
21. The NPV @ 12% switches from positive to negative if benefits are 2.1% lower or if investment costs are 2.1% higher.
C. Fiscal Impact
- 63 - 22. The analysis shows a twofold impact of the Asmara rehabilitation and expansion component on the Government finances. First, the Government will receive an increase in tax revenues resulting from the power sector expansion that the project makes possible. Second, the Government will have an incremental financial gain from the spread between the terms ofits payments on the IDA credit and those ofits re-lending ofthe proceeds from the Credit to EEC.
23. The tax revenues relevant to the analysis are EEC's incremental income taxes and the incremental taxes on the fuel that the company uses to generate power. EEC pays about 40 percent of its income as income tax but in recent years the company has been operating at a loss. As a result ofthe project, EEC is expected to start making profits from FY2006; hence, the Government will earn tax revenue from EEC from that year onwards. However, since EEC has a very low share of equity compared to its debt, the analysis assumes that the Government will not be charging dividends on EEC's income. Instead, it will allow EEC to retain its full net income, after taxes, for investments in system improvements. Revenue from fuel taxes will increase because EEC will need larger amounts offuel to generate more power required as a result of electricity access expansion and economic recovery. The calculation of fuel taxes assumes a $30/bbl price of crude oil and retains the present tax structure in the fuel price. The Government will, however, lose some tax revenue on account of customs duty against the goods that EEC will import for the project. Overall, the net present value ofthe tax income generated by the project, over a 40 year period, comes to about US$ 17 million.
24. Another source of fiscal revenue is the spread between the IDA credit terms to the Government and the re-lending terms from Government to EEC. The present value ofthe cost ofthe IDA credit to the Government is about US$4.1 million, based on the annual service charge of 0.75 percent. The Government will re-lend the same amount to EEC at a 3.5 percent interest rate for 20 years, with a five-year grace period. The present value ofthe debt service income from EEC comes to about US$ 14 million. In sum, the Government will earn, in net present value terms, about US$ 10 million on the spread.
25. The total net present value of the revenue accruing to the Government on account of the IDA credit is about US$26.9 million, which it can use for social programs. The table below shows the calculation of the fiscal impact.
Table 4.1 1. Fiscal Impact of Asmara rehabilitation and expansion component
- 64 - 17.1 0.00 0.00 0.32 1.27 1.63 216 297 297 297 297 0.0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.4 0.05 0.04 0.04 0.04 0.04 0.04 0.03 0.03 0.03 0.03 4.5 4.01 -0.08 -0.14 4.26 -0.23 0.00 0.00 0.00 0.00 0.00 17.0 0.04 4.03 0.22 1.04 1.47 219 3.00 3.00 3.00 3.00
4.3 4.03 4.15 4.12 -0.05 0.00 0.00 0.00 0.00 0.00 0.00 -1.2 0.00 0.00 0.00 0.00 0.00 -0.26 -0.26 -0.22 -0.14 0.00 -26 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -0.70 -1.39 -1.39 3.4 0.00 0.00 0.00 0.00 0.00 1.23 1.12 0.26 0.00 0.00 10.6 0.00 0.00 0.00 0.00 0.00 245 245 245 0.00 0.00 9.9 -0.03 -0.15 -0.12 4.05 0.00 3.40 3.31 1.79 -1.53 -1.39
NetreuecrredtheGrmmttleM- 2i9 0.01 -0.18 0.11 0.99 1.47 5.58 6.31 4.79 1.47 1.61
- 65 - Annex 5: Financial Summary ERITREA: ERITREA POWER DISTRIBUTION AND RURAL ELECTRIFICATION PROJECT Background
1. After independence in 1993 the Eritrea Electric Authority (EEA) took over the operation of the erstwhile Eritrean branch ofthe Ethiopian Light and Power Authority (EELPA) and started its own operation. Until recently, the EEA has been designated as the sole electricity provider in Eritrea. It has been operating as a public agency under the Ministry of Energy and Mines (MEM) with the Minister of Energy and Mines as the Chairman of its Board ofDirectors. Under this framework, for the past years, the Government has exercised tight control over EEA's s investment and financing decisions.
2. EEA has been operating at a loss due in part to a legacy ofinvestment decision based on implementing government policies rather than a focus on cost recovery and the financial sustainability of the utility. However, this situation has begun to change. The Eritrean Electricity Corporation Establishment Proclamation of May 2004 had transformed the EEA into the Eritrean Electricity Corporation (EEC). Furthermore, the new electricity Proclamation, also ofMay 2004, allows other public or private entities to generate, transmit and distribute electricity. The financial analysis and recommendations in this report are based on this move towards a competitive electric power sector and the related need for improvements to EEC's commercial operations.
Electricity Coverage and Rural Access
3. Access to grid electricity in Eritrea is low, especially outside ofAsmara. However, EEC is constrained in expanding access to rural arrears because of lower customer density, smaller electricity demand per customer, and high cost of supply. These factors make rural electrification a financially unfeasible scheme for EEC. Therefore, Government support for expanding rural access is an essential input for increasing the income generation capacity ofvillages away from the central metropolitan area.
EEA's Operational Performance
4. EEC's total electricity sales increased from 193 GWh in FY 2002 to 206 GWh in FY 2003. To supply 206 GWh ofenergy in 2003, EEC had to generate about 267 GWh in FY 2003 due to system losses. These losses have gradually increased over the years and amounted to 23% ofnet generation in FY 2003. Sales in domestic and small industrial category increased by 10% and 14% respectively in FY2003, while sales to big industries increased by only 4%. In contrast, sales to medium industries declined by 11%. Domestic consumers have the largest share in EEC sales - about 38% oftotal. Commercial consumers have the second largest share. This category of consumers has nearly doubled its share in total electricity sales, increasing from only about 16% in FY 2000 to about 30% in FY 2003.
5. EEC's largest generating plant is the Hirgigo thermal plant in Massawa. Its utilization is low currently - with only about 26% of its installed capacity used to meet demand. Its utilization will, however, increase gradually as the system demand grows. The Hirgigo plant consists of four units, each with a generation capacity of 22.4 MW, resulting in 89.6 MW oftotal capacity installed. The individual unit size ofthe plant is very large compared to the system's peak demand ofabout 46 MW. The reserve plant margin required to cover forced and planned outages at Hirgigo is therefore much higher than it would have been had the units size been, say, 12MW. The larger size ofthe units limits the operating regime and efficiency of EEC. Currently, at peak times during the day, EEC is only able to operate two units at Hirgigo, and has to rely on the less efficient plant at Belesa (Asmara) to meet base load demand.
- 66 - EEC’s Financial Performance
6. EEC’s electricity tariff was revised upwards in March 2003, two years after it was previously revised in March 2001. This revision had a positive impact on EEC’s revenues. During this period the tariff increase for various customer categories ranged from 11% to 46% and the average billing rate increased to about NFA 1SOkWh from its previous level ofNFA 1.2kWh.
7. EEC has not yet closed its books of accounts for FY 2003. However, there is some unaudited information available on EEC’s sales, tariff, billed revenue, energy generation, fuel cost, etc. Based on this information, EEC’s overall revenue increased by 33% in FY 2003 compared to the revenue level in FY 2002. Total billing for energy produced in FY 2003 was NFA 308m or NFA 77m higher than in the previous year. Consumers from the commercial category contributed the most to EEC’s revenue (NFA 119m) while domestic consumers were the second largest contributor (NFA 106m). On the cost side, EEC has experienced a steep increase in its fuel price. Based on fuel consumed for all power plants, in terms of cost and volume, EEA’s average cost for Heavy Fuel Oil (HFO) increased from NFA 2.55/ltr in FY 2002 to NFA 3.08 Ltr in FY 2003. Gas oil price also increased from NFA 4.07/ltr in FY 2002 to NFA 5.77/ltr in FY 2003. This increase in fuel price had an adverse impact on EEC’s generation cost.
Table 5.1. EEC Financial Performance Based on Audited Data
portheYearEndedDecember31 I 1998 I 1999 I 2000 I 2001 I 2002 1
Total Power Sold (GWH) 145.37 158.51 171.99 175.93 193.35 System Loss (“A) 18% 23% 14% 22% 22% Increase in Sales Growth (%) 9% 9% 2% 10%
Avg Billing Rate (NFAlkWh) 0.83 0.83 1.15 1.20 1.19 Increase in Billing Rate (“A) -I%40% 4% 0% Avg Billing Rate (USCentskWh) 8.60 8.52 11.21 8.51 8.3 1 ncrease in Billing Rate (“A) I -1% 32% I -24% I -2%
Operating Income (Mill NFA) 19.97 19.36 24.83 56.55 17.82 Net Income (Mill NFA) (133) 6.41 8.52 0.45 4.66
Debt Service Coverage Ratio 22.38 2.72 0.56 4.59 1.39 Self Financing Ratio (YO) 14% 10% -evSF 9% 2%
8. Table 5.1. shows EEC’s financial performance based on audited data for the years 1998 to 2002. The data shows that electricity sales grew by about 9% per annum between 1998 and 2000. The average tariff increased from 0.83 NFAkWh in 1999 to 1.15 NFA/kWh in 2000. This was an increase of about 40% to recover the currency fluctuation losses and the increase in fuel cost. The tariff then increased to NFA 1.2kWh in FY 2001 and was revised later in FY 2003. In FY 1998, EEC made a loss ofNFA 1.33
- 67 - million. In FY 1999 and in FY 2000 the company made profits of about NFA 6.41 million and NFA 8.52 millionrespectively. EEC's profitability declined in later years and in FY 2002 its net income was NFA 4.66 million. However, these profits are overestimated as the utility isnot charging the foreign currency exchange rate fluctuation loss ofits closed project (Beleza power plant) as a cost on its income statement. Instead, it is making an adjustment directly in the balance sheet. This accounting treatment is inconsistent with intemational standards of accounting for foreign exchange losses. The result is an overstatement of the company's profits, which results in higher taxation.
9 A major component in EEC's costs is imported fuel. The increasing fuel costs have adversely affected the company's profitability. Also, 80% ofthe company's profit is transferred as dividend to the Government and only 20% remains in a reserve fund. This provides less flexibility for EEC in the effective management of its finances. However, from FY2005 onwards, the Govemment has agreed to let EEC retain a larger portion ofthe dividend in its reserve fund for future investments.
Capital Structure
10. EEC has a high debt ratio. In FY 2000, its assets were financed by about 90 percent debt, which increased to about 93% in FY 2002. While this could be acceptable given that EEC is a new public entity, the company should be investing any profit it makes in its own development rather than distributing it as dividends, before it attains a stable capital structure.
Tariff Structure
11. In order to offset increasing fuel prices, which constitute more than 50 percent ofEEA's operating costs, the Govemment raised the tariff by about 30% in March 2003. As a result, the average tariff is now equivalent to about US cents 9 per kwh. Also, EEC's collections efficiency is currently satisfactory, with equivalent of less than two months of sales revenue in arrears.
Analysis of FY2002 Audited Financial Statements
12. The latest audited financial statements for EEC are for FY 2002. The following sections discuss the key aspects ofthe company's financial performance.
13. Revenue. The company's total revenue recorded in FY 2002 was about NFA 268m, about 10% higher than in the previous year. EEC's records show that in FY 2002 total billed energy including service charge was about NFA 235m. Thus, about NFA 33m (12%) ofrevenue came from other sources of income. The audit report, however, provides no additional explanation or breakdown of this other income. During negotiations EEC agreed to provide proper disclosure ofits income in its future financial statements.
14. Operating Costs. EEC's operating costs in FY 2002 (NFA 240m) were much higher than in FY 2001 (NFAl87m). The main reason for this increase was that three of the Hirgigo Power Plant's units became operational in that fiscal year. On average, EEC charges about 7% ofits total fixed assets value as depreciation and in FY 2002 depreciation cost was about NFA 29m. However, while the three units became operational in FY 2002, they were recorded instead under construction in progress. This treatment of the assets underestimates EEC's depreciation cost because the company received the revenue from the energy sales generated by the three completed units without acknowledging their depreciation cost. Thus the operating profit recorded by EEC for FY 2002 is an overestimation. During negotiations, EEC agreed to use proper reporting standards in its future financial statements.
- 68 - 15. Financial Costs. EEC does not service its debts entirely. The notes to the audit report on its loans and their movements are not complete and it is difficult to get an idea on how much interest EEC has accrued and how much it has paid. Information on losses that EEC has incurred due to foreign currency fluctuations is also not clearly spelled out in its reports. Based on the audited report, EEC incurred a foreign currency loss ofNFA 13m in FY 2002. After adjusting for this currency loss, some interest payments, and extra ordinary items, EEC made a net profit ofNFA 7.32m. EEC paid income taxes of about NFA 2.67m (or around 36% ofits profits) and ended its income statement with a net balance ofNFA 4.66m. However, EEC was allowed to retain only 20% (NFA 0.93m) of this profit in its general reserve fund and the rest, about 80% was recorded as dividend payable to govemment.
Financial Restructuring
16. The idle capacity ofthe Hirgigo Power Plant is the main reason for the bleak projection of EEC’s financial performance during 2003-2005. The unused capacity results in depreciation costs from its asset base, and interest and principal repayment costs from the loans Government has taken to finance it. When these assets are not in use EEC has no revenue from them to offset the costs. To improve EEC’s future financial situation and to adequately reflect the company’s assets and liabilities on the basis of their utilization, the Government has recently restructured EEC’s financial accounts.
17. As a result ofthe restructuring, since EEC is utilizing only 30% ofthe Hirgigo power plant, the Government will take on 70% ofthe Hirgigo Power Plant cost from EEC’s balance sheet for the period that the company is not utilizing that portion ofthe plant. This will relieve EEC from counting the depreciation cost, interest expense, and principal payments associated with these assets in its balance sheet until they are in use. Based on the demand growth assumptions for the project, EEC will utilize about 40% of the Hirgigo Power Plant capacity in FY 2008 and Government would then retum 10% of Hirgigo assets and liabilities to EEC’s balance sheet. From this year onwards, EEC will be able to generate enough resources from its operation to be in a position to annually take on an additional 10% ofHirgigo costs in its balance sheet.
18. Table 5.2 shows EEC’s financial performance indicators, taking into account the aforementioned financial restructuring. The Government considers this restructuring reasonable, as the Govemment made investment decision for the four units ofHirgigo power plant based on high demand growth projections following good macro-economic performance in 1992-1997. In the aftermath ofthe conflict situation that took place from 1998 until 2000 actual demand grew at a much lower pace.
19. The proposed restructuring ofEEC’s assets and liabilities, coupled with tariff increases and efficiency improvements, will significantly improve EEC’s financial performance. With this restructuring, EEC is likely to start making operating profits from FY 2004 onwards. From FY2006, it would start making net profits. The company’s equity would become positive from FY 2008 and its debt to equity ratio would improve slowly from FY 2008 onwards. EEC would also be able to maintain a sound debt service coverage ratio (DSCR) of 1.3 or higher from FY 2006 onwards. Table 5.2. Projected Financial Performance of EEC After Financial Restructuring For the Period of FY 2003 to FY 2010
For the Year Ended December 311 2003 I 2004 I 2005 I 2006 I 2007 I 2008 I 2009 I 2010 I
Total Power Sold (GWH) 205.76 214.76 224.23 239.60 256.87 276.54 297.76 319.66 System Loss (%) 23% 24% 24% 22% 19% 17% 17% 17% Increase in Sales Growth (“h) 6% 4% 4% 7% 7% 8% 8% 7%
Return on Equity (“h) -52% -ev Equity-ev Equity-ev Equity-ev Equity 325% 214% 161% Return on Assets (“h) -3.9% -86.3% -3.4% 1.1% 3.8% 3.3% 3.5% 4.1% Operating Ratio 1.07 0.99 0.89 0.82 0.76 0.72 0.69 0.67
Accounts Receivable (days) 63.46 61.74 59.39 57.66 56.35 55.25 54.33 53.58 Current Ratio 0.67 0.76 0.77 0.78 0.92 1.00 0.97 0.97 Debt:Debt & Equity Ratio (%) 0.98 1.92 1.40 1.20 1.05 0.95 0.93 0.90
Debt Service Coverage Ratio 0.32 0.67 1.10 1.36 1.86 1.74 1.83 1.84 Self Financing Ratio (“h) -evSF 98% -evSF 6% 21% 21% 46% 59%
- 69 - Annex 6(A): Procurement Arrangements ERITREA: ERITREA POWER DISTRIBUTION AND RURAL ELECTRIFICATION PROJECT
Procurement
A. General
1. The State ofEritrea was formally established in the year 1993. Its Constitution was ratified by the Constituent Assembly in May 1997, but has not been implemented to date. The Country Procurement Assessment Report (CPAR) carried out by the Bank and sent to the Government in June 2002 points out that no legislation concerning procurement exists. Ministry ofFinance Directives and Ministry of Infrastructure's "Procedures for Carrying out Building Construction Programs" regulate public procurement for goods and services and the procurement ofworks respectively. Both directives are provisional and not fully comprehensive. The drafting of a Procurement Code and national standard documents is one ofthe main priorities recommended by the CPAR.
2. Procurement for the proposed project. 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 general description of various items under different expenditure category are described below and summarized in Table A. For each contract to be financed by the CreditIGrant, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. Bank standard bid documents (SBD) for procurement of goods and works and standard Request of Proposal (RFP) for consulting services will be used for major ICB / LIB contracts and large assignments. Simplified documentation for NCB and shopping may be used for small contracts.
3. Packaging of contracts. The project lends itself to large "packaging" given the large quantities ofelectrical and distribution items to be procured for the project's main components. The design ofthe project will require the main contractors to provide and install most of the major electrical equipment under supply and installation contracts. In general, the largest procurement action under the project will be the selection of major electrical contractors to carry out the supply, delivery, and installation of electrical equipment for the Asmara and the rural electrification components. Construction and installation works will be packaged, whenever feasible, into contracts ofover US$500,000. In packing them in this way into larger contracts will make them more attractive to international and even to larger national contractors. Goods such as miscellaneous mechanical and electrical equipment, office equipment, computers and vehicles will be bulked to the extent possible into larger packages of at least US$250,000 to make them more attractive to bidders. These contracts may be too small to be ofinterest to foreign bidders, but would probably attract bids from larger national contractors (Category 1 under the Ministry ofPublic Works' register).
Procurement of Works
4. International Competitive Bidding (ICB) will be used for large tenders such as the "supply and installation" contracts for the Asmara distribution rehabilitation and expansion and the rural electrification components, and all other contracts above the monetary threshold ofUS$500,000. Contracts will be advertised at the start ofthe project in Development Business through a General Procurement Notice (GPN) to inform contractors ofwork opportunities. National Competitive Bidding
- 70 - WCB) may be used for the procurement of small rehabilitation and construction works, as required. Smaller civil works contracts estimated to cost less than US$75,000 may be procured (as an alternative to NCB) under lump sum, fixed price contracts awarded on the basis ofquotations obtained from at least three qualified local contractors in response to a written invitation stating the basic design, specifications and proposed completion time. "Force account" is unlikely to be used in the project, though it is not excluded, in particular for works in areas with unacceptable risks for the contractors such as minefields and other military hazards.
Procurement of Goods
5. Procurement of goods include items to be imported such as electrical and mechanical equipment, and spare parts. Part ofthis equipment will be supplied and installed by the major contractors under the Asmara distribution rehabilitation and the rural electrification contracts. Other imported items needed for the project will be packaged into contracts of US$250,000 and more and advertised though Development Business. International Competitive Bidding (ICB) procurement method will be used to procure individual contracts for goods and equipment exceeding US$250,000 and other contracts for goods not locally manufactured. Limited International Bidding (LIB) may be used, subject to prior approval by the Bank, for individual contracts below US$250,000 for specialized items produced by only a small number offoreign suppliers. Contracts for locally available goods that are estimated to cost less than US$250,000 will be procured through National Competitive Bidding (NCB) procedures. Goods estimated to cost less than US$50,000 will be procured through Shopping by comparing at least three price quotations from qualified suppliers. In addition, the International Agency Procurement Services Office (IAPSO) ofthe United Nations may be used for the purchase ofa limited number ofvehicles and office equipment needed at the start ofthe Program, as an alternative to other procurement methods, and for purchase ofgoods whose delivery cannot be timed to coincide with larger packages. Direct contracting may be used in case of emergency situations such as drought or epidemic and other situations consistent with section 3.7 ofthe Procurement Guidelines. Direct contracting is, however, always subject to the Bank's prior review.
ConsultinP Services, including Traininv and Service Deliverv Contracts
6. Procurement ofconsulting services will follow IDA Guidelines on the Selection and Employment ofConsultants, April 2004 edition. Consulting contracts for which foreign expertise will be needed will be advertised in Development Business, and, whenever needed, on specialized magazines to attract expression of interest and allow for the preparation of shortlists. The preferred selection method for the selection ofconsulting firms will be the Quality and Cost-Based Selection (QCBS), which will be used for all services contracts with a cost estimate higher than US$lOO,OOO. The QCBS method is described in section 11 ofthe Bank' Consultants Guidelines and allows for competition both at technical and price level.
7. Selection methods other than QCBS may be used for contracts below the monetary threshold of US$lOO,OOO. Of these, the "Least cost selection" (LCS) will preferably be used for auditing assignments since they have well-defined TOR and clearly established qualifications and professional standards. The LCS method may also be used for simple engineering design following the procedures stated in section 3.6 of the Consultants Guidelines. Under the LCS method, the contract may be awarded to the technically qualified firm, which has offered the most competitive price. The Fixed Budget (FBS) selection procedure may also be used for low value, repetitive contracts such as those for training and capacity building when their cost is well-known. Under the fixed budget selection procedure, the Consultant who has submitted the highest ranked technical proposal, will be selected and invited to negotiate the contract. The majority ofthe smaller value contracts estimated to cost less than US$lOO,OOO will, however, be
- 71 - awarded through the Qualijkations (CQ) selection method described in section 3.7 ofthe Consultants Guidelines. The method is based on a comparison of the qualifications of the shortlisted firms. The firm evaluated as the most qualified will be asked to submit a combined technical and financial proposal and then invited to negotiate the contract. The CQ method has proved useful in Eritrea for contracts where national expertise is adequate to the scope ofthe assignments such as for supervision ofcivil works and access roads, drilling operations, small auditing and routine design assignments. Sole source may be considered for small value contracts of US$25,000, subject to the Bank's prior approval.
8. Commercial practices, subject to prior review by IDA, may be used for supply, installation, and service delivery contracts awarded through the Rural Electrification Fund.
9. Finally, shortlists for contracts ofan estimated value of less than US$lOO,OOO may include only national consultants in accordance with the provisions ofparagraph 2.7 ofthe Consultants Guidelines.
Individual ConsultinP Contracts
10. Recruitment of individual consultants will follow procedures consistent with Part V, sections 5.1 to 5.4 ofthe Consultants Guidelines and will be based on a comparison ofthe qualifications (education, experience, availability etc.) of the consultants. Individual consultants may be recruited on a sole source basis in exceptional cases with the prior approval ofthe Bank such as (a) tasks which are a continuation ofprevious work that the consultant has carried out and for which the consultant was selected competitively; (b) emergency situations; and (c) when the consultant is considered the only expert qualified for the assignment - refer to Paragraph 3.10 ofthe Consultants Guidelines.
ODerational Costs
11. Other sundry items, office rental and utilities, and other project implementation related expenses, which would be financed by the project would be procured using the implementing agency's administrative procedures which were reviewed and found acceptable to the Bank. The Bank will finance a total ofUS$70,000 over the life ofthe project. Procurement methods (Table A)
Table A. Project Costs by Procurement Arrangements (Amounts in US$ million) r (Procurement Method 1)
- 73 - Prior review thresholds (Table B) Prior Review:
12. The prior review thresholds under the Program are stated in Table B below and may be updated after the first year of the Program, based on Program performance.
Table B: Thresholds for Procurement Methods and Prior Review'
Contract Value Contracts Subject to Threshold Procurement Prior Review Expenditure Category (US$ thousands) Method (US$ millions) 1. Works >500 ICB All contracts and "Supply and Installation" 400 NCB Post review
<75 "Small works" and Post review Community Participation 2. Goods >250 ICB All contracts for ICB and (<250) LIB LIB
<250 NCB Post review
40 Shopping Post review 3. Services >loo QCBS All (a) Firms 400 CQ TOR only <25 Sole Source All
IC All (b) Individuals >50 <50 IC 1 TORonly <25 Sole Source All 4. Training International, national, Various TORS twinning 6. Goods, works, All Commercial practices, etc. All service delivery contracts under RE Fund ____ ~ ~~ ~~ ~ Total value of contracts subject to prior review: $45 million, about 90% oftotal IDA. Overall Procurement Risk Assessment: Average Frequency of procurement supervision missions proposed: One every 12 months (includes special procurement supervision for post-review/audits)
B. Assessment of the implementing agencies' capacity to implement procurement
13. Procurement activities will be carried out by the Eritrean Electric Corporation (EEC) and the Ministry of Energy and Mines (only for part of the sector reform and institutional capacity building component). EEC's Project Management Unit is staffed by a Project Manager assisted by other EEC staff and two international consulting companies with procurement experience.
- 74 - 14. An assessment ofthe capacity of the ImplementingAgencies to implement procurement actions for the project has been carried out by Francesco Sarno, consultant, former Bank Lead Procurement Specialist, during pre-appraisal in October 2003 and in February 2004. The assessment reviewed the organizational structure for implementing the project and the interaction between the project's staff responsible for EEC's Procurement Officer and the Ministry's relevant central unit for administration and finance. The assessment further concluded that the presence ofthe experienced consulting firms and EEC's and the Ministry's previous procurement experience they have gained in implementing projects financed by other donors and the contracts financed under the Project Preparation Advance, facilitate the execution ofthe project activities. The design and supervision contracts with the international consultants include transmission of skills through on-the-job training of EEC staff.
15. The issues/ risks concerning the procurement component for implementation ofthe project have been identified and include:
(a) weak capacity for procurement planning; (b) lack of experienced procurement staff; and (c) lack ofexperience in project coordination.
The corrective measures, which have been agreed are:
(a) recruitment ofone international consulting firm for the design and management ofthe Asmara rehabilitation and expansion component (completed in January 2004); (b) recruitment of another international consulting firm for the design and management ofthe rural electrification component (completed in January 2004); and (c) procurement training for EEC and Ministry ofEnergy and Mines staff.
The overall project risk for procurement is AVERAGE.
C. Procurement Plan
16. The Borrower, at appraisal, developed a Procurement Plan for project implementation, which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on May 22,2004, and is available at EEC's project office in Asmara. It will also be available in the project's database and in the Bank's external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.
D. Frequency of Procurement Supervision
17. In addition to the prior review supervision to be carried out from the Bank's offices, the capacity assessment ofthe Implementing Agency has recommended one supervision mission every twelve months to visit the field to carry out post review ofprocurement actions.
- 75 - Attachment 1
Details of the Procurement Arrangement involving International Competition.
1. Goods and works and non consulting services (a) List of contract packages which will be procured following ICB and Direct contracting
Rei. ('ontract Estimated Procurement P-Q Doatrstie Review Expcrttrl Expntrd tia (Oewriptiou) cost Meibod Pr&"-* by Bank Bid-Opesing Completion (yeduo) (Prior / Post) Datr Asmara Power ICB YES NO PRIOR 11/26/2004 Mid-2008 Distribution Rehabilitation Rural Electrification ICB NO YES PRIOR 09/30/2004 Mid-2007 1) Rural Electrification ICB NO YES PRIOR 09/30/2004 Mid-2007 (kea 2) M.I.S. for EEC 1 ICB NO NO PRIOR 08/3 1/2005 Mid-2006
2. Consulting Services
(b) Consultancy services estimated to cost US$l00,000 per contract (firms), US$50,000 (individual) and all Single Source selection of consultants will be subject to prior review by the Bank. (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$lOO,OOO equivalent per contract, may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 ofthe Consultant Guidelines. I\ Thresholds generally differ by country and project. Consult "Assessment of Agency's Capacity to Implement Procurement" and contact the Regional Procurement Adviser for guidance.
- 76 - Annex 6(B): Financial Management and Disbursement Arrangements ERITREA: ERITREA POWER DISTRIBUTION AND RURAL ELECTRIFICATION PROJECT
Financial Management 1. Summary of the Financial Management Assessment
1. This report is the result ofa review offinancial management arrangements carried out on a number of occasions beginning in June/July 2001 and culminating in the appraisal mission carried out in April 2004. Other review missions were carried out in October 2003 and February 2004. The scope ofthe work has been set out in the Assessment of Financial Management Arrangements in World Bank-Financed Projects - Guidelines to Staff issued by the Financial Management Sector Board on June 30,2001. Under the Bank’s OP/BP 10.02 with respect to projects financed by the Bank, the borrower and the project implementing agencies are required to maintain financial management systems - including accounting, financial reporting, and auditing systems - adequate to ensure that they can provide the Bank with accurate and timely information regarding project resources and expenditures. The guidelines issued by the Bank’s Operations Policy and Country Services regarding Financial Monitoring Reports (FMfi) require adequate financial management arrangements, including the ability to produce timely FMRs, to be in place by credit effectiveness.
2. An initial financial management review was carried out in June/July 2001 and the conclusion then was that both inherent and control risks existed that may have implications for efficiency, effectiveness, and accountability in the use of project resources. Specific weaknesses were identified and summarized in a draft action plan to complete a series of activities to address the noted weaknesses. Once this time-bound action plan was carried out successfully, the two major implementing agencies associated with the project would have in place financial management systems that would be able to properly account for project resources, as well as produce the required level offinancial management reports in a timely fashion.
3. The October 2003 mission had confirmed that most ofthe issues that were identified in the 2001 review had not been addressed in both the two institutions that will be used to implement the project, the Eritrea Electric Authority (EEA) and the Department ofEnergy ofthe Ministry ofEnergy and Mines (MEM). As the project progressed to appraisal, and in order to help the government focus on immediate critical issues, a distinction was made between those financial management arrangements required to meet the Bank’s minimum requirements and which needed to be attended to immediately, and those that will specifically be addressed under the project to improve the accounting practices especially ofthe EEA.
4. The general observations are that both the EEA and MEM have accounting systems that allow for proper recording of financial transactions, with adequate controls for preparation and approval of transactions. The accounting departments ofboth institutions are headed by qualified accountants with several years of experience, and both institutions have centralized accounting functions. The management ofthe EEA had adequately addressed a number of issues on financial management which were identified and agreed upon to meet the Bank’s minimum requirements. EEA has made progress in the area of financial management and a number of issues which had been identified and agreed upon to meet the Bank‘s minimum requirements have been completed. The audit reports for the years ended December 3 1, 200 1 and December 3 1,2002 have been finalized and copies submitted to the Bank. In the meantime, progress on the accumulated backlog continues with the draft financial statements for the year ended December 3 1,2003 expected to be ready for submission to the external auditors May 2004. A draft Financial Management Manual has been completed and submitted to the Bank for review. The
- 77 - recruitment ofadditional staff, however, has not progressed at the same pace and EEA continues to face difficulties filling key identified positions. A number ofthe remaining critical actions are noted below together with the expected completion dates.
Risk Assessment
5. The risk ratings below are showing low to medium mainly because ofthe remaining critical aspects yet to be completed in the current financial management arrangements. Otherwise, capacity and experience at central level is already in place to address the identified weaknesses and provide the necessary expertise during project implementation. Mitigating factors to address identified risks are noted below. In addition, an action plan has also been agreed with the client to ensure that acceptable financial management arrangements are put in place in readiness for project implementation.
I Risk bsk Rating I Risk Mitigation Measures
Entity Specific Medium Yes Project Specific Low Yes
Control Risk ImplementingEntity Medium Yes Funds Flow Low Yes Staffing Low Yes Accounting Policies and Low Yes Procedures Internal Audit Medium Yes External Audit I Medium I Yes Reporting and Monitoring 1 Medium I Yes I Information Systems I Medium I Yes I
6. Country-Specific. A Country Financial Accountability Assessment (CFAA) has not yet been carried out; one is scheduled for fiscal year FY05. A number of other pieces ofdiagnostic work have been carried out in recent years and include a Country Economic Memorandum (CEM) and a Country Procurement Assessment Review (CPAR). Both ofthese have dwelt on the limited capacity in the country both in the public as well as private sector. This is especially the case in the area of accounting and financial management where there is no established accountancy profession and only a limited number ofprofessionally qualified accountants. The recent conflict with Ethiopia has had a further negative impact on the economic environment as well as the implementation capacity as several ofthe well-qualified staff that had been mobilized to join the military service have not yet returned to their previous post. A Bank-financed project under the Demobilization and Reintegration Program (DRP) is providing financial assistance to discharged soldiers to help them reintegrate into civilian life.
7. Entity-Specific. EEA is a government utility which operates fairly autonomously under the guidance and supervision of a Board ofDirectors. However, this autonomy is not supported by any legal proclamation, making the authority no more than a de facto department ofthe Ministry ofEnergy and Mines. This arrangement has implications for the ability ofthe EEA to operate as a viable commercial enterprise, and to achieve the desired financial self-sufficiency. It also has staffing problems to prepare the necessary documents for recording the company’s transactions onto the computerized general ledger. A number ofmajor changes have been agreed upon with the government. This includes the registration of EEA as a separate legal entity. There is also need to change the business practices of EEA and for which
- 78 - funds will be available under the project. In the meantime and through the completion ofthe accumulated backlog ofaccounting transactions, EEA has demonstrated that with concerted effort, it can improve upon its current performance and ensure timely preparation and submission ofregular reporting requirements for management purposes.
8. Project Speczjic. This is mainly an infrastructure project involving few transactions but of relatively large amounts. The Asmara Distribution Rehabilitation and Expansion component will be one single turnkey contract; the Rural Electrification component will also be made up oftwo turnkey contracts. Both these make up a significant amount ofthe proposed credit and grant which would be subject to prior review by the Bank. EEA staff have been involved in handling transactions ofthis nature including the recently completed Hirgigo plant, as well as the ongoing EU-financed Massawa Rehabilitation project; expertise is therefore already available within the institution. In addition, additional consultants will be engaged as technical advisors to assist in monitoring project implementation.
Implementing Entity
9. The accounting departments ofboth institutions are headed by qualified accountants with several years ofexperience, and both institutions have centralized accounting functions. Both institutions, however, lack experience in handling Bank resources and training would be required in this area. Nonetheless, expertise is being built up in the country through a growing portfolio ofBank-financed projects.
Funds Flow
10. The proposed project will be a blend ofcredit and grant financing. The proceeds ofthe credit and those of the grant would not be mixed and there will therefore be a need to maintain separate accounting records as well as bank accounts. Three special accounts will be required under the project. Two accounts will be maintained by EEA, one for the credit and the other for the grant, while one account will be maintained by MEM for the grant. All the three accounts will be required to be opened in a bank acceptable to IDA. Detailed funds flow and reporting arrangement will be developed for the Rural Electrification Fund during the initial project implementation period. The proposed procurement arrangements are that, as far as possible, most ofthe required expenditure would be made at the central level. This includes international procurement. The flow offunds, therefore, would be mainly to service providers.
Staffing
11. EEA continues to face a problem in the recruitment ofidentified key positions, including those in the Accounting Department, mainly due to the uncompetitive pay structure. A recent advert placed in the local press was not successful in attracting suitable candidates and a new advert was running in the press at the time of the appraisal mission in April 2004. The exercise ofclearing the backlog of financial accounting records alluded to above highlighted the fact that the immediate need for additional accounting staff was no longer there. Rather, what was important was for EEA to continue operating at the level demonstrated in the last six months, recording all the transactions as they are initiated in EEA’s books of accounts. There is also need to streamline the accounting processes, including reviewing various accounting documents used for input to the computerized general ledger with a view to reducing human interventions and in turn human errors. In the meantime, the Finance and Administration Manager will be the designated accountant for the project.
Accounting Policies and Procedures
12. The accounting system developed in-house and used by EEA is capable ofproducing reports which could form the basis ofquarterly Financial Monitoring Reports (FMRs) required for monitoring project implementation. This is only achievable if up-to-date information is available and hence the need to bring update the accounting transactions ofEEA as noted above. The EEA has now prepared a draft Financial Management Manual that describes the accounting system, internal control procedures, basis ofaccounting, standards to be followed, and policies and procedures that guide activities ofthe Authority and ensure staff accountability. The manual has been submitted to the bank for review and management will be provided with comments in due course regarding any issues which would not have been adequately addressed in the current version. The manual also includes details relating to the chart of accounts.
Reporting and Monitoring
13. The Finance and Administration Manager would determine the project’s Chart ofAccounts as well as the format and content of quarterly reports and annual financial statements. Subject to a decision being made, these reports would include financial statements (e.g. sources and application of funds; expenditure classified by project components, disbursement categories, expenditure types, and comparison’with budgets). The reports would closely follow sample formats that are given in the World Bank’s “Financial Monitoring Reportsfor World Bank-Financed Projects: Guidelinesfor Borrowers”, copies of which have already been made available to EEA and Department ofEnergy officials.
Information Systems
14. EEA’s information system comprises of separate and non-integrated modules for billing and inventory records, running on an IBM AS 400 computer; and payroll and the General Ledger, running on stand-alone PCs. The software was developed in-house, and appears adequate for monitoring project resources. One ofthe components ofthe project aims at improving accounting practices, including the updating ofthe Authority’s management information system; in this way, the long term requirements of the Authority in this area will be addressed. The Department ofEnergy maintains a manual system for accounting for project resources. This appears to be adequate given the small portion ofthe project that ‘will be handled by the department.
Impact of Procurement Arrangements
15. Indications are that most ofthe procurement requirements will be made at the head office. This in turn would simplify the flow of funds and minimize the risk ofmisuse ofproject resources.
Conclusion
16. The conclusion is that the accounting and financial management arrangements for EEA do not currently meet the Bank’s minimum financial management requirements. Detailed below are the next steps that were discussed and agreed with EEA during appraisal. Once this time bound action plan is
- 79 - carried out satisfactory, EEA will have developed an accounting system that will be able to produce the required level of financial monitoring reports in a timely fashion.
Next Steps
17. Detailed below are critical issues that will need to be addressed between now and the dates indicated. Ideally, the target should be that, as far as is possible, most ofthese critical activities should be completed well before the due dates:
Action Responsibility Completion date
1 Recruitment of staff in critical positions of the Finance and EEA Appraisal Administration Division of EEA. This should include an accountant designated to handle the accounting, financial management and reporting requirements ofthe project.
2 Clear the accumulated back-log of financial transactions for EEA July 2004 2004. This would ensure that transactions are up to date and current
3 Audit of financial statements for the year ending 3 1 December EEA Effectiveness 2003.
inalize Chart of Accounts and agree format and content of egotiation ‘Fonthly/quarterly/annual financial reporting PmEM r 5 Preparation ofFinancial Management Manual describing EEAMEM Effectiveness accounting systems and procedures, internal controls and funds flow processes: . Final draft incorporating IDA comments
2. Audit Arrangements
Internal Audit
18. EEA has an internal audit unit that reports to the General Manager. This is however understaffed and not able to cope with internal audit functions of the Authority as stipulated in the organizational manual. Due to its current constraints the internal audit unit has limited functions, mainly focusing on routine pre-auditing ofpayment vouchers and daily cash collections. With enhanced capacity building measures being supported by the project, the internal audit unit is expected to cope with the added requirements ofthe project.
External Audit
19. The EEA operates as an autonomous entity and prepares a full set offinancial statements using accrual accounting. The Authority is audited by an auditing firm established by the government to audit
- 80 - government owned enterprises. There is currently a backlog of audited financial statements mainly due to the inability ofEEA to update its accounting records; this may impact on the timely submission of audit reports for the projects, an action plan has been agreed to bring the Authority’s accounting records up to date, and thereafter have the financial statements audited.
20. The audit work would be modeled on the new “Guidelines - Annual Financial Reporting And Auditing For World Bank-Financed Activities” issued by the Bank on June 30,2003. This will take advantage ofthe use ofcontinuing entity financial statements in respect ofEEA since there is a history of preparing these on regular basis. In addition, the performance and sustainability ofEEA is critical as one ofthe objectives ofthe project and its full set of financial statements would be of relevance and interest to the Bank. The MEM would produce project financial statements. The following audit reports would be required to be submitted to the Bank:
Audit Report I DueDate Entitv Financial Statements for EEC I Six months after fiscal vear end Project Financial Statements for MEM I Six months after fiscal year end Management Letters for both EEC and MEM I Six months after fiscal vear end
3. Disbursement Arrangements
2 1. Traditional disbursement procedures will be followed throughout the implementation period ofthe program. Given the expected large contract amount(s) on the Asmara distribution rehabilitation and the rural electrification components requiring international competitive bidding, there may be effective use of either direct payments or special commitments through letters ofcredit.
- 81 - Allocation of creditlgrant proceeds (Table C)
lExpenditurecategory Amount of the Credit Amount of the '30 of Expendituresto be Allocated in US$ M IGrant Allocated inI Financed USSM Works 0.02 100% of foreign expenditures and 85% of local expenditures
Supply and Installation 100% of foreign expenditures and 85% of local exoenditures Component 1 25.18 Component 2 10.00 Goods 100% of foreign expenditures and 85% of local expenditures Component 4.2 1.50 Components 4.1,4.3 and 5 0.04
Consulting Services and Audits 1.95 100% foreign expenditures and 85 % of local expenditures Component 1 Component 2 0.63 Component 4.1 0.90 Component 4.2 0.55 Component 4.3 0.13 Component 5 0.08
Training 100% Component 4.2 0.40 Components 4.1,4.3 and 4.5 0.30
Sub-grants under Component 5 1.41 100% ofthe amounts disbursed ~
Operating Costs 0.07 85%
Refimding of Project PreparationAdvance 1.00 Unallocated 3.84 2.04
Total 29.0 21.0
Use of statements of expenditures (SOEs): 22. All applications to withdraw proceeds from the credit and grant account will be fully documented except for expenditures against contracts for: (a) goods under contracts below US$250,000 equivalent each; (b) works, including supply and installation under contracts below US$500,000 equivalent each; and (c) consulting services under contracts for firms and individuals US$lOO,OOO and US$50,000 equivalent each respectively. Documentation supporting expenditures claimed against SOEs will be
- 82 - retained at EEC and MEM and will be available for review as requested by IDA supervision missions and project auditors.
Special account: 23. To facilitate disbursements ofeligible expenditures for goods, works and services, the Borrower will open three separate special accounts in a commercial bank on terms and conditions satisfactory to the Association. The special accounts will be managed by EEC and MEM and will cover IDA's share of eligible expenditures. The authorized allocations ofspecial accounts A, B and C are US$3.0, US$l.O and US$1.O million respectively, 50% of the authorized allocations may be requested upon effectiveness or as needed. To the extent possible, IDA's share ofeligible expenditures should be paid through the special accounts. Replenishment applications should be submitted regularly, preferably monthly, after monthly bank statements are received and reconciled, with appropriate supporting documents for local and foreign expenditures as required.
- 83 - Annex 7: Project Processing Schedule ERITREA: ERITREA POWER DISTRIBUTION AND RURAL ELECTRIFICATION PROJECT
Project Schedule I Planned I Actual Time taken to prepare the project (months) 1 First Bank mission (identification) Appraisal mission departure 03/29/2004 03/26/2004 Negotiations 05/03/2004 0512 112004 Planned Date of Effectiveness 11/30/2004
Prepared by: Eritrean Electric Corporation and Ministry ofEnergy and Mines.
Preparation assistance: PB Consultants Ltd. and Africon Ltd.
Bank staff who worked on the projecl
Sr. Energy Economist Power Engineer, Consultant Financial Analyst Project Analyst Program Assistant Amadou Konare Environmental Consultant Roxanne Hakim Anthropologist Chrisantha Ratnayake Sr. Power Engineer Procurement Analyst Francesco Sarno Sr. Procurement Specialist Brighton Musungwa Sr. Financial Management Specialist Alfred Gulstone Lead Power Engineer Ludmilla Butenko Sr. Financial Analyst Sr. Counsel Finance Officer Peer Reviewers: Sr. Private Sector Development Specialist Lead Energy Specialist
- 84 - Annex 8: Documents in the Project File* ERITREA: ERITREA POWER DISTRIBUTION AND RURAL ELECTRIFICATION PROJECT
A. Project Implementation Plan Procurement Plan, May 2004.
B. Bank Staff Assessments
9 Procurement Capacity Assessment, November 2003. 9 Review ofFinancial Management Arrangements, October 2003 and March 2004. 9 Financial analysis model for EEC (an electronic file). 9 Economic analysis model (an electronic file).
C. Other
9 Distribution and Voltage Conversion Study ofAsmara, IVO Power EngineeringLtd. and Electrowatt Engineering Ltd. April 14,1998 9 Power Distribution and Rural Electrification Project, Project Document, Eritrea Electric Authority, EEA, February 2003. 9 Environmental and Social Assessment, Government ofEritrea, Ministry ofEnergy and Mines, January 2004. 9 Resettlement Policy Framework, Government ofEritrea, Ministry ofEnergy and Mines, January 2004. 9 Condition Assessment ofthe Asmara distribution system, PB Power, March 2004. 9 Design Report for rural electrification around the towns ofKeren, Barentu, Dekemhare and Adi Keih, AFRICON LTD., May 5,2004. 9 Design Report for the Asmara distribution rehabilitation and expansion component, PB Power, May 30,2004. 9 TORs for the Technical and Support Committees. 9 TORs for the PMU and the PC. 9 Pilot Investment Climate Assessment - Obstacles to the Expansion ofEritrea's Manufacturing Sector, World Bank/IFC (December, 2002). 9 Current Energy Utilization and Future Options in Rural Areas - Country: Eritrea, Dr. Semere Habtetsion, Ministry ofEnergy and Mines and Dr. Zemenfes Tsighe, Department ofGeography, University of Asmara - African Energy Policy Research Network (AFREPREN), October 2002. 9 Energy Dimensions ofRural Enterprises in Eritrea: The Case ofAla Small-scale Irrigation Farmers, Dr. Semere Habtetsion, Ministry ofEnergy and Mines and Dr. Zemenfes Tsighe, Department ofGeography, University ofAsmara, October 2000. 9 The Benefits ofRural Electrification in India: Implications for Education, Household Lighting, and Irrigation by Douglas F. Barnes, Kevin B. Fitzgerald, and Henry M. Peskin (July, 2002).
- 85 - Annex 9: Statement of Loans and Credits ERITREA: ERITREA POWER DISTRIBUTION AND RURAL ELECTRIFICATION PROJECT June 4-2004 Difference between expected and actual Original Amount in US$ Millions disbursements' Project ID FY Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd PO70272 2003 Education Sector Investment Project 0.00 45.00 0.00 43.83 0.57 0.00 PO73604 2002 Emerg. Demb. & Reint. 0.00 60.00 0.00 75.23 29.29 0.00 PO58724 2002 Cultural Assets Rehabilitation 0.00 5.00 0.00 4.68 2.34 0.00 PO68463 2001 Integrated Eady Childhood 0.00 40.00 0.00 26.05 16.73 0.00 PO65713 2001 HIWAIDS, Malaria, STD & TB Control 0.00 40.00 0.00 23.75 6.03 0.00 PO44674 2001 Emergency Reconstruction 0.00 90.00 0.00 3.23 -12.63 0.00 PO43124 1998 Health 0.00 18.30 0.00 3.81 3.69 2.69 PO34154 1998 ERlTRE4 PORTS 0.00 30.30 0.00 16.15 15.09 2.75
Total: 0.00 328.60 0.00 196.75 59.97 5.44
-86- ERITREA STATEMENT OF IFC's Held and Disbursed Portfolio Mar - 2004 In Millions US Dollars
Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic
Total Portfolio: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Total Pending Commitment: 0.00 0.00 0.00 0.00
- 87 - Annex 9: Statement of Loans and Credits ERITREA: ERITREA POWER DISTRIBUTION AND RURAL ELECTRIFICATION PROJECT June 4-2004 Difference between exDected and actual Original Amount in US$ Millions disbursements' Project ID FY Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd PO70272 2003 Education Sector Investment Project 0.00 45.00 0.00 43.83 -0.57 0.00 PO73604 2002 Emrg. Demb. &Rein!. 0.00 60.00 0.00 75.23 29.29 0.00 PO58724 2002 Cultural Assets Rehabilitation 0.00 5.00 0.00 4.68 2.34 0.00 PO68463 2001 Integrated Early Childhood 0.00 40.00 0.00 26.05 16.73 0.00 PO65713 2001 HIWAIDS, Malaria, STD 8 TB Control 0.00 40.00 0.00 23.75 6.03 0.00 PO44674 2001 Emergency Reconstruction 0.00 90.00 0.00 3.23 -12.63 0.00 PO43124 1998 Health 0.00 18.30 0.00 3.81 3.69 2.69 PO34154 1998 ERITREA PORTS 0.00 30.30 0.00 16.15 15.09 2.75
~~ Total: 0.00 328.60 0.00 196.75 59.97 5 44
- 88 - ERITREA STATEMENT OF IFC's Held and Disbursed Portfolio Mar - 2004 In Millions US Dollars
Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic
Total Portfolio: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic
Total Pending Commitment: 0.00 0.00 0.00 0.00
- 89 - Annex 10: Country at a Glance ERITREA ERITREA POWER DISTRIBUTION AND RURAL ELECTRIFICATION PROJECT Sub- POVERTY and SOCIAL Saharan Low- Eritrea Africa income 2002 Population, mid-year (millions) 688 2,495 Life expectancy 450 430 306 1,072 Average annual growth, 1996.02 Population 1%j 2.7 2.4 1.9 2.3
30 59 81 Access to improved water source 76 37 95 103 87
2002 0.64 26.5 28.9 -30.1 30.6 -18.2 1.o 87.8 2.6 44.2 83.5
2002-06
__ 5.7 Low-income group GDP per capita 1.5 74 -0 7 3.3 I-I I
STRUCTURE of the ECONOMY 1992 2001 2002 1 Growth of investment and GDP (%) (% of GDPj c Agriculture 30.6 17.9 11.7 fWT I Industry 12.0 22.5 24.8 50 Manufacturing 8.2 10.8 11.7 0 Services 57.4 59.6 63.5 -50 Private consumption 104.0 92.2 92.1 .iw 1 I 21.8 39.4 38.0 General government consumption -GDI &GDP Imports of goods and services
1992-02 2o01 2o02 Growth of exports and imports (%) (average annual growtbj Agriculture -1.4 29.1 -35.5 lWT Industry 11.5 6.3 9.2 50 Manufacturing 8.1 5.5 6.5 Services 4.6 4.6 5.2 Private consumption -0.3 13.5 4.9 General government consumption 14.2 -7.7 3.1 -50 Gross domestic investment 10.7 69.9 -12.3 -Exports &imports Imports of goods and services 6.1 16.1 -5.3
- 90 - Eritrea ~
PRICES and GOVERNMENT FINANCE 1992 2001 2002 Inflation (%) Domestic prices 1% change) i Consumer prices 14.6 16.9 Implicit GDP deflator 13.6 14.5 Government ffnance (% of GDP, includes current grants) Current revenue 30.6 43.6 37.9 97 98 99 00 01 02 Current budget balance -7.1 -I8.8 -13.4 *CPI -GDP deflator Overall surplus/deficit -11.3 -31.5 32.7
TRADE 1992 2001 2002 I Export and import levels (US$ mill.) (US$ millions) c Total exports (fob) 15 20 54 /goo T Food and live animals 1 6 30 1 0 0 Beverages and tobaco 400 Manufactures 1 6 7 Total imports (cif) 278 537 520 Food 35 154 105 200 Fuel and energy 2 3 5 Capital goods 12 91 115 0 BB 97 98 s4 00 01 Export price index (1995=100) 91 92 Import price index (1995=100) 98 100 I Exports Imports “I Terms of trade (1995=100) 93 92
BALANCE of PAYMENTS 1992 2001 2002 Current account balance to GDP (%) (US$ millions) Exports of goods and services 88 147 186 Imports of goods and services 278 570 551 lioT Resource balance -190 423 -365 Net income 0 -5 -6 Net current transfers 171 298 254 Current account balance -19 -130 -117 Financing items (net) 110 144 124 Changes in net reserves -91 -14 -7 Memo: Reserves including gold (US$ mi//ions) 5 51 31 Conversion rate (DEC. local/US$1 4.6 10.9 14.0
EXTERNAL DEBT and RESOURCE FLOWS 1992 2001 2002 (US$ millions) :omposition of 2002 debt (US$ mill.) Total debt outstanding and disbursed 4aa 564 IBRD 0 0 IDA I58 219 Total debt service 6 9 IBRD 0 0 IDA 1 1 Composition of net resource flows Official grants 128 84 Official creditors 103 82 Private creditors 0 0 Foreign direct investment 12 20 Portfolio equity 0 0 World Bank program Commitments 170 65 A - IBRD E - Bilateral Disbursements 78 46 B - IDA D - Other multilateral F ~ Private Principal repayments 0 0 C - IMF G - Short-term Net flows 78 46 Interest payments 1 1 Net transfers 77 45
Ueveiopment tconomics Wlflu3
-91 - Additional Annex II Summary of Monitoring and Evaluation Arrangements ERITREA: ERITREA POWER DISTRIBUTION AND RURAL ELECTRIFICATION PROJECT
1, The project design summary in Annex I will guide the monitoring ofoutputs and evaluation of impacts, which will happen at several levels as discussed below. The performance indicators in Annex 1 will be reviewed and fine-tuned annually to take account ofprogress on the ground.
(a) EEC through its PMU will be responsible for the continuous monitoring ofthe construction program for the Asmara and RE components. For the Asmara component, EEC will collect data on the number of different types ofconsumers connected to electricity supply during the project’s implementation period, electricity transmitted to and sold in Asmara, level ofnetwork losses, number of supply interruptions, extent ofvoltage fluctuations, and customer complaints and other problems during the construction period and remedial action taken. For the RE component, EEC will document the number ofvillages electrified, the number of consumer connections made, cash contributions received from the electrified villages and moneys deposited to the RE Fund. Moreover, EEC will implement the activities identified in the Environmental and Social Management Plan for the Asmara and the RE component. EEC will report on all of the above activities in its quarterly Progress Reports. The report will also include management information data on EEC’s financial and operational performance as an Annex. The appraisal mission provided EEC with a suggested format for this Annex.
(b) MEM will continuously monitor the progress made in the project’s sector reform component. Also, it will monitor the implementation ofthe Environmental and Social Management and Monitoring Plan and the Resettlement Action Plans for the rural component. It will also be responsible for the monitoring and evaluation ofthe social outcomes in the electrified villages. The MEM will monitor the following, among others: (i)land being taken away for rural electrification construction; (ii)number of villages/townships electrified in a Zoba/sub-Zoba compared to before; (iii)time series statistics ofthe domestic, commercial, and industrial customers connected and their level ofelectricity consumption; (iv) improvement in social facilities such as health, clean water sources, and schools compared to before; and (v) how many people employed compared to before, etc. MEM will report on these indicators in its quarterly Progress Reports.
(c) Village Administrators will: (i)carry out environmental and social screening in their respective villages to be electrified; and (ii)oversee the implementation ofthe compensation plans. They will report on these activities to the MEM, who will document them in their quarterly Progress Reports.
- 92 - Mr. Makhtar Diop Country Director - Etitrea The WorM Bank HItlpark Building Upper Mill Nairobi, Kenya
Dear Mr. Diop
-93 -
Mailing Address: Tel. 28.1-1-41 68 f2 Fax: 293-1-42 ?%31 P.U.ffox 52M. Jimna Scnbetis St. No, $4, Asmasa 2834 -12 7%44 burden OR the emnomy, Eritrea's current pattern of energy ~n~u~pti5nis unsustainable.
2. The 2003 energy statistics for Eritrea indicates that the final energy ~~~sum~t~on was around 718,000 tones of ail equivalent af which 65% was from biomass resources, 32.3% from imported dl products and electricily's share was 2 The largest mnsumer was the hausehold sector, accctunting for 68.8%, follgs by transport 13.8%, public and commercial 92%' the energy industry 7.7% an manufacturing industry 2.5%. Per capita cansumpton of electdclty, assuming a population of 3.7' Mitlkn, was 62 kWh campared wRh the Sub-Saharan werag of 113 kWh (for the year 2000, excluding South Africa).. Acmrding to E Demographic a& Health Survey (2002), only 3% of the rural pupulafmn electricity aCI;ess, urban and the national awss being 78% and respmively.
3. The present power distrihutian system in Asmara, which is over 50 years old, ig incapable of meeqing addiWnal loads. Frequent power failures and voltslgs fluctuations and unacceptably high powor losses a critical prablems of thh system. Thus, the main objective of the hmam isttibulion component the project is to alleviate the acute weakness and s~o~~~mi~g~of the 01 dis~~b~tj~ffnehvarks h Grmter Asmara.
Initiatives and a~~~~~~~~~~~
4, Wfih the completmn crf the Power Genefation ami Transmission Txpa Project (Le, Hirgigo Power Plant), Eritrea's pwer genefation capacity has than doubled feom 52 to 136 megawatts, 7711s 1s adequate to meat the demands far power in the urban areas prese d by We intarconnea=ted system (ICs). To s new demand as the economy gms,action$. expand the country' on and transmissbn as ribution lines bepnd &e urban centres to ntml ntiy out of rea& to th The Rural ~l~~~~~t~~~ component of this pmjed constitutes an rt to avail easy access to power supply to ~ti~~~atefarm and non-farm b es. These mea are
important lo reduce nrrat poverty. To keep w&.s ~~~~~~~~~ to em t. electricity wlil be suppPied from the na al grid using Iow-cost technologies and operational pror;rzldu~esthat an be ~p~~~~~~a6 demand grows, The Government has been ~~~~d~~~capital subsidy and will continue to do SO far of power ~~fr~s~~~t~r~in areas where services wuuld not be viable ~~~ho~~sucb a support.
5. As a result of the Eervemment injtiativm to irnpmve the, energy supply, the f~~i~w~ngmajor a~h~~~~%~t~ have been r6mxkd in the short history af the c:ountry,
Power generation has increased from c 30 MW fn 1994 to over 130 MW. e T"he length oft smission tines has increased from 4%km to aver 350 km, m The length of d~~ttib~~~ntines has increased fwm 8fsO km to aver 1400 km, R~hab~~jt~~~nof power ~i~~rib~t~on system is in progress.
- 94 - 9 Per capita cansumption of etedricity has increased frum I6 kWh in 1991 to over 60 kWh. I Uver 600 kW solar syst" have been installed ~~~g~~tthe country, mainly for community wthre pupses. Wind and sotar resources assessment is being cmducted fum 25 ~e~#~a~~~~~statbns installed for this purpose, ;. Pitot wind energy applications project is in the pipeline. I Dissemination of imp stove is in pmzgaess with over 15,000 done SQ far. 0 Electricity Froclamatian and incorporation of the pubficpower utility have been enacted wirth the aim of pr~~otjn~operational efficiency and safHy, economic sustalnability, private end communi@ parPidpath and fair competitian in (eiedri~ttybusiness.
The importance of Energy in Poverty Reduction Strategy
@.Amding to the Lwing Standards Meas ey (LSMS) carried out t r the National St , the poor Gon 66 percent of the Eritw t bout twa-thirds live reas and Vie remaining : L Of %he totat urban fall under the @*@nepo r poverty is not only a
7. In the Interim Poverty reduction Strategy Paper (1- PRSP), the GaE emphasis! 3 the paor is a necessary ai 1 human development, Mode 1 lowering Indoor and outd~r childrm many of whc t t3bj up time for incar 3
'I II 7 and mral areas. ll 6 eligibility cTjl~?Tjioto ensure Its su
8. The primary objective in the energy sector is to develop an eficient and and dependable ene ~r~~~~~~nand supply sys ri'trea's growing econ in an ~~~~~~~1~ and sustai raising the quality electrify every home, businesses and soci specifically, Our large% are as fotlows;
* Reduce by half, bebeen 2 and 2015, the proprtien of urbanl semi
urban and rural ~~us~~u~dswithout access to adequate ~~~~~~~
9 Reduce by half, between 2005 and 2015, the proportion of urban, se urban and rural households reliant OR cooking methods that are sustainable; and
- 95 - e By 2015 provide adequate, dean and efficient energy sewices to all educatlonai, health and clean waksupply facilities,
9. Achievement af these goals requims significant investments on energy services and scaling of gM expansion and j~~le~~~~~~~of stand alone at hybridised renewable energy sysbrrzs. The *Asmar8 Power ~i~~i~~tj~nand Ru Electrification Project" (APDREP) will assist strategic i~~l~m~~~~io~of the goals in the targeted urban and mrat amas. The G~v~rnm~~~~approach is to implement similar projects in a phasad manner with the view to achieve long-term objjedves,
Power Sub-Serstor Paticy and Strategic Ptan
40. The strategic objectives are to develop an economically and ~~vj~n~e~~a~l~ r through the application of appropriate teec;hnology af ene mnservafion and usage ~pti~i$a~~and diversifyin sources of alwtriMy and devdoping indigenous resources and measures, Mom spec'rfic objectives are: (I) to provide adequate, appropriate, secured electricity to all sec2ars; and (ii) decrease the the power sector an imported ail.
11 The l~p~~~en~t~o~of the atstlve strategic objecrtiVes myires poky major investments and capacity building. The priodty measuras and pertaining to the power sector are:
IC Expand national ele~~~tjo~pr~gmmmes through the consoIidation and expansion of $he power grid system and generation capacities; increase the sham of elwtricity in the national energy market; through efBicisnt tftdrieity tariffs are to cover ope"ional expenses, loan sentking and to ewes for future ~~vel~p~~~: I. Ensum that cross-sukidiss, if at all ju~~~~~~~~,are transparent and kept ta ;a ~i~~~~~,only being #nsi~~~~when known to comptement G~~~rn~~~t'~social policies; e Promote private investment in the power s&w. Conduct and axpand rural ~~~~~~ca~~~nprogram and ~s~~b~~~hW ~~~~~~~~~~i~n~~~o~~~ngFund b this effect, Dewtop power generation systems from the indigenous and cleaner
scitfrc6s of energy, gas, wind, solar, ~~~~~~~~~ modem bkmass; rl ~~ren~~~~~~~human and ~~~~~tut~~n~~~r;rp;ac&yessentiat for devebpin efficient and ~~s~a~~abl~power sector;
- 96 - instwmeM as reflmkd in tire Electricity Proclamation is to design a long-term tariff setting mechanism that is unitary per tariff category within the national grid and based on real cosb and reasonabfe profits. The Gavernmsnt be9leves that the tariff poticy will hefp:
I Achiwe long term finanr;ial s~sta~n~bjl~~of the fritrean Electric Gorpomtian; Motivate smati income earning enterprises using own dieset-op and pumpsets to switch to the cheaper and more dependable central grid; Encommge the economics of scale ~f industrial pro~~~~onand application ~f rational categorisatian of consumers; * To the extent possible, ensure the increased electricity access and ~~o~~b~l~by the rural, semi urban and urban peor people to meet the poverty reduction targets; and Facifibte private sector penetration in the electricity business.
Reform Measures under this proleat and beyond
13. The key elements of the efmn agenda that will be ~tr~ng~~~ie~or conductied in the Power Sector refcinn sub-c"ponent of this prcrject, for whkh ~ns~~~~~ will be engaged indude:
a) Establishing the Eritrea ElecZric Corporation as an eubnomous electric utility through ~ra~a~~~onto operate on commercial principfes, with cleqr mies for the respomibilAiw and. accauntabilities of the owner, the board, and the ~anag%ment~
b) Electricity Proclamation has been enacted whose central objective is to promote itafficiency, safety, ~n~~r~n~~~t~lpmtectian and private se ent in the pwer f&x&r. It provides State Regulations for ment and aperations of power plants and ekctriml ~~~Qr~s" tar@%and fare trade of electricity.
c) Carry out re~~~ctu~ngof EEA% fitaencial accounts to realisti the company's revenue eamin3 assets and liabilities, make ~~~f~~u~~i~~~,and tu increase Wsml iransparmcy;
- 97 - h) Carry aut a corporate rw&uct g of EL&to enable it to fill itsi u~#~~~~~~s under the newly enacted Ele ty Pmlamatian, increase efficiency, and y* meet its perfamancg targets;
Ministe6f Energy and Mines
- Ministry of National Development
- 98 - Annex I
Perfwmanlcra of ErhaUoGtric ~~~~~~
The Erittaa Electric Authority operates an ~~~~~~~~ (ICs) and Self-Cantained Systems (SCS) whose total insUSed generating mapadties stands at 142 MW and 14 MW respectively, bringing the total to 168 MW. The bulk of this, Le, WMW, is frum the newly is^^^^^^ Hirgigo Power Plant war Massawa. The IC5 accounted for QO*h af the e!edflcity generation, whicb mounted to 2$7' Gvvh implyiyl a andest grWh ad 6% over the previous year 2002, Electricity sold was 206 Omindicating a 23% lass, which is quite high. The numbet of customers in 2003 .was 108,708 of which 96,665 were in the ICs and 12,040 in the SGS. Pomrjstic corcsumm amuntd for 38% of sales, indushy for 31%, public and ~ommercialfor 30%, and street lighting 2%, Average in"? ffm sales wits 13 w:nias af USD per kWh. The number of employees .was 761 implying custome 143:li. Other usefuf manage are the number of capacity and generated GWh wd for EEA standing at 4.9/IvIW and 2.9/GWh resp&vely. The values wcrtmmendad krthe region is SfMW and 2?GWh as wet1 as 1253 fat customers to employee tab.
- 99 -
MAP SECTION