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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