Document of The World Bank
FOR OFFICIAL USE ONLY Public Disclosure Authorized
Report No: 36474-MG
PROJECT APPRAISAL DOCUMENT
ON’ A
PROPOSED CREDIT
IN THE AMOUNT OF SDR 6.8 MILLION Public Disclosure Authorized (US$lO MILLION EQUIVALENT)
TO THE
REPUBLIC OF MADAGASCAR
FOR A
POWEWWATER SECTORS RECOVERY AND RESTRUCTURING PROJECT
Public Disclosure Authorized IN SUPPORT OF THE FIRST PHASE OF THE POWEWWATER SECTORS RECOVERY AND RESTRUCTURING PROGRAM
June 14,2006
Energy Team Infrastructure Group Africa Region Public Disclosure Authorized
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS
(Exchange Rate Effective June 7,2006)
Currency Unit = Malagasy Ariary 2169.00 = US$1
FISCAL YEAR January 1 - December 31
ABBREVIATIONS AND ACRONYMS
ACCT Agence Comptable Centrale du Tresor (Central Accounting Agency ofthe Treasury) ADER Agence de Developpement de 1’Electrification Rurale (Agency for Rural Electrification) AFD Agence Franqaise de Dtveloppement (French Development Agency) AfDB African Development Bank APL Adaptable Program Loan BADEA Banque arabe pour le developpement tconomique de 1’Afrique (Arab Bank for Economic Development in Africa) CAS Country Assistance Strategy CFAA Country Financial Accountability Assessment CPAR Country Procurement Assessment Report CELCO Cellule de Coordination DEEL Direction de 1’Equipement Electricit6 (Department ofElectricity Equipment and Installations) DFB Directorate of Finance and Budget EBITDA Earning Before Interests, Taxes, Depreciation and Amortization EIB European Investment Bank EIRR Economic Internal Rate ofReturn ESMF Environmental and Social Impact Management Framework ESIA Environmental and Social Impact Assessment EMP Environment Management Plan FDI Foreign Direct Investment FIDEF FCdCration Internationale des Experts Comptables Francophones (International Federation ofFrancophone Accountants) FMRs Financial Monitoring Reports GDP Gross Domestic Product GOM Government of Madagascar HFO Heavy Fuel Oil IFC International Finance Corporation IG2P Integrated Growth Poles Project IHP Independent Hydropower Projects INTEC Institut National des Techniques Economiques et Comptables (National Institute ofEconomy and Accounting) IPP Independent Power Producer ISR Implementation Status Report JlRAMA Jiro Sy Ran0 Malagasy LSDP Letter of Sector Development Policy MEM Ministry of Energy and Mines NCB National Competitive Bidding OP Operational Policy ORE Electricity sector regulator PCB Polychlorinated Biphenyl POP Persistent Organic Pollutants PRG Partial Risk Guarantee PRGF Partial Risk Guarantee Facility PRSP Poverty Reduction Strategy Paper RAP Resettlement Action Plan ROSC Reports on the Observance of Standards and Codes SOEs Statement of Expenses UGMP Unite de Gestion des Marches Publics (Unit for Public Procurement) UNEP United Nations Environment Programme
Vice President: Gobind Nankani Country Director: James Bond Sector Manager: S. Vij ay Iyer Task Team Leader: Stephan Gamier - Program Assistant: Lily Wong
MADAGASCAR MG Power/Water Sectors Recovery and Restructuring Project
CONTENTS
Page
A . STRATEGIC CONTEXT AND RATIONALE ...... 1 1. Country and Sector Issues ...... 1 2 . Rationale for Bank Involvement ...... 5 3 . Higher Level Objectives to which the Project Contributes ...... 7
B. PROJECT DESCRIPTION...... 7 1. Lending Instrument ...... 7 2 . Program Development Objectives ...... 7 3 . Project Components ...... 9 4 . Lessons Learned and Reflected in the Project Design ...... 11 5 . Alternatives Considered and Reasons for Rejection...... 12 C. IMPLEMENTATION ...... 13 1. Partnership Arrangements (if applicable) ...... 13 2 . Institutional and Implementation Arrangements ...... 14 3 . Monitoring and Evaluation ofOutcomesResults ...... 15 ... 4 . Sustainability...... 15 5 . Critical Risks and Possible Controversial Aspects ...... 17 6 . Credit Conditions and Covenants ...... 18 D. APPRAISAL SUMMARY ...... 20 1. Economic and Financial Analyses ...... 20 2 . Technical ...... 23 3 . Fiduciary ...... 24 4 . Environmental and Social ...... 25 5 . Safeguard Policies...... 26 6 . Policy Exceptions and Readiness ...... 27
Annex 1: Electricity Sector and Program Background...... 28 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ...... 36 Annex 3: Results Framework and Monitoring ...... 37 Annex 4: Detailed Project Description...... 43 Annex 5: Project Costs ...... 56 Annex 6: Implementation Arrangements ...... 57 Annex 7: Financial Management and Disbursement Arrangements ...... 59 Annex 8: Procurement Arrangements ...... 66 Annex 9: Economic and Financial Analysis ...... 72 Annex 10: Safeguard Policy Issues ...... 92 Annex 11: Letter of Electricity Sector Development Policy (Abstract) ...... 97 Annex 12: Project Preparation and Supervision ...... 98 Annex 13: Documents in the Project File ...... 100 Annex 14: Statement of Loans and Credits ...... 101 Annex 15: Country at a Glance ...... 102 Annex 16: Map IBRD 34815 ...... 104 MADAGASCAR
POWEWATERSECTORS RECOVERY AND RESTRUCTURING PROJECT
PROJECT APPRAISAL DOCUMENT
AFRICA
AFTEG
Date: June 14,2006 Team Leader: Stephan Claude Frederic G Country Director: James P. Bond Sectors: Power (100%) Sector Manager: S. Vij ay Iyer Themes: Infrastructure services for private sector development (P) Project ID: PO95240 Environmental screening category: Partial Assessment Lending Instrument: Adaptable Program Lending Project Financing Data [ ] Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other:
For Loans/Credits/Others: Total Bank financing (US$m.): 10.00
ASSOCIATION Total: 0.84 9.16 10.00
Borrower: Government of Madagascar
Responsible Agency: Ministry of Energy and Mining and JIFUMA
I
Cumulative1 4.0 I 9.0 I 10.0 I 10.0 I Project implementation period: Start: September 1, 2006 End: December 31,2008 Expected effectiveness date: September 1, 2006 Expected closing date: April 30, 2009 Does the project depart from the CAS in content or other significant respects? [ ]Yes [XI No Does the project require any exceptions from Bank policies? 1 Re$ PAD D. 7 [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [ IN0 [s approval for any policy exception sought from the Board? [ ]Yes [ IN0 Does the project include any critical risks rated “substantial” or “high”? [XIYes [ ]No Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ]No Re$ PAD D. 7 Project development objective Re$ PAD B.2, Technical Annex 3 The aim ofthe program is to restore an adequate public utility service for electricity and water in urban areas ofMadagascar and to create the foundation for a sustainable expansion of a commercially-oriented service in the most cost-efficient way. Project description [one-sentence summary of each component] Re$ PAD B.3.a, Technical Annex 4 Component A: Investments for: (Al) Power generation reinforcement (rehabilitation); (A2) Reduction oftransmission and distribution technical losses; and (A3) Revenue management and Modernization ofInformation Systems and IT equipment. Component B: Funding and technical assistance for: (Bl) close cooperation with the IFC transaction advisor’s team in the process ofselecting and contracting a new private operator and communication; (B2) prolongation ofthe current management contract; (B3) preparation of future generation projects in coordination with IFC’s (second) IPP mandate; (B4) strengthening of the Ministry of Energy and Mining; (B5) feasibility and environmental studies for APL-2 investments; (B6) monitoring and evaluation; and (B7) project implementation.
Which safeguard policies are triggered, if any? Re$ PAD 0.6, Technical Annex 10 OP 4.01 Environmental Assessment OP 4.3 7 Safety of dams Significant, non-standard conditions, if any, for: Re$ PAD C. 7 Board presentation: July 13, 2006 Loadcredit effectiveness: (a) The Subsidiary Agreement between GOM and JIRAMA has been duly authorized or ratified. (b) MEM has adopted the Project Manual and JIRAMA has adopted JIRAMA’s Project Manual all in form and substance satisfactory to the Association. (c) For the purpose of Part B ofthe Project, MEM has elaborated its accounting manual of procedures and upgraded its accounting and financial management and monitoring and evaluation system (capable ofproducing FMRs) in a manner satisfactory to the Association; and has appointed an accountant specialist and a procurement officer within the MEM acceptable to the Association. (d) For the purpose of Part A ofthe Project, JIRAMA (DEEL) has upgraded its accounting and financial management and monitoring and evaluation system (capable ofproducing FMRs) in a manner satisfactory to the Association. (e) Two special accounts have been opened (for DEEL and MEM) in the Central Bank under conditions acceptable to the Association. (f) Auditors satisfactory to the Association have been recruited for the purpose of Component A and Component B ofthe Project Covenants applicable to project implementation: Credit Covenants are likely to be: Dated covenants regarding tariffs (a) No later than November 30,2006, GOM shall have adopted the Electricity Tariff Indexation Formula. (b) No later than April 1,2007, GOM shall have publicly disclosed the Electricity Tariff Indexation Formula and adjusted electricity tariffs in accordance with said formula, and shall subsequently adjust said tariffs in accordance with the Electricity Tariff Indexation Formula every 6 months. Dated covenants (Milestones) regarding the process ofrecruiting the long-term private partner for JIRAMA (c) No later than December 3 1,2006, GOM shall have established terms and conditions to be used in the contracting of JIRAMA’s private partner satisfactory to the Association and have launched the prequalification process. (d) No later than April 1,2007, GOM shall have launched the bidding process for the recruitment ofa new private operator for the management ofJIRAMA’s operations. Financial covenants (a) Beginning with the first quarter ofCY 2007, JIRAMA to produce a quarterly management report (including relevant technical, commercial and financial parameters for the monitoring ofthe company and to communicate this reporting to the Bank less than 60 days after the end ofthe quarter. (b) Accounts receivable not to exceed 3 months billings by the beginning ofFY 2008 and onwards. (c) GOM shall define in agreement with the Association, no later than September 30 ofeach year during Project implementation amounts to be injected as need be into JIRAMA during the following calendar year so as to allow normal operations ofthe company.
Specific condition of disbursements would be: (a) Credit disbursement for Component B would be permitted only after recruitment by MEM of a technical advisor acceptable to the Association. (b) Credit disbursement for the rehabilitation ofthe civil works ofthe Vatomandry hydroelectric plant (to satisfy the requirements ofthe safeguard policy OP 4.37 on Dam Safety) would be permitted only after JIRAMA has submitted a report satisfactory to the Association on the condition ofthe Vatomandry dam and the proposed safety measures to be implemented.
A. STRATEGIC CONTEXT AND RATIONALE
1. Country and Sector Issues
Sector Issues
1.1 Madagascar has a population ofover 17 million, a third ofwhich is urbanized. Average per capita income is about US$290. In 2004, 72.1% ofthe population was deemed to be at or below the poverty line. The primary sector ofthe economy accounts for a third of GDP but 80% of employment. Despite some macroeconomic instability in 2003-2004, characterized by high inflation and a rapidly depreciating currency, the real economy grew by over 5.3% in 2004 and by 4.6% in 2005. The overall macroeconomic situation has stabilized and in the medium-term, real GDP growth is expected to average 5%. This implies robust growth in the demand for electricity. Unfortunately, power shortages have become a bottleneck to growth as the demand for electricity recovered strongly in 2003-2004, without any accompanying increase in supply capacity. The majority ofenterprises in the Export Processing Zones, which employ over 100,000 workers (mainly in garment manufacturing) were not equipped with standby generators, so the adverse impact on output was acutely felt when power cuts began in mid-2005. Load shedding is estimated to have cut 0.5% off last year’s economic growth rate. These shortages also adversely affect the overall investment climate and discourage Foreign Direct Investments (FDI). Power is an essential input to the success ofthe Government ofMadagascar (GOM) economic growth agenda.
Electricity Sector
1.2 At present, with the exception ofa handful ofprivate power producers, electricity supply and distribution is entirely in the hands ofJIRAMA, the state-owned power and water utility company. JIRAMA, with 6,500 staff, supplies about 400,000 electricity consumers in 112 urban centers and 125,000 water consumers across 65 urban centers. Access to electricity outside the capital is low (about 15% nationwide, but far less in rural areas). There is no interconnected national electricity grid and JIRAMA operates small grids in and around three major urban centers, while the rest ofthe country is served by stand-alone systems, mostly supplied by high- cost diesel generators. Madagascar has a very large hydroelectric resource potential, about 6,000 MW, which has barely begun to be tapped.
1.3 The presently installed capacity ofthe grid serving Antananarivo (140 MW) is inadequate and load shedding of at least 10 MW occurs at times ofpeak demand. This grid supplies 70% of Madagascar’s electricity consumption. An additional 40 MW offuel-oil fired generation capacity is expected to enter service in mid-2007, which will ease the supply constraints in the Antananarivo grid.
1.4 JTRAMA’s total installed generating capacity is about 300 MW, over 35% ofwhich is hydroelectric. Electricity sales in 2005 were 754 GWh. Sales have increased at an annual average rate of almost 7% since 1996, somewhat above the average increase in GDP over the same period. Hydroelectricity accounted for 65% ofproduction in 2005. Total energy losses in 2005 were about 24%.
1 1.5 A new agency for rural electrification (ADER) operating outside the areas covered by JIRAMA’s concession was set up in late 2002, along with a national electrification fund. ADER began operating in mid 2004 and has as its mandate the objective of electrifying all 7,300 villages with more than 400 inhabitants over the next 15 years. It has an annual target of30,000 new rural connections over the next five years, but has yet to raise the necessary financing.
1.6 Legislation creating an electricity sector regulator (ORE) was passed in 2001, but for practical purposes it only began operating in mid 2004. It is still in the early stages of establishing itself as a full-fledged institution capable ofexercising its legal mandate. More details about the electricity sector are given in Annex 1.
Water Sector
1.7 Access to public water supply in those areas served by JIRAMA is about 50%, but is only about 20% nationwide. In 2005 JIRAMA produced about 95 million cubic meters of treated water, over 50% of which was in the capital. Unaccounted for water represents a third oftotal production. JIRAMA has uniform water charges nationwide. In 2006 the average revenue from water sales is expected to be about USc30 per cu.m. Legislation setting up a water and sewage regulatory agency has been passed, but not yet implemented.
Financial Issues
.1.8 JIRAMA has been under severe financial stress for the past two years. Tariffs remained frozen from 2001 to mid-2005, even though this was a period ofhigh inflation, sharp devaluation of the local currency and rising world oil prices. Furthermore, electricity production costs also rose because all additional demand in the past few years has had to be met by using expensive diesel-powered plants. The inaction on the part ofthe GOM, due to political reluctance to raise tariffs, directly contributed to the financial insolvency ofJIRAMA. The latter was forced to build up large arrears to its fuel suppliers and was incapable of servicing its debts. The inability even to pay for fuel to run its power plants and the resulting power cuts brought matters to a head in mid-2005. GOM was obliged to intervene and bail out JIRAMA with a cash injection to pay for fuel, to help ease the power shortages, which lasted from May-September 2005.
1.9 These shortages badly hurt the manufacturing and export-oriented industries such as garments, seafood processing etc. which were unprepared to deal with load shedding due to a lack of standby generators. This crisis brought an end to the complacency and neglect ofthe power sector on the part of the authorities, as it was a sharp warning ofthe vulnerability ofthe entire economic recovery and growth program to disruptions arising from a lack ofelectricity.
1.10 Very limited new investment has taken place in recent years to increase power supply, while demand has increased substantially as the economy recovered from the political crisis of 2002. Most of JIRAMA’s power plants are now inadequate to meet demand in their service areas. Over 6,000 requests for new connections in the capital (backed by down payments) are currently frozen, due to the lack ofmaterials to connect them and the capacity to supply them. Additional generation capacity has been added on an ad hoc basis in the past few years through expensive quasi-IPP/leasing contracts awarded on a non-competitive basis. JIRAMA’s operational performance is unsatisfactory, with high losses and poor maintenance. Thermal
2 plants are generally in a very poor condition. Billing, metering and revenue collection practices are weak. Unpaid arrears oflarge consumers, both public (like universities) and private (numerous manufacturing enterprises), exceeded three months’ billings at end-2005.
Recent Reforms
1.11 After an extended stalemate on institutional reforms ofthe sector in 2003, the new government decided against privatization ofJIRAMA’s assets. A diagnostic study and management audit ofJIRAMA carried out at that time revealed the severity ofthe problems facing JIRAMA. This study led to GOM’s decision to opt for a two-year management contract as a first step towards raising JIRAMA’s performance to a level where it can carry out its mandate of providing satisfactory service to electricity and water consumers. Given the changed international investment climate in the early years ofthis decade and the lessons from privatizations ofother developing country utilities, the Bank concurred with this approach. As a result, JIRAMA has been under private management since April 2005 (paras. 1.16- 1.17) and GOM has decided that the present short-term management contract will be succeeded by a longer-term solution based on a public-private partnership.
1.12 Two belated but large electricity tariff increases were introduced in 2005, amounting to a cumulative rise of 75%. A further 10% rise in tariffs took place in April 2006, consistent with the GOM sector reform program. Average revenue this year should therefore be about UScl3/kWh. Average water tariffs were also raised by a third in 2005 and by 20% in April 2006. JIRAMA does not have a policy ofpan-territorial pricing for electricity, and tariffs charged in areas supplied entirely by thermal energy are substantially more than in those with access to hydroelectricity. Time ofday pricing is applied to medium and high voltage customers.
Government Objectives, Policies, and Commitment
Linkages to Macroeconomic Policies
1.13 The GOM’s Poverty Reduction Strategy Paper (PRSP) states the overall objective ofthe government as the reduction ofpoverty by half in ten years. The three key priorities set out by the PRSP are: (i)improving governance; (ii)promoting broad based growth; and (iii)providing human and material security. Achieving rapid economic growth requires improved infrastructure, particularly improved transport links and the availability ofa reliable electricity supply. The absence ofthe latter is both an additional cost to existing businesses as well as an impediment to attracting inflows of new foreign investment. The provision ofpotable water is also a key element in achieving the goal ofproviding human and material security.
1.14 GOM has decided to stimulate private sector led economic growth in three distinct geographical poles, Nosy Be (for tourism) in the north, Antsirabe-Antananarivo (for export processing) in the center and Taolagnaro, formerly Fort Dauphin, (for minerals) in the south. It is indispensable for the success ofthe growth poles strategy that the recent electricity supply problems do not recur.
3 Sectoral Policies
1.15 Restoring and improving electricity supply to acceptable levels necessarily requires both substantial new investment and major reforms to the power sector. The first major step in reforming the power sector took place in 1999, with the passage ofa law abolishing JIRAMA’s monopoly and creating a regulatory body. This opened the door to private investment in generation for sale to JIRAMA, as well as to the creation ofnew generation and distribution enterprises outside JIRAMA’s current operating areas. New legislation was also passed for the water sector.
1.16 JIRAMA’s top management was replaced in early 2005 and the utility is currently being run under a two-year, IDA-funded management contract, which has already brought positive results. Better generation plant dispatching, optimization ofplant operations, enhanced revenue collection and cost control measures, have all contributed to improved cash flow and reduced financial losses. Financial recovery from a situation ofnear-bankruptcy is now under way. JIRAMA’s balance sheet has also been restructured through a mix ofwrite-offs and debt-equity conversions (Annex 9).
1.17 JIRAMA’s recovery process is fully supported by GOM, as shown by the measures already taken, and by high-level commitments publicly made to the donor community at a round table conference on the sector held in January 2006. A task force with wide representation from outside GOM was set up in 2005 to study and advise on the best long-term structure for the power and water sectors. Its work is close to completion and GOM has indicated that it will follow the Task Force’s proposal that JIRAMA be retained as a combined power and water utility under state ownership but with operations delegated to a private firm. JIRAMA will be offered to the private sector to manage on a long-term basis under ‘affermage’- type’ contractual terms that are in the process ofbeing defined. It is expected that recruitment ofthe long-term partner would be finalized in mid 2007. IFC has already been retained by GOM to act as its transaction adviser to guide and manage the selection and contractual process. Figure 1 illustrates the ongoing sector reform process.
’ GOM would remain the owner ofthe assets and be financially responsible for all major asset renewals or system expansion. The operator would have a long-term operating contract and pay an annual ‘rental’ fee to GOM for the use of the assets. Its remuneration would not be guaranteed, but would have to be generated from the cashflow of JIRAMA.
4 Figure I:JIRAMA's Reform Program
1.18 The Government's letter ofsector policy (Annex 11) reflects the progress made in the reform agenda and the future role ofthe energy and water sector as engines ofgrowth. The government's strategy articulates inter alia, the main goals ofthe reform program, GOM's commitment to the public-private partnership model and the implementation ofcost-reflective tariffs .
2. Rationale for Bank Involvement
2.1 The Bank has been engaged in the power sector in Madagascar for several decades, with mixed results. However, after years ofresistance to fundamental sector reforms, the Bank was able to convince the government to consider far-reaching reforms, going beyond the interim step ofa management contract, and viewed as the only way to resolve the utility's poor and declining performance. The Bank has established a constant dialogue with the Government ofMadagascar over the last three years, and is therefore considered as the lead donor in the sector.
2.2 Donor assistance would continue to be needed to finance long-term sector investments, even when JIRAMA is under private management. In reality, given prevailing conditions in the international utility business, combined with Madagascar's handicaps ofsmall market size, remote location, political history, lack ofa convertible currency, etc., a firm and explicit donor commitment to participate in financing long-term investments appears to be a precondition for attracting any private sector interest in operating JIRAMA.
5 2.3 The Bank’s close involvement with GOM’s ‘rescue’ ofJIRAMA in 2005 and the design ofits financial and operational recovery program over the past year is showing signs of success. In order to maintain the momentum ofsector reforms, it is essential that the Bank remains fully engaged. Bank support of the recovery program was clearly an important signal to other donors at the recent roundtable conference to back GOM’s reform efforts. They now expect the Bank to continue to lead external assistance to the sector reforms.
2.4 As clearly identified in the World Bank’s Africa Action Plan, better power supply is vital to promote growth and it is an essential input for the success ofother Bank-supported projects. While the IDA supported Integrated Growth Poles Project (IG2P) will address the most immediate barriers to accelerated growth in three key regions, the allocation in the IG2P project for electricity is necessarily limited. The importance of a reliable power supply cannot be understated, particularly at a time when Malgache garment exports to the USA and EU are facing severe competition from Chinese suppliers. IG2P does not have the means to tackle the very large needs ofupgrading JIRAMA’s main grid.
2.5 The proposed operation is a logical follow-on to the Energy Sector Development Project (ESDP) that closed on December 3 1,2005, but which left a large agenda ofunfinished business that still needs to be tackled, particularly the short-term recovery program for JIRAMA and the transition to a sustainable long-term arrangement for managing the utility. With the GOM decision to put JIRAMA under an operations & maintenance (0 & M) contract (uffeermage), it is clear that there will continue to be a need for public funds for investment in system rehabilitation and expansion. No international private operator ready to run JIRAMA will, however, be willing to commit substantial risk capital on a long-term basis to the utility. GOM will therefore necessarily turn to the donor community to help finance JIRAMA’s capital investment program. Further external support is also needed to reduce the degree ofrisk faced by foreign private investors considering generation IPPs in Madagascar and/or taking over JIRAMA’s operations. Instrument ofcredit enhancements such as IDA PRG, IFC A & B loans or MIGA guarantees could be employed as necessary.
2.6 The primary objective of providing IDA guarantee support would be to help make JIRAMA’s O&M contract appealing to prospective operators by mitigating those critical sovereign and political risks which have kept private operators and investors away from the power sector in Madagascar.
2.7 The attractiveness of JIRAMA’s O&M contract and ofsmall private hydropower generation investment program will be greatly enhanced by the PRG backing ofgovernment commitments under the project. A fraction ofthe PRGF amount would be used to issue a partial risk guarantee covering selected GOM obligations towards the O&M contractor. Tentatively, the main risks that could be covered by an IDA guarantee would be: (i)the regulatory risk i.e., the risk that the GOM and/or JIRAMA do not abide by the country’s regulatory framework; (ii)the risk that GOM and/or JIRAMA breach their contractual obligations under agreements signed with the private operator; and (iii)change in law, political force majeure, or currency convertibility risks.
6 3. Higher Level Objectives to which the Project Contributes
3.1 The GOM is currently preparing its “second-generation” PRSP called the Madagascar Action Plan (MAP) that sets out the “roadmap” aiming to produce a quantum leap in the country’s development process. The Bank is currently preparing its new CAS in parallel which will support the implementation ofthe MAP. The CAS will reflect the GOM’s focus on infrastructure provision to underpin growth and private sector development. The proposed project is thus a core element in the Bank’s support to the MAP because it addresses a critical gap in infrastructure and a key constraint for private sector development in the Madagascar economy. Growth and job creation in the modem sectors are vulnerable to inadequacies in the public electricity supply system.
B. PROJECT DESCRIPTION
1. Lending Instrument
1.1 The proposed lending instrument for this operation would be a two-phase, six year APL (mid-CY 2006 - mid-CY 2012). Only Phase 1 (mid-CY 2006 to mid CY 2008) ofthe proposed APL is presented here. IDA funding ofUS$ 10 millionvia APL- 1 is described in depth in this report. An adjustable program loan provides the GOM with the necessary flexibility ofcontent and timing it needs to reform the sector and facilitate an orderly commercial transition of JIRAMA. The GOM intends to commercialize JIRAMA through private operations. The search and recruitment ofa new private operator to run JIRAMA has yet to commence, and the terms of the PPP under which GOM and its donors would fund long-term investments for the ‘new’ JIRAMA, have yet to be defined. These actions are expected to be undertaken with APL 1.
1.2 This operation (APL-1) aims to assist the Government to prepare JlRAMA for enhanced operations and private participation. The content ofAPL-2 has yet to be defined in detail, but components will be selected from a well-defined Government investment program to be presented at the next donors’ round table, planned for September 2006. The two phases APL provides the Bank the possibility to introduce appropriate triggers that would be linked with satisfactory progress on the agreed recovery ofJIRAMA and its future sustainable operation.
2. Program Development Objectives
2.1 The aim of the program is to restore an adequate public utility service for electricity and water in urban areas ofMadagascar and to create the foundation for a sustainable expansion ofa commercially-oriented service in the most cost-efficient way.
2.2 A successful outcome for the initial phase ofthe program would be for a financially solvent JIRAMA to be in the hands ofprivate managers on a long-term basis. (See figure 2). This outcome appears to offer the best prospects for efficiency and sustainability and is a necessary precondition for addressing the huge unmet needs for electricity and water outside the main urban centres of Madagascar. It is also the considered and agreed choice ofthe Task Force appointed to advise GOM on its options for the long-term future of JIRAMA.
7 Figure 2: JlRAMKs Financial Restructuring
2.3 At the conclusion ofAPL-2, the expectation is that JIRAMA would have become an efficient, profit-making and creditworthy enterprise, providing good-quality services, to an expanded customer base, and be able to finance a reasonable portion of new sector investments.
8 3. Project Components
3.1 To address immediate technical shortcomings in the utility, JIRAMA has identified a short-term investment plan estimated to cost approximately US$1 00 million for electricity and US$100 million for water, to lower the cost and improve the performance ofits generation plants, cut technical losses and improve commercial performance. The Bank, in coordination with other donors, would finance some ofthe most pressing and high-priority investments ofthis recovery plan. This is the centerpiece of APL-1. Specifically, the program would assist with:
(a) reduction ofgeneration costs: rehabilitation ofexisting hydroelectric and thermal units, as well as conversion of some diesel generators to heavy fuel oil;
(b) reduction of technical losses in transmission and distribution: upgrading ofkey sections of MV lines, replacement ofoverloaded transformers and undersized distribution lines and cables;
(c) improvements to metering, billing and revenue collection: meter verification and replacement, high-value customer management, updating of customer records, introduction ofprepayment meters and spot metering techniques in selected clusters;
(d) modernization of JIRAMA ’s information systems and IT equipment: installation ofa company-wide computer network and associated hardware and software.
3.2 Only the most pressing needs of the electricity sector would be covered by APL-1, which is entirely focused on restoring JlRAMA to a minimum acceptable level ofoperational and financial performance, an essential precondition to attracting a private firm. The specific investments to be financed have been selected on the basis oftheir short payback periods and high impact on JIRAMA’s earnings.
3.3 APL-1 would also support the long-term objectives ofimproving the electricity and water sectors’ performance by assisting Madagascar in providing funds: (a) for complementary actions and communication activities needed to accompany the transaction advisor (IFC) in the process of selecting and contracting a new private operator to take over JTRAMA; (b) for prolongation of the current management contract to avoid any hiatus before the takeover by the selected strategic partner; (c) TA for preparation offuture generation projects in coordination with IFC’s IPP mandate; (d) TA to the Ministry ofEnergy (MEM) to steer the above process to a successful outcome and for capacity building within MEM including environmental and social safeguards issues; and (e) the technical and safeguard studies required for APL-2 as well as the due diligence requirements for private hydro generation investments.
9 Table 1: Project Costs by Component (in US$ 000s)
IDA AFD JIRAYA Sehcoinpotienr A1.w Puwei yeiieialioii reiiifoiceiiiiil (lelial~iiitalioiil 2 000 4 155 1700 Sulvxwipoiieiit A1.b’ Retlailctive tinaiiciiig 1 000 500 Siihcoiiipoiieiir A2: Reduclioii of lraiisiiiissloii alld dinrltiiilioii tecliiiicai lanes 1,300 tbd tbd Sulicoiiipoiieiit PJ: Reveiirie i~i.iildgeliIeil1dlld iiiodeiiiIzd11oii of Iiiloiiiiatioii Systeiii aiid IT eqiiiliinent 2,300 400 U~uffocared 400
Total Component A 7.000 tbd tbd
~
nand PrOlBctlmDlement;ltlOn IDA I AFD JIRAMA Subcampoiieiit B1: Tecliiilcdl OsdStaiiCe 8nil colliliillliicatioii - Coiilianiiig irrlvale npeiarnrs to lake over JIRAMA 250 tbd Sirhcoiripoiieiit 82: Prnioiigarloii oftlie ciiireiit inaiiageineiit CoiitracI 900 tbd Subcoinpoiicnt 83: Preparstloii Of hilllie gelierallnii projects hi coordiiiatioii with IFC IPP iiimihle 600 Siilicoiiipoiient BI: Stieiigtlieiiiiig oftlie lvlinisliy of Energy aiid Irlliiliiy 400 Sribcoiiipoiieiit 05: Piepararloii of APL2 and eiiviioiiiiieiifd stridles for APL2 ilivestiiieiin 150
Siihcoinpoiieiil BG: Moi~iroiililjai111 evalllaliuii 150 Sulicoiiipoiieiit 87: Pioject iiiipletiieiitatioii 150 Umfloc.?recl 400
Total Coimonent B 3 000 tbd tbd
Total APL.11 10.000 1 tbd I tbd I ______I
Phase I1 (or APL-2) of the Program
3.4 The funding needs for APL-2 (FY 2009 - FY 2012) from IDA would tentatively be about US$30 million, covering investments in generation, transmission and distribution system expansion, as well as capacity building and consulting services for implementation ofthe institutional reform of the sector. A significant part ofAPL-2 funding could be allocated to a credit enhancement facility (such as partial risk guarantee facility) to attract foreign investors. The second phase would be conditioned on satisfactory progress towards financial recovery of JIRAMA and a signed PPP agreement for the long-term management ofthe utility by a private firm.
3.5 The content ofAPL-2 has yet to be defined in detail, but components will be selected from a well-defined Government investment program to be presented at the next donors’ round table, planned for September 2006. Additional funding is expected to be secured from AfDB, bilateral donors and the private sector.
3.6 Further details on APL-2 can be found in the table in Attachment 4.2 ofAnnex 4.
Financing Requirements and Financing Plan
3.7 The GOM’s energy/water sector recovery plan estimates a need for US$lOO million of short-term investment financing for the years 2006-2009 for the Electricity and Water sectors respectively. These estimates do not include the developments ofHydro Generation facilities that, although offered for private sector financing as PPs, are likely to require significant public sector support.
10 3.8 APL 1 & APL-2 would together cover approximately 25% ofJIRAMA’s priority investments during the period 2006 - 20 1 1. US$125 million ofdonor support (including the combined US$40 million from IDA) are already committed. Further financing for long-term investments are expected to be pledged at a second donor’s conference to be held in September 2006.
4. Lessons Learned and Reflected in the Project Design
4.1 The recently-closed Energy Sector Development Project (ESDP, Cr. 2844), implemented between 1996 - 2005, was over-ambitious, too complex and too broad in its scope. Within a single project it simultaneously attempted to improve service to existing consumers, extend access to electricity in rural and urban areas, undertake fundamental sector reforms to facilitate private sector entry, promote energy efficiency and conservation and improve management of woodfuel supply and usage. The lesson learnt from ESDP and applied here is that the proposed project is much more narrowly focused and does not attempt to address broader issues in the energy sector.
4.2 ESDP did not adequately address weak corporate governance in JIRAMA, including non- transparent and non-competitive contracting, abuse of privileges by staff, lax management and poor customer service. These problems have now been sufficiently exposed to public scrutiny and the transfer ofJlRAMA to a private operator will serve to keep a check on costs, improve revenue collection and inculcate higher standards ofservice. Transparency and accountability are also expected to be enhanced.
4.3 The early years ofESDP (pre-2003) were also characterized by an excessively dogmatic approach to institutional reform by the Bank, which led to stalemate. The proposed project has avoided repeating this error by its consultative and participatory approach to reforms, as illustrated by the importance attached to the role and recommendations ofthe Task Force on reforms. Much more attention has been given to keeping the labour unions fully abreast ofall matters affecting JIRAMA staff, and regular press briefings have also been given to inform public opinion.
4.4 The experience under ESDP also shows that there is a need to be more vigilant with respect to tariffs during inflationary times. The failure by GOM to address the erosion oftariffs caused by devaluation and rising world oil prices, contributed to the financial insolvency of JIRAMA. The conditionality ofthe proposed project reflects this lesson by front-loading actions expected ofGoM.
4.5 Experience and the lessons learned from similar projects elsewhere shows that attracting private operators to run African utilities is fraught with difficulties. Recent cases also illustrate that even in instances where long-term contracts were entered into private firms are ready to revoke them if the operating environment turns unfavourable. The proposed project will therefore seek to minimize such risks by ensuring that the ground rules and contractual arrangements are drawn up as clearly as possible, by providing GOM with suitably experienced international financial and legal advisers.
11 5. Alternatives Considered and Reasons for Rejection
5.1 A number ofstrong arguments favor an APL rather than a SIL. In the current context of a utility emerging from near-bankruptcy, in a period oftransition involving changes to its corporate culture and business practices, some flexibility of actions and their timing are felt to be needed and these are more easily accommodated in an APL structure than in a SIL.
5.2 It would have been possible to continue with the existing JIRAMA management contract on an open ended basis period, however this would have not incentivized the operator to improve performance. It would also be expensive, and require donor or GOM financing, since JIRAMA’s own internal resources would be insufficient to cover its cost.
5.3 The option ofseparating of water from electricity activities was examined in detail by the consultants hired to assist GOM in deciding on JIRAMA’s long-tern structure. The consultant recommended that a separation was inappropriate for a company ofrelatively modest size. Vertical and horizontal unbundling ofJIRAMA’s electricity operations was also studied by the same consultants and advised against for the same reason.
5.4 The most extreme option could be called the ‘do-nothing’ scenario, i.e. allow the current management contract to lapse and then leave JRAMA to struggle on as best as it could. This would have been a recipe for rapid collapse, widespread damage to the modem export-oriented sector ofthe economy and a repeat ofthe expensive 2005 GOMbailout for the sector.
12 C. IMPLEMENTATION
1. Partnership Arrangements (if applicable)
1.1 All donors involved in the sector are closely coordinating their interventions for maximum effectiveness. This has been clearly expressed in the joint aide memoire ofthe January 2006 Paris donors' round table. The aide mCmoire set forth a common set of conditionalities requested by the donors to commit financing to support GOM's recovery plan for JIRAMA, as well as for the sector's medium-term expansion requirements. (See figure 3).
Figure 3: Medium Term Power Generation & Investment Plan ......
...... 2 I
1.2 The European Investment Bank (EIB) is very active in water supply and ..as alreac .y approved a project of€47 million in mid-2006. The Dutch government is contributing grant funds towards the construction ofa 40 MW fuel-oil power plant (expected in service in mid- 2007) that will help relieve the current supply shortages as well as substitute for higher-cost diesel generation. Agence Franqaise de DCveloppement (AFD) has indicated that it will support implementation of the JIRAMA recovery program with a contribution in 2006 ofabout US$lO - 12 million. A third 30 MW generator at the existing Andekaleka hydro plant is about to begin, with financing from the Banque Arabe pour le DCveloppement Economique de 1'Afrique (BADEA). The African Development Bank (AfDB) has indicated its potential sector financial support in 2008. Since the financing plan for APL-2 is still to be completed, the involvement of other donors will be needed and firm pledges obtained early enough to be included in the information and guidance to potential private partners for JIRAMA.
1.3 Within the WBG, there is close cooperation between IFC and the Bank. IFC has already been hired by GOM to act as a transaction adviser for a series ofhydro generation projects that are to be offered to private investors to develop as PPs. In response to the difficult climate for
13 attracting FDI to the power sector in Madagascar, an IDA-supported PRG is also being prepared to complement IFC’s efforts to attract potential investors and to attempt to lower the risk premium (and hence the cost) in a bulk supply contract to JIRAMA.
1.4 In addition, IFC will also be the GOM’s investment adviser and lead the process ofhiring a private partner to manage JIRAMA. In order for IFC to successfully carry out its two mandates it requires the close collaboration ofthe Bank and other donors to provide financing for the preparatory work such as feasibility and environmental impact studies for the generation IPPS.
2. Institutional and Implementation Arrangements
2.1 The project would have two distinct implementation entities. One would be an integral part ofJIRAMA’s DEEL (Direction de 1’Equipement Electricitk), and would deal with hardware, procurement and physical implementation by JIRAMA ofits rehabilitation sub-proj ects. The other would be a small coordination and advisory group responsible for the policy and institutional reform components as well as for monitoring and evaluation ofthe project in its entirety that would be attached to the office ofthe Minister ofEnergy and Mining.
2.2 The physical rehabilitation works do not present any significant technical difficulty for JIRAMA, and the implementation cell would predominantly deal with procurement-related matters. Adequate expertise for this exists within JIRAMA, backed up by local consultants on a short-term basis as required.
2.3 MEM, however, has a serious problem oflack of adequate capacity to lead the process of selecting a new private operator and carry through sector reforms. Despite GOM’s decision to recruit IFC as its investment adviser to manage the selection process from start to finish, the MEM interface with IFC will need to be strengthened, and for this purpose it is envisaged that the project will finance the services ofa resident expatriate adviser in MEM for about two years. The adviser would also be responsible for managing the small coordination and advisory group (Cellule de coordination-CELCO) attached to the office ofthe MEM (see above).
2.4 MEM and the DEEL (JIRAMA) will maintain separate accounts for all transactions related to each component for which they have overall implementation responsibility and will produce their individual annual financial statements in accordance with internationally accepted accounting principles. The consolidation ofproject accounts if necessary, the production of quarterly Financial Monitoring Reports (FMRs) in compliance with international accounting standards and IDA requirements and the monitoring of the project progress will be assured by MEM.
2.5 While the capacity of JIRAMADEEL is deemed adequate, the capacity of MEMKELCO to deal with financial and accounting matters will need to be strengthened by: (i) improving the fiduciary system in place to ensure timely delivery ofdata on project activities; and (ii)recruiting a qualified and experienced accountant to assist the MEM accounting staff in
14 performing financial management tasks including budgeting, accounting, financial reporting, and disbursement operations.
3. Monitoring and Evaluation of Outcomes/Results
3.1 The implementation ofthe project will be monitored through quarterly progress reports that the Project coordinators (both at JIRAMA and MEM) will prepare and submit to IDA. This will provide a way oftracking actual project execution against implementation milestones established at the time ofthe project launch. These are the key performance indicators and project outcomes that are detailed in Annex 3.
3.2 Further, in order to assess impacts that the project is expected to have on the quantity and quality ofelectricity and water supplied, it is envisaged that several surveys will be carried out at different points on JIRAMA’s network. Monitoring ofrevenue enhancement measures will be facilitated by the ring-fencing of clusters where these are to be introduced. Baseline data will be collected in these clusters prior to introduction ofthe new customer management techniques.
3.3 Other indicators of JIRAMA’s overall performance, their baseline values and targets have been agreed during negotiations. These indicators are given in Annex 3.
4. Sustainability
Thefollowing topics are relevant to long-term sustainability:
4.1 Policy framework: The 1999 sector legislation is basically sound but will probably need to be revised to reflect Government’s decision regarding JIRAMA’s institutional reform. Some topics also need to be defined with greater clarity and precision and these will be addressed under IFC’s mandate as transaction adviser, which includes the provision oflegal support. The electricity sector regulator (ORE) is operational and has established some initial credibility in the recent round oftariff increases. The Letter of Sector Development Policy (LSDP) clearly spells out GOM’s vision of the sector for the next 5 - 10 years and presents a good basis for both private and donor participation in sector development.
4.2 Technical: It is expected that the future private operator ofJIRAMA will ensure that maintenance is carried out according to good operational practice. The remuneration ofthe future operator will depend on maximizing revenue and plant availability, which in turn creates a strong incentive for sound 0 & M practices. It is also expected that JIRAMA under a private management would better assist the government in making strategic future electricity generation choices by providing a more reliable long-term planning and data on expected load growth.
4.3 Financial: The 1999 law makes a provision for indexation oftariffs, but this was ignored. No cast-iron assurance can be obtained that history will not repeat itself in future, but the lessons appear to have been learnt from the economic damage to the country and the financial cost to the budget of bailing out JWAin 2005. The GOM has agreed to introduce a Credit
15 covenant under the proposed project that will permit JIRAMA to apply tariffs that ensure full cost recovery (para. 6 - Credit conditions and covenants). In addition, the introduction of private management in JIRAMA will provide the necessary stimulus to improve revenue collection particularly from large industrial users, cut down on electricity and fuel theft and inject greater all-round cost consciousness within JIRAMA.
4.4 Fiscal: The GOM’s budgetary support to JIRAMA in 2006 is expected to exceed AR 70 billion (roughly US$30 million), in order for it to continue operating and to help it meet payment obligations, predominantly to fuel suppliers (over AR 180 billion). Depending upon the evolution of world oil prices, further budgetary support will be needed from GoM in 2007, although on a greatly reduced scale. The project seeks to ensure that from 2008, JIRAMA will no longer need to rely on budgetary support for its operating expenditures. However, it must be recognized that this turnaround is vulnerable to further rises in world oil prices andor unforeseen major delays in commissioning ofthe 40 MW fuel oil power plant in mid-2007. It is thus proposed as a trigger for the second phase ofthe APL that JIRAMA should break even in terms of EBITDA (Earning Before Interests, Taxes, Depreciation and Amortization) in 2007. Such a target might not seem very demanding for a power and water utility with a majority ofits generation derived from hydroelectric units. However, it would represent a major improvement compared to the situation that prevailed in 2004 and 2005. Also given, the projected efficiency improvements that will begin to have a full year effect only in 2008, and provided an adequate tariff indexing formula is effectively applied, JIRAMA’s profitability should significantly improve in 2008 and 2009. By the end ofthe decade, JIRAMA should be expected to generate enough cash-flow from internal sources to fund the investments required to adequately maintain its assets. In these respects, the project will have a positive fiscal impact. Nevertheless, it has to be recognized that public funds through international loans or grants will still be required to fund the bulk of JIRAMA’s long-term-investments required to increase significantly the rates of access to electricity and water in Madagascar, but these will not have any budgetary impact.
16 5. Critical Risks and Possible Controversial Aspects
Main Risks Mitigation Measures I RiskRating Macro-economic Proposed Guarantee facility will protect private operator S problems: high inflation, against tariff erosion and ensure currency convertibility. currency devaluation, Bank and IMF macro-economic programs with GOM; rising oil prices. but some risk will remain, especially if oil prices remain high. Uncertain whether GOM Dated covenants, APL-2 triggers and Guarantee facility M is able to stay the course provide some assurance of coverage of political and on reform process. regulatory risks. Reforms stalled due to APL-1 investments to be committed prior to elections. M forthcoming elections. APL-2 will proceed only after selection ofprivate operator (post-elections). Political opposition to GOM will commit to preserving real level of tariffs by S higher tariffs. indexation (FA covenant), but some element of risk will remain. ~~~ ~ Labor union resistance to Unions participate in Task Force on long-term future of M internal JIRAMA reforms. JIRAMA. Will be kept informed in selection process for private operator. Weak institutional and TA to assist Ministry of Energy to implement sector M implementation capacity reforms, but some slippage risk will remain. Insufficient interest by IFC’s appointed as transaction adviser to GOM to guide M foreign utilities in taking over JIRAMA.
be in place end-2006 to mitigate risks. Project transactions may Recruitment of a qualified accountant in conformity with M not be properly accounted Bank procedures, to assist the MEM accounting staff in by MEM, and financial performing FM tasks. reports not timely Elaboration and implementation of an accounting manual produced. ofprocedures. Adjustment of the accounting software acquired within the context of the Energy Sector Development Project and users training. The quality of the audit Recruitment of an international auditing firm acceptable M may not be acceptable and to IDA to carry out the annual audit of the project the report not delivered in financial statements ofthe Project. time due to weak capacity ofthe accounting profession.
The overall risk of the program has been assessed as moderate.
17 6. Credit Conditions and Covenants
6.1 Effectiveness conditions would be:
The Subsidiary Agreement between GOM and JIRAMA has been duly authorized or ratified.
MEM has adopted the Project Manual and JIRAMA has adopted JIRAMA’s Project Manual all in form and substance satisfactory to the Association.
For the purpose ofPart B ofthe Project, MEM has elaborated its accounting manual of procedures and upgraded its accounting and financial management and monitoring and evaluation system (capable ofproducing FMRs) in a manner satisfactory to the Association; and has appointed an accountant specialist and a procurement officer within the MEM acceptable to the Association.
For the purpose ofPart A of the Project, JIRAMA (DEEL) has upgraded its accounting and financial management and monitoring and evaluation system (capable ofproducing FMRs) in a manner satisfactory to the Association.
Two special accounts have been opened (for DEEL and MEM) in the Central Bank under conditions acceptable to the Association.
Auditors satisfactory to the Association have been recruited for the purpose of Component A and Component B of the Project.
6.2 The main Credit Covenants are likely to be:
Dated covenants regarding- tariffs
(a) No later than November 30,2006, GOM shall have adopted the Electricity Tariff Indexation Formula.
(b) No later than April 1,2007, GOM shall have publicly disclosed the Electricity Tariff Indexation Formula and adjusted electricity tariffs in accordance with said formula, and shall subsequently adjust said tariffs in accordance with the Electricity Tariff Indexation Formula every 6 months.
Dated covenants (Milestones) regarding the process ofrecruiting the long-term- private partner for JIRAMA
(c) No later than December 3 1,2006, GOM shall have established terms and conditions to be used in the contracting of JIRAMA’s private partner satisfactory to the Association and have launched the prequalification process.
18 (d) No later than April 1, 2007, GOM shall have launched the bidding process for the recruitment of a new private operator for the management ofJIRAMA’s operations.
Financial covenants
(b) Beginning with the first quarter of CY 2007, JIRAMA to produce a quarterly management report (including relevant technical, commercial and financial parameters for the monitoring ofthe company and to communicate this reporting to the Bank less than 60 days after the end of the quarter.
(c) Accounts receivable not to exceed 3 months billings by the beginning ofFY 2008 and onwards.
(d) GOM shall define in agreement with the Association, no later than September 30 of each year during Project implementation amounts to be injected as need be into JIRAMA during the following calendar year so as to allow normal operations of the company.
Other covenants (Financial management and audits)
(a) DEEL/MEM shall maintain records and accounts in accordance with sound accounting practices.
(b) DEEL/MEM shall prepare and finish to the Association not later than 45 days after the end ofeach calendar semester, interim un-audited financial reports for the Project covering the semester, in form and substance satisfactory to the Association.
(c) DEEL/MEM shall have its Financial Statements audited in accordance with the provisions of Section 4.09 (b) ofthe General Conditions. Each audit ofthe Financial Statements shall cover the period ofone fiscal year ofthe Recipient. The audited Financial Statements for each such period shall be furnished to the Association not later than six months after the end ofsuch period.
6.3 Specific condition of disbursements would be:
(a) Credit disbursement for Component B would be permitted only after recruitment by MEM of a technical advisor acceptable to the Association.
(b) Credit disbursement for the rehabilitation ofthe civil works ofthe Vatomandry hydroelectric plant (to satisfy the requirements of the safeguard policy OP 4.37 on Dam Safety) would be permitted only after JIRAMA has submitted a report satisfactory to the Association on the condition ofthe Vatomandry dam and the proposed safety measures to be implemented.
19 6.4 Triggersfor Initiating APL-2
In order to proceed with APL-2, GOM would need to demonstrate:
(a) Satisfactory implementation ofAPL- 1 investments;
(b) Sufficient progress on the JMAfinancial restructuring as per the agreed financial covenants ofthe FA for APL-1;
(c) Regulatory agencies (water and electricity) fully operational with clearly defined and implemented tariffs indexation formulas; and
(d) Completion of the recruitment of the long-term private partner for JIRAMA up to contract signature.
D. APPRAISAL SUMMARY
1. Economic and Financial Analyses
Economic Analysis
1.1 System expansion plan: The recent oil price hikes have turned JIRAMA’s stop-gap and suboptimal choice ofdiesel generators into a severe financial burden for its consumers and also for GOM. The success ofthe proposed recovery program for JIRAMA is predicated upon a rapid move away from diesel generation, initially to Heavy Fuel Oil (HFO) and then in the medium- to long-term to hydroelectricity. Unfortunately, in the short- to medium-term, despite Madagascar’s evident hydroelectric resource potential, the scope for rapidly developing new hydro power sources is rather limited. Work on the addition ofa third 30 MW generator at the existing Andekaleka hydro plant is about to begin, with financing from BADEA. Under normal hydrological conditions it will produce 200 GWh per year, representing a massive cost saving to JIRAMA. Two minor sites (Sahanivotry and Lily) are at a sufficiently advanced stage of preparation by private developers to contribute a further 80 GWh ofhydro power by 2009 - 2010. Due to a lack ofpreparatory studies, other small to medium term hydro prospects are unlikely to be commissioned before 2010 - 201 1.
1.2 In the near term, major fuel savings can therefore only be achieved through substitution of heavy fuel oil burning plants in place ofdiesel generators (financed under APL-1). Implementation ofa 40 MW HFO plant (with financing from Dutch Government) to be sited in the capital has begun and it is expected to be in service in mid-2007. This plant will permit JIRAMA to greatly reduce its use ofdiesel, since the plant is capable ofproducing 200-250 GWh annually. All of the above new generation projects have been delayed by several years and should already have been in service. They produce substantial economic benefits and delays in completing them would be very costly to JIRAMA.
20 1.3 Economic Rate ofReturn: Given the diverse nature ofthe physical investments envisaged under the recovery program and its nature as a two-part APL, the economic analysis is based on a 5-year time-slice (2006-2010) ofthe electricity sector’s total investment program, which has been reviewed and found to be least-cost in nature. Details are contained in Annex 9. Assigning specific benefits to particular project components would have been both arbitrary and nearly impossible. The base case estimate ofthe EIRR is 14.4%.
1.4 The physical benefits from these investments that have been quantified here are twofold: first, (and most important) the incremental electricity supplied to consumers; second, the reduction in high-cost diesel fuel consumption arising from the replacement of diesel generators by more economical ones using heavy fuel oil (HFO).
1.5 The incremental demand that can be met as a result ofinvestments made possible by the program is based on the variant ofthe load forecast prepared by JIRAMA’s consultants, HQI. For the purposes of the economic analysis, only five years (2007 - 201 1) ofcumulative load growth have been considered as benefits directly attributable to the 2006 - 2010 investment program. Total electricity demand is projected to increase at an annual average rate of7.6%. However, demand growth in 2006-2007 is severely constrained to only 2% - 4%, due to a deliberate attempt by JIRAMA to restrain consumption prior to the entry in service of a large, new HFO plant.
1.6 The minimum value ofthe incremental sales has been taken to be the average tariff across all customer categories charged by JIRAMA in 2006, i.e. UScl3/kWh. This does not represent the full value ofbenefits to users from this electricity, but in the absence of an estimate of the ‘consumer surplus’ it is a minimum measure ofbenefits that has been used as a proxy. It is well below the JIRAMA tariff charged to LV consumers in Zone 3 (isolated centers served entirely by diesel), ofUSc 19-20/kWh. Fuel savings to JIRAMA have been estimated at the difference between the cost ofgeneration using HFO in the new HFO power plant and diesel fuel that it would otherwise have to use in its existing generators, about USclO/kWh at current oil prices.
1.7 Full details of the analysis and the parameters used in estimating the ERR are given in Annex 9. The EIRR is particularly sensitive to variations in oil prices, the size and timing ofthe investment program, delays in completing more efficient plants, and to assumptions about demand growth. As can be seen in Annex 9, depending on the combination of negative factors assumed, the EIRR varies from 10.3% to 13.7%.
Financial
Financial Analysis of JIRAMA
1.8 The following conclusions can be drawn from the financial forecasts presented in Annex 9:
(a) In spite ofthe large funds injected in the company by the government and donors, the ongoing conversion ofdebt into company equity, and the successive tariff increases for electricity and water, JIRAMA remains in a precarious financial situation.
21 (b) With most ofits debts cancelled or rescheduled, JIRAMA has been given a fresh start financially; however its most immediate problem remains an insufficient generation of funds from internal sources: cash-flow from current operations is likely to remain negative in 2006 and 2007. This is the result ofJIRAMA’s unfavorable generation mix, with too much diesel fired capacity, and the ever-rising world price ofoil.
(c) Electricity tariffs have been raised by nearly 100% over the past year, bringing the expected average revenue this year to UScl3 per kilowatt-hour, a level that is similar to its value in 2002 and 2003. However, oil prices are much higher today than they were then, and the current level oftariff remains below what would be adequate to achieve cost-recovery. Further hikes during the next 12 months are politically and socially difficult to envisage. As a result, JIRAMA cash position is bound to deteriorate again over the period to 2008, especially if the company reduces its payment arrears to its suppliers, as envisioned in the January 2006 ‘plan de redressement’. Therefore, a new injection of liquidity from GOM will probably be needed in mid-2007.
(d) The financial forecast presented in Annex 9 assumes several internal efficiency improvements, but the biggest source ofpotential savings is the reduction ofgeneration costs, which will occur from mid-2007 onwards.
(e) Tariff discipline is essential if JIRAMA is to become financially viable on a sustainable basis. An updated tariff indexation formula needs to be defined and scrupulously followed. A FA covenant that would impose the consistent application ofa tariff indexing procedure from April 2007 onwards is thus proposed. In addition to this procedural aspect, the level ofthe tariff should be set adequately (it is thus proposed to retain it as a trigger for the second phase ofthe APL that JIRAMA should break even in terms ofEBITDA in 2007).
Situation of JIRAMA at the Beginning of the Management Contract 1.09 A diagnostic study ofJIRAMA’s operations carried out in 2003 revealed the severity of the problems the company had to face. The management contract, which has been in place since April 2005, shed further light on the true extent ofJIRAMA’s financial difficulties. In summary, the situation in mid-2005 can be described as follows:
1.10 Extreme financial unsustainabilitv ofcurrent operations: during the first semester of 2005, the variable costs associated with thermal generation alone (fuel expenses and energy purchase costs) were superior to the total revenues of the company leaving no source offunds to pay for other current expenses (maintenance, personnel etc), let alone new investments or debt repayment.
1.1 1 Rapidly accumulating arrears to suppliers: given the structural disconnect between current expenses and revenues, JIRAMA could not continue to operate without increasing its level ofdebt and arrears to suppliers. This practice merely postponed the liquidity crisis facing JIRAMA until after the management contract took effect.
22 1.12 Lack ofeffective and reliable financial reDorting and internal controls: Illustrations of these deficiencies are the absence ofreliable and audited annual accounts, the lack ofmonitoring ofthe cash position of the company, incomplete and late reporting offinancial information from the many remote outlying JIRAMA centers. The management contractor is already addressing most of these issues.
The Financial Recovety Process Supported by APL-1
1.13 Financial restructuring of JIRAMA: JIRAMA cannot realistically service the debt it has accumulated. The financial restructuring entails substantial debt cancellation by the GOM, as well as an injection ofcash. Overall, the plan entails significant budgetary costs in excess ofAFt 75 billion for GOM in 2006. It is likely that an additional injection ofliquidity in JIRAMA will be necessary again in mid-2007, depending upon the trend ofworld oil prices.
1.14 Tariff increases: While further increases oftariffs in real terms might be necessary in the future, if oil prices do not decrease, the bulk ofthe adjustment effort in this respect has already been done, especially taking into account expected reduction in generation costs thanks to planned investments. It is, however, vital that the current level oftariffs be at least preserved in real terms. The definition of an indexing formula for electricity and water tariffs and a streamlined decision-making process to apply the formula and implement the necessary tariff adjustment will provide protection against the volatility ofthe currency and ofoil prices.
1.15 Additional Support from GOM: Under the assumption laid out in Table 9 ofAnnex 9, JIRAMA would start to generate a positive cash-flow in 2008, due to a combination ofmoderate tariff increases, a better generation mix, and improved operational performance. JIRAMA will nevertheless remain in a difficult situation with insufficient liquidity up to the end of 2008 (current ratio below 1 and increase ofshort-term financial debt) without fresh injections ofcash from GOM in 2007. Provision for continuing cash injections to JIRAMA needs to be made in the GOM budget for 2007.
2. Technical
2.1 The investments under the APL-1 have been designed to meet Madagascar's near term electricity sector objectives and to enable a swift financial turnaround ofJIRAMA, viz.:
' Convert costly diesel generation to HFO, resulting in savings of USclOkWh on every unit of electricity produced; . Assure a minimum level ofmaintenance ofkey power plants to maintain existing capacity and reduce the number of power cuts; ' Reduce technical and non-technical losses; ' Improve revenue management and collections; and ' Encourage development ofcost effective generation sources, e.g. small hydro plants.
2.2 The investments were chosen among a list ofcandidates totaling about US$lOO million identified by JIRAMA as necessary for the success ofits financial restructuring plan presented to
23 the donors’ round table meeting in January 2006. The first phase ofthe APL focuses on immediate critical generation needs and investments with high returns to urgently mitigate the severe financial problems ofJIRAMA. For these investments the bidding documents are already well advanced. For some, advance procurement is already ongoing and JIRAMA plans to quickly utilize the IDA funding by means ofretroactive financing right after Credit effectiveness.
3. Fiduciary
Financial Management
3.1 The financial management systems both at the DEEL in JIRAMA and MEM need to be strengthened to address some deficiencies and build their capacity to produce quarterly Financial Monitoring Reports (FMRs). The main measures to be taken are the following:
0 For MEM: (i)recruitment, under terms and conditions acceptable to IDA, ofa qualified and experienced accountant to assist the MEM accounting staff in place in performing FM tasks; (ii)elaboration of a chart of accounts to ensure the availability ofall relevant information for financial reporting; (iii)elaboration and implementation ofwritten operating instructions to ensure proper record keeping and adequate safeguarding of assets; (iv) design and implementation of an accounting system to ensure timely production of financial information required for managing and monitoring activities to be implemented by the MEM.
0. For DEEL: (i)review of the DEEL chart ofaccounts to reflect components and activities outlined in the PAD to satisfy reporting requirements; (ii)update of the current accounting manuals ofprocedures in order to include all necessary changes required by this new project, facilitate adequate record keeping and the maintenance of proper control over assets; (iii)review and adjustment ofthe accounting software acquired within the context of the Energy Sector Development Project in order to satisfy DEEL requirements and ensure timely production of financial statements and FMRs required by IDA. All these recommendations should be implemented prior to credit effectiveness. The content and formats offinancial statements and FMRs have been determined during appraisal mission and agreed at negotiations.
3.2 The project financial statements (CELCO and DEEL) will be audited annually by independent and qualified auditors acceptable to IDA in accordance with International Standards of Auditing. The auditors should be recruited prior to credit effectiveness. The audit report will be submitted to IDA not later than 6 months after the end of each fiscal year.
Procurement
3.3 A new Malagasy procurement code was enacted in July 2004 but, since then, the texts for their application have recently been approved but it will take some time before entering in effectiveness and thus the existing Procurement Code of 1998 will continue to be used at least until early 2007. The Bank has ascertained that deficiencies identified in the 1995 CPAR have
24 been properly addressed. IDA standard bidding documents (SBDs) are widely used in Madagascar. However, an area ofconcern is the cumbersome and overly bureaucratic approval process for contract signing by GOM, which causes unnecessary delays. In addition, insufficient programming and procurement planning contribute to delays in project implementation which result in slow disbursement. To mitigate risks ofdelays for the proposed project, proper prerequisites for the use of Bank SBDs, including evaluation reports for National Competitive Bidding procedures (NCB) have been agreed upon with Government during negotiations. The procedures manual will be updated as a part of the Project Implementation Plan.
3.4 A Procurement Capacity Assessment ofJIRAMA was not conducted during appraisal because it was agreed with JIRAMA’s management that the same team will be maintained in place as the one which dealt with the recently-closed ESDP. On the basis ofthe experience acquired by the JIRAMA procurement team, an action plan was drafted to address areas where capacity needs to be strengthened. The action plan includes (i)a specific section on procurement in the Project Implementation Manual to be finalized or updated before Credit effectiveness; (ii)improvement ofrecord keeping ofprocurement-related documents; and (iii)refresher procurement training sessions for project staff.
3.5 A separate Procurement Capacity Assessment was conducted for the MEM procurement Unit during appraisal. The assessment reviewed the organizational structure for the unit. The key issues and risks concerning procurement by MEM have been identified. Corrective measures which have been agreed are: (i)recruitment, under terms and conditions acceptable to IDA, ofa qualified and experienced procurement expert; and (ii)the close follow-up ofthe agreed procurement plan and activity scheduling. A procurement action plan will be fine-tuned quarterly and the main procurement plan will be updated accordingly.
4. Environmental and Social
4.1 APL- 1 will finance generation rehabilitation, disti-ibution reinforcement and rehabilitation ofthe existing transmission lines and substations in various towns in Madagascar. The investments are entirely aimed at upgrading existing installations. Nonew greenfield sites will be developed or human resettlement undertaken.
4.2 JIRAMA has undertaken an Environmental and Social Impact Management Framework for phase 1 ofthe proposed APL. Phase 2 ofthe APL will be the subject of a complete study (ESIA) during the execution ofphase 1. The JIRAMA subprojects envisaged in APL Phase 1 comprise 3 distinct groups:
- Group 1: Rehabilitation ofthermal power stations. - Group 2: Rehabilitation ofhydroelectric power stations. - Group 3 : Rehabilitation oftransmission and distribution networks.
4.3 The rehabilitation ofthermal power stations in Ambohimanambola, Mahajanga, Toamasina, Toliary, Antsiranana includes the rehabilitation ofthe existing Power Plants. The environmental examination ofthe projects related to the rehabilitation ofthe power stations
25 showed that the environmental impacts are generally neutral. However, the impacts of the investments alone cannot be considered independently from the totality ofthe installations and the current environmental situation in the site in which they are located. The main impacts are noise, the atmospheric emissions, pollution ofground and water due to non efficient management ofeffluents, and poor risk management including absence of an emergency plan. The main mitigation measures to address these issues along with the action plans are available in the Environmental and Social impact Management Framework for phase 1.
4.4 The rehabilitation ofthe hydroelectric power stations ofAntelomita 1, Ankazobe, Tsiazompaniry, Vatomandry, Andekaleka and Volobe, consist ofreplacement ofused turbine and alternator parts, turbine cooling equipment, general revision ofplant, and rehabilitation of the civil engineering works. The investments will not alter the current design ofthe dam, existing water levels nor surpass the original capacity ofthe turbines. The main environmental impact identified concern the safety ofthe sites (e.g. the transformer Switchyards are not locked and the fire fighting equipment is outdated) and the silting up ofthe reservoirs because ofthe soil erosion on the basin slopes. The review ofthe environmental impact ofthese subprojects concluded that they are non significant and reversible, with the exception ofthe environmental impacts ofthe civil engineering works planned for the hydroelectric station in Vatomandry (192 KW). For this plant, JIRAMA must meet the requirements ofthe Bank safeguard policy OP 4.37 on dam safety. This rehabilitation will not be implemented until a review ofthe dam’s safety, carried out by an independent expert, has been judged satisfactory by IDA.
4.5 The transmission and distribution rehabilitation subprojects present very minor environmental issues. Specific attention is given to the rehabilitation oftransformers in which the PCB (Polychlorinated Biphenyl) represents an environmental risk. JIRAMA has agreed to comply with the action plan for the elimination ofPersistent Organic Pollutants (POP), elaborated in collaboration with the Malagasy Environmental Administration, the coordination committee ofPOP and supported by UNEP. JIRAMA will therefore ensure safe storage of the old transformers in accordance with the recommendations ofthe action plan.
5. Safeguard Policies
Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, being revised as OP 4.11) [I [XI Involuntary Resettlement (OPBP 4.12) [I [XI Indigenous Peoples (OP/BP 4.10) [I [XI Forests (OP/BP 4.36) [I [XI Safety ofDams (OPBP 4.37) [XI [I Projects in Disputed Areas (OP/BP 7.60)* [I [XI Projects on International Waterways (OP/BP 7.50) [I [XI
* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties’ claims on the disputed areas
26 5.1 The environmental classification ofAPL-1 is Category B. The approach to safeguards is presented below, and the results are summarized in Annex 10.
5.2 OP 4.01 Environmental Assessment: JIRAMA has hired consultants to prepare an Environmental and Social Impact Management Framework (ESMF) that guides the screening, analysis ofthe existing environmental conditions and the environmental liabilities and impacts of the present operations in APL phase 1. The consultants have elaborated guidelines with mitigation measures and action plans to reduce the existing negatives impacts. The Government will prepare relevant safeguard studies (ESIAs with EMPs and RAPs, as applicable) for Phase 2 and these will be conducted and submitted to ASPEN for review and clearance.
5.3 OP 4.12 Involuntay Resettlement: It is unlikely that this Operational Policy (OP) will be triggered for phase 1, since land acquisition or displacement is not necessary for this stage. Only under APL Phase 2, this Operational Policy may be triggered. In that event, ESIAs with RAPs will be conducted and submitted to ASPEN for review and clearance.
5.4 OP 4.3 7 Safely of Dams: For the civil engineering works planned for the hydroelectric power station in Vatomandry, an expert review ofthe safety ofthe structure will be available just before the implementation ofthe project and submitted to ASPEN for review and clearance.
6. Policy Exceptions and Readiness
No exceptions to Bank policies are requested.
27 Annex 1: Electricity Sector and Program Background MADAGASCAR: Power/Water Sectors. Recovery and Restructuring Project
Energy resources
1. Despite a substantial hydroelectric potential in excess of7,000 MW, Madagascar has so far only developed under 100 MW ofgenerating capacity using this resource. Access to electricity is extremely low (less than 5% in rural areas) and the vast majority ofthe population relies on petroleum products and wood fuel for cooking and lighting. Little has been done so far to develop alternative energy sources like bagasse, solar or wind power.
Electricity consumption
2. One ofthe notable features ofMadagascar's electricity supply system is its fragmentation and the absence of a national high-voltage transmission grid. Because of the low levels of demand, and the large distances separating load centres; local supply systems still represent the least-cost solution for supply in the majority ofcases. There are only three urban interconnected networks in Madagascar, serving Antananarivo-Antsirabe, (representing 70% ofnational electricity sales), Toamasina and Fianarantsoa, which together account for 80% of total sales. For the remainder ofthe country JIRAMA has 112 separate supply systems serving other small urban areas, not all ofwhich provide 24-hour service. Electricity production by JIRAMA2was 988 GWh in 2005, with total sales of754 GWh. JIRAMA's electricity losses were about 24% in 2005, ofwhich half are estimated to be technical.
Existing generation facilities
3. Electricity production in Madagascar is based on a mix ofhydro and thermal plants for base load. Currently production capacity is 292 MW with 105 MW (or 36%) ofhydro capacity and 187 MW ofthermal capacity, which are capable ofproducing about 1,000 GWh per year. A further 40 MW belongs to private auto producers. The largest hydro plant, Andekaleka (2 X 29 MW) was built with IDA assistance in 1982. Due to recent modifications ofthe operating regime that was formerly extremely conservative, the plant is now capable ofdelivering 10% additional power - i.e. 64 MW.
4. In general terms, Madagascar's generation facilities are very old. As a consequence, a large number ofthe existing thermal units need to be retired before year 2010. While the hydro production facilities are in relatively good shape, mainly due to donor support, some ofthe power plants also need substantial maintenance oftheir turbines in order to continue to function at nameplate capacity.
Including purchases of24 GWh from private producers.
28 5. The state of the thermal plants is generally poor due to lack ofpreventive maintenance, spare parts and fimding for new generators, especially in the areas served exclusively by thermal diesel plants. JIRAMA's recent financial crisis has accelerated the problem to a point where if considerable investment resources are not provided, regions could be completely deprived of supply for sustained periods of time. Poorly managed and maintained thermal power plants have further led to an increase in diesel consumption that on average is 20% above benchmark values.
Evolution of Demand
6. Low voltage users accounted for 63% ofJIRAMA's electricity sales of 754 GWh in 2005. As shown in Figure 1, demand growth during the period 1995-2005 was 7% annually, markedly faster than the previous decade, when it barely averaged 3% p.a. The last three years since the end of the political crisis in 2002 exhibited unprecedented double-digit growth of 12%, albeit after a 9% decline in demand in 2002. The strong demand growth can be attributed in part to the sharp decline in the real cost of electricity to consumers, resulting from a four-year tariff freeze (2001-2005) at a time of high inflation and depreciating exchange rate. Peak demand in the Antananarivo network was 148 MW in 2005, which does not reflect the true level of demand due to load shedding arising from a shortage ofgenerating capacity.
7. The number of consumers increased from about 190,000 in 1994 to 402,000 in 2005, an average annual growth rate of 7%. The distribution ofconsumers is highly concentrated: Only 30 JIRAMA supply centres have over 1,000 clients, while there are under 10 sites with 5,000 or more consumers.
Figure 1: Electricity demand growth in Madagascar, 1987-2004
GWh I Evolution de la consommation 1987-20041 800 700 600 500 400 300 200 100
Source: Etude de marche et prkvision de la demande, HQIAug. 2005.
29 Tariff policy
8. Madagascar is unusual in not having a pan-territorial pricing policy for electricity. To reflect differences in costs (particularly fuel), and in factors such as load density and load factor, JIRAMA has classified its networks in three "tariff zones", with prices being lowest for zone 1 and highest for zone 3. Zone 1 comprises three ofthe larger systems, where generation comes mainly from hydropower. Zone 2, including Mahajanga and Toliary, corresponds to larger thermal systems that use mainly heavy fuel oil. Zone 3 covers the rest ofthe systems, which generate power from plants using only diesel. The general low voltage residential tariff in zone 3 is presently 2.4 times than the one paid by consumers in zone 1. For high and medium-voltage consumers, rates are differentiated by time ofday (peak, day, and night). The peak price in zone 1 is over five times the night rate, in an attempt to flatten JIRAMA's evening peak.
9. In 1992, GOM passed an important decree (No. 7800-92) which introduced the principle of automatic tariff adjustments, based on an indexation oftariffs to the exchange rate, the price ofoil, and the local consumer price index. However in practice this indexation policy has never been systematically applied. The current JIRAMA tariff schedule is presented at the end of Annex 9.
Future demand for electricity
10. Demand for electricity is projected to increase at an average of6.5% to 7.5% annually, according to the load forecast undertaken as part ofthe Least Cost Generation Master plan prepared in 2005-2006 by Hydro Quebec International. The study forecasted electricity demand up to 2030. The increase is primarily fuelled by an increase in the number ofconsumers and could be further accelerated if GDP per capita growth figures increase more than projected. As seen in the chart below, the difference in the forecasts between the high and low case scenarios is highly dependent on the construction ofa small number oflarge industrial/mining projects.
Figure 2: Scenarios of future electricity demand
1 6000 , I
5000
4000
f 3000 (3 2000
1000
Source: Etude de marche etprevision de la demande, HQIAug. 2005. Low case (GDPgrowth 3.5%, Population growth 2.0%, major industrial projects delayed), Base case (GDP growth 5.6 %, Popn. growth 2.3%), High Case (GDP growth 7.6 %, Popn. growth 2.5%, Major industrial/mining projects advanced).
30 11. In the short- to medium-term, however, it is expected that demand growth will be much lower (2% - 4%) over the period 2006-2007, due to supply constraints, but once these are eliminated, there will be a rapid ‘catch up’ period (2008-2009) when demand is expected to increase by 8% - 10% p.a.
12. The Madagascar grid is highly dispersed across the country, with a large number ofsmall unconnected grid systems. Peak energy demand projections for investment purposes are therefore unsuitable on an aggregate basis for the country as a whole, since the type ofload and amount ofcommercial use vary greatly between the regions and the various grids. It is ofgreater relevance to study the main growth centres such as the Antananarivo network, that represents 70% ofthe electricity consumption and half ofthe total medium and high voltage loads in the country. Peak demand here has been projected to rise from 147 MW to 594 MW, or over 300% in the 25 years between 2005 and 2030.
13. This massive increase opens up the possibility ofinterconnections between the three main load centres ofAntananarivo, Toamasina and Fianarantsoa, to make better use of untapped hydro resources and achieve economies of scale in generation expansion that would otherwise be difficult to justify if intended solely for one ofthese grids taken alone. The interconnections are expected to cost US75 million for the Antananarivo - Fianarantsoa interconnection and US$47 million for the Antananarivo - Toamasina transmission line3 and will enable JIRAMA to save about US$400 million on fuel during the 2006-2029 period compared to the scenario ofhaving three independent, unconnected systems. These transmission links will also enable JIRAMA to connect the future hydro generation sites ofVolobe and Antetezambato with the main grid.
according to HQIestimates in the 2005 master plan.
31 Medium- and Long-Term supply options
Medium Term Supply 2006-2010
14. The Supply/Demand Balance for the Antananarivo networ-- (R Tana) over the next 5 years is largely dependent on an ambitious investment program and JIRAMA’s ability to keep the old plants going long enough prior to the entry in service ofnew plants. (see Figure 3).
Figure 3: Antananarivo Grid Electricity Supply -Demand Balance
RI TANA Demand/ Supply Balance
260
240
220
200
180 Peak Supply (MW) 160
140
120
100 2006 2007 2008 2009 2010 2011
15. As shown in Table 1, peak supply is barely keeping up with demand during the wet season. Load shedding of 10% ofthe supply during the dry season occurs at present, since hydro output is reduced. Several ofthe old thermal plants are in a poor state or at the end oftheir estimated lifetime, causing breakdowns and further interruptions in supply. This precarious situation is likely to persist until the commissioning of the first batch ofgeneration investments in mid/late 2007.
32 Peak Demand (MW) 147 153 168 182 196 212 Hydro 95 95 95 95 95 95 HFO 9 14 14 14 14 14 Diesel 27 27 27 27 27 15 IPP 18 18 18 18 18 18 Existing supply 149 154 154 154 154 142
New Generation 86 86 86 101
Peak Supply (MW) I 149 154 240 240 240 243 iource: JIRAMA.
16. In order to meet the increasing demand and put an end to the current supply shortages, the government has identified the most urgent generation investments for the medium-term. These are geared towards increasing supply and lowering the cost ofproduction of existing plants, while investments will be made in new HFO plants with quick returns on investment largely replacing more expensive diesel alternatives. These investments can be clustered as follows:
0 Rehabilitation and conversion
Rehabilitation and conversion of the thermal power plants in Ambohimanambola, Antsirabe, Antsiranana, Mahajanga, Toliara. The investments of about USSl.7 million would save around US$lmillion per year in fuel costs while improving reliability and increasing production by 27 GWh.
e New Production
o A new 40 MWHFO thermal power plant for the Antananarivo grid. This will be able to produce 200-250 GWh annually at base load. o The addition ofa third turbine in Aizdekaleka hydro plant to increase production capacity by 30 MW and 200 GWWyear under normal hydrological conditions. o Construction of small sized hydro plants as IPPs, notably Sahanivotry and Lily adding 12+4 MWof base load capacity and total average energy of 80 GWh. o Leasing or IPPs for a number of smaller power plants for the regional centers of Antsiranana, Mahajanga, Toliary.
33 1 400 000
1 200 000 .-- -.- ... - . 1 000 000 1 --
800 000 1
600000 -
400 000 --
200000
0 ._ 19. The least cost Generation Master Plan identifies the following hydroelectric candidates for the main grid5 for the long-term.
Project Commissioning Capacity Guaranteed Approx. Cost Year in MW Energy US$m (GWh) Talaviana 2009 15 7 26 Lohavanana 2012 120 56 194 Volobe Amont Phase 1 2015 60 38 107 Phase 2 2018 30 23 Antetezambato Phase 1 2019 60 60 180 Phase 2 2020 60 90 26 Phase 3 2023 60 26
20. The ranking and sequencing ofthe principal hydro investments shown in Table 3 are dependent on development ofvarious grid interconnection projects as well as the possibilities of co financing with proximate large-scale mining operations, as in the case ofthe Volobe Amont project.
The Antananrivo and Taomasina grids would also be interconnected in parallel.
35 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies MADAGASCAR: Power/Water Sectors Recovery and Restructuring Project
Ratings Sector Issue Project (Bank-financed projects only) zompleted Projects ED Rating! Outcome Sustain- ID Impact ability Hydro-generation, Andekaleka Hydroelectric Development Project (Approved 1978), Credit 08 17 Rehabilitation and Energy Project (approved S L su maintenance ofthe power 1987), Credit 1787 system and institutional strengthening Increased generation Energy Sector Development ICR not ICR not ICR not capacity, rehabilitation of Project (approved 1996), Credit completed completed completed the power system and 2844 (Rating institutional strengthening N/A) Improved Access to Water Rural Water Supply and S L su supply and Sanitation Sanitation Pilot (approved services in Rural areas 1997), Credit 30250 Improved Urban Urban Infrastructure Project S L su Infrastructure and Job [approved 1997), Credit 29680 creation Latest Supervii on
~ Ongoing Projects Implementation Development Progress (IP) Objective (DO) Transport Sector Transport Infrastructure S S Development Investment Project (approved 2003), Credit 38360 Stimulate Economic Integrated Growth growth and Job creation Poles (approved 2005), Credit 41010
Note: MS Marginally Satisfactory S Satisfactory U Unsatisfactory MU Marginally Unsatisfactory
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3 4:> cd 0 .- hl 0 .-c a Annex 4: Detailed Project Description MADAGASCAR: Power/Water Sectors Recovery and Restructuring Project
Introduction
1. The proposed lending instrument for this operation is a two-phase, five year Adaptable Program Lending (APL). The APL program is conceived as a 6 year effort (mid-CY 2006/mid-CY 2012) to be implemented in two phases. Only Phase 1 ofthe proposed APL (mid-CY 2006 to mid-CY 2008) is presented in detailed in this annex with a detailed cost table presented in Attachment 1. A preliminary description of APL-2 is presented in Attachment 2 ofthe present annex. IDA’Scontribution to the first phase (APL-1) is expected to be US10million and for the second phase (APL-2) is expected to be about US$30 million and should provide resources to implement critical investments and guarantees for investments to be made by the private sector.
2. Through a programmatic approach, the proposed project aims at supporting the most pressing needs ofthe electricity sector. Hence APL-1 is entirely focused on restoring JIRAMA to a minimum acceptable level ofoperational and financial performance. This restoration is an essential precondition to attracting a private firm to operate JIRAMA under an ‘affermage’ contract. APL-1 would inter alia, provide funds for TA to GOM to facilitate close cooperation with the IFC transaction advisor’s team in the process of selecting and contracting a new private operator to take over JIRAMA at the end ofthe current management contract, as well as for prolongation ofthe current management contract to avoid any hiatus before the takeover by the selected strategic partner. APL-1 will also provide funds for some preparatory studies needed to build up a pipeline ofAPL-2 investments and Guarantees.
3. APL-1 comprises two components:
Component A: Investments for: (Ala) Power generation reinforcement (rehabilitation); (Alb) retroactive financing; (A2) Reduction of transmission and distribution technical losses; and (A3) Revenue management and Modernization of Information Systems and IT equipment.
Component B: Funding and technical assistance for: (Bl) close cooperation with the IFC transaction advisor’s team in the process ofselecting and contracting a new private operator and communication; (B2) prolongation ofthe current management contract; (B3) preparation of future generation projects in coordination with IFC’s (second) IPP mandate; (B4) strengthening ofthe Ministry of Energy and Mining; (B5) feasibility and environmental studies for APL-2 investments; (B6) monitoring and evaluation; and (B7) project implementation.
43 Component A: Short-term investments (including; continpencies: IDA: US$7.0 million)
4. To address the immediate technical shortcomings ofthe utility, JIRAMA has drawn up a medium-term (2006 - 2010) investment plan estimated to cost US$200 million (for both electricity and water), to improve the performance ofcostly and poorly performing generation plants, reduce high technical losses and introduce improvements in revenue management. The Bank, in coordination with other donors, would finance some of the highest priority and most urgent investments of this plan. This is the centerpiece of APL-1. This component will be executed by JIRAMA. Bid packages for these projects are under preparation.
Subcomponent Ala: Power generation reinforcement (rehabilitation) (IDA: US$2 million)
5. This subcomponent supports the project objective ofrestoring and improving electricity supply and contributing to JIRAMA’s financial recovery. It includes rehabilitation of existing hydroelectric and thermal units, and conversion ofgeneration units from diesel to heavy fuel oil (HFO).
(a) Replacement ofhydro-refrigerants system for the ANDEKALEKA hydropower plant (2 x 32 MW): The project proposes to finance the replacement (6) and rehabilitation (7) of those hydro-refrigerants.
(b) Rehabilitation ofunit No3 ofthe ANTELOMITA 1 hydropower plant (0.8 MW): The current state ofAntelomita 1 does not allow using its energy to full capacity. The project proposes to finance the acquisition ofcomponents to rehabilitate the plant. The project will also finance some training in system control and protection.
(c) Renovation works in the VOLOBE hydropower plant (6.7 MW) The present condition ofVolobe does not allow its energy potential to be fully used. The project proposes to finance acquisition ofcomponents to rehabilitate and restore the plant. General rehabilitation ofsome equipment (turbine wheels, alternators, etc.) ofthe plant will also be done under the proposed project.
(d) Rehabilitation of small hydropower plants ofANKAZOBE, TSIAZOMPANIRY, AMBODIRIANA and VATOMANDRY: The project proposes to finance the rehabilitation ofthese small hydropower plants to reduce JIRAMA’s dependence on thermal generation in its isolated system.
(e) Rehabilitation ofmechanical auxiliaries ofthe AMBOHIMANAMBOLA thermal power plant (3 x 6 MW): Most ofthe mechanical auxiliaries are in poor condition. The plant cannot be run on a permanent basis with HFO. A first tranche of rehabilitation is already ongoing, and this will be completed under the project by replacement of some mechanical auxiliaries such as boilers, re-heaters and exchangers.
44 (0 Rehabilitation of thermal plants in MAHAJANGA (Unit 1303), TOAMASINA (2 x 8 MW) and TOLIARY (Unit 1305) are expected to be financed by the Agence Franqaise de Dkveloppement (AFD).
Subcomponent A 1b: Retroactive finan cing (IDA: US$l rn illion)
6. Some of the urgent works needed to rehabilitate JIRAMA’s thermal plants were to have been financed under the previous IDA Credit for ESDP that closed in December 2005. As these could not be finished prior to the closing date, JIRAMA has had to finance them from its own resources. Some ofthese expenditures meet the requirements ofOP 12.10 on Retroactive Financing; in particular because (i)they represent less than 10% ofthe Credit amount; (ii)they have been paid for within 12 months ofCredit signing; and (iii)they followed Bank’s procurement processes. An amount ofup to US$1 million would be eligible for retroactive financing under the proposed project. The concerned contracts for the following works will be reviewed for eligibility:
(a) Rehabilitation of the Ambohimanambola thermal power plant (3 x 6 MW) (tranche 1): Contract C1190/ 911823/T0501A with SEMT PIELSTICK.
(b) Rehabilitation of the Antsirabe thermal power plant: Contract C1200/91824/T0502A with SEMT PIELSTICK.
(c) Rehabilitation ofthe Mahaianga thermal power plant: Contract C1210/91825/T0503A with MAN B & W Diesel.
(d) Rehabilitation of the Ambohimanambola thermal power plant (3 x 6 MW) (tranche 2): Contract C 1220/9 1826/T0504A with POLYRESINE.
(e) Rehabilitation of the Ambohimanambola thermal power plant (3 x 6 MW) (tranche 3): Contrat C1240/91828/T0506A with SEMT PIELSTICK.
45 Detailed cost table for subcomponent A1
ConlaonenrA I. .. . Power- IDA AFD JIRAMA
a Replacement of hydro-refrigerants system for the ANDEUALEUA hydropower plant 260 25 b Rehabilitation of unit N’ 3 ofthe ANTELOMITA 1 hydropower plant 710 84 c Renovation works in the VOLOBE hydropower plant 750 76 d Rehabilitation of small hydropower plants ofANK9ZOBE TSIAZOMPANIRY, AMBODIRIANA and VATOMANDRY 80 e Rehabllitatlon of mechanical auxillaries Olihe AMBOHIMANAMBOLAthermal power plant 200 20
Total IDA(Sub)omponentAl.aI 2,000 I 0 1 205 1
AFD - Rehabilitation ofthermal plants in MAHAJANGA (Unit 1303) 1,081 215 AFD. Rehabilitation ofthermal plants in TOAMASINA (2x8 MW 2,234 113 AFD- Rehabilitation ofthermal plants inTOLLARY (Unit 1305) 840 1167
Total AFD (ncwprojccts)/ 0 I 4.155 I 1.495 1 Recroactlve financing I 1,000 I
Total retroactive financing A1.b 1.000 500
~~ TOTAL Subcomponent AI 3 .OOO 4,155 2.200
Subcomponent A2: Reduction of traizsmission and distribution technical losses (IDA: US$I.3 million)
7. Reduction of losses: rehabilitation oftransmission networks (APL-1: US$0.3 million): Reliability ofthe transmission system is poor arising from a combination of factors like old equipment, lack ofprotection and control equipment and inaccurate metering. High voltage networks in Madagascar need to be strengthened and rehabilitated; this upgrade will result in increased power reliability with a reduction of significant outages in the network to be rehabilitated. The project proposes to finance the rehabilitation ofthe AmbohimanambolaNandraka transmission line, which serves Antananarivo.
8. Reduction oflosses: rehabilitation ofdistribution (APL-1: US$lmillion): Many of JIRAMA’s distribution transformers and lines are already saturated, which leads to voltage drops, high technical losses, low reliability and load shedding. The project would finance the acquisition ofdistribution materials and equipment to rehabilitate and reinforce networks in the RITANA (peak demand of 136 MWl698 GWh in 2004) and in some other centers such as MORONDAVA (1.375 kWl5 MWh), MANAKARA (890 kWl3 MWh), ANTSIRANANA (7.083 kWl32 MWh), SAMBAVA (1.680 kWl7 MWh), ANTALAHA (1.3 15 kWl5 MWh), AMBANJA (735 kWl3 MWh) and TOAMASINA (13.250 kWl59 MWh). Specific subprojects are being finalized and would be financed in part by APL-1 and by AFD.
46 Detailed cost table for Subcomponent A2
.. 2: Redtmion of Tra?sm&uona& IDA AFV JlRAlulA
New projects a Rehabilitation ottransmlsslon networks jm/tbd 1 85 b Rehabilitation ofdlstrlbuti0n neiworks I 1 no0 I tbd 1 130
Total Subcomponent A2 1.300 tbd 21 5
Subcomponent A3 - Revenue management and Modernization of Information Systems and acquisition of IT equipment (IDA - US$2.3 million)
9. Revenue management (APL-1: US$1.35 million and JIRAMA: US$0.385 million): While the overall revenue collection performance ofJIRAMA is reasonable, there is still considerable scope for improvement, particularly as regards industrial clients. The Project will support targeted investments that aim at improving the commercial side ofthe distribution business as measured by enhanced billing and increased revenues. The main rationale ofthese investments is to create value in the Madagascar electricity business and demonstrate the returns on such investments so that they can be replicated on a larger scale.
10. Given the large investment requirements compared to the available IDA financing, the desired developmental impact would not be achieved if investments are thinly spread and if they are not directed to achieve specific outcomes in identified areas. In order to address this concern, it is proposed to adopt a “cluster” approach in implementation ofthe Project. Investments would be implemented in these clusters to create “islands ofexcellence” to be replicated in the Second Phase ofthe APL or by the JIRAMA operational budget. The results would thus be improved revenues, reduced losses and reduced billing complaints. The choice ofclusters will be made in close cooperation with JIRAMA following specific criteria.
11. The rationale behind such an approach is: (a) spreading activities thinly across JIRAMA may not demonstrate clear impact; (b) it is easy and practical to establish a baseline for key performance indicators at a cluster level, or for a specific type of customer; and (iii)measurement ofimpacts will be facilitated.
12. A set ofactivities is proposed to be financed under APL-1, some of which will be comprehensive, as for industrial customers, while others will be more on a trial basis that may be extended under APL-2, if good results are obtained.
(a) OrganizatiodManagement: The revision and implementation ofa standard flowchart for commercial teams will be carried out during the Management Contract, in order to revise and improve commercial procedures and to improve the circulation of information. Tasks and responsibilities will be better assigned
47 and job descriptions made more appropriate. This action does not require any financing, but is part ofthe accompanying actions in the JIRAMA recovery program.
(b) Improvement ofinvoicing: Increasing the ratio ofmeter readerdcustomers and of the number and qualification of supervisors will reinforce internal controls and will improve billing. This action does not require any financing through APL-1.
(c) Fight against fraud - adiustment of the penalties: Another aspect of the reduction ofcosts and the improvement ofefficiency is the revision and the upward adjustment ofthe penalties applied to fraudulent customers. This action does not require specific financing.
(d) Meter and residential customer records verification program: This program covers the following activities: (i)carrying out, in conjunction with local authorities, a technical and administrative check ofthe meterdcustomers, by neighborhood (cluster level); (ii)identifying and dealing with frauds and abnormalities and updating the meter/customer databases, both for electricity and water; (iii)creating and training anti-fraud units; (iv) carrying out technical and commercial adjustments such as replacement/normalization ofconnections and meters; and (v) acquiring metering tools, IT equipment and GPS. The project proposes to finance an exhaustive verification program in pre-identified zones (clusters). IDA financing will be intended for the purchase ofmetering tools and implementation ofthe program.
(e) Purchase and installation ofprepayment meters: In order to address problems of payment recovery in some ofthe more difficult service areas, Prepaid Systems (prepayment meters) in a predefined cluster area will be implemented. This trial at the level ofan entire zone will be spread to administrative customers and to some specific customers with high consumption. The project proposes to finance the purchase and installation ofthese prepayment meters.
(f) Investments in Spot Metering Equipment and Systems: Better cash flow management and revenue control by introduction ofspot billing which involves hand-held terminals, printers, modems and associated accessories. In this method, bills are printed and delivered on the spot at the customers’ premises when their meters are read, and the utility’s customer database is updated electronically. Customers have the additional advantage ofstaggered payment due dates, thus reducing crowding at cash collection centers on or near the due date. Apart from improving customer service, this intervention also compresses the cash flow cycle, and introduces electronic data recording, facilitating diligence on this critical revenue generating part ofthe business. It is proposed that 100 Meter readers in a defined distribution cluster ofAntananarivo would be equipped with spot billing equipment.
The project will also finance consultant support for training and capacity building of JIRAMA staff in the application ofspot metering and pre-payment metering techniques in the selected clusters. The component will include on-the-job
48 training in use ofspot billing equipment by meter readers so as to fully benefit from the new technology as well as training in software applications to use the customer data made available. The project will further assist in establishing a suitable framework for pre-payment metering ofresidential consumers. such as arrangements for card sales licensing, meter verification procedures, suitable client interface etc.
(g) Systematic verification ofinstallations in Premises ofall 800 industrial customers: About 800 industrial subscribers represent more than 30% oftotal electricity consumption; because of lack ofresources, industrial installations are verified and checked by specialized JIRAMA staff only every 5 years. The systematic verification ofthese HV/MV installations is an absolute priority. The results of these verifications and the necessary corrective actions need to be implemented without delay, given the potential loss ofrevenue to JIRAMA. The project proposes to contribute to the financing of the corrective actions.
(h) Purchase and installation ofelectronic meters for all 800 industrial customers: In order to improve demand management, to have a better knowledge of HV and MV customers and for a better understanding and monitoring oftheir consumption (daily load), it is essential to replace the traditional mechanical and electro-mechanical meters by electronic meters. This action was started under the previous IDA Credit and will be completed with JIRAMA financing.
13. Modernization ofinformation systems and acquisition ofIT equipment: (APL-1 - US$0.95 million)
(a) Interconnexion of all JIRAMA premises: The objective ofthis action is: (i)to open up the Inter-Regional’s Services; (ii)to reduce time for data processing transfers, to accelerate the exchange oflocal information; (iii)to reduce the various expenses (transport, computer supplies) linked to present non-networked exchanges ofinformation; (iv) to improve customer satisfaction (internal and external) by the reduction ofresponse times; (v) to facilitate monitoring of connections reliability; and (vi) reduce telephone costs within JIRAMA. The project proposes to finance the introduction of an internal IT ((backbone)) for all JIRAMA’s site. The progressive installation ofadequate communication support will allow more reliable data transfer and analysis and in real time.
(b) Acquisition ofIT equipment and training ofJIRAMA staff in their use: JIRAMA is clearly under equipped regarding IT equipment. The project proposes to finance the acquisition ofequipment and software such as: computers, related software, and various office equipment such as printers, video-proj ectors, scanners. Due to limited resources, only a part ofthe needs will be financed through APL-1. The project also proposes to finance training programs ofusers and IT staff.
49 Detailed cost table for Subcomponent A3
IDA AFD JIRAMA
a OrganizationlManagement 0 b Improvemenlofthe invoice function 0 c Fight against the fraud- adjustmentofthe penalties 0 d Meter and resldentlal customer recordsverlflcatlon program 150 85 e Purchase and installation of prepayment meters 4m f Investments in Spot Metering Equipment and systems 500 g Systematicverification of installations in premises ofthe all 800 industrial customers 300 h Purchase and installation ofeletronic Meters for all 800 industrial customers mn Total -revenue Manaaemend 1350 I 0 1 385 1
Modernization of Information System and IT equipments a lnterconnexion ofall JlRAMApremises I 400 1 I 7 b Acquisition of IT equipment and training ofJlRAMA staff in their use 1 550 I E Total Modernization of Information System and IT equipmentsl 950 1 0 1 15
~~ Total Subcomponent A3 2.300 0 400
Cost table for Component A
IDA I AFD I JIRAMA Siihcoiiiponeiit A1.a: Powei yeiieiatioii ieiiifotceiriit (ieliaiiililaiioii) 2,000 4 155 1.700 Siilconipoiieiit A1.L: Retioactive fiiidiiciiig 1,000 500 Suhcninpoiieiit p2: Retliictioii of lidiisiiiissioii mid ilistiihtioii tecliiiicsl losses 1,300 tbd tbd Siibcoiiipoiieiit A3 Reveiiiie iiimdgeiiieiit diid iiinileiiiiz.itioii of iiiloiiiidtioii Systeiii .iiiil IT eyiripiiieiit 2,300 400 Ufwllowted 400
Total Component A 7.000 tbd tbd
50 Component B: Technical Assistance and Capacity BuildinP (IDA US$3 million, includine contingencies)
Subcomponent Bl: Technical Assistance and Communication - Contracting a private operator to take over JIRAMA (IDA US$0.25 million)
14. The project proposes to finance technical assistance to assist the Government and IFC in the process ofselecting and contractirlg a new private operator to take over JTRAMA at the end ofthe current management contract.
15. Through this subcomponent, the project will intend to strengthen the transparency and the credibility ofthe proposed reform agenda through consultation and information on the objectives ofthe reform. It is therefore essential for the MEM to formulate, adopt and implement a strategic communication plan targeting all interested groups and parties. To prepare and implement such plan, the MEM should benefit from specialized technical assistance.
Subcomponent B2: Extension of the current management contract (IDA US$0.9 million)
16. The project proposes to provide funds for the prolongation of the current management contract by 6 - 9 months to avoid any hiatus before the take over by the selected strategic partner. (see provisional timetable below).
Subcomponent B3: Preparation of future generation projects in coordination with IFC’s IPP mandate (IDA: US$O. 6 million)
17. The project proposes to finance some studies (pre-feasibility, environmental studies etc.) in order to assist the Government and IFC to have sufficient project documentation available for a selection ofsmall to medium size hydroelectric generation projects to attract investor interest.
51 Subcomponent B4: Strengthening of the Ministry of Energy and Mining, (IDA: US$O.4 million)
18. The Minister ofEnergy and Mining (MEM) has requested the services ofan international consultant to advise him on activities linked to the reform process and the IPP program (mandates 1 & 2 ofIFC). The Consultant will report directly to the Minister of Energy and Mining. The Advisor will also have to ensure project coordination and will lead the mini project implementation team (CELCO) in MEM. The project proposes to finance the services of an individual resident expatriate advisor for a period of 12 - 24 months.
19. The project also proposes to finance a Technical Assistance to perform a capacity analysis and core competence strategy for the MEM future mission. This will include an assessment ofenvironmental and social safeguard capacity within the Ministry to handle future investments.
Subcomponent B5: Preparation of APL-2 feasibility and environmental studies for APL-2 investments, (US$0.15 million)
20. In order to confirm the feasibility, carry out detailed engineering, secure the relevant financing (andor guarantee) and obtained the required approvals, the technical, environmental, social and commercial feasibility and the engineering ofPhase I1 investments will need to be assessed and the relevant bidding documents prepared. The project will provide resources for JIRAMA and MEM to be able to hire the necessary consulting services to carry out some of this preparatory work.
Subcomponent B6: Program monitoring and evaluation (US$O.l5 million)
21. The project will support monitoring and evaluation ofthe APL program by providing resources to design a Monitoring and Evaluation System for the Ministry of Energy and Mining and JIRAMA to be able to follow and report progress, track performance in line with the indicators agreed at negotiations (Annex 3), and assess the impacts ofthe activities supported by the Project. CELCO/MEM will have overall responsibility for meeting Bank M & E reporting requirements.
Subcomponent B 7: Assistance to MEM in project implementation (US$O.lS million)
22. Component B of the project will be implemented through a mini Coordination Cell (CELCO) to be located in the MEM. The project proposes to finance the services of an accountant and procurement officer for CELCO. This component will also finance project related external audits by auditors acceptable to IDA.
52 IDA I AFD 1 JIRAMA Siibcoiiipoiieiit 81: Teclinlcrl Assistaiice .1nd coiiiiiiiiiiic~itioii- Contractiiig pibate operators to take ovei JlRAlrlA 250 ibd Siilleomponent 82: Prnloiiyatioil of the ciirient inanageinelit contian 900 tbd Siihcoiiipniient 83: Prepaiation of liltlire yeiieratioii piojecn in cooidilialion with IFC iPP iiianclate 600 Sulcoiayonent 81: Stieiigtlieiiiiiy oftlie hlinistiy of Eneigy aiitl Mining 400 Siihcoiiieoiieiit 85: Pievaiatioii of APL2 and enviioiiiiieiital studies foi APL.2 investiiieiits 150 (campleiiei?Ied by A tins; PPR Subcoiiipoiieiit 86: Yoiiitoiilig aiid evaluitioii 150 Siibcoiiipoiient 87: Ploject iiilyleineiitdtinii 150 Ulwllowad 400
Total Component B 3.000 tbd tbd
53 Attachment 4.1 APL-1 - Cost table
ConlDonenrA ?Ai:Power- IDA AF[I JIRAMA
a Replacement of hydro refrigerants systpm for the ANDEKALEKA hydropower plant 260 25 b Rehabilitation ofunit N' 3 oftheANTELOMlTA1 hydropower plant 710 84 c Renovation works In the VOLOBE hydropower Plant 750 76 d Rehabilitation of small hydropower plants ofANWOBE TSIAZOMPANIRY AMBODIRIANA and VATOMANDRY 80 e Rehabilitation of mechanical auxiliaries Ofthe AMBOHlMANAMBOL4thermal power plant 200 20
Total IDA (Sub)omponent A1.a 2.000 0 205
AFD- Rehabilitation ofthermal Plants in MAHPJANGA(Unit1303) 1081 215 AFD Rehabilitation ofthermal plants in TOAMASINA(Zx8 MW 2,234 113 AFD Rehabilitation ofthermal plants in TOLIARY (Unit 1305) E40 1167
Total AFD (new projects) 0 4,155 1,195
Retroactive financing 1 000
Total retroactive financing A1.b I 1.000 500 ~ TOTAL Subcomponent AI I 3.000 1 4,155 1 2.200
of Tran- .. IDA AFD JIRAUA
New projects a Rehabilitation oftransmission networks 1 300 1 tbd 1 85 b Rehabilitation of distribution networks I 1000 1 tbd I 130
Total Subcomponent A2 1,300 tbd 215
Total Component A( 7.000 I tbd 2.81 5
ConlDonenrs & Fvoluau120and Pr- Inn I AFD 1 JlRAlrlA
(complemented by a future PPF] Subcomponent 86 Prooram monitoring and evaluation 150 Subcomponent B7 Assistance in MEM to project implementation 150
Unwllocated 400
Total Component B/ 3000 I tbd 0
Total APL-1 I 1~.000 1 tbd 2,215 I
54 Attachment 4.2: APL-2 - Description and Cost Table
23. The second phase of the APL would be conditioned on satisfactory progress towards financial recovery of JIRAMA and a signed “affermage” contract for the long-term management ofthe utility by a private firm. 24. APL-2 would seek to lay the foundation for a sustainable expansion of a commercially- oriented utility in the most cost-efficient way by investing in strategically important areas such as: (i)HV interconnections ofthe main load-centres; (ii)preparation ofthe next large scale hydro facility; and (iii)investments and TA necessary to make JIRAMA raise its performance to developing world utility best practice. 25. APL-2 funding (mid-2008 - mid-2012) from IDA would tentatively be about US$30 million. A significant part of APL-2 funding will be allocated to a partial risk guarantee facility to attract private investors for large scale PPP hydro operation. Additional funding is expected to be secured from AfDB, bilateral donors and the private sector. 26. Further definition ofthe investment component will be funded by the TA component of APL-1. The table below proposes indicative areas ofinvestments to be included in APL-2.
Tentative cost tab for APL-2
3 1 Prep hture large scale hydro project 3 2 Reform and Strengthemg ofMEM 3 3 Cotrunurucataoq Momtotonng and evaluataon 3 4 Project unplementatlon TOTAL
Undoeated 121 I I
~ APL-2 -TOTAL 10 20 114 70 204
APL-2 -TOTAL IDA (10 + 20) - 30 I
55 Annex 5: Project Costs
MADAGASCAR: PowerWater Sectors Recovery and Restructuring Project
Local Foreign Total Project Cost By Component and/or Activity US$ million US$ million US$ million Component A Subcomponent A1 150 2,850 3,000 Subcomponent A2 65 1,235 1,300 Subcomponent A3 115 2,185 2,300 Component B Subcomponent B 1 140 110 250 Subcomponent B2 900 900 Subcomponent B3 600 600 Subcomponent B4 400 400 Subcomponent B5 50 100 150 Subcomponent B6 100 50 150 Subcomponent B7 150 150
Total Baseline Cost 770 8,430 9,200 Physical Contingencies 35 365 400 Price Contingencies 35 365 400 Total Project Costs 840 9,160 10,000 Interest during construction Front-end Fee Total Financing Required 840 9,160 10,000
56 Annex 6: Implementation Arrangements MADAGASCAR: Power/Water Sectors Recovery and Restructuring Project
1. The proposed Power/Water Sectors Recovery and Restructuring Project would have two distinct implementation entities. One would be an integral part ofJIRAMA’s DEEL (Direction de 1’Equipement Electricitk), and would be responsible for implementation ofComponent A, Equipment and services related to JIRAMA. The other would be a small coordination and advisory group (Cellule de coordination-CELCO) responsible for the policy and institutional reform components, Component B, as well as for monitoring and evaluation ofthe project in its entirety. CELCO would be attached to the office ofthe Minister ofEnergy and Mining.
Implementing agencies
2. JIRAMA’s DEEL: DEEL (Direction de 1’Equipement Electricitk) is a department within JlRAMA in charge ofproject Management activities for JIRAMA electricity sector investments. DEEL was within JIRAMA, in charge ofthe implementation ofrelated components ofthe former energy project PDSE. Financial management and procurement procedures and staffing expertise were found to be adequate.
3. MEM’s CELCO: MEM’s own assessment has demonstrated that there is a lack of adequate capacity within the ministry and that therefore a small coordination and advisory group (Cellule de coordination-CELCO) attached to the ministry would be responsible to implement Component B ofthe project. The CELCO is composed of(i) a resident expatriate advisor who will manage the unit; (ii)a qualified and experienced accountant to assist MEM accounting staff in performing financial management tasks including budgeting, accounting, financial reporting, and disbursement operation; and (iii)a qualified and experienced procurement officer familiar with World Bank procurement procedures to assist MEM in all procurement activities. Incremental costs of the unit will be supported by the project.
Project Reporting, Monitoring and Evaluation
Project implementation manual 4. Both DEEL and CELCO will prepare a Project Implementation Manual. The PlMs will set forth all operational and procedural steps regarding activities evaluation, reviews and approval, flow ofinformation, procurement and financial management arrangements.
Financial management 5. CELCO (MEM) and DEEL (JIRAMA) will maintain separate accounts for all transactions related to each component for which they have overall implementation responsibility and will produce their individual annual financial statements in accordance with internationally accepted accounting principles. The consolidation ofproj ect accounts if necessary, the production of quarterly Financial Monitoring Reports (FMRs) in compliance with international accounting standards and IDA requirements and the monitoring ofthe project
57 progress will be assured by CELCO (MEM). They will also need to upgrade the fiduciary systems already in place to ensure timely delivery ofdata on project activities.
Audits 6. CELCO and JIRAMA financial statements will be audited annually by an international private accounting firm acceptable to IDA in accordance with International Standards of Auditing and the FM Practices in World Bank-financed Investment Operations issued by the FM Sector Board on November 3,2005. The auditors will be required to: (i)express an opinion on the project financial statements; (ii)carry out a comprehensive review ofthe internal control procedures and provide a management report outlining any recommendations for their improvement. The audit reports will be submitted to IDA not later than six months after the end ofeach fiscal year. The auditors should be recruited prior to credit effectiveness. The terms of reference ofthe audit will be reviewed by the financial management specialist ofthe Bank/IDA to ensure the adequacy ofthe audit scope, drawing special attention to particular risk areas identified during project preparation.
Monitoring and evaluation 7. The implementation ofthe project will be monitored through quarterly progress reports which the Project coordinators (both at JIRAMA and MEM) will prepare and submit to IDA. This will provide a way oftracking actual project execution against implementation milestones established at the time ofthe project launch. These are the key performance indicators and project outcomes that are contained in Annex 3.
8. Further, in order to assess impacts that the project is expected to deliver on the quantity and quality of electricity and water supplied, it is envisaged that several surveys will be carried out at different points on JIRAMA’s network. Monitoring ofrevenue enhancement measures will be facilitated by the ring-fencing ofclusters where these are to be introduced. Baseline data will be collected in these clusters prior to introduction of the new customer management techniques,
9. Other indicators ofJIRAMA’s overall performance, their baseline values and targets have been agreed during negotiations. These indicators are given in Annex 3.
58 Annex 7: Financial Management and Disbursement Arrangements MADAGASCAR: PowerrWater Sectors Recovery and Restructuring Project
Introduction
1. In accordance with Bank policy and procedures, the financial management arrangements ofthe DEEL (Direction de I'Equipement Electricitk, a department ofJIRAMA) and the MEM (Ministry ofEnergy and Mines) respectively responsible for the implementation ofthe components A (Investments) and B (TA, studies etc.) ofthe proposed Credit (Power/Water Sectors Recovery and Restructuring Project) have been reviewed to determine whether they are acceptable to the Bank.
2. This review is rather an update for the DEEL (JIRAMA) since the FM systems of this entity have already been assessed in the context ofthe previous Energy Sector Development Project closed in December 2005. The conclusions ofthis review are given in Section D (Appraisal Summary) ofthe main body ofthis PAD and not repeated here.
3. With regard to MEM, no FM assessment has been carried out yet since the Coordination Unit (CELCO) in charge of implementation ofcomponent B is still not in place. However, we have started to define with the MEM the characteristics ofthe FM system(s) to be implemented, and developed an agreed action plan to ensure that the ingredients for sound project financial management are in place prior to Credit effectiveness.
Country issues
4. The World Bank's CFANCPAR, completed in 2003, and some diagnostic works carried out over the last three years by the Bank and other donors, identified a range ofweaknesses and issues hampering the performance ofMadagascar's budget and expenditure management system. To address these issues, the Government has developed in 2004 and 2005, in conjunction with all key development partners, a priority action plan for public finance reform. The main achievements encountered so far include: (i)adoption ofa new organic public finance law; (ii) introduction ofprogram budgets to improve the presentation ofthe budget and its alignment with policy priorities of the government as specified in the PRSP; (iii)reinforcement ofthe Treasury internal control system by recruiting additional staff and improving the operational efficiency of the "Brigade du Tresor"; (iv) simplification ofthe expenditure management process by integrating the functions of"sous- ordonnateurs" and credit managers; (v) creation ofan internal control mechanism (IGF: General Finance Inspection) at the level ofthe Ministry ofFinance; (vi) review ofthe legal framework for the control institutions (IGF, Brigade du TrCsor, Auditor general) and implementation of capacity building measures to improve their efficiency; (vii) development and implementation ofa computerized integrated financial management system in six main treasuries, capturing the different phases ofthe expenditure process. The reinforcement of the Treasury internal control and the implementation ofthe integrated financial management system (IFMS) in six treasuries have improved timeliness and quality offinancial information.
59 5. The Auditor General has also cleared the backlog ofaccounts and completed the examination ofthe draft budget execution laws for the years 1998 until 2003. The oversight function ofParliament has been strengthened through capacity building and training ofthe Public Finance Committee.
6. While overall implementation progress ofthe reform program is encouraging, significant actions remain to be done, including the following: (i)improvement ofbudget execution rate in priority sectors; (ii)reinforcement ofthe capacity ofthe line ministries in public financial management, especially in the implementation ofthe new program budget structure; (iii) strengthening ofcash management; (iv) production ofthe treasury accounts within the legal timeframe; and (v) reinforcement ofcontrol over state owned companies and national public institutions. The strategic coordination ofthe multiple reforms and the monitoring & evaluation system also need to be improved. To mitigate risks in public expenditure management, the World Bank, through the Governance and Institutional Development Program (PGDI), and a number ofdonors continue to support Government’s public finance reforms reflected in its annual priority action plan for 2006.
7. Regarding the accounting profession, some positive developments have been noted over the last three years through assistance provided by the FIDEF (Fbdbration Internationale des Experts Comptables Francophones) and INTEC (Institut National des Techniques Economiques et Comptables). However, a number of local accounting firms continue to operate below the international standards due to the lack ofproper auditing standards, clearly defined guidelines and procedures for systematic peer reviews, quality control mechanisms to harmonize methodology. To improve the capacity and the competitiveness oflocal auditing firms, the following measures have been taken while auditing Bank/IDA financed projects: (i)obligation for local auditors to enter into partnership with international accounting firms; and (ii)effective participation of the international accounting firm in audit fieldworks and submission ofaudit report jointly signed by the local and international audit firms. An accounting and auditing ROSC (Reports on the Observance ofStandards and Codes) would be certainly helpful to identify clearly both issues and actions to be taken to strengthen the capacity ofthe accounting profession in Madagascar.
Budgeting
8. Budgeting arrangements for the MEM and JIRAMA are clearly documented. The budgeting needs ofthe project will be fulfilled by the DFB (MEM- Directorate ofFinance & Budget) regarding component B and by the JIRAMA Directorate ofFinance regarding component A. The accounting software actually in place (at the MEM and DEEL) can adequately cater for the budgeting arrangements ofthe project.
Accounting
9. The DEEL accounting system is in compliance with generally accepted accounting standards. It uses standard book accounts (journals, ledgers and trial balances) to enter and summarize transactions and operates on a double entry accrual principle. The accounting system to be used by CELCO will present exactly the same characteristics. However, regarding budgetary execution procedures, CELCO will apply the procedures actually used within the
60 MEM (Le, preparation ofexpense commitment form by the DFB, verification ofthis request by the Expenditure Commitments Oversight Directorate, execution ofthe transactions by the project, determination ofthe exact amount to be paid upon reception offinal bills, preparation of payment order and payment after appropriate verification ofthe validity ofthe transactions) and will provide the Budget Directorate ofthe Ministry ofFinance with monthly statement of commitment and payment drawn under the project credit lines.
10. DEEL will maintain separate financial records for all transactions under its responsibility and will send, on a monthly basis, the balance sheet to CELCO for consolidation. CELCO will be in charge oftimely production ofmonthly trial balances for the ACCT (Agence Comptable Centrale du TrCsor), and quarterly FMRs.
1 1. To ensure better understanding and proper application ofpolicies and procedures by the project staff (DEEL and JIRAMA), appropriate accounting manuals ofprocedures will be prepared and implemented both at the MEM and JIRAMA. This manual will describe inter alia the outline of the project accounting system, the accounting policies to be followed, the formats of books and records, the Chart of accounts, the financial reporting, and relevant information to facilitate record keeping and maintenance ofproper control over assets. The consultant in charge of this implementation will also provide adequate training to project staff.
12. DEEL and CELCO will use the integrated computerized system acquired within the context ofthe previous Energy Sector Development Project, which in particular facilitates annual programming ofactivities and project resources, record-keeping (general accounting and cost accounting), financial and budgetary management and preparation ofproj ect financial statements. However, this software needs to be adjusted to meet DEEL and MEM requirements, especially to allow for procurement management, fixed assets management, timely production of quarterly FMRs required for managing and monitoring project activities, and follow-up on project implementation progress. The consultant in charge ofthis update will also provide training for users to ensure efficient use ofall modules offered by the software. The TORSfor this consultant will be reviewed by the Bank Financial Management Specialist. The new computerized system will be fully functional before project implementation begins.
Internal Control & Internal Auditing
13. DEEL’s accounting staff is qualified and has relevant experience to be fully successful in carrying out their functions. For CELCO, the recruitment ofa qualified and experienced accountant will be required to assist the MEM accounting staff in place in performing FM tasks. The recruitment ofthis accountant is a condition ofeffectiveness. To ensure efficient use of credit funds for the purposes intended and consistent application ofprocedures on procurement, financial management, disbursement, the IGF/IGE in close collaboration with the JIRAMA Internal Audit Department will play the role ofinternal auditors. They will report directly to the Minister ofFinance, the Minister of Energy and Mines, and the JIRAMA Board ofDirectors. All issues identified during internal audit should be addressed quickly to improve the project performance.
61 Funds Flow and Disbursement arrangements
14. The flow of funds from IDA and Government is presented as follows:
Designated acct. A Designated acct. B
1 1 Contractors, suppliers of goods and services
Disbursement from IDA credit and Government counterpart funds
15. For the implementation ofthe Power/Water Sector Recovery and Restructuring Project the following bank accounts will be opened in a commercial bank under conditions satisfactory to IDA: . Designated Account A to be managed by DEEL (JIRAMA): Denominated in US dollars, disbursements from IDA credit will be deposited in this account opened in a local commercial bank to finance project activities under component A, in accordance with the disbursement percentage indicated in the FA; . Designated Account B to be managed by CELCO (MEM): Denominated in US dollars, disbursements from IDA credit will be deposited on this account opened in a local commercial bank to (i)finance project activities under component B in accordance with the disbursement percentage indicated in the FA;
16. Funds deposited in these accounts will be used to ensure timely payments ofcontractors and suppliers ofgoods and services. The project implementation and accounting manuals will describe in details all procedural aspects regarding financial management and disbursements from the designated account(s), and project account (payments, replenishment, accounting, reporting and internal controls).
62 Method of Disbursement
17. During the first year ofproject implementation, DEEL and CELCO would follow the transaction-based disbursements procedures (traditional mode) outlined in the Bank's Disbursement Handbook. The use ofreport-based disbursements could be possible if requested by the borrower and if the following criteria are met: (i)the FM rating (both at DEEL and CELCO) has been maintained at satisfactory level; and (ii)the submission of at least three quarterly satisfactory FMRs that could be relied upon for purposes ofdisbursement. Detailed disbursement procedures will be described in the project accounting manual ofprocedures.
Minimum Application Size
18. The minimum application size for direct payments, and special commitments is 20% of the amount advanced to the related special account.
Use of Statements of Expenses (SOEs)
19. Disbursements would be made against Statement ofExpenses (SOEs) for contracts and goods not requiring the Bank's prior review. Therefore disbursements for all contracts for: . Contracts for equipments and goods in an amount inferior to US$200,000; . Contracts for consulting services, training by firms ofless than US$lOO,OOO; . Contracts for consulting services, training by individual of less than US$50,000; . Training not subject to contract and all incremental operating expenses; would be made on the basis ofSOEs and certified by the DEEL concerning the component A, and CELCO with regard to component B. SOE statements would be audited semi annually by independent auditors acceptable to the Bank. All SOEs supporting documentation would be kept therefore by the executing agencies and made available for review by donor supervision missions, and internal and external auditors.
Designated Accounts
20. To ensure that finds will be available when needed, two designated accounts in US$ will be established in a local commercial bank under conditions satisfactory to IDA. The designated account A will be opened in the name of DEEL whereas the designated account B will be in the name ofthe CELCO. The authorized allocation for the designated accounts A and B covering IDA's contribution would be respectively US$500,000 and US$350,000 covering IDA's share of four (4) months ofestimated expenditures. CELCO and DEEL would be responsible for preparing disbursement requests for components under their responsibility. The designated accounts would finance all project eligible expenditures inferior to 20% ofthe authorized allocation, and replenishment applications would,be submitted at least on a monthly basis.
2 1. The designated accounts would be replenished on the basis ofdocumentary evidence of payments required by IDA, made from the designated accounts, eligible for financing under IDA Credit. All SOEs supporting documentation will be kept by the executing agencies and made available for review by bank supervision missions and external auditors.
63 Financial Reporting
22. To monitor project implementation, JIRAMA and MEM will produce respectively the following reports in compliance with international accounting standards:
(a) JIRlMA . . JIRAMA’s audited annual financial statements (b) DEEL:
. Projectfinancial statements related to component A: (i)Summary of Sources and Uses ofFunds (by components/activities/credit category and showing all sources offunds); (ii)the Accounting Policies Adopted and Explanatory Notes; and (iii)a Management Assertion.
. FMRs related to component under its responsibility: The FMRs to be prepared by DEEL will include financial reports, physical progress reports and procurement reports related to component A. The FMRs should be submitted to the CELCO within 30 days of the end ofthe reporting period (on a six month basis) for consolidation.
(e) MEM (CELCO):
Projectfinancial statements related to component B: (i)Summary of Sources and Uses ofFunds (by components/activities/credit category and showing all sources offunds); (ii)Project Balance Sheet; (iii)the Accounting Policies Adopted and Explanatory Notes; and (iv) a Management Assertion.
Quarterly FMRs: The FMRs to be prepared by CELCO will include financial reports, physical progress reports and procurement reports related to all project components to facilitate project monitoring. The project FMRs should be submitted to IDA within 45 days ofthe end ofthe reporting period (on a six month basis).
23. The form and content ofFMRs and annual financial statements were determined during appraisal and agreed at negotiations. Models ofthese reports will be presented in the project accounting manual ofprocedures.
Auditing
24. During the first phase ofthe project, CELCO and JlRAMA financial statements will be audited annually by an international private accounting firm acceptable to IDA in accordance with International Standards of Auditing and the FM Practices in World Bank-financed Investment Operations issued by the FM Sector Board on November 3, 2005. The auditors will be required to: (i)express an opinion on the project financial statements; (ii)carry out a
64 comprehensive review ofthe internal control procedures and provide a management report outlining any recommendations for their improvement. The audit reports will be submitted to IDA not later than six months after the end ofeach fiscal year. The auditors should be recruited prior to credit effectiveness. The terms ofreference ofthe audit will be reviewed by the financial management specialist ofthe Bank/IDA to ensure the adequacy ofthe audit scope, drawing special attention to particular risk areas identified during project preparation.
Audit Report Due Date 1. Continuing entity financial statements Within six months after the end of each
(JR4MA) I financial year. 2. Project financial statements related to Within six months after the end of each component implemented by DEEL financial year. 3. Project financial statements related to Within six months after the end ofeach component implemented by CELCO. I financial year.
Supervision Plan
25. A supervision mission will be conducted at least once every year based on the risk assessment ofthe project. The mission’s objectives will include that ofensuring that strong financial management systems are maintained for the project throughout its life. A review will be carried out regularly to ensure that expenditures incurred by the project remain eligible for IDA funding. The Implementation Status Report (ISR) will include a financial management rating for the component.
65 Annex 8: Procurement Arrangements MADAGASCAR: Power/Water Sectors Recovery and Restructuring Project
A. General
1. Procurement for the proposed project would be carried out in accordance with World Bank’s “Guidelines: Procurement Under IBRD Loans and IDA Credits” dated May 2004; and “Guidelines: Selection and Employment ofConsultants by World Bank Borrowers” dated May 2004, and the provisions stipulated in the Legal Agreement. The general description ofvarious items under different expenditure category is described below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame have been agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.
2. Advertisement: A General Procurement Notice will be published in UN Development Business and Development Gateway Market (dgMarket) and will show all International Competitive Bidding (ICB) for goods and works and major consulting service requirements. Specific Procurement Notices will be issued in Development Business and dgMarket and at least one newspaper with nationwide circulation for ICB contracts and before preparation of short lists with respect to consulting contracts above US$200,000, in accordance with the Guidelines.
3. Procurement of Works: There will not be any specific procurement ofworks. Complementary works in relation to goods contracts will be procured within those goods contracts.
4. Procurement of Goods: Goods procured under this project would include: spare parts for rehabilitation and maintenance ofgenerator units, equipment for rehabilitation ofdistribution networks, pre-payment meters, spot metering equipment, and computer hardware and software. The procurement will be done using Bank’s SBD for all ICB and National SBD agreed with or satisfactory to the Bank. The project will also finance expenditures which meet the requirement of OP 12.10 on retroactive financing.
5. Direct Contracting for goods may be used in exceptional cases, such as for the extension ofan existing contract, standardization, proprietary items, spare parts for existing equipment, and urgent repairs and emergency situations, according to paragraphs 3.6 and 3.7 of the Guidelines. The items to be procured through Direct Contracting would be agreed on in the procurement plan.
6. Selection of Consultants: The Project will finance the contracting ofconsultancy services for improvement of the commercial aspects ofthe electricity distribution business in terms of, improving inter-alia the billling system, financial management controls, fraud prevention, technical controls, modernization ofinformation systems and IT equipment, revenue management and project monitoring and evaluation. The project is also expected to finance the
66 extension ofthe existing management contract for JIRAMA in case ofa delay in the process of selecting the long-term strategic partner. The project is further expected to finance pre- feasibility and detailed engineering studies including studies of environmental and social safeguard aspects with regard to future generation projects. As part ofComponent B the project will finance technical assistance for MEM covering the preparatory work for APL-2 including advisory services during the reform process. Specialized advisory services would be procured through Individual Consultants Selection (ICs).
7. Operational Costs: These relate to the functioning ofCELCONEM and would be procured using MEM’s administrative procedures, which were reviewed and found acceptable to the Bank. The Project will finance some operating expenditures under component B.
8. Review by the Bank of Procurement Decisions. The thresholds for prior review by Bank are specified in the procurement plan. Table A shows (a) the proposed thresholds for the different procurement methods; and (b) the proposed initially-agreed thresholds for prior review by the Bank. The Bank will preview procurement arrangements proposed by the Borrower for the items specified in the procurement plans for their conformity with the Financing Agreement and the applicable Guidelines. Any procurement item not specified for prior review may be subjected to a post-review ofthe procurement process.
Table A: Thresholds for Procurement Methods and Prior Review
Expenditure Category Contract Value Procurement Contracts Subject to 1 Threshold (US$) Method Prior Review (US$) Works No major specific works are expected
Goods 200,000 or more ICB All 30,000 or more and NCB less than 200,000 Less than 30,000 Shopping Consultant Services - 100,000 or more QCBS All Firms CQS LCS sss Consultant Services - 50,000 or more ICs All Individuals
67 B. Assessment of the agency’s capacity to implement procurement
9. Procurement activities will be carried out by JIRAMA for component A and by MEM through CELCO in collaboration with the Unit for Public Procurement (UGMP) for component B. JIRAMA is properly staffed and its Procurement unit consists ofproficient procurement officers and procurement assistants. MOEMAJGMP is staffed with a procurement officer who will be further supported by an initial procurement officer to be recruited by CELCO.
10. An assessment ofthe capacity ofJIRAMA to implement procurement actions for the project has not been carried out because its procedures and staffing were already found to be satisfactory during the implementation ofthe former Project PDSE and has since then not substantially changed. An assessment ofthe capacity ofMOEMAJGMP was carried during the appraisal mission ofMay 2006. The assessment reviewed the organizational structure for implementing the project and the interaction between the project staff responsible for procurement and the Ministry’s central unit for administration and finance.
11. Most ofthe issues/risks concerning the procurement component for implementation of the project have been identified. Identified issues and corrective measures which have been agreed are described in the table below. Considering the lack ofcapacity within the MEM, the overall project risk for procurement is considered high.
Table B: Procurement Risk Assessment and Risk Mitigation Component B, Implemented by MEM
~ Designation Concerns Risk mitigation Due date Planning and Lack of budget - Capacity building on - At Project budgeting planning budgeting effectiveness - Recruitment of an experienced - At Project Procurement officer to effectiveness CELCO Execution and Lack of internal Audit Development of cost - At Project monitoring and contract 1 effectiveness management control Staffing Competent but -Recruitment of an - At Project insufficient experienced effectiveness Procurement officer to CELCO Competition among Lack ofadvertisement Use of GPN at national - At Project private sector level effectiveness Use ofBank procedure for advertising Project management Lack ofdefinition of Development of - At Project responsibilities project implementation effectiveness manual
68 C. Procurement Plan
12. The Project’s detailed activities for the first 18 months ofimplementation are detailed in the procurement plan which was discussed and agreed between IDA and the borrower on June 2, 2006 and is available at MEM and JIRAMA Headquarters. 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
13. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended bi-annual supervision missions to visit the field to carry out post review ofprocurement actions.
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m d a -a Annex 9: Economic and Financial Analysis MADAGASCAR: Powerwater Sectors Recovery and Restructuring Project
A. Economic analysis of the Prowam
Introduction
1. The proposed program offers the prospect ofhigh economic returns to the economy of Madagascar, which is clearly suffering from inadequate electricity supply. Lack ofpower severely hurt the modem, garment manufacturing sector in 2005, with adverse consequences on output, lost orders and lower exports than would otherwise have been possible. GDP growth is estimated to have been lower by 0.5% simply as a result ofthe load shedding imposed by JIRAMA on its clients. Even before the 2005 financial crisis, the service rendered by JIRAMA was inadequate and declining due to insufficient investment and neglected maintenance. Finally, resource constraints meant that JIRAMA was not in a position to either extend service or to increase its generating capacity in a timely, least-cost manner. Many sizeable urban centers outside JIRAMA’s main grids have long had daily power cuts and supply interruptions due to lack offuel and/or equipment breakdowns. These issues are all being addressed under the 5-year restructuring and recovery program for the power sector.
2. In addition, the program also put in place the necessary conditions and operating environment needed to attract private investors to the sector. The sector’s large investment backlog is beyond the limited budgetary resources ofGoM. Putting in place a private operator to manage JIRAMA will provide both potential IPP investors as well as Madagascar’s development partners with the assurance that JIRAMA will be professionally managed, internal efficiency will be raised and service quality to consumers improved. A solvent JIRAMA with a healthy cash flow and good payments record is an essential precondition to private participation in developing Madagascar’s plentiful hydroelectric potential.
Least-cost generation plan
3. JIRAMA’s current mix ofgeneration plant reflects sub-optimal choices made over the past decade. Poor management, delayed decision making and of late, lack of funds have led to an excessive reliance on diesel generators, even in sites where hydroelectric or heavy-fuel generators would have produced cheaper electricity. For reasons ofexpediency and rapidity several high-cost diesel generators have been acquired on a rental/leasing basis, without competitive tendering. The recent oil price hikes have turned the choice ofdiesel generators into a severe financial burden for JIRAMA, its consumers and also for GoM. The success ofthe proposed recovery program for JIRAMA is predicated upon a rapid move away from diesel generation, initially to HFO and then in the medium- to long-term to hydroelectricity.
72 4. In the short- to medium-term, despite Madagascar’s evident hydroelectric resource potential, the scope for rapidly developing new hydro power sources is rather limited. Work on the addition ofa third 30 MW generator at the existing Andekaleka hydro plant is about to begin, with financing from BADEA. Under normal hydrological conditions it will produce 200 GWh per year, representing a massive cost saving to JIRAMA. Two minor sites (Sahnivotry and Lily) are at a sufficiently advanced stage ofpreparation by private developers to contribute a further 80 GWh ofhydro power by 2009-2010. Due to a lack ofpreparatory studies, other small to medium-term hydro prospects are unlikely to be commissioned before 20 10-2011. Nor has there been sufficient technical investigation or pre-feasibility work done on the larger hydro sites (Lohavanana, Volobe and Antetezambato) that have been identified as the least-cost options for 2012 onwards.
5. In the near term, major fuel savings can therefore only be achieved through substitution ofHFO plants for high-cost diesel generators. Implementation ofa 40 MW HFO plant to be sited in the capital has begun and it is expected to be in service in mid-2007. This plant will permit JIRAMA to greatly reduce its use ofdiesel, since the plant is capable ofproducing 200- 250 GWh annually. Andekalela 3, has been delayed by several years and should already have been in service. It produces even greater economic benefits and delays in completing these two projects would be very costly to JIRAMA.
Economic Rate of Return
6. Given the diverse nature ofthe physical investments envisaged as part ofthe program, the economic analysis is based on a 5-year time-slice (2006-2010) of the electricity sector’s total investment program, which has been reviewed and found to be least-cost in nature (see table 3). Assigning specific benefits to particular project components would have been both arbitrary and nearly impossible.
7. The physical benefits from these investments that have been quantified are twofold: first, (and most important) the incremental electricity supplied to consumers; second, the reduction in high-cost diesel fuel consumption arising from the replacement ofdiesel generators by more economical ones using heavy fuel oil (HFO). Benefits from reduced technical losses and improved reliability ofservice have not been quantified in the economic analysis presented here (Table 2). The base case estimate of the EIRR is 14.4%.
8. The incremental demand that can be met as a result ofthe investment program is based on a variant ofthe load forecast prepared by JIRAMA’s consultants, HQI. For the purposes of the economic analysis, only five years (2007-201 1) ofcumulative load growth have been considered as benefits directly attributable to the 2006-20 10 investment program. Total electricity demand is projected to increase from about 770 GWh in 2006 to 1,110 GWh in 20 11, equivalent to an annual average increase of 7.6%. However, demand growth in 2006-2007 is severely constrained to only 2% - 4%, due to a deliberate attempt by JIRAMA to restrain consumption prior to the entry in service ofa large, new HFO plant. By way ofcomparison, during the period 1995-2005, electricity demand rose at an average of 7% annually, despite the minimal investment in the sector to expand service.
73 9. The minimum value ofthe incremental sales has been taken to be the average tariff across all customer categories charged by JIRAMA in 2006, Le. USc13kWh. This does not represent the full value ofbenefits to users from this electricity, but in the absence ofan estimate ofthe ‘consumer surplus’ it is a minimum measure ofbenefits that has been used as a proxy. It is well below the JIRAMA tariff charged to LV consumers in Zone 3 (isolated centers served entirely by diesel), ofUScl9-20/kWh.
10. Fuel savings to JIRAMA have been estimated at the difference between the cost of generation using HFO in the new HFO power plant due in service in mid-2007 and diesel fuel that it would otherwise have to use in its existing generators. This works out at about USclO/kWh at current oil prices6.
11. Full details ofthe analysis and the parameters used in estimating the EIRR are given in the tables below. The EIRR is particularly sensitive to variations in oil prices, the size and timing of the investment program, delays in completing more efficient plants, and to assumptions about demand growth. As can be seen from Table 1, depending on the combination ofnegative factors assumed, the EIRR varies from 10.3% to 13.7%.
Table 1: Results of EIRR Sensitivity Analysis Parameter EIRR (in %)
Fuel costs 20% higher 13.7 1 Year delav in Andekalela Unit 3 13.1 6 month deiay in HFO plant 12.7 Lower demand growth (5% p.a.) 11.7 Higher fuel costs+lower demand 11.8 Investment costs 20% higher 11.3 Higher fuel+lower D+HFO plant delay 10.3
In April 2006 spot prices FOB Singapore were US$52/barrel for HFO and US$SO/bbl for diesel. In addition, HFO engines consume less fuel per unit of electricity (220 gm vs, 250 gm/kWh).
74 Table 2: EIRR Analvsis - Base case
Notes 0 8, M = 4 5 UScentsIkWh to cover G+T+D operating costs Fuel costs of2lcentslkWh for diesel and 12c/kWh for HFO = April 2006 CIF Anatananrivo price (excl taxes) equates to $80/bbl diesel and $52/bbl HFO Singapore FOB spot price+$30/ton sea freight+$l20/ton land transport to tana Prices assumed to decline per WB crude oil price fcast Sales assumed to rise by 2% in U6,4% in 07, 10% in 138 and 8% thereaffer No incremental fuel cost in 2008 due to Andekaleka3 hydro startup - supply greater than sales increase Fuel savings of 10c/kWh between diesel and HFO in 2007 on 80 GWh due to change in generation mix Due to start ofAndekalela3 in 2008, the fuel savings are 62GWh of diesel and 42 GWh of HFO production avoided Incremental sales valued at 13c/kWh, which is the current average revenue earned by Jirama in 2006
75 Table 3: Electricity Sector Investment Program I lvlAD AGASGAR ELECTRIGIW SECT0 R I NVESTfvlENT P ROGRAfvl
Table 4: Sales and production forecast r SALES AND PRODN. FORECAST I JlRAfvlA TOTAL 2005 2006 2007 2008 2009 2010 2011 ELEC SALES (Gwh) 754 769 800 880 924 970 1019 Losses % 23 7 24 24 23 22 5 22 21 5 Prnrii irtinn fcwhl 988 1012 1052 1143 1192 1244 1297 of which Hydro 650 680 680 875 925 975- 1025 Thermal 338 332 372 268 267 269 272 296 202 112 50 60 60 70
Notes Load fcast 2% in 06,4% in 07,10% in 08,8% thereafter Andekalela 111- 150 GWh in 2008,200 GWh thereafter Sahnivotry 60 GWh, Lily 20GWh ORET prodn rises from 100 GWh in 2007 to 200 GWh in 201 1 New hvdo IPP exaected in setvice in 2009-10 with 100 GWhlvr arodn
76 B. Financial Internal Rate of Return Analysis of the Project
12. The Project proposes a blend of investments in technical facilities (rehabilitation ofhydro and HFO generation, transmission network rehabilitation and/or reinforcements, reinforcement of distribution facilities), as well as a support to commercial activities (loss reduction, IT.. .).
13. The following financial analysis ofthe Project is based on an aggregate cost-benefit analysis ofits main components for the first phase ofthe APL (including the costs that will be supported by the client). The scope ofthis rate ofreturn analysis is therefore much narrower than for the EIRR analysis presented above which considers the whole investment program of JIRAMA ofwhich only a fraction is financed by the Bank (for a financial analysis ofJIRAMA as a whole, see part C ofthis annex).
VdUe I BaseCase I Lmvcase , Generation, Transmissioq I 51 .O%l 38.3%
Revenue Management and 24.8% 17.7% IT Total Base case 412% 46.1 %
I cost mSDS I 73 I 7.8 i 14. The project investments yield the following distinct benefits: reduction ofgeneration costs, additional revenue from incremental electricity supply, reduction of T & D technical losses, reduction ofcommercial losses. Other economic benefits ofthe project such as an improved reliability ofsupply are not considered because the main beneficiaries will be JIRAMA’s customers rather than the company itself.
15. The Base Case and Low case FIRR calculation are given in the table below. The calculation is based on a total costs of7.3 Million USD for the components ofthe project included in the analysis (retroactive financing and technical assistance are not included, and 15% of contingency costs are added to Bank costs).
16. The Low Case scenario is based on more pessimistic assumptions for the profitability of the Project (Le., hels prices 20% lower, electricity tariffs 20% lower, contingency costs of25% instead of 15%). The profitability ofthe activities supported by the Project remains high under the low case, reflecting past under-investment by JIRAMA.
17. The FIRR for technical investments is based on technical parameters that are relatively straightforward. The forecasting for the revenue management activities is fraught with greater uncertainties (our assumptions are much more conservative than JIRAMA’s). Beyond their direct impact, the revenue management activities have an experimental value. On the basis of their results that will be carefully monitored, it should be possible to base future investment decisions on more reliable forecasts (regarding, for instance, the decision to invest in the generalization ofprepaid meters).
77 C. Financial analvsis of JIRAMA
Introduction
18. The Project strategy is centered on:
(a) Rescuing the company from financial and technical collapse;
(b) Implementing small but highly profitable investments to rehabilitate existing generation, transmission and distribution facilities, and increase revenues;
(c) Creating the adequate organizational, institutional, technical and financial conditions that will allow in the medium-term to pursue a more ambitious policy of access expansion based on larger investments notably in additional hydro generation capacity.
(d) The Project will complement the restructuring plan that has been initiated, including activities Key actions to be accomplished: Recreating the basic process and procedures necessary to efficiently manage JIRAMA, restructuring ofJIRAMA balance sheet, (financial restructuring ofliabilities, re-capitalization ofthe company). A financial restructuring exercise is currently underway and this summary analysis incorporates the measures that have been decided.
19. The present annex describes and analyzes succinctly (i)the recent financial history of JIRAMA; (ii)the situation ofthe company in 2005 when the full extent ofits difficulties became apparent with the beginning ofthe management contract; (iii)the restructuring plan ofthe company that is underway and the medium-term financial prospects ofthe company.
20. Among the conclusions that can be drawn from this forecasting exercise, the following stand out:
(a) In spite ofthe large hnds injected in the company by the government and donors, the projected conversion ofdebt into company equity, and the successive tariff increases on electricity and more recently on water, JIRAMA remains in a precarious financial situation.
(b) With most ofits debts cancelled or rescheduled, JIRAMA has been given a fresh start financially, however its most immediate problem remains an insufficient generation offunds from internal sources: cash-flow from current operations is likely to remain negative in 2006 and 2007, given JIRAMA’s unfavorable generation mix (new HFO and hydro plants not yet in operation, Andekaleka will not be operating at full capacity during rehabilitation works).
(c) As a result, JIRAMA cash position is bound to deteriorate again over the next two years (especially ifthe company reduces its arrears towards suppliers as envisioned in the “plan de redressement”), and will probably need a new injection ofliquidity before 2008.
78 (d) Our financial forecast assumes several efficiency improvements (reduced transmission and distribution losses, improved revenue collections, better management of personnel costs). The biggest source ofpotential savings is however the reduction of generation costs. The Project includes several activities components precisely devoted to ’ the rehabilitation ofhydroelectric installations. These activities have an extremely very high rate of return.
(e) However, once these “low-hanging fruits” are harvested (the small investments that should have been made years ago), a further reduction in average generation costs can only be achieved by following a disciplined investment planning approach, based on the least-cost expansion plan. Given the lead time oflarge hydroelectric projects, this approach will take several years before its benefits are felt in terms ofincreased supply and/or lower tariffs.
(f) Tariff discipline is essential if JIRAMA is to become financially viable again: an updated indexing formula should be defined and scrupulously followed. Our financial forecast assumes yearly tariff adjustments (the next one being scheduled for April 2007) slightly above the rate of local inflation. The average tariff per kWh expressed in USD is currently similar to its value in 2002 and 2003, and oil prices are much higher today than they were then.
(g) There is a trade-off between the expansion of access and the affordability oftariff for existing users that needs to be acknowledged. To be able to invest, with donor support, in access expansion, JIRAMA needs to generate a positive cash-flow from current operations. A way to address this issue is through the sequencing ofactivities and investments. An ambitious policy to increase access to electricity can only be based on the availability ofnew sources ofgeneration at an affordable price because as long as JIRAMA meets extra demand at the margin with thermal generation, any effort to increase supply will directly deteriorate its cash position.
(h) JIRAMA needs to better prioritize its investment program: after years ofneglect and under-investment, all domains ofJIRAMA’s operations (generation, transmission, distribution, commercial, administrative, IT. . .) seem to require significant investments. However, financing has yet to be found for a large portion ofthe investment program that JIRAMA initially has presented for the years 2006 - 2009. This initial program seemed extremely over-ambitious financially, but probably also in operational terms. The current project attempts to address this need for a more prioritized and better sequenced investing approach. Therefore, during the first phase ofthe APL, the project targets the most profitable investments. Also, concerning revenue management activities, it will allow the experimentation ofseveral approaches in order to facilitate future decisions regarding larger scale investments. For the next phase ofthe APL, the use ofa PRG guarantee should bring an important leverage and allow the financing oflarge scale expansion investments.
79 Recent Financial History of JIRAMA
21. From 2001 to 2005, the financial performance ofJIRAMA has severely deteriorated, primarily on account ofincreasingly inadequate electricity and water tariffs. Tariffs have remained unchanged in local currency from July 2001 to July 2005. Over this period, Madagascar has experienced political troubles in 2002 and a significant domestic rate ofprice inflation. This has been accompanied by a substantial depreciation ofthe national currency against the US dollar from 2003 onwards.
22. Throughout the period, for various reasons including the political instability, the lack of financial resources, and a systematic preference by decision-makers for solutions yielding quick results, no rigorous planning process ofinvestments was followed. Given their short lead time and low investment costs, diesel generators were systematically preferred to hydroelectric generation or even to HFO-powered generators. Also, in 2003 and 2004, JIRAMA entered into contracts with Independent Power Producers. Usually negotiated in a situation ofemergency given the risk ofdisruption of supply created by the lack ofadvanced planning, the contracts with IPP were usually costly because (i)they were based on thermal generation; (ii)they were not always tendered on a competitive basis; (iii)the independent producers rationally demanded a large risk premium on their investment given the uncertainties attached to JIRAMA’s signature.
23. The choice ofthermal generation with diesel oil proved disastrous. The combination ofa depreciating national currency and ofrising oil prices in USD on international markets logically increased the cost ofthermal generation. In 2001, fuel costs represented 48% ofthe revenues derived by JIRAMA from electricity sales, an already high proportion given that thermal generation made up less than a third ofthe generation mix ofJIRAMA at the time. From 2001 to 2005, the volume ofthermal generation rose by 35%, but the corresponding fuel costs increased by 280%. As a result, in 2005, fuel costs alone were significantly above the revenues derived from electricity sales. JIRAMA was in fact selling each kWh largely below its variable cost of generation.
24. The decline in the profitability of the company goes back to at least the year 2001, but became really acute in 2004. In 2002, the operations ofthe company suffered from the consequences ofthe political situation but JWAparadoxically benefited fi-om reduced demand that allowed a significant reduction in the volume ofthermal generation. In 2003, a further deterioration ofoperating profitability was masked in the annual accounts by a change in the accounting rules governing the depreciation ofassets. This accounting change, though without impact on cash-flow, allowed JIRAMA to show an operating profit in 2003, in spite ofa barely positive EBITDA.
25. Over the course ofthe FY2004, the price ofDiesel Oil in local currency more than doubled, provoking severe cash-outflows. The magnitude ofthe operating losses should have prompted a large tariff increase, primarily in order to prevent a bankruptcy ofJIRAMA, but also to recreate an adequate economic signal (due to non-reevaluated tariffs, electricity had become extremely cheap compared to oil and natural gas).
80 26. Instead, JIRAMA’s management did not attempt to address the structural inadequacy of revenues but chose to continue to operate as long as possible within the existing tariffs, by implementing short-term solutions. A positive step that was undertaken is the improvement of revenue collection. The company managed to collect significant amounts of arrears from its customers (mainly from the government). However, the other measures taken aimed at saving cash in the short-term went against the medium-term technical and financial viability ofthe company. JIRAMA managed up to the end of2004 to maintain a quasi-normal electricity supply in most ofthe country only by accumulating large amount ofdebts toward its suppliers and the government (non payment oftaxes and non repayment offinancial debt). The lack of funds also prompted the company to more or less halt much needed maintenance operations. Investments had already been severely restricted for several years.
27. The pronounced deterioration ofJIRAMA finances was entirely predictable given the increase in the price ofoil and the absence oftariff reevaluation. The need for an immediate and significant tariff increase should have been recognized much earlier. Indeed, the sector regulator had recommended in the fall of2004 to increase electricity tariffs by nearly 80% on average. It must be noted, however, that the (unaudited) financial accounts produced by JIRAMA did not adequately reflect the severity ofthe situation. For instance, the accounts for 2003 presented a net positive result. Also, the management ofJIRAMA should have been clearer on the seriousness ofthe liquidity crisis. The lack ofsincerity ofJIRAMA’s accounts and of financial transparency played a part in the failure ofthe GOM to recognize earlier the absolute necessity of a large tariff increase.
28. The historical financial results ofJIRAMA that are summarized in the table below must be taken with caution. They originate from the annual accounts that have been reviewed but not been certified by external auditors (the audit firm Mazars). In particular, there are reasons to think that JlRAMA did not adequately depreciate its inventories and its customer receivables.
81 Table 5: JIRAMA Summary Income Statement (FY 2001-2005)
(in millions USD) Actual - Accounts not certified Prov. ---2001 2002 2003 2004 -2005
Electricity Sales 66,8 64,9 79,l 62,5 69,2 Water Sales 17,7 16,7 19,3 14,3 14,5 Other operating Revenues 11,7 7,3 21,8 13,3 14,O Total Operating Revenues 96,l 89,O 120,2 90,l 97,7 Fuel 32,O 32,5 46,4 50,9 79,3 Power Purchase, excluding fuel 4,6 5,O 7,5 Other operating expenses 33,2 25,s 39,5 26,O 51,6 Personnel 17,O 17,3 21,s 15,4 18,5 EBITDA 13,8 13,4 7,s -7,2 -59,3 Depreciation 596 8,6 -2,l 3,5 935 Operating Income 8,2 4,8 10,O -10,7 -68,9 Net Interests -10,2 -8,6 -6,4 -1 1,l -,1
Company tax -95 -,4 -35 -34 -3 1 Net Income -2,4 -4,3 3,l -22,2 -69,l Working Ratio (cash opex / op rev) 86% 85% 93% 108% 161% Rate of return on assets 8% 5% 7% -10% -84% Average Electricity Tariff(Ar/kWh) 135 149 143 141 I78 Average Electricity Tariff (Usckwh) 10,4 11,l ll,7 8,2 8,9
82 29. As the table above illustrates, JIRAMA operated in 2001 with a relatively low level of margin (in terms of EBITDNsales) for an electricity and water utility. This meant that the level ofcash flow fi-om current operations was probably barely adequate to maintain and renew existing assets, but not to service its long-term debt and/or fund an expansion ofservice. However, the situation became really dramatic in 2004, primarily due to the increase in oil prices in local currency. (The abyssal deficit for 2005 is probably somewhat overstated and the deficit for 2004 underestimated due to lack ofproper provisions for inventories and receivables at end 2004).
Table 6: JIRAMA Summary Balance Sheet (FY 2001-2005)
(in millions USD) Actual - Accounts not certified Prov. --2001 2002 - 2003 -2004 -2005 Net Fixed Assets 102,7 99,7 141,O 103,2 81,6 In operation 116,8 118,8 157,4 119,6 118,9 Work in progress 875 654 18,8 22,2 275 Concession -22,6 -25,6 -35,l -38,5 -39,9
Current Assets 126,4 137,7 144,5 85,l 79,2 Accounts Receivables 105,O 112,7 122,3 61,3 70,8 ofwhich customers 62,8 76,l 78,4 27,a 21,8 ofwhich others 42,2 36,6 43,9 33,4 49,O Inventories 21,4 25,O 22,2 23,9 8 94
Cash 7,2 12,9 12,2 15,8 14,2 Total Assets 236,3 250,3 297,7 204,2 175,O Current Liabilities 47,s 58,7 66,s 106,3 168,2 Suppliers 18,l 21,7 34,2 48,l 94,2 Other 29,7 37,O 32,6 58,I 74,O
Short Term Financial Debt 377 692 991 437 90 Long Term Debt 158,l 161,3 187,9 145,3 120,6 Total Liabilities 209.6 226.2 263.8 256.3 288,8 26,7 24,i 34,o -52,a -113,7 260% 232% 206% 91% 56% Financial Leverage 85% 87% 84% 163% NA 2 71 340 291 132 95
83 30. Faced with a liquidity crisis, JlRAMA was able to continue to operate in 2004 thanks to improved revenue collection and a very large accumulation ofshort-term debt.
Table 7: JIRAMA Performance Indicators (FY 2001-2005)
Prow -2001 2002 2003 2004 -2005 Electricity Generated (GWh) 834 780 898,3 981,l 1015,5 % of Thermal Generation 32,4% 31,4% 31,9% 35,1% 36,0% Of which Gas Oil 90% Of which HFO
T & D losses (inc. non technical)
Water produced (millions m3) Losses (YO) 32,1%91,3 35,9%90,9 36,lYo93,7 34,0°/o93,31 3;;’;l Average Electricity Revenue (US centskWh) 10,4 11,l 11,7 82 8,9 Average Electricity Revenue (ArkWh) 135 149 143 141 178 Year on year increase of average rev. in Ar/Ki 11% -4% -2% 26% Average Water Revenue (US centsim3) 28,5 28,7 32,2 23,2 21,5 Average Water Revenue (Arsim3) 3 70 387 392 398 43 0 IYear on year increase of average rev. in Ar/m: 4% 1% 2% 8% y 27 1 340 29 1 132 95
3 1. JIRAMA’s operational performance, while unsatisfactory, did not deteriorate significantly over the period for most parameters. The main causes ofthe financial difficulties experienced by the company are the inadequate level oftariffs and the bad investment choices for new generation capacity.
Situation of JIRAMA at the beginning of the management contract
32. A diagnostic study ofJEWMA carried out in 2003 revealed the severity ofthe problems facing JIRAMA. The findings ofthis report coupled with the insistence ofthe World Bank, eventually prompted the GOM to decide on a two-year management contract for JIRAMA. This management contract, when it became effective during the first semester of2005, had the effect of shedding light on the true extent ofJIRAMA’s financial difficulties.
33. Summarized, the situation that became apparent can be described as follows:
(a) Extreme financial unsustainabilitv of current operations: During the first semester of 2005, the variable costs associated with thermal generation alone (fuel expenses and energy purchase costs) were superior to the total revenues ofthe company leaving no
84 source offunds to pay for other current expenses (maintenance, personnel.. .) let alone new investments or debt repayment.
(b) Rapidly buildingup arrears towards suppliers: given the structural disconnect between current expenses and revenues, could not continue to operate without increasing its level of debt. Around the end ofyear 2004, the company switched to a practice of paying fuel oil with letters ofcredit allowing for a delay of four months before the cash payment became due. The effect ofthis practice was to postpone the liquidity crisis of JIRAMA until after the management contract took effect.
(c) Lack ofeffective and reliable financial reporting and internal controls: Symptomatic illustrations ofthese deficiencies are for instance: the absence ofreliable and audited annual accounts, the lack ofmonitoring ofthe cash position ofthe company, the incomplete and late reporting from the isolated centers.
34. This does not mean that the company had no administrative infrastructure or procedures in place. On the contrary, for most domains (commercial, technical, financial.. .), staff members ofJIRAMA were used to prepare numerous periodic reports to retrace the activities ofeach department and of each territorial level. However, this reporting, while very time-consuming, had become largely useless for operational purposes. Among the reasons for this were: excessive quantity and uneven relevance ofthe information reported, long delays in producing the reports, lack ofgeographical exhaustivity ofthe information (missing data from several isolated centers), impossibility to adequately assess the reliability ofthe data or cross reference it (impossibility for instance to assess the consistency between commercial statistics, and the actual cash revenue collected from customers).
35. While the reporting system in place was very inadequate, there are reasons to think that with limited investments in IT and office equipment and software, and an impulsion from the top management ofthe company; JIRAMA administrative staff has the required capacity to maintain adequate reporting systems. One area where the lack ofeffective control is particularly damaging is the insufficient monitoring offuel consumption. A systematic reporting on a monthly basis and for each electricity center ofthe quantities offuel used, power generated, energy metered and billed, and ofthe actual revenue collection from the customers would help to detect quickly problem areas within the company.
The recovery process supported by the project
36. The restructuring process is materialized by a restructuring plan (“plan de redressement”) supported by the GOM. The main dimension ofthis plan are the following:
(a) Financial restructuring ofJIRAMA: JIRAMA cannot realistically service the debt it has accumulated. The financial restructuring will entail substantial debt cancellation by the GOM, as well as an injection ofcash. Negotiations are underway with the other creditors ofJIRAMA (mostly suppliers), with the objective ofrescheduling the repayments ofcapital by JIRAMA and transforming part ofthe debt in equity. Overall, the plan entails significant budgetary costs (of which 50 billions AR in cash in 2006) for
85 the GOM. In addition, it is likely that an additional injection ofliquidity in JWAwill be necessary before 2008.
(b) Tariff increase: successive and significant tariffs increase have been decided and implemented in 2005 (two increases of electricity tariffs) and 2006 (increase of water and electricity tariffs). One obvious lesson fi-om the recent history ofJlRAMA is the absolute necessity of maintaining adequate cost-recovering tariffs. In addition to the front-loaded tariff increase that has already taken place, this should be achieved in the future through:
(i) Maintaining transparency regarding the financial situation ofJIRAMA (see covenant on reporting obligations for JIRAMA);
(ii) Vigilance from donors and from the IMF (considering the budgetary cost and the macroeconomic effects of a collapse ofJIRAMA);
(iii) The definition ofan indexing formula for electricity and water tariffs and a streamlined decision process to apply the formula and effectively implement necessary tariff changes: the volatility ofthe currency and ofoil prices will remain a problem going forward and JlRAMA, given its low or negative margins, will not be able to bear the cost ofthis volatility (see covenant on tariff indexing).
(c) Efficiency improvements. The key operational parameters to improve the financial viability ofJIRAMA are the following: (i)lowering the cost ofexisting generation; (ii)technical losses reduction; (iii)improved revenue collection. Those are the three priorities for the initial investment component ofthe APL. While relatively small, the investments to be financed under the first phase should have a significant financial impact, given their extremely high overall projected rate ofreturn. This situation reflects the past mismanagement ofthe company, and the fact that modest investments with extremely rapid pay-back have not been carried out. The project also supports small investments in IT which should contribute to improved financial reporting and internal controls.
86 37. The assumptions regarding performance indicators for JIRAMA and key operational parameters for 2005 - 2009 (including average tariff) are summarized in the table below.
Table 8: JIRAMA Performance Indicators (FY 2005-2009)
7...... Forecasf...... 1 ~~2~~~ ity Generated (Gwh) 10155 10669 11352 12483 1345.4 Thermal Generation 36.0% 37.2% 39.7% 41 .8% 41.4% 90% 86% 6470 32% 33% 10% 14% 36% 68% 67%
& D losses (inc. MHtechnical) 233% 23.4% 228% 223% 218%
ater produced (millions m3) 100.1 1036 107.1 110.6 114.1 328% 32.4% 3213% 295% 2813%
8.9 11.2 11.9 12.5 13.1 178 264 297 324 352 26% 49% 13% 9% 9% 21.5 26.0 27.3 28.1 28.7 430 612 680 732 77 1 8%1 43% 11% 8% 5% 951 52 48 44 36
87 38. Under theses assumptions, JIRAMA would start to generate a positive cash-flow on current operations (EBITDA less interest expenses) in 2008, due to tariff increase, a better generation mix, and improved overall operational perfonnance.
Table 9: JIRAMA Summary Income Statement (FY 2005-2009)
(iH milfiow UXD) ‘I...... Forecast .....,...... J 2005 2- 2007 2008 2009
Electricity Sates 69.2 91.5 104.4 120.8 137.6 Water Sales 14.5 18.2 19.9 21.9 23.5 3Uler operating Revenues 14.0 14.5 15.6 16.9 18.2 Total Operating bvenues 97.7 1242 1399 i596 179d Fuel 79.3 63.1 62.6 60.5 65.2 Power Purchase, excluding fuel 7.5 6.7 12.7 27.1 29.2 3ther operating expenses 51.6 45.3 44.9 47.6 4x3 18.51 12.9 13.0 13.4 13.6 -59.31 -3. 6.6 11.0 22.9 bepreciation 9 .J 8.2 8.3 8.4 10.9 Q~eratingLicoine -68.9 -11.8 -1.7 2.6 12.0 Net Interests -.1 -6.8 -8.9 -7.4 -7.9 ::ompany tax -.1 -.1 -.l -.2 -1.2 NetIiwoine -69.1 -18.3 -10.7 -4.9 1-14 Working Rafio (cash opex /op rev) 161% 103% 95% g3% 87% Rate of refum on assets -84% -13% -I% 2% 8% Average Electricity Tarij”(hikwh) I78 268 297 328 352 ,/lveraRe Electricity Tar$(Usc#c wh] 89 II.2 11.9 12.5 13.1
88 39. However, JIRAMA will remain in a situation of insufficient liquidity up to the end of 2008 (current ratio below 1 and increase of short-term financial debt), in part because of the progressive reduction ofpayment arrears towards suppliers.
Table 10: JIRAMA Summary Balance Sheet (Fy 2005-2009)
(in mimom USD) 7...... Forecast...... , ,1 2005~~072~ Net Fixed &sets &16 902 1235 1366 1442 In operation 118.9 98.7 103.2 106.5 134.7 Work progress 2.5 31.1 63.8 78.4 64.8 2 oncession -39.9 -39.4 -43.5 -4x.3 -55.3 Current Assets 792 43.4 479 535 568 Accounts Receivables 70.8 36.8 43.5 49.8 53.3 ofwhich customers 21.8 15.6 16.5 17.2 16.1 ofwhich others 49.0 21.2 27.0 32.7 37.2 Inventories 8.4 6.6 4.4 3.7 3.5 Cash 142 5.1 a a a Total -Assets 13.0 13s.s 171.3 190.2 200.9 current Liabilities 1682 619 43.7 338 296 suppliers 94.2 54.7 36.9 27.1 23.1 Other 74.0 7.1 6.8 6.8 6.5 Short Term Financial Debt a a 10.8 246 23.1 Long Term Debt 1206 506 849 l00a 1145 I ITatnl Liabilities 1SSn8( 112.4 139.4 158.3 167.3 -113.7 26.3 31.9 31.5 33.7
~~
89 40. The cash flow statement highlights the deteriorating cash position ofJIRAMA up to the year 2008 included. The support ofthe government is apparent in the equity increase. However, the cancellation of long-term financial debt by the GOM will not solve the immediate liquidity problem of the company. The build-up of short-term financial debt in the forecast is not healthy and would be costly for JIRAMA (high interest rates) or impossible to finance. Therefore, as explained in the main text of this appraisal document and discussed with the GOM, additional budgetary support of JIRAMA will probably be needed in 2007.
Table 11: JIRAMA Summary Cash Flow Statement (FY 2005-2009)
p-i#milfiois UXD] 2005 2006 2007 2008 2009 EBITDA -59.3 -3.7 6.6 11.0 22.9 f: omp any tax -0.1 -0.1 -0 1 -0.2 -1.2 Variationin working capital(assets) -6.1 23.7 -6.8 -7.7 -5.0 Variation in working capital@abfities) 76.9 -80.7 -14.8 -8.0 -3.1 Net Interest expenses -0.1 -6.8 -8.9 -7.4 -7.9 Cashflow bmcurrent opemtions 113 -67.6 -2411 -12.2 56 Net Investments -2.5 -29.2 -46.5 -26.7 -22.9 Cash flow after investments 88 -968 -705 -39A -172 Increase(+)/decrease(-) in LT financial debt -4.2 -51.6 37.1 18.6 17.9 Increase(+) in equity and subsidies 0.0 141.5 17.8 6.2 0.0 Cash flow hmfinancing acthities -42 899 548 248 179 Increase(+ydecrease(+) in net cash position 46 -69 -15.7 -14.2 .6 Net Cash Position at the end ofthe FY (cash 142 5.1 -108 -24.6 -23.1
90 Attachment 9.1 Jirama Electricity TARIFF
Applied from April 2006
Exchange Rate Ar/USD 2100 Ar 31 -mars-06
IFF IJnit Tariffs April 2006 TA -.... I I Zone 1 I Zone2 I Zone3 Tariff HV Capacity.. Charae I US$kW 1 $12.291 I Heavy Energy_. I US centsikWh I 4.11 I I t Usage Fixed Fee US$ -* I I $52.381 I Caaacitv Charee I US$ikW I $10.601 1 : Tariff HV aM 3 Hourly
Tariff MV Heavy Usage Tariff MV Short
3 Usage I Tariff MV Hourly
Tariff MV Heavy Usage v1 Tariff MV u Short 05 Usage
6 Tariff MV Hourly Energy Night
Tariff LV General Others Tariff LV B General -” Others $, 5 Tariff LV - Life Line -;i Non Residential Subscribed Cap < 3 kW Tariff LV - Life Line Residential Subscribed Can < 3 kW
91 Annex 10: Safeguard Policy Issues MADAGASCAR: PowerWater Sectors Recovery and Restructuring Project
A. Overview
1. During the preparation ofthe JIRAMA financial recovery and restructuring plan, the Malagasy Government in collaboration with the Utility has developed an investment Plan for the period 2006 - 2012.
2. The investment Plan relates to all the activities ofJIRAMA: electricity, water, as well as the activities related to customer management, financial and commercial issues. The part ofthe proposed program to be supported by IDA focuses on financing needs for the most pressing and high-priority investments and will be executed in two phases: the first phase APL-1 for the period mid-2006 - mid-2008 and the second phase APL-2 for the period ofmid-2008 - mid- 2012.
3. Phase 1 ofthe program (APL- 1 would assist JIRAMA recovery plan with:
(a) reduction of generation costs by rehabilitation of existing hydroelectric and thermal units, as well as conversion ofsome diesel generators to heavy fuel oil;
(b) reduction of technical losses in transmission and distribution by upgrading of key sections of MV lines, replacement ofoverloaded transformers and undersized distribution lines and cables;
(c) improvements in metering, billing and revenue collection by meter verification and replacement, high-value customer management, updating ofcustomer records, introduction of prepayment meters and spot metering techniques in selected clusters;
(d) modernization of JIRAMA 's information systems and IT equipment by installation ofa company-wide computer network and associated hardware and software.
4. APL-1 would also support the long-term objectives ofimproving the electricity and water sectors' performance by assisting Madagascar in providing funds: (a) for complementary actions needed to accompany the transaction advisor (IFC) in the process of selecting and contracting a new private operator to take over JIRAMA; (b) for prolongation ofthe current management contract to avoid any hiatus before the takeover by the selected strategic partner; and (c) TA to the Ministry ofEnergy (MEM) to steer the above process to a successful outcome and for capacity building within MEM.
5. APL-1 will also support the technical and safeguard studies required for APL-2 as well as the due diligence requirements for private hydro generation investments to be eligible for IDA- backed guarantees in a subsequent PRG operation currently under preparation.
92 6. JIRAMA selected a consultant to carry out the preparation ofan Environmental and Social impact Management Framework (ESMF) for investments to be implemented under APL- 1. The ESMF was prepared in accordance with Bank guidelines and national environmental policies (Environment Charter and Mecie decree related to the necessity ofinvestments’ compatibility with Environment).
7. Investments proposed to be financed under APL-1 concern rehabilitation and reinforcement ofexisting installations. The reinforcements consist mainly ofreplacement of transformers and faulty equipment. As no new Greenfield sites will be developed or human resettlement undertaken by JIRAMA as an effect ofthe investments under APL-1, it is unlikely that this Operational Policy (OP) will be triggered. This Operational Policy is likely to be triggered for the second Phase ofthe project APL-2.
8. The environmental classification ofthe APL-1 part ofthe project is Category B (partial Assessment). During the preparation ofphase 2 (APL-2), ESIAs with RAPSwill be conducted and submitted to ASPEN for review and clearance.
B. Methodology
9. The following methodology has been used in the preparation f the ESMF: (i)review f investment plan; (ii)review of legal and regulatory framework and analysis ofenvironmental safeguard triggered by World Bank policies; (iii)field visit; (iv) data analysis, identification and assessment ofthe potential project impacts and mitigation measures; and (v) proposal for environmental measurements with mitigation measures.
C. EnvironmentalAssessment Findings
Rehabilitation of tlzermal power station
10. Rehabilitation ofthermal power station ofAmbohimanambola, Mahajanga, Toamasina, Toliary, Antsiranana consist of the replacements ofmachine parts, including the rehabilitation of auxiliaries and general revision of the generator Units.
11. The environmental examination ofthe projects related to the rehabilitation ofthe power station showed that the environmental impacts are generally neutral. However, the impacts of the investments alone cannot be considered independently from the totality ofthe installations and the current environmental situation in the site in which they are located. The main impacts are noise, the atmospheric emissions, the pollution of ground and water due to non efficient management of effluents, and poor risk management including absence of an emergency plan.
93 MAIN IMPACTS PROPOSED MITIGATION ACTIONS MEASURES Noise pollution Respect instruction security and Wearing ear-protection obligatory in the power safetv stations site
Installation of a system control and Ensure adequate maintenance of machinery follow-up the workers health Conduct a systematic check-up every six months Periodic control for noise level on the receivers
Atmospheric emissions Installation of a system control and Creation of a data base on employment health follow-up the employee health Optimized and rigorous Inspect machinery and vehicles regularly and carry maintenance for the material and out necessary repairs on time to prevent and discharge equipment of oil gasoline or other pollutants Respect times and criteria ofmaintenance Replacement of defective parts Soil and water pollution (solid Envisage equipment for used oil collection and Waste and effluents) disposal, as well as fuel storage so as to avoid soil, ground and surface waters contamination Soil treatment Temporary collect in tanks at the safety site Used Oil disposed by specialized companies (ADONIS or TOTAL services)
Improvement ofthe processing Conduct a study on the basin capacity according to system for liquid waste the effluents quantity ~ Risk and dangers Acquisition of fire fighting Purchase of fire extinguishers equipment Strengthen worker safety measures Emergency plan made available by the establishment of an Information and sensitizing staff including simulation emergency plan for each site
Training on the safety prevention Repeater course for staff systematic training Provide workers with protective gears
Dangerous waste (asbestos) Provide worker protection equipment Respect instruction security and Tanks secured in safety site safety Elimination following National Plan for the POP with Malagasy Environmental Administration
Rehabilitation of hydroelectric power station
12. Rehabilitation of the hydroelectric power station ofAntelomita 1, Ankazobe, Tsiazompaniry, Vatomandry, Andekaleka and Volobe, consist of replacement of used turbine and alternator parts, Turbine Cooling equipment, general revision of plant, and rehabilitation of the civil engineering works.
94 13. The analysis ofthe environmental impacts ofthe projects concluded that impacts are non- significant and reversible except for the environmental impacts ofthe restoration ofthe civil engineering works planned for the hydroelectric power station at Vatomandry. Specific attention needs to be given to the rehabilitation of transformers in which the PCB (Polychlorinated Biphenyl) represents environmental risk. JIRAMA has agreed to comply with the action plan for the elimination ofPersistent Organic Pollutants (POP), elaborated in collaboration with the Malagasy Environmental Administration, the coordination committee ofPOP and supported by the UNEP. JIRAMA will therefore ensure safe storage ofthe old transformers.
14. For the hydroelectric power station in Vatomandry (192 KW), JIRAMA must meet the requirements ofthe safeguard policy OP 4.37 on the Safety ofDams. This rehabilitation will therefore only be realized after an expert report on the dam safety, carried out by an independent expert, judged satisfactory to IDA.
MAIN IMPACTS PROPOSED MITIGATION ACTIONS MEASURES Soil and water pollution by used Waste Management Create a site for safe storage or old batteries Noise pollution Security and safety instructions Noise-protection obligatory in the site enforced and adhered to Ensure adequate maintenance of machinery Periodic control for noise level on the receivers
Risks of work related accidents Security and safety instructions Enforce the presence of safety works signals enforced and adhered to Create a staffed and equipped dispensary accessible during working hours Provide material for protection of staff on site Strengthen worker safety measures by the establishment of an emergency plan.
Chemical pollution risk Transformer Security and safety Organized Training for workers on the PCB risk instructions enforced and adhered to Ensure transformers storage in safe site Elimination following National Plan for the POP with Malagasy Environmental Administration
Dams silting up Dams Clearing Limit the interventions on land with high risk of erosion Minimize deforestation Install soil stabilizing vegetation
Soil and water pollution Adequate management for the soil Organize training programs targeted at all worker polluted by oil used or fuel involved in the collection and elimination oil used
Rehabilitation of power lines
15. The component “rehabilitation ofpower lines” relate to the rehabilitation ofthe distribution networks MT and BT ofthe interconnected network ofAntananarivo (RI Tana) and other centres as well as the rehabilitation ofthe 63 kV RI Tana Transmission line. These
95 projects include reinforcement ofthe networks, replacement and repair oftransfonners and faulty equipment. The current problems are especially due to acts ofvandalism, dilapidating Structures on the 63 kV line and out-dated equipment. Generally, the likely environmental impacts are non significant for the 63 kV Transmission line.
7- I I I
MAIN IMPACTS PROPOSED MITIGATION ACTIONS MEASURES Landscape change Integrated Landscape Eliminationof the faulty lines and dilapidating - structures Risks of accident with the pylon Maintenance Repaint regularly rusted Regular field visit
Assessment of implementation and monitoring capacity
16. The execution ofthe APL-1 will require JIRAMA to amend its organization to integrate “environmental Management” which is currently missing from its management structure. An entity within JIRAMA should manage all environmental actions involving the Company. This environmental unit will report to the Managing Director ofJIRAMA or to a directly designated high level manager in the hierarchy. The Unit will be responsible for the supervision of environmental management within the Company, as well as to propose a revised environmental policy. The environment unit will be the focal point for the environmental Administration and will represent the Company on all questions related to environmental issues. The Unit would be responsible for prior examination ofall projects undertaken by JIRAMA as well as environmental monitoring ofthe existing installations.
17. On site, compliance with the environmental action plan will be ensured by the heads of operation who will submit a report to the environmental services. These tasks relate to the implementation ofenvironmental measurements as well as the follow-up ofthe environmental impacts ofthe activities.
96 Annex 11 : Letter of Electricity Sector Development Policy (Abstract) MADAGASCAR: PowerNater Sectors Recovery and Restructuring Project
This is an abstract in English of the letter dated 29 May 2006 from the Minister of Energy of Madagascar to the Vice-president, Africa Region. A copy of the letter in French is contained in the Project Files.
Objectives ofelectricity sector policy
a Contribute to economic growth; a Accelerate access to electricity; Reduce the burden ofthe sector on public finances.
Short-term actions for JIRAMA’s recovery
The 2005-2009 recovery plan consists ofinternal measures to reduce costs, improve JIRAMA’s technical and commercial performance accompanied by restructuring of its balance sheet, a recapitalization ofthe company, injection ofworking capital by the Government, exoneration of certain taxes and duties and substantial tariff increases. It is to be accompanied by a high- priority program ofinvestments.
Long-term management option for JWA
The Government has decided to accept the recommendation ofthe Task Force set up to review the institutional and management options for JIRAMA. Consequently:
a JlRAMA will remain state-owned; a Water and electricity activities will not be separated; a The enterprise’s electricity branch will not be unbundled but will remain vertically integrated; a A private partner will be competitively recruited to operate JIRAMA under a type of leasing contract (contrat d’affermage).
Other Government commitments
a Provide JIRAMA with additional working capital if required; a Clear up payment arrears to JIRAMA ofpublic bodies and set up a mechanism to prevent a recurrence; a Support JIRAMA in its efforts to improve its payment rate from industrial and household consumers; a Launch an IPP program with the assistance ofIFC; a Introduce an automatic electricity tariff adjustment mechanism.
97 Annex 12: Project Preparation and Supervision MADAGASCAR: Power/Water Sectors Recovery and Restructuring Project
Planned Actual PCN review February 28,2006 February 28,2006 Initial PID to PIC April 25,2006 April 28,2006 Initial ISDS to PIC April 25,2006 May 10,2006 Appraisal May 12,2006 May 19,2006 Negotiations May 3 1, 2006 June 2,2006 Board/RVP approval July 13,2006 Planned date of effectiveness September 1, 2006 Planned date of mid-term review September 30,2007 Planned closing date April 30, 2009
Key institutions responsible for preparation of the project:
Ministry ofEnergy and Mining of Madagascar Ministry of Economy, Finance and Budget JlRAMA
Bank staff and consultants who worked on the project included:
Name Title Unit Task Team
StCphan GARNIER Power Engineer, Team Leader AFTEG Erik FERNSTROM Power Engineer AFTEG Sunil MATHRANI Senior Economist (Consultant) AFTEG Fabrice BERTHOLET Financial Specialist AFTEG Gervais RAKOTOARIMANANA Senior Financial Management Specialist AFTFM Sylvain RAMBELOSON Senior Procurement Specialist AFTPC Paul-Jean FEN0 Safeguards Specialist AFTS1 Amadou KONAFS Safeguard Specialist AFTS1 Gilles VEUILLOT Counsel LEGAF Wolfgang CHADAB Finance Officer LOAG2 Pierre VIEILLESCAZES Senior Financial Officer IEF Lily WONG CHUN SEN Program Assistant AFTEG Saholy ANDRIAMBOLOLOMANANA Senior Program Assistant AFC08
98 Quality Assurance Team / Peer Riewers
S. Vijay IYER Sector Manager, Energy AFTEG Irene XENAKIS Operations Advisor AFTQK Ronald RIDKER Consultant AFTQK Charles FEINSTEIN Sector Leader LCSFP Michel LAYEC Lead Energy Economist AFTEG Prasad TALLAPRAGADA Senior Energy Specialist AFTEG Luiz MAURER Senior Energy Specialist AFTEG Lief JENSEN Lead Financial Management Specialist AFTFM Maria Isabel MARQUES-de-SA Principal Investment Officer CASDR, IFC Nicola Ruggero SAF'ORITI Investment Officer CASDR, IFC Stefan RAJAONARIVO Business Development Officer CASDR, IFC
Bank funds expended to date on project preparation:
1. Bank resources: US$lOO,OOO 2. Trust funds: US$O 3. Total: US$lOO,OOO
Estimated Approval and Supervision costs:
1. Remaining costs to approval: US$O 2. Estimated annual supervision cost: US$150,000
99 Annex 13: Documents in the Project File MADAGASCAR: Power/Water Sectors Recovery and Restructuring Project
Letter of Electricity Sector Policy dated May 29, 2006 from the Minister of Energy of Madagascar to the Vice-president, Africa Region.
Economic Internal Rate of Return Calculation (EIRR) for the 2006 - 2012 JIRAMA’s investments.
Financial Internal Rate ofReturn Calculation (FIRR) for the 2006 - 2009 JIRAMA’s recovery plan.
Financial Internal Rate of Return Calculation (FIRR) for the APL- 1 investments.
Environmental and Social Management Framework Report.
Law Nr. 98-032 (Electricity Law) and Law Nr. 98-029 (Water Law) dated January 20, 1999 and implementation texts.
Ordinance Nr. 75/024 dated October 17, 1975, establishing JIRAMA.
Study alternative forms of structuring the water and electricity markets and of restructuring “Jiro sy Ran0 Malagasy” (JIRAMA) - (Financed by PPIAF).
Least Cost Generation Master Plan.
100 Annex 14: Statement of Loans and Credits MADAGASCAR: Power/Water Sectors Recovery and Restructuring Project Difference between expected and actual Onginal Amount in USS Millions disbursements
Project FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d ID PO90615 2006 MG-MultiSec STIIHIVIAIDS 2 (FY06) 0.00 30.00 0.00 0.00 0.00 29.01 4.67 0.00 PO83351 2006 Integ Growth Poles 0.00 129.80 0.00 0.00 0.00 111.85 -10.09 0.00 PO82806 2004 MG-Transp Infrastr Invest Prj (FY04) 0.00 150.00 0.00 0.00 0.00 112.49 49.93 5.84 PO74448 2004 MG-Gov & Inst Dev TAL (FY04) 0.00 30.00 0.00 0.00 0.00 20.08 5.64 0.00 PO74236 2004 MG-GEF Env Prgm 3 (FY04) 0.00 0.00 0 .oo 9.00 0.00 7.25 3.17 0.00 PO74235 2004 MG-Env Prgm 3 (FY04) 0.00 0.00 0.00 0.00 0.00 31.86 8.61 0.00 PO73689 2003 MG-Rural Transp APL 2 (FY03) 0.00 80.00 0.00 0.00 0.00 40.88 -0.08 -7.38 PO76245 2003 MG-Mineral Res Gov SIL (FY03) 0.00 32.00 0.00 0.00 0.00 16.95 -2.36 0.00 PO72987 2002 MG-MultiSec STIiHIViAIDS Prev APL 0.00 20.00 0.00 0.00 0.00 5.25 -1 .os 0.00 (FY02) PO72160 2002 MG-Priv Sec Dev 2 (FY02) 0.00 23.80 0.00 0.00 0.00 11.35 7.08 0.00 PO55166 2001 MG-Com Dev Fund SIL (FYOI) 0.00 110.00 0.00 0.00 0.00 17.57 -63.3 1 4.69 PO51922 2001 MG-Rural Dev Supt SIL (FYOI) 0.00 89.05 0.00 0.00 0.00 32.59 4.34 -9.74 PO5 1741 2000 MG-Health Sec Prgm Supt 2 (FYOO) 0.00 40.00 0.00 0.00 0.00 16.36 -3.32 0.00 PO52186 1999 MG-Microfinance (FY99) 0.00 16.40 0.00 0.00 0.00 1 .so 0.86 -0.42 PO01568 1998 MG-Community Nutrition 2 (FY98) 0.00 27.60 0.00 0.00 0.00 2.17 -8.48 0.00 ~~ ~ Total: 000 77865 000 900 000 457 16 - 442 - 7.01 MADAGASCAR STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions ofUS Dollars
Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1997 AEF GHM 0.50 0.00 0.00 0.00 0.50 0.00 0.00 0.00 1995 AEF Karibotel 0.19 0.00 0.00 0.00 0.19 0.00 0.00 0.00 1991 BNI 0.00 2.09 0.00 0.00 0.00 2.09 0.00 0.00 2005 BNI 5.96 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2000 BOA-M 0.00 0.82 0.68 0.00 0.00 0.82 0.68 0.00 2004 Cottonline 1 so 0.00 0.00 0.00 1.50 0.00 0.00 0.00 Total portfolio: 8.15 2.91 0.68 0.00 2.19 2.91 0.68 0.00
Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2004 LGA 0.01 0.00 0.00 0.00 2001 Besalampy 0.02 0.00 0.00 0.00 2001 COTONA I11 0.01 0.00 0.00 0.00 2004 BP Madagascar 0.00 0.00 0.00 0.00 Total pending commitment 0 04 0 00 0 00 0 00
101 Annex 15: Country at a Glance MADAGASCAR: Powerwater Sectors Recovery and Restructuring Project
Madagascar at a glance Ma6
S& POVERTY ardSOCUL Saharan LOW- ta w lopin ant dlarn ond' Mahcascar Africa imane 2004 Poorlation. mid-war hhs) 17.4 7 19 2338 GNI DW cada P#asme#md. US1 3m 6m 510 GNI (Adbsmehd. USWml 52 432 1,184 Averam arrud uowth.199804 PoDdation rn) 29 22 1.8 Labor bm f%I 29 in 1.1 Mast recdestimate (latest vea audlatie. 1998.041 Powm f$ daodabnbdo wi-ahm/no&vh I 71 ManDamlation Wofhto$laao&hnI 31 37 31 LiL wectacvat bih f~rsl 53 '% 58 lnfart rmrtalh Lerl.PPOk bkhsl 78 101 79 Ctild mlnuMon f%ofMmn&erSI 33 44 kceat0 animmved waerswme i%ofnoadaaknI 45 ti 75
Litencv &of nao&bnace 7 SI €8 €6 61 --"*- Gross mmanfenrdlment Eofdiookoe aao&hnl 120 85 94 Ilgdagasar Male 122 ICQ 101 - &-me pup Female 117 s3 88 I KEY ECONOMlCRATlOSard LONGTERM TRENDS 1984 1994 2003 2004 moiioinlc tailox' GDP IUSb&mI 29 3n 55 4.4 Gross catital brrrdonlGDP 88 10 9 I79 24.3 Emom dadsard seMce&DP 133 zn 23 .I 32.6 Trade Gron &msticsaunoslGDP 40 33 89 8 .0 Gron rational suna&DP 2 .I 1.4 13 n 13.9 I Clrrentacrcunt telanoelGDP -6 n 4.4 49 -10.8 Irtem9 DavrrertslGDP 2.1 0.7 08 0.7 Total debtlGDP 72 8 1378 go6 79.4 Tmldebt seniekmork 30 2 93 5.4 5.6 Presentdur ofbbllGOP 288 Present dueof debtkmrts 1148 hdebtdnrn 133B94 193604 2003 20M 2001-08 farerace am!wM) I G DP 1.2 2.7 9s 53 6.1 GDPoercaob -1.5 -03 6.7 2n 3 .0 Emark ofaocds ard seMces 4.0 0.7 41.7 15 11.6
STRUCTUREdtk ECONOMY 1984 19% 2003 2004 i%at GDPl hriCulbJre 353 z18 292 28.8 lrdustnf 13D 9.7 I5 3 16.0 buharn'na 112 8n 13.7 14.2 Senices 511 @5 555 55.2 Hcusehold Inal mnarrration emmdmre 862 B38 82n 82.5 Genml oorhfirel mmmdicn extoendlure 98 69 g .I g .6 lmcrtsofawdsand senices 179 298 32 .I 4.2
198434 1994-04 2003 2004 (anrace am/m&I &riculbJre 23 I9 13 3.1 Irdustn, 12 25 145 6.6 bukdvina 08 32 I5 3 6.1 Seni-5 1.1 3D 10.4 6 .O Hcusehold Inal mnwrrotion emmdmre 0.4 32 12 5 0.7 General aorhfirel mmmdicn extendlure -08 29 242 8.6 Groa catital bdon 3.4 92 338 57.6 hcrt50fawdsand senices 0.1 72 328 24.8
Nc&e:2004daaae prelrmrerye+t'ms TIE diamonds how fcur kevindcaors in the ccumfinboldloomared with rn imornmx~mae. lfdata are mnim the diamrd wll be imomkte.
102 I
Xi1 81 X?
P2 3 3
44° 46° 48° 50°
MADAGASCAR POWER/WATER SECTOR RECOVERY
12° AND RESTRUCTURING PROJECT 12°
EXISTING TRANSMISSION LINES: ANTSIRANANA 138 kV, DOUBLE CIRCUIT 63 kV 35 or 20 kV DIANA MAJOR PRODUCTION CENTER WITH A CAPACITY OVER 1MW Ambilobe Nosy-Be Iharana EXISTING HYDRO POWER STATIONS Mahavavy Vohimarina CANDIDATES FOR HYDRO DEVELOPMENT PAVED ROADS Ambanja ALL-WEATHER ROADS ANTSIRANANA 14° RAILROADS 14° RIVERS S AVA Sambava SELECTED CITIES Bealanana REGION CAPITALS Analalava Andapa PROVINCE CAPITALS Antsohihy Antalaha NATIONAL CAPITAL SOFIA REGION BOUNDARIES Befandriana PROVINCE BOUNDARIES Maroantsetra Sofia MAHAJANGA Boriziny Mandritsara MAHAJANGAAnjombony 16° 16° Mitsinjo Marovoay Mampikony Soalala Bemarivo
Mahajamba Mananara BOENY Ambato Boeni
Besalampy ANALANJIROFO Tsaratanana Boinakely Soanierana- Andilamena Ivongo Ambodifotatra Maevatanana
Vohitraivo Mozambique Betsiboka Kandreho Vavatenina MELAKY Andriamena Manambaho BETSIBOKA Fenoarivo-Atsinanana Amparafaravola Lake Ambatomainty Alaotra
Morafenobe Ambatondrazaka Channel Vohidiala VolobeVolobe Amont 18° 18° Maintirano Bemahatazana ALAOTRA VVolobeolobe Ankazobe Mahavavy MANGORO Fenoarivo be TOAMASINA ANALAMANGA Fanandrana BONGOLAVA Anjozorobe TOAMASINA Antsalova ANTANANARIVO Tsiroanomandidy ANTANANARIVO Manja- INDIAN kandriana Andekaleka Miarinarivo Perinet Ampasimanolotra Lily MandrakaMoramanga Manambolo ITASY Antelomitas ATSINANANA I and II OCEAN Faratsiho Miandrivazo Vatomandry Belo Anosibe Canal Tsiribihina Mandoto Antanambao-Manampotsy Antanifotsy Lohavana Tsiribihina VAKINANKARATRA Antsirabe SahanivotrySahanivotry Mangoro 20° Mahanoro 20° MENABE Manandona TalavianaTalaviana Marolambo Morondava Antetezambato Mahabo Fandriana Morondava Malaimbandy AMORON' MANIA Ambatofinandrahana Ambositra Manandriana VAT O VAV Y Nosy Varika FITOVINANI Vohilava
Ambohimahasoa Pangalanes Ikalamavony Ranomafana Manja Ifanadiana Mananjary
FIANARANTSOA Namorana Irondro Beroroha HAUTE MATSIATRA Manandray Morombe Mangoky Ambalavao 22° TOLIARA Ankarmena Ikongo 22° IHOROMBE Manakara Ankazoabo atm. FIANARANTSOA Ihosy Vohipeno Ivohibe ATSIMO ANDREFANA Vondrozo Sakaraha Farafangana Iakora ATSIMO TOLIARA Fiherechana Betroka Benenitra ATSINANANA Vangaindrano Midongy-du-Sud Betioky Onilahy
ANOSY Befotaka 50° 24° 24° TANZANIA 45° 50° Berakete Bekily COMOROS Antsiranana Manantenina Mayotte (Fr) E U Ampanihy Mandrave 15 15° IQ Mahajanga ° B ANDROY M Amboasary- ZA O R Sud l M e A n n C Toamasina Tolagnaro a S Beloha h Ambovombe C A ANTANANARIVO e G Tsihombe Androy 20° u 20° q A i b D m Fianarantsoa a A z
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This map was produced by the Map Design Unit of The World Bank. M M The boundaries, colors, denominations and any other information shown 0 50 100 150 200 Toliara IBRD 34815 JUNE 2006 on this map do not imply, on the part of The World Bank Group, any KILOMETERS judgment on the legal status of any territory, or any endorsement or 25° 25° acceptance of such boundaries. 44° 46° 48° 40° 45° 50°