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Document of The World Bank Public Disclosure Authorized Report No. 17170-ET PROJECT APPRAISALDOCUMENT Public Disclosure Authorized FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA ENERGY 11 PROJECT Public Disclosure Authorized November 13, 1997 Energy Team Africa Region Public Disclosure Authorized CURRENCY EQUIVALENTS Currency Unit = Ethiopian Birr (ETB) US$1.00 = Birr6.801 as of November 1997 SDR 1.0 = US$1.37 as of October 1997 FISCAL YEAR July 1 - June 30 WEIGHTS AND MEASURES I kilometer = 0.621 miles 1 square kilometer (km2 ) = 0.386 square miles 1 kilovolt (kV) = 1,000 volts 1 megawatt (MW) = 1,000 kilowatts 1 megavolt ampere (MVA) = 1,000 kilovolt amperes 1 gigawatt hour (GWh) = 1 million kilowatt hours 1 ton of oil equivalent (toe) = 10,500,000 kilocalories Vice President: Callisto Madavo Country Director: Oey Astra Meesook Technical Manager: Mark Tomlinson Task Manager: Alfred Gulstone ABBREVIATIONSAND ACRONYMS AfDB AfricanDevelopment Bank BOT Build, Operate and Transfer DANIDA Danish InternationalDevelopment Agency DCA DevelopmentCredit Agreement EELPA EthiopianElectric Power and Light Authority EEPCO EthiopianElectric Power Corporation EESRC EthiopianEnergy Studiesand ResearchCenter EIA EnvironmentalImpact Assessment ERR EconomicRate of Return ESMAP Energy Sector ManagementAssistance Program GOE Governmentof Ethiopia ICR ImplementationCompletion Report ICS InterconnectedSystem IDA InternationalDevelopment Association LRMC Long Run Marginal Cost MME Ministryof Mines and Energy MOA Ministryof Agriculture NGO Non GovernmentalAgency NORAD Nordic DevelopmentAgency NPV Net PresentValue PA Project Agreement PAD Project AppraisalDocument PAP Project AffectedPopulation PMU Project ManagementUnit PPF Project PreparationFacility SCS Self ContainedSystem Sida SwedishInternational Development Agency STD SexuallyTransmitted Diseases ETHIOPIA ENERGY II PROJECT PROJECTAPPRAISAL DOCUMENT CONTENTS Page No. Project Financing Data .................................. 1I BLOCK 1: ProjectDescription ................................... 2 1. ProjectDevelopment Objectives ................................... 2 2. Project Components..................................... 2 3. Benefits and Target Population................................... 2 4. Institutionaland ImplementationArrangements ................................... 3 BLOCK 2: ProjectRationale ................................... 3 5. CAS ObjectivesSupported by the Project................................... 3 6. Main Sector Issues and GovernmentStrategy ................................... 3 7. SectorIssues to be addressedby the Project and StrategicChoices ........................................ 5 8. Project AlternativesConsidered and Reasonsfor Rejection.................................................... 6 9. Major RelatedProjects Financedby the Bank and/or Other DevelopmentAgencies ............. 6 10. LessonsLearned and Reflectedin the Project Design............................................................. 6 11. Indicationsof BorrowerCommitment and ownership............................................................. 7 12. Value Added of Bank Support............................................................. 7 BLOCK 3: SummaryProject Assessments ............................................................. 7 13. EconomicAssessment ............................................................. 7 14. FinancialAssessment ............................................................. 8 15. TechnicalAssessment ............................................................. 9 16. InstitutionalAssessment ............................................................ 10 17. Social Assessment............................................................. 1.1 18. EnvironmentalAssessment ............................................................ I 1 19. ParticipatoryApproach ............................................................ 12 20. Sustainability............................................................ 12 21. Critical Risks............................................................ 12 22. PossibleControversial Aspects ............................................................ 12 - ii - BLOCK 4: Main Loan Conditions .......................... 13 23. EffectivenessConditions .......................... 13 24. Assurances.......................... 13 BLOCK 5: Compliance with Bank Policies....................... 14 Annexes 1. ProjectDesign Summary.......................... 15 2. Detailed Project Description.......................... 18 3. EstimatedProject Costs.......................... 23 4. Cost BenefitAnalysis Summary.......................... 24 4A. FinancialAnalysis Summary.......................... 28 5. EEPCO Past and CurrentFinancial Performance: FY90/91-95/96 .30 6. Procurementand DisbursementArrangements .37 7. Project ProcessingBudget and Schedule.44 8. Documentsin the Project File.45 9. Status of Bank Group Operationsin Ethiopia.46 10. Ethiopiaat a Glance.47 Map: Ethiopia - IBRD No. 28768 INTERNATIONALBANK FOR RECONSTRUCTIONAND DEVELOPMENT INTERNATIONALDEVELOPMENT AsSOcIATIoN AFRICA REGIONAL OFFICE AFC06 Project Appraisal Document ETHIOPIA ENERGY II PROJECT Date: November 13, 1997 [] Draft [X] Final Task Manager: Alfred Gulstone CountryDirector: Oey Astra Meesook Project ID: 736 Sector: Energy Lending Instrument: Sector Investment and Maintenance PTI: [ ] Yes [X] No Loan Project FinancingData [ Loan [X] Credit [ Guarantee [] Other [Specify) For Loans/Credits/Others: Amount(US$mlSDRm): US$200.0 million/SDR 146.1 million Proposed Terms: [] Multicurrency [ Singlecurrency Grace period (years): 10 years [] Standard [X] Fixed [] LIBOR-based Variable Years to maturity: 40 years Commitmentfee: 0% Service charge: 0.75% Financing plan (US$m): Source Local Foreign Total Government 24.64 24.29 48.93 Cofinanciers: EuropeanInvestment Bank 9.65 32.46 42.11 Nordic DevelopmentFund 0.00 4.85 4.85 IDA 42.93 157.07 200.00 Total 77.22 218.67 295.89 Borrower: Federal DemocraticRepublic of Ethiopia Guarantor: Responsibleagencies: (i) Ministry of Mines and Energy (MME); (ii) Ethiopian Electric Power Corporation(EEPCO); and (iii) Ministry of Agriculture(MOA). Estimateddisbursements (Bank FY/US$M): 1998 1999 2000 2001 2002 2003 2004 Annual 2.29 21.49 39.88 51.01 50.44 27.50 7.39 Cumulative 2.29 23.78 63.66 114.67 165.11 192.61 200.00 Page2 ProjectAppraisal Document Ethiopia:Energy II Project For Guarantees: [] Partial Credit [ ] Partial risk Proposed coverage: Project sponsor: Nature of underlying financing: Terms of financing: Principal amount (US$) Final maturity Amortization profile Financing available without guarantee?: [] Yes [] No If yes, estimated cost or maturity: Estimated financing cost or maturity with guarantee: Expected effectivenessdate: January 31, 1998 Closing date: January 31, 2004 Block 1: Project Description 1. Project developmentobjectives (see Annex 1 for key performanceindicators): The project objectives are: (a) to increasethe efficiency and sustainabilityof Ethiopia's power sector, and to increaseelectricity use for economic growth and improvedquality of life; and (b) to improve utilization efficiency of rural renewableenergy. Progress on these objectiveswill be measuredby Ethiopia achieving by the end of 2002: (i) total system failures of no more than 3 per year (ii) capacity to connect 250,000 new customersto the grid as the distribution networkis rehabilitated and expanded (under a separateproject); (iii) 100% of new industrial applicants for power connectionswill be satisfied; and (iv) inventoryof biomass stock in Northern regions. 2. Project components(see Annex 2 for a detailed descriptionand Annex 3 for a detailed cost breakdown): Component Category Cost Incl. % of Total Contingencies(US$M) (I) Gilgel Gibe Hydroelectric Plant Physical 281.88 95 (ii) Rural Energy Development Physical/Institution 5.08 2 Building (iii)PowerSector Reform: Legal and Regulatory Reform Institution Building 0.53 Restructuring of EEPCO Institution Building 8.73 3 Total 295.89 100 3. Benefits and target population: The benefits of power sector reform include relievingthe financial burden on the treasury by charging adequate prices, reducing costs, improving quality of service, and by eventuallyattracting private capital for system expansion as needed. A more appropriatecapital structure and better working capital managementwould reduce the cost of capital to EEPCO. The benefit of the Gilgel Gibe hydroelectricplant will result from energy generated and used by consumers during the useful life of the plant, (valued at $330 million). The benefits from the rural energy development component will result from reduced degradation of the rural ecosystem. ProjectAppraisal Document Page3 Ethiopia:Energy II Project 4. Institutionaland implementationarrangements: Implementationperiod: Six years, 1998-2003 Executing agencies: (i) EEPCO for constructionof the Gilgel Gibe HydroelectricPlant and restructuring program of EEPCO; (ii) the Ministry of Agriculturefor the Woody Biomass Inventory; and (iii) MME for the power sector reform program and institutional strengtheningfor rural energy. Project coordination:(i) EEPCO has appointedproject managementconsultants for Gilgel Gibe; EEPCO's planning unit will be responsiblefor the restructuringprogram; the Ministry of Agriculture will establish a project implementationteam with a project manager for the Woody Biomass Inventory; and (iii) MME, with the help of short- term consultants,as needed, will implementthe power sector reform and the institutional strengtheningfor