Mozambique - Urban Household Energy Project

Document of The World Bank FOR OFFMCIAL USE ONLY Rqpo.tNoP-4986 -MOZ MEMORANDUM AND RECONMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 17.1 MILLION OF THE PEOPLE'S REPUBLIC OF MOZAMBIQUE FOR AN URBAN HOUSEHOLD ENERGY PROJECT MAY 12, 1989 This docment has a restricted distribution and may be used by recipients only in the performance of their ofricial duties. Its contents may not otherwise be disclosed without Wold Bank authorization.  CURRENCY EQUIVALENTS (APRIL 1989) US$ 1 a 700 Meticais (NT) - April 1989 US$ 1 580 Meticais (MT) - at time of appraisal MT 1 = US$0.002 US$1 - 2.5 Rand (R) ABBREVIATIONS AND ACRONYMS BADEA Arab Bank for Economic Development in Africa BDM Banco de Mocambique BPD Banco Popular de Desenvolvimento cR Cents Rand (South African) DC Direct current DCA Development Credit Agreement DN Direct Negotiations DOE Department of Energy EDM Electricidade de Mocambique ESCOM Electricity Supply Commission (RSA) ESMAP Energy Sector Management Assistant Progran HCB Hidroelectrica de Cabora Bassa ICB International Competitive Bidding IS International Shopping LCB Local Competitive Bidding LPG Liquified petroleum gas MIE Ministry of Industry and Energy MOCACOR Mozambique LPG Distribution Company NORAD Norwegian Aid Agency PETROGAL Portuguese National Oil Company PETROMOC Empresa Nacional de Petroleos de Mocambique PPF IDA's Project Preparation Facility PROLEC Urban Electrification Program R Rand (South African) RSA Republic of South Africa SIDA Swedish International Development Authority UCPI Coordination Unit for Import Programs WEIGHTS AND MEASURES B/D barrels per day GWh gigawatt hour ha hectare kg kilogram kgoe kilograms of oil equivalent km kilometer kV kilovolt kVA kilovolt ampere kW kilowatt kWh kilowatt hour MW megawatt toe tonnes of oil equivalent v volt FISCAL YEAR Government and Public Enterprises: Calendar Year  FOR OMCL4 USE ONLY MOZAMBIQUE URBAN HOUSEHOLD ENERGY PROJECT CREDIT AND PROJECT SUMMARY Borrower: People's Republic of Mozambique Beneficiaries: Electricidade de Mocambique (EDM) Empresa Nacional de Petroleos de Mocambique (PETROMOC) Mocacor Banco de Mocambique (BDM) as financial intermediary Ministry of Industry and Energy and other Government departments. Amount: SDR 17.1 million (US$ 22 million) Terms: Standard, with 40 years maturity Onlending Terms: (a) PETROMOC (US$ 2 million) and Mocacor (USS 0.7 million) at 1102 of IBRD terms and EDM (US$ 4.3 million) at IBRD terms. Repayment over 20 years with 5 years' grace for EDM and over 10 years with four years' grace for PETROMOC and Mocacor. EDM, PETROMOC and Mocacor would bear the foreign exchange risk. (b) The balance will be channelled through Banco de Mocambique for implementation of the electrification component and for import of goods and materials for the electrification and comercial energy programs, and to MIE and other Government Departments for woodfuel, coal and co-ordination components. The credit includes USS 2.8 million not allocated to specific categories. Financing Plan: IDA USS 22 million Danida USS 3 million BADEA US$ 10 million Nordic Development Fund US$ 5.7 million Mozambican companies USS 8.9 million Government USS 1.2 million TOTAL US$ 50.8 million Parallel Financing: SIDA and NORAD (Commodity Aid) and IDA Rehabilitation II Credit USS 30 million Economic Rate of Return: 50Z Staff Appraisal Report: Report No. 7611-MOZ Map: IBRD No. 21316 This document has a restricted distnbution 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.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDSNT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF MOZAMBIQUE FOR AN URBAN HOUSEHOLD ENERGY PROJECT 1. The following memorandum and recommendation on a proposed development credit to Mozambique for SDR 17.1 million (US$ 22 million equivalent) is submitted for approval. The proposed credit would be on standard IDA terms with 40 years maturity and would help finance an urban household energy project. The project would be cofinanced by BADEA (US$ 10 million), Danida (US$ 3 million) and Nordic Development Fund (US$ 5.7 million). IDA is expected to administer the untied portion of the Nordic Development Fund financing. Imported fuel requirements for project implementation (USS 30 million) would be financed in parallel under commodity aid programs of Sweden and Norway and in part under IDA's Rehabilitation II Credit (1841-MOZ). The principal implementing agencies would be the Ministry of Industry and Energy (co-ordinator), the Electricity Company of Mozambique (EDM), the National Petroleum Supply Company (PETROMOC) and MOCACOR, the distributor of liquified petroleum gas (LPG). 2. Background. The predominant source of energy for Mozambique is fuelwood, which accounts for about 802 of primary energy supply. Petroleum accounts for 16Z, hydro electricity for 31 and coal for 1Z. Household consumption accounts for the majority of woodfuel use and about 25Z of commercial fuels. Energy is in short supply in urban areas and woodfuel prices are high. Government wishes to increase availability of household energy in urban areas, with a view to meeting needs, reducing costs and easing the pressure on woodfuel resources. Mozambique has abundant hydroelectricity and coal, from its own sources and at low cost from neighboring countries. A reduction in energy costs for households is an urgent issue as purchase of traditional fuels absorbs a quarter to a half of typical family income and commercial fuels are much cheaper. Early action is needed to help maintain the social consensus for economic reform. Deforestation is extensive near the cities but solutions based on growing more trees are severely limited because of armed attacks, and past efforts in plantation forestry have encountered major managerial difficulties. 3. The Bank's energy sector report of 1987 11 facilitated agreement with the Mozambican Government on the major energy sector policy issues. Priorities for the five-year energy sector investment program were identified and there is common agreement on the principle that energy prices should fully reflect long run marginal costs and allow the energy supply companies to be financially sound. Institutional development of EDM and PETROMOC has been hindered in the past because of the cost and problems of maintaining supply in the face of armed attacks, failures in Government policies, shortages of skilled staff and inadequate financial systems and data. The companies have received extensive support from donors including particularly Sweden, Norway and Portugal. The Government has undertaken sizeable investments in the power sector for security reasons including relocation and 1 TMozambique: Issues and Options i the Energy Sector', January 1987; Joint UNDP/World Bank Energy Assessment Program.  - 2 - duplication of facilities, the cost of which has not yet been passed on to EDM. EDM and PETROMOC faced severe financial difficulties prior to 1987. The Energy Technical Assistance and Rehabilitation Project, which was approved for IDA financing in May, 1987 (CR.1806-MOZ), was designed to address the most critical investment and institutional develcpment needs of the energy sector, including initial steps to address household energy needs. The project initiated financial recovery programs for EDM and PETROMOC involving; (1) hiring accounting firms to prepare detailed accolnts for 1984- 88; (2) defining responsibility for major energy sector assets and determining their valuation; (3) setting financial covenants for cash generation and debt-service coverage; and (4) reviewing prices and tariffs semiannually. The project is being implemented satisfactorily, although a little behind schedule. Detailed draft accounts for EDM and PETROMOC were completed in late 1988. This work highlighted large public sector arrears in both energy supply companies and for EDM issues regarding the transfer of responsibility to EDM for the security related power sector investments made directly by the Government, how to value the assets concerned and whether they should be incorporated on EDM's books as debt or equity. Under the proposed project the financial recovery programs of EDM and PETROMOC would be continued and reinforced to address the above issues. While electricity and petroleum product prices remain subject to government control, both have been increased periodically, most recently in April, 1989. They are now significantly above import prices. 4. Government's Sector Obiective and Strategy. Government's objective for household energy is to eliminate the urban energy shortfall and reduce urban demand for fuelwood and charcoal, at the same time lowering the cost of energy used by householders. The longer term aim is to halt deforestation and environmental damage by reducing urban wood use to the sustainable level, believed to be about 50Z-60? of current urban wood consumption. Its interim strategy is to encourage the use in urban areas of commercial fuels potentially available from indigenous sources, and improve the efficiency in supply and use of traditional fuels. A comprehensive formal household energy strategy for the longer term is under preparation (financed by the Energy Technical Assistance and Rehabilitation Project) and should be ready for review early in 1990. 5. Pro3ect Obiectives. The project is designed to bring about quickly enhancement of supply and a significant reduction in energy costs to about one-quarter of the households in the main urban centers, particularly Maputo, Beira, Nampula, Nacala and Quelimane. A further objective is to continue the institutional and financial strengthening of the principal energy supply companies initiated under Energy Technical Assistance and Rehabilitation Credit. The project also aims to slow down significantly deforestation around the urban centers, and to improve air quality. 6. Project Description. The project will make available to urban households a variety of commercial fuels to substitute high cost and scarce wood fuels and charcoal. It will facilitate a rapid increase in electrification of urban areas eventually to about 35X of households. The project also includes provision of coal stoves to 10? of households, and will improve efficiency in the use of traditional fuels. A biomass energy unit has been established to focus efforts in traditional energy. For the next few years while households are being electrified and coal stoves are  introduced the household energy shortfall will be met with other commercial sources, especially kerosene and LPG. Long term credit will be available from a local bank (BPD). Apart from support implicit in local interest rates for householders, no subsidies are envisaged in implementing the strategy. 7. The project consists of: (i) power system reinforcement in Mozambique's cities together with connection of 40,000 houses, provision of coal stoves to about 50,000 households, reinforcement of kerosene and LPG distribution facilities, improvements in woodfuel supply and operations, provision of stoves, lamps, pots and pans, drums and cans etc; and (ii) technical assistance and consultancy support to reinforce the operations of EDM, PETROMOC and Mocacor, to support the project coordination and implementation, and for the woodfuels and coal programs. Project components relating to appliances and fittings are likely to involve the local private sector and domestic preference will apply in relevant bidding packages in line with IDA guidelines. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Mozambique are given in Schedules C and D respectively. A map is also attached. The Staff Appraisal Report No.7611-MOZ dated May 12, 1989 is also attached. 8. Rationale for IDA Involvement. Involvement in the project helps reinforce an important element in IDA's overall country assistance strategy which focuses on supporting the Government's Economic Recovery Program. The project builds on initiatives started under the Energy Technical Assistance and Rehabilitation Credit. It's design is based in part on household energy and electricity distribution studies undertaken by IDA in collaboration with ESMAP. 9. Actions ARreed. The Government has agreed on the following actions: (a) As conditions of disbursement on EDM's hardware components, EDM will implement a tariff increase in the second half of 1989, submit to IDA a satisfactory financial restructuring plan for resolving EDM's financial situati