Angola - Power Sector Rehabilitation Project

Document of The World Bank FOR OMCAL USE ONLY MICROFICHE COPY Report No. P- 5783-ANG Type: (PM) ReportNo. P-5783-ANG * IMILLAN, P./ X34019 / J7 063/ AF3IE MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EECUTIVE DIRECTORS ONA PROPOSED CREDIT OF SDR 24.5 MILLION TO THE PEOPLE'S REPuBLIc OF ANGOLA FOR A POWER SECTOR R1EHABILTATION PROJECT MAY 21, 1992 This document has a rstrcted distribution and may be used by recipients only In the performance of their official dutes. Its contents may not othenwise be discloed without World Bank authorization.  CY EOUIVALENIT$ Date QMenov Unit = NewKwanz Mar. 91-Nov. 1991 US$1.00 - Nk6 Nov. 16,1991 US$1.00 = Nkz9O Feb. 29, 1992 US$1.00 = Nkz18O ApTil 1992 US$1.00 Nkz55O WEIGHTS AND MEASURES l hectan (ha) = 2.47 acres I kilomeW (km) = 0.624 miles 1 kilogram (kg) = 2.2 pounds (lb.) 1 met (m) = 3.28 feet 1 metric ton -n ton) = 2.204 (lb.) 1 squawe kilometer (km24 = 0.386 square mile (sq.m.) GLOSSARY ABBREVIATIONS A.fDB = African Development Bank BNA = National Bank of Angola CCCE = Caisse Centrale de Coop6ration Econoinique (Prance) CELP = Companhia El&trica do Lobito e Benguela (power utility) EDFI = Electricite de France International EDEL = Empresa de Distuibugao de Electricidade de Luanda (power utility) Ei B European Investment Bank ENE = Empresa Nacional de Electricidade (power utility) ESMAP = Energy Sector Mangement Assistance Progamme GWH = Gigawatt- Hour HV = Hih Voltage ICB = Inational Competitive Bidding IDA = Intemational Development Association LCB = Local Competitive Bidding Kv Kilovolt MV = Medium Voltage MW = Megawatt OGE = Orcamento Gedl do Estado (General Budget) PPF Project Preparation Facility SAR = Staff Appaial Report SEEA = Secretuia de Estado de Energia e Aguas (Ministry of Energy) SDR = Special Dawing Rights SON1FE = Sociedade Nacional de Estudos e Fioanciamento de EmpreadimentoeUltramarinos (Northern AngolaElectricity Company) TCF = Trllion cubic fet UCP = Project Coordinating Unit FISCAL YEAR January I to December 31  FOR OMCIL USE ONLY PEOPLE'S REPUBLIC OF ANGOLA POWER SEC=OR REHABILITATION PROJECr. Credit and Project Summary Borrower: People's Republic of Angola. Amount: SDR 24.5 million (US$33.5 million equivalent). Terms: Standard IDA terms, with 40 years maturity. Financing Plan: US Million IDA 33.5 AfDB 18.6 EIB 9.0 Government 5.4 66.5 Economic Rate of Return: Physical Investments :37 percent (average) Staff Appraisal Report: No. 10524 -ANG IBRD 23770 This document has a restricted distribution and may be used by recipienvs only in the performance of their official duties. Its contents may not otherwise be disclosed withoLt Word Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE PEOPLE'S REPUBLIC OF ANGOLA 1. I submit for your approval the following report and recommendation on a proposed development Credit to the People's Republic of Angola for SDR 24.5 million, the equivalent of US$33.5 million, on standard IDA terms with a maturity of 40 years to help finance a power sector rehabilitation project. The existing institutional set-up in the sector and the financial situation of the utilities do not justify the onlending of any part of the Credit. 2. Electricity supply in Angola comprises three separate integrated systems (Northern, Central and Southern) and multiple independent centers. Total installed capacity for power generation is 462 MW, of widch only 253 MW are presently available. Several hydroelectric power plants and transmission lines have been severely damaged by acts of sabotage and other disruptions caused by the civil war that has raged the country for the last 15 years. The State Secretariat for Energy and Water (SEEA) has the responsibility to supervise and coordinate all activities in the water and energy sector, excluding petroleum. All power utilities are owned by the State. The National Electricity Company (ENE), which was created in 1980 with the objective of becoming the sole national power company, presently operates the Central and Southern systems, as well as some isolated centers. SONEFE is responsible for the production and transport of electricity in the Northern System, the largest in tie country, and provides direct supply to medium and high voltage industrial users in the Luanda region. In March, 1992, this company was legally integrated into ENE, but has kept its previous administrative and orgizational structre. The Electricity Company of Luanda (EDEL) is in charge of distributing power among low voltage consumers in the Luanda region. Some provincial governments and municipalities also produce and distribute electricity. 3. All power utilities are at the present time run like govermnental departments, with the SEEA playing a myor administrative and managerial role. None of the companies have a Board of Directors and activities like annual budgets, investment programs, financial statements, salary structure and internal regulations are all approved by the SEEA. ENE did not prepare any financial statements for its first eight years of operations, but has recently prepared accounts for 1989 and 1990. SONEFE has been run since 1975 by an Emergency Commission appointed by the SEEA and, although it has been legally integrated into ENE, has kept intact all its structures. Subsidies from the general budget finance a large percentage of operating expenses of the utilities and represent about 3.5 times the revenues from the sales of electricity. The Government has decided to grant financial and managerial autonomy to the companies and has increased tariffs so as to eliminate the need of subsidies to cover operating expenses in the consolidated power sector. 4. The total production of electric energy was 778 GWH in 1990, which represented a decrease of 12% in relation to the figure for 1989 due to acts of sabotage in the Cambambe- Luanda transmission line. In 1991, it increased to 936 GWH. Electricity production had reached 1029 GWH in 1974 and the annual growth rate in the 1970-74 period was 13.8%. There is, therefore, a substanta amount of repressed demand for electricity. The power sector has suffered from more than a decade of neglect due to the economic crisis, damage to physical assets  -2 - as a result of sabotage and shortages of skilled personnel and spare parts. At the present time, France, Portugal, Italy, Spain, Sweden, Belgium, Norway and the African Development Bank have approved financing to rehabilitate parts of the Angola power system. One of the objectives of the proposed project is to assist the SEEA in the coordination of these rehabilitation efforts. Pron bectivfl. 5. The main objectives of Angola's power rehabilitation program, are to (i) lay the institutional foundation for sustainable operations in the sector; and (i) reesablish the integrity of the bansmission grd in the Northern and Central electrical systems that were heavily sabotaged and destroyed during the civil war. The program is aimed at creating minimum conditions of efficiency and reliability in the supply of electric power to the main population centers of Angola, so as to create an appropriate basis for economic recovery. At the same time, assistance would be provided to create a new institutional and legal structure in the power sector that, among others, wfll separate the regulatory function of ti,s Government from the administration and management of utilities and to start the process of developing efficient, commercially viable and autonomous power companies. ftoject Description. 6. The proposed project, which is a key part of the rehabilitation program, includes the following components: (i) institutional reforms in the power sector; (ii) capacity building in the power utilities to improve management and maintenance practices (US$ 4.6 million); (iii) assistance to the SEEA to define the legal and institutional framework of the power sector and to coordinate the implementation of the power sector rehabilitation program (US$ 4.1 million); (iv) rehabilitation of transmission line;. and sub-stations in the Quileva-Lomaum-Huambo corridor and of the distribution network of Huambo (US$ 24.0 million); (v) a pilot program of prepayment meters (US$ 1.3 million); and (vi) engineering studies and supervision of the rehabilitation programs in the Northern system (US$ 1.7 million). The rehabilitation of the Cambambe-Luanda transission lines and the corresponling substations (US$ 30.8 million) will be undertaken trough parallel financing from the African Development Bank and the European Investment Bank. The detailed costs of the program, as well as the financing arrangements, are presented in Schedule A. Procurement and disbursemnent arrangements are summarized in Schedule B. A timetable of key project processing events and the status of IDA operations in Angola are given in Schedule C and D, respectively. A map showing the locations of the project facilities is attached. Staff Appraisal Report No. 10524-ANG, dated May 21, 1992, is being distributed separately. }bject lbnplenwna00n 7. Tbe overall administation and coordination of the project will be the responsibility of the SEEA, which has created a Project Coordination Unit for this purpose. Implementation Units will be created within ENE to supervise the execution of the rehabilitation works in the Northern and Central Systems. It has been agreed that project management and supervision for all physical rehabilitation components will be contracted to qualified consulting firms that will work under terms of reference and contractual conditions satisfactory to the Bank. Projeet Sustainabilitv. 8. The separation of the regulatory function of the State from the management and adminian of power utilities, which is included in the institutional reforms supported by the  project, is a necessary first step in establi3hing the basis of efficient operation of the power sector. The legal and regulatory reforms complement the capacity building initiatives to improve management and operation of utilities, financed by the project and by some other donors, and provide an adequate foundation for sustainable activities in the sector. The financial viability of utilities was enhanced by the new electricity tariffs effective since January 1, 1992, which represented increases of between 358 to 450 percent in relation to the levels that existed in October, 1991. The increases were calculated so as to eliminate the consolidated operating deficits of the power sector as a whole. The Government has accepted the principle that tariffs will be maintained in a first phase at a level that eliminates the need of subsidies from the general budget for operating expenses and will be based, at a later stage, on long-run marginal costs. The rehabilitation of the transmission lines included in the program will allow the conveyance of low-cost hydro-power to the main population centers of Angola and will increase the quality of electric services. These investments will reduce operating costs of the utilities, complement the technical assistance and create an adequate basis to increase tariffs, collections and revenues, thereby enhancing the utilities' ability to contribute to their investment program. The capacity building components of the project addresses directly the need to improve management, technical operation and maintenance in the utilities. Lessons from Previous Power Projects. 9. As the proposed project is the first in the power sector of Angola, there are no direct lessons to draw from prior Bank experience in this country. However, lessons have been drawn from other projects in the Africa Region. Strong emphasis has been given to institutional improvements and policy reforms. Electricity tariffs have already been increased to levels that eliminate the need for subsidies for operating expenses and the new legal and regulatory framework will be adopted before June, 1993. The Electricity Law will address the issue of power company autonomy and place the utilities at arm's length from the Governme-t. Detailed procurement schedules have been prepared and agreed with the implementing agencies and large packages, including turn-key contracts, will be used. Annual reviews of progress will be undlertaken to adapt the project during execution to the changing environment. Ratlonak for IDA Involvement. 10. The project would initiate a long term relationship between Angola and the Bank to rehabilitate and develop the power sector. The provision of adequate and reliable supplies of electricity is essential for Angola's economic recovery. Rehabilitation of the existing system is the least-cost means of meeting the demand for electricity in the short-term and therefore has the highest priority. A new institutional structure and legal framework for the power sector must be put in place urgently and crucial policy issues must be effectively addressed. Through assistance to develop autonomous and efficient power companies, the project will contribute to overall improvements in the efficiency of the economy. IDA will also assist the Government in coordinating the actions of bilateral donors and improving the management of available resources to implement the rehabilitation program. Aged Actions. 11. During negotiations, agreements were reached on the following matters: (i) submission before March 31, 1993 of proposals for the legal and regulatory framework of the electricity sector and for the new institutional and organizational structure of the sector; (ii) taking all legal and administrative measures to implement the proposals before June 30, 1993; (iii) submission before March 31, 1993 of a plan for the restructuring of ENE and implementation of the plan  -4 - before June 30, 1993; (iv) increasing every six months electricity tariffs to reach before December 31, 1993, a level sufficient to cover operating expenses (excluding depreciation) for the electricity power sector calculated on a consolidated basis; (v) submission before December 31, 1993 of a tariff study, including an analysis of the long-run marginal cost of supply, and implementation of the recommendation no later than June 30, 1994; (vi) beginning of June 30, 1994, maintain a tariff structure for the electricity sector based on the long-run marginal cost of supply and sufficient to cover operating expenses and depreciation for the power sector on a consolidated basis; (vii) undertaking annual reviews of tariff structure and level with the Association; (viii) submission before November 1, of each year of a rolling investment program in the power sector for the next three years; and (ix) cuting the supply of electricity to all delinquent customers, including government agencies and public enterprises that do not setde their accounts within two months. The following are conditions of Credit effectiveness: (i) establishment and staffing of the Project Coordination Unit within the SEEA; (ii) contracting of consulting services to assist the SEEA in coordinating the power sector rehabilitation program; (iii) establishment and staffing within ENE of a Project Implementation Unit; and (iv) preparation of the terms of reference and short list of auditors to carry out the audit of the financial statements of ENE. The Government has also prepared a letter of development policy in the power sector which was finalized during negotiations. 12nviroame-iN1 Asped 12. The rehabilitation of the proposed transmission and distribution facilities does not have any significant negative environmental impact. Commonly known and well-tried construction practices would be used and the routes are defined by the existing lines. No diversion of water during repairs of the hydropower station is contemplated and site disturbances at substations and transmission towers will be minimal. The contractors will be required to remove the debris from the sabotaged towers and this, together with the demining of the area, will have a positive environmental impact. Discarded transformers and materials wIll be sold as scrap to a local industry. &-am QWjeive Categodes. 13. The project will contribute to the following categories: (i) public sector reform, through the legal and regulatory framework for the power sector, the new institutional structure an I the capacity building components; and (ii) basic infrastructure, through the rehabilitation of the transmission lines and the increase in the availability and reliability of electric power that is essential for the economic recovery process. PoetBenefrits. 14. The rehabilitation of the principal transmission lines from the existing hydroelectric plants to the major load centers constitutes the least-cost alternative to supply the existing and potential demand for electricity. The proposed works included in the program have an average economic internal rate of return of 37 percent. A sensitivity analysis was carried out and the rate of return is decreased to 32 percent when the rate of growth of demand is reduced to half. The execution of the project will remove an important bottleneck that at present hinders economic growth and contributes to the deterioration of the social environment in urban areas. Industrial activity is today about half of what existed at the time of independence and an adequate and reliable availability of electric power is required to restart this sector. Through assistance to strengthen the quality and reliability of the electric power supply, develop autonomous and efficient power companies and adapt the institutional structure of the sector to a market based economic system,  -5- the project will contribute to improve the efficiency and productivity of the economy. The separation of the regulatory function of the Government from the management and administration of power companies, the improvements in the quality of public investments in the sector and the institutional reforms initiated with project suppurt will also make a positive contribution to overall economic efficiency- brolec Risks. 15. The physical risks of the project are minimal as rehabilitation will be carried out by experienced contractors under well-known conditions. Major institutional risks are that: (i) the population may resist paying higher tariffs for electricity without immediate improvements in the quality of service; and (d) the manpower will be insufficient to ensure adequate operation of the rehabilitated power systems. An early start in rehabilitation works affecting major urban area, and in the capacity building actions supported by the project will help minimize these risks. 16. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors appro-e it. Lewis T. Preston President Attachments Washington, D.C. May 21, 1992  -6- Schodule A Page 1 of 2 Local Foreign Total % Poroign % Total Exchange Base Costs I. IDA FINANCED PROJECT A. Reihb. of Northern System Engineering studies and Superv. 0.0 1.5 1.5 100.0 5.1 B. Rehab. of Central System 1. Transmission lines 0.8 11.5 12.3 93.5 22.7 2. Substations 0.4 4.1 4.4 99.1 8.2 3. Huambo Distribution 0.5 2.6 3.1 83.9 5.7 Sub-Todal 1.7 18.1 19.8 91.6 36.7 C. Prepaymt Meters Program 0.1 0.8 0.9 97.2 1.6 D. Capacity Building Maintenanc 0.0 2.1 2.1 100.0 3.9 E. Capaciiy Building Management 0.0 1.9 1.9 100.0 3.4 F. T.A to the SEEA 1. Studies & Instit Refonn 0.0 0.3 0.3 100.0 0.6 2. Project Coordiation Team 0.0 3.1 3.1 100.0 5.7 Sub-Total 0.0 3.4 3.4 100.0 6.3 TOTAL BASELINE COSTS 1.7 27.8 29.5 94.2 100.0 Physical Contingencies 0.2 2.7 2.9 92.7 10.0 Price Contingencies 0.3 2.9 3.3 89.9 11.0 TOTAL COSIS 233. 35.7 93.6 121.0 11. PARALLEL FINANCED PROJECT Rehab. of the Northen System 1. Cambanbe Plant and Substations 0.2 4.0 4.2 95.5 2. Cambambe-Luands Lines 2.3 18.6 20.9 89.7 3. Luanda Substations 0.8 4.9 5.7 86.6 Total 3.2 27.6 30.8 89.6 I. TOTAL PROGRAM COSTS 54 61.1 66.5 98  -7 - gcedule A Page 2 of 2 Progm Financing Plan f - .. - . .U.-._. IIDA AfDB E,B GOVERNMENT Amount r Amout X Amont Amoumt A. Caaembe Plant & Subst. 0.3 6.6 0.0 0.0 4.1 89.2 0.2 4.2 B. Ca_mane-Luanda Lines 1.4 6.s 18.6 .0.0 0.0 2.3 10.3 C. Substations in Luanda 0.0 0.0 0.0 0.0 4.9 86.6 0.8 13.4 0. Central SYstem Rehab. 22.1 91.2 0.0 0.0 0.0 0.0 2.1 8.8 E. Prepayment Noters Program 1.0 97.00 0.0 0.0 0.0 0.0 0.3 3.0 F. Capacity Buildin- 4.6 100.0 0.0 0.0 0.0 0.0 0.0 0.0 |. T.A. to the SEEA 4.1 100.0 0.0 0.0 0.0 0.0 0.0 0.0 TIMAL 333 SO.4 _18.6 28.0 9.0 13.5 5.4 8.1  -8- Schedule B Page I of 2 PROCUREMENT AND DISBURSEMENT ARRANGEMENTS Procurement Method WaS TASK ANKE ice LCS OTHER TOTAL 1.0 PHYSICAL REHABILITATION WORKS 1.1 150 Kv Trans. Lines Rehab. 13.52 13.52 (12.50) (M2.50) 1.2 150 Kv Subst. Rehab. 2.21 2.21 (1.76) (1.76) 1.3 Huomo Distrib. Rehab. 1.28 1.28 (0.62) (0.62) 2.0 Go00oS 2.1 Electrical Equipment 4.10 4.10 (4.10) (4.10) 2.2 General Plant 0.13 0.61 / 0.74 (0.13) (0.61) (0.74) 2.3 Electric Meters & Cards 0.88 0.88 (0.88) (0.88) 3.0 CONSULTANCIES 3.1 North System Rehab. Prep. Serves. 0.52 0.52 (0.52) (0.52) 3.2 North System Proj. giat. & Superv. 1.23 1.23 (1.23) (1.23) 3.3 Central System Rehab. Prep. Servcs. 0.50 0.50 (0.50) (0.50) 3.4 Central Lines Proj Ngmt. Superv. 0.98 0.98 (0.98) (0.98) 3.5 Central Subst. Proj. Ngmt. & Sup. 0.37 0.37 (0.37) (0.37) 3.6 Huambo Distribution Study 0.52 0.52 (0.52) (0.52) 3.7 Huambo Distr. Proj. Mgmt.& Superv. 0.31 0.31 (0.31) (0.31) 3.8 Monitoring of Prepay. Metering M0 0.15 (0.12) (0.12) 3.9 T.A for Maintenace 2.35 2.35 (2.35) (2.35) 3.10 T.A for Management 2.18 2.18 (2.18). (2.18) 3.11 T.A for the SEEA 3.86 3.86 (3.86) (3.86) 21.99 0.13 13.58 35.69 TOTAL (19.86) (0.13) (13.55) (33.52) Note: Figures in parentheses are the respective amounts financed by the IDA credit. ICB: International Competitive Bidding LCB: Local Competitive Bidding a/ Shopping.  -9- Page 2 of 2 D)ISBURSEMENTS AmuAlt Percenta Financed (1) Consultants'services and training 12.9 100% of expenditures (2) Rehabilitation programs 14.9 100% of foreign expenditures 80% of local expenditures (4) Equipment, materials and vehicles 5.7 100% of foreign expenditures 80% of local expenditures TCTAL 33.5 Estimated IDA Disbursements: IDA isal Yea (US$ million) FY93 FY94 FY95 FY96 FY97 FY98 Annual 4.2 11.0 9.7 6.0 2.3 0.3 Cumulative 4.2 15.2 24.9 30.9 33.2 33.5  -10 - Schedule C AN+OLA POWER SECTOR REHABILITATION PRO Timetable of Key Project Processing Events (a) Time taken to prepare: 11 months (b) Prepared by: Government/Bank_j/ (c) First IDA mission: June 1991 (d) Pre-Appraisal mission departure November 1991 (e) Appraisal mission departure: February 1992 (t) Negotiations: May 1992 (g) Planned date of effectiveness: September 1992 (h) List of Relevant PPARs: N/A 1/ The Bank's contribution to the preparation of the project was the responsibility of Messrs. Patrlcio Millan and Angel Baide.  -11 - Schedule D ANGiQLA POYVER SECrOR REHABILHTATION POlC U1AU QF BANK GROUP OPRAflQNS A. STATEMENT OF BANK LOANS AND IDA CREDITS May 3, 1992 Amount in U$S Million o or Fiscal JBorrowe Purpose (less cancellation) Numr . ,. .X; ..Bank IDA (1) | Undisbursed Cr. 2274 91 Angola Economic Mgmt.Cap.Bldg 23.00 22.72 Cr. 2289 92 Angola Inf*astructure Rehab. 37.70 38.64 Eng. Cr. 2326 92 Angola Urban Environmental 45.58 45.88 _______ _____ Rehabilitation d rn _ ___ __ ___ __ __ ___ __ ___ __ . _ ___ _ _ __:: Sub-Total active Projects 106.28 107.24 Total less cancellations: 0.00 106.28 of which has been repaid 00 Total due Bank and IDA: 0.00 106.28 Total undisbursed 0.00 107.24 (1) The sum of total undisbursed is higher than toutl due Bank and IDA because of depreciation of the UsS. Not yet effective B. STATEMENT OF IFC INVESTMENTS No IFC investments to date.  tRD 23770 GABON \/KNA ANGOLA HYDROELECTRIC FACILITIES AND ___"e_ WRE < .NUi HIGH VOLTAGE TRANSMISSION NETWORK bJandost ? g 9 MIAWVI 220W & I5W TRANSSMISSON UNES - T 1mRE220kVMRANS ONUNES ANGO 1kV&0kVTRANSMISSIONIUNES NAMllIAMBI - { - ~~ ~~~~~~~0 SELECMDTWNS - RNLOAflS UOISWKA ( 0' @ PROVINCE CWS + AJIPORtS 1 o ,CONGO 1NATIONAL CAPITAL 4 PORS CONGO lA - jMAIN ROAOS - PROMNCE BOUNDARIES X , .- INTERIONAL 8OUNAIES CA2AO,, man a 100 200 300 I I~~~~~~~~~~~~~~~~~~~~~~~~~ a ,~~~~~~~~~~~~~~~IIM1 0 100 200 300 400 500 Z A)RNE __ 20 2._4 ws?- tf /- ~~UIGE / XN DAM-of remlers am * oxdwt for thee c a