Task A : sector performance and structural sector reform - deliverable 3.2 : electricity act and sector restructuring

REVISED FINAL REPORT October 2017 Task A: Sector performance and structural sector reform Deliverable 3.2: Electricity Act and Sector Restructuring report Disclaimer and copyright note This document has been prepared only for the International © 2017 Bank of Reconstruction and Development ("IBRD") and solely PricewaterhouseCoopers for the purpose and on the terms agreed with the IBRD in our LLP agreement dated 21 March 2017 relating to Task A. All rights reserved. In this The scope of our work was limited to a review of documentary document, 'PwC' refers to the evidence made available to us. We have not independently UK member firm, and may verified any information given to us relating to the services. sometimes refer to the PwC network. Each member firm We accept no liability (including for negligence) to anyone else is a separate legal entity. in connection with this document. We have agreed with you that the report will be provided by you to GECOL for their consideration. 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Strategy& | PwC 1 The present report focuses on the sector restructuring roadmap and the related inputs for the Electricity Act Focus of this report 1 2 Rapid assessment 3 4 5 Project Regulatory Restructuring of Project review and of the sector set-up reform key actors recommendation performance 1.1 2.1 Rapid sector 3.1 Gap analysis of the 4.1 5.1 Option study for Findings review and Data collection performance sector structure vs. GECOL restructuring final report assessment previous plan 1.2 3.2 4.2 Methodology, High-level options for Roadmap for team and approach sector reform establishing of LEMRA validation 3.3 Sector restructuring (framework, actors and roadmap) Focus of 3.4 this report Electricity Act 6 Workshop & trainings 7 PMO (progress reporting) Source: Task A inception report Strategy& | PwC 2  The reform was defined over a plan designed across different waves, based on different macro-objectives Libya restructuring roadmap “Future Focus of Task A Vision” Wave III Levels of evolution “Realize Wave II ambition”  Consider to evolve to more “Restructure and complex and competitive Wave I prepare for market models (wholesale “Fix the basics and ambition” market model)  Consider sector privatization prepare for vision, minimizing state restructuring”  Choose the desired end burden while optimizing state sector model and competitiveness  Establish (legally) the structure regulatory authority  Launch internal  Complete short-term communication and  Clarify sector governance performance improvement change initiatives  Strengthen sector legal actions framework  Complete GECOL org.  Achieve a fully functional,  Launch short-term restructuring transparent and performance improv. actions  Achieve full functional sustainable electricity  Start GECOL org. unbundling sector restructuring  Continue reviewing  Achieve accounting periodically tariff levels unbundling  Launch new tariff framework Min target duration  3 years 3 years 3 years (min) Time Source: Strategy& analysis Strategy& | PwC 3 The rapid sector assessment has identified a number of interrelated key issues affecting the Libyan electricity sector Libya electricity sector issues Complex geo- political and economic situation Weak sector 1 governance Low results accountability Sector structure 2 (monopoly) 3 Increasing costs 6 7 8 9 10 4 Commercial Low financial Heavy burden Low Poor operating Low service losses & poor sustainability on state investments performance quality collection Commercial If GECOL does not losses improve operating performance it can not improve service Poor quality and solve its collection financial issues Unbalanced 5 tariff Source: Strategy& analysis Strategy& | PwC 4 The present document will focus mostly on the first 2 waves, providing the inputs for the necessary Electricity Act(s) Next sections approach & focus Wave III Wave II “Realize Wave I “Restructure ambition” “Fix the basics and prepare for and prepare for ambition” restructuring” • Options for end state sector model and structure • Detailed roadmap measures • Sector functioning (roles & • Detailed roadmap measures responsibilities by actor) • Sector functioning (roles & responsibilities by actor) Covered only partially Electricity Act inputs • Inputs for the draft of the future Electricity act Strategy& | PwC 5 This document describes the sector reform plan for Libya, focusing mostly on the Institutions-led activities Considerations on current report A more detailed Document objectives restructuring roadmap focused on GECOL is • Describe the Wave 1 objectives, measures and activities to be found in Task C • Describe the Wave 2 objectives, measure and activities • Highlight (at a high-level) the options for the Wave 3 preparation • Discus the inputs for the electricity act preparation Document intends to: Important note • Describe the target re-organization & structure of the Libyan electricity sector • The document is preliminary – final sector roadmap is to be found in the Task A final • Identify the roles & responsibilities of each report (since Task A final report will also include electricity sector actor the final findings of Task D and the other • Provide a challenging horizon and action plan analyses under preparation during the for the reform implementation preparation of the current version of the report) • Describe the inputs needed for the • The current reform is built to resolve the issues preparation of the necessary for the identified with the rapid sector assessment. The preparation of the electricity act previous deliverable (3.1. sector reform options) only serves to provide inputs for the target sector • Allow team members and stakeholders to structure and framework to be achieved by Libya initiate discussions on the future sector reform Strategy& | PwC 6  Wave I: Fix the basics and prepare for restructuring Wave II: Restructure and prepare for ambition Options for Wave III Appendix – Inputs for Electricity Act Strategy& | PwC 7 I Fix the basics and prepare for restructuring Wave I will focus on resolving the six key issues identified through a number of objectives, measures and milestones… Wave I measures and milestones Wave I objectives Wave I Electricity Sector Fix the basics and Measures Milestones Issues’ root causes prepare for restructuring • Establish policy mandate • Ministry in charge • Set regulatory agency Weak sector Clarify sector • Regulatory agency in operation • Clarify GECOL’s governance governance governance • Government decree1 • Strengthen sector legal • National Electricity Strategy framework • Core BUs separated • Corporate core general dept. Sector structure Establish performance • GECOL accounting unbundling (ICT, E&P, HR&O & AFC) (monopoly) accountability • GECOL reorganization established • Accounting unbundling regulation • Sep. annual accounts submitted • Ensure state financial support Restore acceptable • All generation, transmission, Poor operating • Improve investment plan. process service quality control, MV & distribution performance • Address operating perf. issues “Zero load shedding” • Explore import supply milestones completed • HR strategy in place • Optimize power mix • Critical resource map and • Improve efficiency Costs control manpower rebalancing plan Increasing costs • Address manpower issues & staff reskilling • Workforce planning in place • Compensation and benefits • Capabilities & skills map redesign • Reskilling plan Unbalanced tariff • Tariff covering part of P&L costs framework • Launch new tariff framework • Theft areas map Improve GECOL & • Metering roll-out • Higher theft sanctions sector financial • Address electricity theft • Customer database Commercial losses sustainability • Fight insolvency • SMS/e-mail billing in operation and poor collection • GECOL’s mobile app running 1) This first Government Decree could be replaced with an Electricity Act in case a window of opportunity opens for the submission of a the electricity law to the House of Representatives; Source: Strategy& analysis Strategy& | PwC 8 I Fix the basics and prepare for restructuring …and lays the foundation for the introduction of renewables in the Libyan power fleet to address supply shortage RES roadmap: wave I measures and milestones Wave I Wave II Wave III 2021 2024 2027 RES preparation and Increased private RES framework institution building investment in RES consolidation Electricity Sector Wave I objectives Wave I Issues’ root causes Measures Milestones • REDEVCO set up Weak sector RES capacity and • REDEVCO operations • RES permitting and governance institution building start documentation regime Poor operating • Wind pilot projects study performance completion Start pilot RES • Wind and PV pilot • PV pilot project study penetration projects Load shedding completion • 3% RES penetration Source: Gopa intec and Suntrace Task D Roadmap for Renewable Energy Development, Strategy& analysis Strategy& | PwC 9 I Fix the basics and prepare for restructuring| Clarify sector governance Libya shall first clarify its sector governance, setting-up well-defined institutions with policymaking responsibilities Measures and activities Measures Activities Year 2018 2019 2020 Owner Establish Draft Presidential decree/Cabinet Decision Parliament policy clarifying government body with sector policy responsibilities1 Ministry in mandate charge Set Establish regulatory agency within the government2 Ministry in charge Regulatory Agency regulatory in operation agency Regulatory agency in operation Regulatory Agency Clarify Review composition of GECOL’s General Assembly Government GECOL’s governance Streamline and right-size BoD reallocating non-typical functions GECOL Begin reform discussion & draft the bill for the Government decree Ministry in charge Sign and endorse the Government decree3 Government Government decree Strengthen Draft the National Electricity Strategy Ministry in charge, sector legal Regulatory Authority, framework GECOL, NOC4 Sign and endorse the National Electricity Strategy Parliament National Electricity Strategy Milestone 1) MoE and Renewable Energy was established through Cabinet Decision (33) of 2012, but its mandate has not been renewed; 2) Beside its regulatory functions, this government agency will be in charge for leading the sector reform implementation; 3) This first Government Decree could be replaced with an Electricity Act in case a window of opportunity opens for the submission of a the electricity law to the House of Representatives; 4) Ministry in charge is the activity owner but the draft results from a comprehensive public consultation process with sector’s institutional stakeholders ( i.e. Regulatory Agency) and industry representatives (i.e. GECOL, NOC); Source: Strategy& analysis Strategy& | PwC 10 I Fix the basics and prepare for restructuring| Establish performance accountability The Regulatory Agency will focus on supporting GECOL and the sector in pursuing its accounting unbundling… Measures and activities Measures Activities Year 2018 2019 2020 Owner Draft accounting unbundling regulation1 Regulatory Accounting unbundling Agency regulation published Set up a timing and procedures for separated annual account submission Regulatory Agency GECOL accounting Establish clear accounting system to allocate directly GECOL unbundling and indirectly related BS and IS accounts to value chain activities Draft separated annual accounts (IS and BS) for each BU GECOL Submit separated annual accounts (IS and BS) for each value chain activity GECOL to the regulatory agency Sep. annual accounts submitted Milestone 1) Includes instructions to draft separated annual accounts and rules for submission to the Regulatory Agency for review; Source: Strategy& analysis Strategy& | PwC 11 I Fix the basics and prepare for restructuring| Establish performance accountability …helping to establish improved accountability and operating model (also achieved through reorganization) Measures and activities Measures Activities Year 2018 2019 2020 Owner Separate Generation and Transmission into different BUs GECOL Core BUs Create new core ICT function (managed by CIO) reporting separated GECOL directly to MD Move IT away from network into ICT corporate core dept. with GECOL direct report to MD ICT corporate core established Move Communications unit under Transmission BU GECOL Group Generation, Transmission, Distribution GECOL projects in an integrated E&P function GECOL re- Move Projects Planning & Studies to E&P function GECOL organization Move Projects Accounting away from Contracts and Dev. GECOL Accounts within E&P function E&P corporate core established Move Tenders & Contracts from Contracts & Dev. to Procurement GECOL Create AFC function managed by CFO reporting to MD GECOL Move related units1 in the newly created AFC core function, GECOL led by a new CFO AFC corporate core established Consolidate in HR&O department (under MD) all the GECOL HR-related core functions leaving non-core HR activities HR&O corporate core within Support Services established Milestones 1) Units to be migrated to AFC are: Performance Monitoring general dept. (from BoD), core activities of Financial Affairs (e.g. Financial Planning and Ledger & Fin. reports) and L/C Financing and Customs Clearance from Contracts and Development accounts; Source: Strategy& analysis Strategy& | PwC 12 I Fix the basics and prepare for restructuring| Establish performance accountability GECOL reorganization shall focus on the establishment of performance accountability (separate BUs & CC functions) GECOL to be organization (2021) Board of Directors BoD Affairs Internal Control Media Managing Corporate Core Director ICT Center MD Office ERP Follow-up Technical Support Follow up Digital Inf. & Doc. ICT Networks Public Relations Infrastructure Experts and Telephones consultants office Legal Affairs Strategic PMO Performance Monitoring Planning Studies & dev. Distribution projects and Follow-up E&P Transmission projects Financial planning & Projects Accounting AFC Generation projects reporting1 Contracts & Dev, accounts Organization & Structuring Strategic Planning2 HR & O Dept. HR & Communication Business Distribution & Services Generation Transmission Support Units Supply Services Generation Transmission Distribution Procurement General Services Control MV Networks Reorganization Customer changes to be Accounting HR support Communications further deep-dived Service 1) Includes corporate core activities from Financial Affairs (i.e. General ledger and financial reports, Financial Planning and Fixed assets and insurance); 2) Strategic Planning unit from the Planning Studies & development division; Sources: GECOL (company organization chart 2015), Strategy& analysis Strategy& | PwC 13 I Fix the basics and prepare for restructuring| Establish performance accountability To achieve accounting unbundling, best practices suggest to separate the company’s accounts through 5 subsequent steps Accounts allocation steps from AEEGSI regulation EXAMPLE General ledger accounts Accounts allocation steps Economic accounts to be Non • 1 Identify core value chain activities 3 indirectly attributed to attributable activities accounts • 2 Attribute to each core value chain activity the directly linked economic Patrimonial and economic 2 accounts directly Cost centers and patrimonial accounts attributable to activities • 3 Attribute economic accounts1 which are not directly linked to core value chain activities to shared services through cost centers 1 Core value chain activities Internal 4 Shared Services Transactions 4 • Identify internal transactions, both Generation among shared service functions and Internal among core value chain activities 4 Transactions • 5 Allocate, through cost drivers, the Transmission Drivers 5 economic accounts attributed in 4 Internal phase 3 to shared services Transactions Distribution/Supply 1) Patrimonial accounts can not be indirectly allocated to activities through cost drivers, hence the annual separated BS should present only directly attributable BS accounts to core value chain activities Sources: AEEGSI Accounting unbundling regulation (TIUC-Testo integrato unbundling contabile), Strategy& analysis Strategy& | PwC 14 I Fix the basics and prepare for restructuring| Restore acceptable service quality/ “Zero load shedding” Government shall then support GECOL with the necessary funding, so that it can work at restoring its service quality Measures and activities Measures Activities Year 2018 2019 2020 Owner Ensure state Set extraordinary investment budget account1 Government financial support Improve a more efficient budget allocation process Gov’t / GECOL Review and strengthen GECOL investment planning process GECOL (e.g. Master Plan preparation process)3 Improve Establish a least cost planning methodology to identify the least GECOL investment cost mix of resources which would meet forecasted electricity planning demand ensuring a reliable service level (to be applied for process evaluation of investment across the whole value chain) Ensure cost-efficient implementation of planned investment GECOL Complete all measures and activities proposed in the generation GECOL action plan All generation milestones completed Address Complete all measures and activities proposed in the transmission GECOL operating action plan All transmission milestones completed performance Complete all measures and activities proposed in the control GECOL issues action plan All control milestones completed Complete all measures and activities proposed in the MV & distribution GECOL action plan4 All MV & distribution milestones completed Detailed initiatives & roadmap provided within Task C- Improving GECOL technical performance 4.2 Explore Explore possible imports from neighboring countries GECOL import Initiate/establish cooperation agreements Ministry supply with other countries for electrical interconnections5 in charge Milestone 1) To be completed as part of the Comprehensive business process reengineering study proposed in Task C final report action plan for the Processes area of analysis; 2) Government & GECOL shall also work on improving / clarifying the electricity budget allocation process going forward; 3) As part of the Comprehensive Business process reengineering suggested in Task C final report action plan; 4) Because of the similarities between the issues identified in MV and Distribution, a unified action plan was drawn 5) Activity to be initiated only if feasible possibility for imports from neighboring countries is found otherwise no action should follow; Source: Strategy& analysis Strategy& | PwC 15 I Fix the basics and prepare for restructuring| Restore acceptable service quality/ “Zero load shedding” In Wave I, the Government should also work on a more efficient investment budgets & planning with GECOL… Budget preparation and submission process Libyan National Budget chapters: I II III IV Admin. expenses2 Salaries and Development and other Subsidies4 wages1 projects3 current expenses Development budget Recurrent budget GECOL (new org. set-up) Actors directly dealing Government with the Government Managing Director Ministry of Ministry of Planning Finance AFC Submit budget Engineering & Projects In line with the revised process, requirements Government shall allow GECOL Submit budget requirements to have more say in: Opex budget • Deciding areas for allocation Capex budget Distribution & of capital expenditure Corporate Core Generation Transmission • Setting priorities for budget Supply GECOL leadership allocation Operating BUs 1) Includes social security; 2) Administrative expenses for government authorities and ministries; 3) e.g. new plants, housing projects; 4) Includes credits for public debt, food programs, oil&gas and electricity subsidies. For what concerns GECOL includes subsidies on fuel and GECOL’s losses on P&L Sources: Strategy& analysis Strategy& | PwC 16 I Fix the basics and prepare for restructuring| Restore acceptable service quality/ “Zero load shedding” Together with the CAPEX budgeting process GECOL shall review and strengthen the investment planning process… Investment planning process Process steps GECOL E&P department to establish policies for to be organizational structure Project selection capital investment planning (i.e. eligibility criteria setting criteria; prioritization criteria) Actors directly dealing with the Government for financing Managing E&P to provide BUs with schedules and Director Provision of requests forms, each requiring information for calendar, forms project ranking and instructions AFC Bus to assess progress of ongoing projects Project requests and prepare and submit projects proposals to preparation E&P dept. Engineering & Projects Provides Review projects E&P to review all BUs project proposals criteria for according to the predetermined criteria cost-efficient Submit requests projects project prioritization requests Prioritize projects E&P to prioritize projects through least cost Business units planning methodology requests Focus in next slide Draft the Master Plan from the projects final Distribution list arranged by priority order according to the Generation Transmission Draft Master Plan & Supply criteria used in the scoring process Sources: Strategy& analysis Strategy& | PwC 17 I Fix the basics and prepare for restructuring| Restore acceptable service quality/ “Zero load shedding” …Using a least cost planning methodology for project selection and implementation Least-cost planning methodology ILLUSTRATIVE Supply/demand balance Option selection GW Load 12 A Option forecast 10 study 8 ! Need for Negative investment 6 reserve B Option in new + 4 margin resources 2 Existing 0 resources C Option 2017 2018 2019 2020 Select option with lowest: