Madagascar - Petroleum Sector Reform Project

 ICRR 10525 Report Number : ICRR10525 ICR Review Operations Evaluation Department 1. Project Data : OEDID : OEDID: C2538 Project ID : P001558 Project Name : Petroleum Sector Reform Project Country : Madagascar Sector : Oil & Gas Adjustment L/C Number : Credit 2538-MAG Partners involved : Prepared by : Fernando Manibog, OEDST Reviewed by : Group Manager : Gregory K. Ingram Date Posted : 08/24/1999 2. Project Objectives, Financing, Costs and Components : The project's objectives were to: (a) open up Madagascar's petroleum sector to private participation by creating the appropriate competitive framework; (b) support infrastructure investments to improve operational efficiency and attract private investors; and (c) develop an efficient regulatory capacity . To achieve these objectives, the project's components consisted of: (a) technical assistance for petroleum sector reform, including the restructuring and corporatization of the state -owned petroleum company (Solitany Malagasy, or SOLIMA), as well as the establishment of open access to key infrastructure and a national regulatory authority; (b) refinery rehabilitation and management assistance; (c) improvement of storage and transport infrastructure; (d) construction of a new maritime petroleum terminal; and (e) an LPG promotion program, including bottles, storage tanks, filling stations and transport equipment. Total project costs of US$55.3 million equivalent were estimated at appraisal, of which SDR36.7 million (US$51.9 million equivalent) were to be financed by the IDA credit . The project disbursed only SDR$3.3 million or 9 percent of the original credit amount, and closed on December 31, 1998 with no extensions. 3. Achievement of Relevant Objectives : Apart from the partial achievement of reform objectives through the drafting of a new legal framework and the preparation of a strategy for SOLIMA's privatization, none of the project's infrastructure objectives (b) to (e) above were achieved. Eventually, the petroleum sector reforms were pervasive, including the adoption of the new petroleum law in March 1999 (after the project closed), the ongoing establishment of a regulatory agency, and the current privatization of SOLIMA. These deep reforms, however, could be credited more to the dialogue related to two, subsequent structural adjustment operations and a private sector development (PSD) project (Credit 2956-MAG) rather than the petroleum sector reform project itself . 4. Significant Achievements : SOLIMA's ongoing privatization is basically following the strategy developed by the project, and the introduction of modern principles for petroleum sector operations is also based on the legal framework for liberalization prepared under the project. These results, however, are relatively minor compared to the sector -wide scope of objectives. 5. Significant Shortcomings : Based on the ICR, it appears that both the Bank and the Borrower were caught in a vicious circle of confused policy messages and hence inaction, which doomed the project . The Bank unilaterally upgraded the scope of required reforms, insisting during project implementation on the full privatization of SOLIMA, although this is not included in the original Credit Agreement, and despite the clear inability of the Government to meet even the more basic, ground-laying set of reforms which the project originally envisaged . The Borrower did not show much resolve in meeting disbursement conditions, thus blocking the quasi -entirety ot the project's infrastructure components, but was also slowly moving toward full privatization of SOLIMA as a requirement for the new structural adjustment and PSD projects, thus de facto operating on two parallel sets of conditionalities . Neither the Bank nor the Borrower made motions to restructure the project in order to move the full dialogue related to privatization and its stringent pre-requisites within the scope of the structural adjustment and PSD operations, while delegating physical investments and operational efficiency improvements to the project . Project restructuring may have allowed the environmental and LPG components to proceed, which are critical activities given the heavy deforestation and biodiversity losses resulting from the need to meet massive wood and charcoal energy requirements in Madagascar . Instead, disbursements were frozen when -- without restructuring the project -- the goal post was moved from laying the foundations for privatization, to actually fully privatizing SOLIMA . 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Unsatisfactory Unsatisfactory Institutional Dev .: Partial Modest Sustainability : Uncertain Uncertain Bank Performance : Deficient Unsatisfactory Borrower Perf .: Deficient Unsatisfactory Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : As the scope of required sector reforms evolve, an existing project (s) should be restructured if it is decided that new projects would serve as the leverage for the new round of reforms, rather than overlaying the existing operation with conditions that were not in the original Credit Agreement . Moreover, there should be better coordination between sector divisions, i.e., the energy and environment staff in the specific case of this project . The preparation and appraisal of this project, which had a critical household energy component by way of substituting LPG for fuelwood and charcoal, coincided with the preparation of the National Environmental Action Plan (NEAP), as well as the preparation, appraisal and first years of implementation of the Bank and multidonor -financed Environmental Program One (which were the first 5 years of the 15-year NEAP). No cross-fertilization or synergy was evident, however, between the separate energy and environment project teams, despite the crucial role of traditional energy procurement in the serious environmental degradation occurring in Madagascar . 8. Audit Recommended? Yes No 9. Comments on Quality of ICR : The ICR is well presented, but like many moderately satisfactory ICRs, it adopts the "tunnel vision" of seeing only the petroleum subsector in total isolation, without considering its broader implications in terms of household inter -fuel substitution and its potentially positive environmental and social impacts, and the significant role of energy (not just petroleum) reforms and privatization in delivering the Country Assistance Strategy's focus on poverty alleviation .