Senegal - Energy Sector Investment Project

Report No. PID8365 Project Name Senegal-Energy Sector Investment (@) Project Region Africa Regional Office Sector Electric Power & Other Energy Adjustment Project ID SNPE51356 Supplemental Project SNPE70530 Borrower(s) GOVT. OF SENEGAL Implementing Agency Address TBD Agence Senegalaise d'Electrification Rurale Environment Category B Date PID Prepared August 24, 2000 Projected Appraisal Date September 29, 2000 Projected Board Date December 21, 2000 1. Country and Sector Background The energy sector plays an important role in the Senegalese economy as the country is highly dependent on oil imports, the population makes use of wood fuels to a large extent for cooking and electricity supply is underdeveloped. Major issues in the energy sector include excessive control on imports by the refinery shareholders in spite of the 1998 liberalization trade law, continued subsidy to the refinery shareholders, lack of competition in product marketing, increasing depletion of forestry resources, limited access to power supply and the high cost of electric power and petroleum products. The Government strategy, for which the Bank provides support through the Energy Sector Adjustment Credit (ESAC) (Cr.3069-SE) seeks to improve the efficiency and the competition of the energy sector, introduce private sector participation in the financing of the sector, establish an effective regulatory framework with suitable monitoring to create equal access to all operators in the petroleum downstream operation and increase the access to energy of the population, while protecting the environment. The ESAC supports the establishment of a comprehensive legal and regulatory framework for the hydrocarbons, power and rural energy sectors, the privatization of SENELEC and a comprehensive set of measures which are spelled out in a Sector Development Policy letter issued by the Government in January 1997 (see MOP No. P-7207-SE). The proposed investment credit would address complementary issues which are described below:A major issue in the power sector is the low level of coverage. Access to electricity is largely confined to the capital city of Dakar and other major urban centers. Grid connected village electrification is limited to areas in the immediate vicinity of large population centers and some tertiary centers. The vast majority of the population living in the smaller centers (with less than 1,000 inhabitants), numbering nearly 13,000 such centers, are without electricity supply. At present, about 268 of these villages are electrified and it is expected that subsequent to the privatization of SENELEC another 39 (for a total of 307) will be electrified by 2003.  Total rate of rural electrification is low at about 4.1%.The reasons for the low coverage are: (i) weak institutional set up, (ii) inadequate tariff policies which did not provide for cost-recovery of investments, and did not focus on type of services more appropriate for rural areas, (iii) inappropriate, expensive technologies of grid connected rural lines, and (iv) lack of financial means of SENELEC.Village electrification by communities or independent providers is practically non-existent as, until very recently, SENELEC has retained the national monopoly for electrification. Moreover, given SENELEC's limited capability to expand services, the population increase outnumbers the increase in the number of connections, and access to electricity would remain stagnant or even decrease in percentage.The Government strategy for addressing power sector issues includes demonopolization, divestiture of state-owned public utility (Senelec was privatized in March 1999, through the sale of 33t of its capital to a strategic investor that has full control over management and operations) and a major emphasis on participation of the private sector in the provision of public services. The major structural issues are being addressed with Bank support under the ESAC. All reforms in the power and traditional energy sectors have been implemented, while some of the reforms in the hydrocarbons sector still need to be fully complied with, reason why the second tranche has not, as yet, been released and the closure date of the ESAC has been postponed till December 31, 2000.The proposed operation would complement the program of reforms by: (i) strenghthening the Electricity Sector Regulatory Commission (Commission de Regulation du Secteur de l'Electricite) (CRSE), recently created by Law No. 98-29 (Loi d'orientation relative au secteur de l'electricite) and the National Committe for Hydrocarbons, (ii) supporting the national agency for rural electrification (Agence Senegalaise d'Electrification Rurale) (ASER), which was also established by Law no. 98-29, (iii) supporting the establishment and financing of an autonomous Rural Electrification Financing Mechanism (REFM), and providing financial assistance for its operation, and (v) channeling Bank and donors financial assistance to increase electrification coverage under least expensive technologies and appropriate type of services.Despite the importance of petroleum for the economy, Senegal's petroleum potential has yet to be established as the country is very under-explored (the density of the wells to date is only 7t of the world average). Future exploration would depend on increased efforts on the part of the Government to attract oil companies.The Government strategy with regard to the petroleum sector is to improve the legislative framework, liberalize the sector, and foster exploration of oil and gas. To that effect, the Government issued Law No. 98-05 in January 1998, to improve the terms under which companies explore for and produce hydrocarbons, and Law No. 98-31, (Loi relative aux activites d' importation, de raffinage, de stockage, de transport et de distribution des hydrocarbures), which liberalizes trade and commercialization of petroleum products and set clear rules for setting their prices. Additionally, the public enterprise, PETROSEN, which formerly executed exploratory works had its by-laws amended to reflect a concentration solely on the promotion of exploration by private international companies of areas with potential for deposits of hydrocarbons.The new role of PETROSEN would be: (i) to ensure that promotion information documents such as maps, seismic and data on wells are readily made available to interested petroleum companies and can easily be updated, (ii) enhance the publicity of data so as to make oil companies more aware of the Senegalese prospects, and to keep Senegal in their minds when considering new -2 -  exploration activity, and (iii) develop a strategy in relation to licensing, to achieve diversity (number of companies) and activity (i.e. ensuring that work commitments are appropriate for the size of the area licensed), (iv) screen license applicants, and (v) act as a non-operating partner in situations where this encourages private investment. To avoid conflicts of interest and to demonstrate the financial implications of these activities Petrosen is investigating the option of separating their activities into three subsidiaries, namely for the promotional work, for the provision of services to the private investors, and for the joint ventures with the private sector. Petrosen will sell its rig when the opportunity arises. 2. Objectives The proposed project would complement ongoing IDA support (through the Energy sector Adjustment Credit) to the Government strategy for energy sector reform and liberalization that is spelled out in the Letter of Sector Development Policy issued in 1997.The project development objectives are to:(a) promote social equity between urban and rural areas by increasing access to electricity and kerosene in rural areas, through private providers;(b) ensure proper regulation as well as competition in the energy sector, leading to affordable and reliable energy supply to urban and rural population;(c) reduce dependency from petroleum products imports through encouraging the private sector to develop national resources;(d) promote end-use energy efficiency; and,(e) lessen the barriers to development of renewable energy sources.These development objectives would be achieved by (i) supporting the establishment of a national agency for rural electrification, (ii) providing financing for a decentralized rural energy fund, aimed at attracting private investment and mobilize significant internal and external resources, (iii) contributing to Senelec's investment program for grid-connected electrification; (iv) strengthening the newly created power and petroleum sector regulatory authorities, and (v) attracting foreign oil companies to invest in the exploration of Senegal's oil and gas potential which eventually would result in gas and/or oil discoveries and exploitation. 3. Rationale for Bank's Involvement The Bank support would act as a catalyst to strengthen Government's partnership with other donors and mobilize financing. Injection of foreign funds are needed to reach the Government's objectives to promote sustainable economic development. IDA's experience in other countries offers comparative advantage and allows sound policy advice to the Government in building public and private partnerships to promote private sector growth and in addressing long term human resources issues. The Bank' s support to the Government in developing a legal and regulatory framework and improving the institution and capacity building would bring knowledge of successful reforms of the power and petroleum sectors elsewhere and would augur increased participation of the private sector which is one of the important decisions which the Government would like to take in the infrastructure sector. The Bank brings together the experience of other countries in DE that could result in increasing confidence of potential private investors.GEF will provide financing to cover (i) incremental costs associated with PV options, and (ii) support for information campaigns, training, and technical assistance. Without GEF financing to remove the barriers, this market is not likely to develop spontaneously. - 3 -  4. Description The proposed Project component provides for supplying electricity services to some 20,000 households in about 100 villages through grid extension, photovoltaic, and diesel (or hybrid) systems. These systems are all paid for by the beneficiaries through a financing mechanism that will be managed by a local commercial bank. Environmental benefits will result from the use of renewable energy technologies.The Rural Electrification component has to overcome the barriers to more widespread use of DRE activities, which are:(i) Capacity & Rural Infrastructure Building. Private providers and investors will be assisted in the identification and setting up of electricity service delivery in rural areas under concession arrangements. Village associations are also invited to organize service delivery through an operator. Technical assistance will focus on two separate issues: technical capacity to create village electrification systems, and financial capacity through a refinancing mechanism to pay for the service delivery.(ii) Financing Mechanism. The lack of long-term credit as well as the high up-front cost of renewable energy systems necessitated an innovative financing mechanism. Local commercial banks will manage such mechanism.(iii) Administration. An autonomous agency (ASER) has been set up to promote and facilitate the above activities, plus a mechanism to monitor and evaluate the RE operations. In addition, assistance will be provided to develop a national rural electrification program, including regulatory aspects.AFD and AFDB have expressed their interest in co-financing, although no definite commitments have as yet been made. Private local investors and beneficiaries are expected to contribute an amount of about $50 million. 1. Setting up of the Agency for Rural electrification, ASER 2. TA and Financial assistance to DSM activities 3. Establishment and financing of the DEFM 4. Technical assistance & equipment for the training and strengthening of the regulatory agencies and the Direction de l'Energie 5. Financing through SENELEC of grid extension in urban and rural areas 6. Technical Assistance to MEMI and petroleum regulator 7. Petroleum Exploration Promotion Program for PETROSEN 8. TA/equipment for Petrosen's strengthening 10. Independent testing laboratory consultants (to be leased to independent testers for operation) 11. CNH assistance, consultants, training 5. Financing Total ( US$m) GOVERNMENT 5 IBRD IDA 65 MULTILATERAL INSTITUTIONS (UNIDENTIFIED) 55 GLOBAL ENVIRONMENT FACILITY 6 Total Project Cost 131 6. Implementation Implementation Agencies. The project would be implemented by the Ministry of Energy and Mines, ASER, PETROSEN and private operators (Senelec and others). Within MEMI a project implementation unit (PIU) has been formed, - 4 -  which would be in charge of day-to-day management of the project. The head of the PIU is answerable to the MEMI. The PIU would be responsible for: (a) overall project implementation performance, (b) financial management as well as disbursement and procurement operations, (c ) providing external auditors with the necessary information for audit of project accounts, (d) management of the DSM component, (e) relations with Government agencies, SENELEC, donors, the private sector, NGOs and all stakeholders.The Government has created ASER, a semi-public agency which is charged with the promotion and financing of rural electrification activities (RE). ASER would prepare implementation guidelines, promote DE, review proposals submitted to it by commercial enterprises and/or individuals for the financing of RE. These proposals would be judged based on their technical and financial merits (sustainability) and whether they satisfy the parameters of the implementation guidelines. Disbursement of funds and repayment of loans would be handled by (a) commercial bank(s) who would act as agents for ASER to manage DEFM funds under a contract.The Government has created (Committtee on hydrocarbons) and this needs to be converted into an independent regulatory body to promote competition in the petroleum downstream sector, in particular by providing equal access to all operators, by minimizing monopoly situations and by ensuring elimination of barriers to entry. In order to achieve these objectives, MEMI will organize investment in an independent petroleum depot with equal access to all operators, and an independent product testing laboratory to monitor quality and quantity of products. PETROSEN, the national petroleum company, would be in charge of executing the petroleum exploration promotion component, in conjunction with the private seismic company. This would be the first major step in Petrosen fulfilling its revised promotional role and would be an innovative approach to ensuring that the private sector role is maximized. There is little precedent for the private sector seismic companies undertaking such a role for onshore prospects. As established in the recently enacted petroleum code, PETROSEN has changed its role towards a promoter of exploration and regulator of concessions. It has executing capability and professional staff.The private operators would implement the rural electrification and DSM components Implementation Period. The project would be implemented over a four-year period (2001-2006). Auditing and Reporting. MEMI would establish and maintain adequate computerized financial management systems, including accounting, financial reporting and auditing, to ensure that accurate and timely information regarding project resources and expenditures is made available. MEMI and ASER's accounts would be audited annually by independent external auditors acceptable to IDA. Petrosen already has its accounts independently audited. The audited accounts and the auditor's report, including a separate opinion with respect to statements of expenditures and the Special Accounts, would be submitted to IDA within six months of the end of the fiscal year. The sound establishment of sound accounting and financial management systems would be a condition of Board presentation.Project Monitoring. Monitoring, evaluating and permanent learning would be an important dimension of the project as DE delivery mechanisms need to be field tested to make sure that these can be applied on a sustainable basis and on a large scale. Lessons learned during this process would be immediately applied. Two performance reviews would be undertaken by independent consultants, respectively at the end of the twelfth month and at the end of the thirtieth month of the project to enable the Borrower and IDA to evaluate - 5 -  the implementation experience. Independent consultants would be used to perform these evaluations.ASER is responsible for all monitoring and evaluation and will complete this during the project appraisal. Second both the objectives of ASER and that of the country's electricity law are to promote activities are replicable and sustainable. The following serves as quantitative indicators for the project (should this be an annex?)Procurement. Procurement of consultant services (Category 1) and goods (category 2) for supporting ASER, the regulatory agencies and MIME would be done in agreement with Bank guidelines. Specific arrangements would be determined during project preparation for the provision of financial assistance to the DSM program and contribution to the Rural Electrification fund (Category 3), and the financing through SENELEC of grid extension in urban and rural areas (Category 4). 7. Sustainability The project would implement an innovative approach to DE and must build-in monitoring and evaluation to make adjustments as required and to test alternatives during implementation. It is expected to build up institutional capability in ASER and generate sound implementation guidelines and standardized models of DE community schemes. The entrepreneurial culture and capacity developed through the actions financed under this project would permit the private operators to fund consequent part of the extension DE program. The cost-effectiveness of these private electricity service delivery model would be an important determinant of affordability and sustainability. This would be closely monitored and evaluated by a team of independent evaluators.The DE schemes would help demonstrate the affordability of a commercial DE delivery by (i) designing appropriate technical specifications for equipment, (ii) requiring project operators to develop credible servicing plans, (ii) certifying sub-project commissioning. Future village electrification systems are expected to benefit from cost reductions due to economies of scale and learning curve cost reductions, mainly in the delivery and financing mechanisms but also from locally manufactured components. Specifically the creation of ASER would ensure the technical and financial sustainability of the proposed project. Consumers' willingness to pay on a full cost recovery basis and for the systems to be replicated in other villages would ensure the overall project's long-term sustainability.The provision of a common facility petroleum depot, independent product testing laboratory and the establishment of an effective regulatory framework with suitable monitoring would ensure genuine competition in the downstream petroleum sector. 8. Lessons learned from past operations in the country/sector (a) Solar home systems projects must: (i) overcome the first cost barrier created by their high initial cost (relative to conventional alternatives) to gain an adequate potential market size, (ii) establish responsive and sustainable PV sales and distribution infrastructure, and (iii) provide quality products and services. (World Bank Technical Paper # 324, Best Practices for Photovoltaic Household Electrification Programs, 1996).(b) Solar home systems projects should: (i) operate on a full cost-recovery basis, (ii) provide adequate consumer information, and (iii) ensure adequate management skills in local implementing organizations. (World Bank Technical Paper #304, Photovoltaic Applications in Rural Areas of the Developing World, 1995).(c) Rigorous economic and financial analysis of rural electrification projects and an increased attention to cost recovery - 6 -  are the key to successful project implementation. (OED Report #13291, Rural Electrification in Asia, A review of Bank experience, June 1994). (d) Government incentives, including taxes, duties, and subsidies, must be consistent with national and sectorial objectives for maximum long-term impact. (mid-term Evaluation Report on the India Renewable Resources Development Project, November 1995).(e) Conventional grid extension is costly and the investment cannot easily be recouped in areas with scattered populations because of low power loads, the provision of subsidies should be restricted, however, to the investment component (initial cost).(f) there is little correlation between expenditures by Governments on data acquisition and exploratory drilling, and the interests of petroleum companies in exploring the areas. Therefor Governments should restrict themselves to obtaining regional information, after thorough consultation with potential explorers, and only after extensive attempts to promote on the basis of existing data. (Senegal has already tried to promote the onshore area with more than fifty companies). (g) with special benefits provided to the refinery shareholders, there is minimal competition allowed in the downstream petroleum sector, as experienced in many other countries in Africa. The refineries in Africa produce substandard products but charge prices as those of superior international quality. Regulatory framework and monitoring are weak. Independent product depots and testing do not exist. 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues The project would have favorable effects on the environment as PV systems would replace thermal based generation. Other environmental concerns with regard to the power sector in general are being addressed in the framework of the privatization of SENELEC, where environmental liabilities have been evaluated and mitigation measures entrusted to the new operator. In the petroleum sector the project is supporting overhaul of petroleum product specifications, in particular the reduction of lead in gasoline and sulfur in gas oil. 11. Contact Point: Task Manager Said R. Mikhail The World Bank 1818 H Street, NW Washington D.C. 20433 12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. -7 -  This PID processed by the InfoShop during the week ending August 25, 2000 - 8 -