Tanzania - Petroleum Sector Rehabilitation

 ICRR 11155 Report Number : ICRR11155 ICR Review Operations Evaluation Department 1. Project Data: Date Posted : 05/28/2002 PROJ ID : P002786 Appraisal Actual Project Name : Petroleum Sector Project Costs 103.60 102.73 Rehabilitation US$M ) (US$M) Country : Tanzania Loan/ Loan US$M ) 44 /Credit (US$M) 44.97 Sector (s): Board: EMT - Oil and gas Cofinancing 30 2.84 (89%), Central government US$M ) (US$M) administration (11%) L/C Number : C2202 Board Approval 91 FY ) (FY) Partners involved : DANIDA, European Closing Date 12/31/1997 06/30/2001 Investment Bank, European Commission, Government of Netherlands, OPEC Fund Prepared by : Reviewed by : Group Manager : Group : Ramachandra Jammi Andres Liebenthal Alain A. Barbu OEDST 2. Project Objectives and Components a. Objectives The project's overall objective was to improve the capacity, efficiency, reliability and safety of Tanzania's petroleum distribution system by removing specific infrastructure and policy constraints . The specific objectives were : (i) implement and maintain an appropriate petroleum pricing policy; (ii) improve oil industry performance; (iii) improve the technical and managerial skills and capability of petroleum industry personnel; (iv) reduce oil pollution and its threat to the environment; (v) lower the haulage cost of petroleum products; and (vi) improve national and transit petroleum trade through increased use of the rail system . In 1998, with the Board's approval, a new objective was added -- viz. facilitating economic growth through the provision of increased power generation capacity -- to allow use of funds from this project to bridge the cost overrun in another -- the Power VI project. The funds became available because oil marketing companies that were to receive investment support under the project financed a larger portion from their own resources than anticipated at appraisal. b. Components The project's original components were : (i) Oil Depots: rehabilitation and construction of depots and loading /unloading facilities; (ii) Tanga jetty and terminal: construction of jetty and terminal and associated facilities; (iii) Rail tank wagons: purchase of 39 and 42 rail tanks respectively for the Tanzania -Zambia Railway Authority (TAZARA) and Tanzania Railways Corporation (TRC) systems; (iv) Retail network: rehabilitation of the retail petroleum distribution and marketing network and purchase of road tank trucks; (v) LPG marketing: provision of six LPG filling stations and eight LPG road tank trucks; (vi) Rehabilitation of Lake Victoria jetties at Bukoba, Musoma and Mwanza and rehabilitation of the existing self-propelled barge in Lake Victoria; and TA and training : technical assistance studies, training, project management and related office equipment . The project components were restructured three times : First, component (ii) above was effectively cancelled because revised cost estimates at $ 20 million were about four times higher than at appraisal . Second, funds were allowed to be transferred to the Power VI project . Third, the funding for the legal and technical advisory services sub-component was expanded by US$ 7.3 million to a) take another project -- the Songo Songo project -- to closure; and b) to assist the government in arbitration of a dispute between Tanzania Electric Supply Company (TANESCO) and a Malaysian firm, IPTL, regarding a 100 MW diesel plant at Tageta. Also, the scope of components (iii), (v) and (vi) was reduced to some extent. c. Comments on Project Cost, Financing and Dates Project Cost and Financing: The final project cost at $102.73 million was only marginally lower than the $ 103.60 million estimated at appraisal. Similarly the actual Bank contribution at $ 44.97 million was not much different from the $44 million at appraisal. However, a significant amount of the final project costs went to new or restructured components that are not directly related to the original project design . (US$15 million for financing the Kihansi hydropower plant completion and US$ 7.3 million for legal and advisory services for the Songo Songo project and arbitration of the dispute between with TANESCO and IPTL ). Among the prospective cofinanciers, the European Commission, the European Investment Bank and the OPEC Fund did not make any firm commitments, and the others -- DANIDA and the Government of Netherlands -- do not appear to have followed through with the amounts indicated against them in the SAR. Dates: The slow pace of reaching agreement on tariffs delayed project effectiveness . The original project closed after two extensions in October 1999, nearly two years after the planned closing date of Dec 1997. The legal and technical advisory services category was extended till June 30, 2001 to allow arbitration between TANESCO and IPTL to be completed, 3. Achievement of Relevant Objectives: The project substantially achieved its overall objective, with some shortcomings . (i) A petroleum pricing framework was created which encouraged greater investment by private oil marketing companies. This achievement was soon overtaken by broader government initiatives that liberalized prices across the economy; (ii) The project achieved many of its physical objectives in terms of new construction or rehabilitation of oil storage depots, railway sidings, retail stations as well as purchase of LPG bottles, which may have contributed to improved industry performance. However, the significant component for construction of the Tanga jetty was dropped because the revised cost estimate was too high; (iii) Some improvement in managerial and technical skills appears to have been achieved through training of 35 officials of the Ministry of Energy and Mining and the Tanzania Investment Bank . Most of the officials are still with the institutions at project closing, (iv) In reducing pollution and negative environmental effects, old leaking pipes were replaced, storage facilities were improved, and the Lake Victoria barge was completed, though some investments planned in Lake Victoria were not made; (v) Not much progress was made in reducing long -distance haulage costs due to various factors -- underperformance of TRC, slow transport sector reform, El Nino floods of 1997, and petroleum smuggling across the border with Kenya; (vi) There was no improvement in national and transit trade because of civil war in Rwanda and Zaire, embargo on Burundi by East and Central African countries, the El Nino flood, and the extension of the Kenyan pipeline from Nakuru to Eldoret; and (vii) The new objective (which is unrelated to the thrust of the original project design ) of helping completion of Kihansa hydroelectric project as part fo the Power VI Project, was successfully achieved . The project established the first stage of pricing reform and financed studies that enabled the government to take decisions in key areas including closing of an uneconomic refinery, sector liberalization, a Draft Petroleum Supply Act and interim regulatory arrangements . The overall liberalization of the economy promoted private investment in the sector, and in 2000, the government took the next step in the petroleum sector reform program by liberalizing the prices of petroleum products in line with agreements under the Bank ’s First Structural Adjustment Credit and the IMF program and based upon the analytical work carried out under the project . At the same time, import of cheaper petroleum from Kenya under the new policies, have made some of the new facilities created under this project less relevant for the northern region of Tanzania . This is also a reason cited for why the private sector did not follow through with planned construction of some of the unloading facilities . 4. Significant Outcomes/Impacts: Of the new components added to the original project, assistance to TANESCO in the arbitration of its dispute with IPTL helped the former save an amount having a net present value of $ 70 million. In the process, the Ministry of Energy's understanding of project finance and negotiations improved . The project established the first stage of pricing reform and financed studies that enabled the government to take decisions in key areas including closing of an uneconomic refinery, sector liberalization, a Draft Petroleum Supply Ac, and interim regulatory arrangements . 5. Significant Shortcomings (including non-compliance with safeguard policies): Bank performance is considered less than satisfactory in respect of quality at entry . During appraisal, the Bank recognized that the possible under -performance of the railways was a major risk but does not appear to have taken enough measures to mitigate it. The conclusion of a rail transport agreement between TRC and the private oil companies was made a condition of effectiveness rather than a condition of Board approval . The slow pace of concluding an agreement on tariffs considerably delayed project effectiveness . Further, the issue of a liability tariff was not resolved even at project closure, adversely affecting usage of facilities constructed under the project . The Bank displayed inconsistency in the covenants on the liability tariff issue between the current project and the Railway Restructuring Project, making it difficult for the government and the Bank to bring the concerned parties to agreement. While the project financed analytical work for the petroleum sector reforms, constraints to improvement in petroleum distribution could have been better addressed in the first place through appropriate macroeconomic policy changes which did take place outside the ambit of this project but based on the analytical work carried out under the project. Lastly, the revised estimate for the Tanga jetty being as much as four times as the appraisal estimate, may point to a possible shortcoming in the appraisal process . 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Moderately Satisfactory [OED's moderately sat. rating is not possible under the ICR's 4-point rating scale]. While the overall objectives have been substantially achieved, because of specific shortfalls detailed in section 3 (even though many were largely beyond the project team’s control), the overall outcome is considered moderately satisfactory. Institutional Dev .: Modest Modest Sustainability : Likely Likely Bank Performance : Satisfactory Unsatisfactory The project team displayed flexibility in restructuring a project with unsatisfactory quality at entry, by restructuring it three times to meet the needs of the borrower and produced several positive outcomes under the revised objectives . However, taken together with the impact of the unsatisfactory quality at entry on the project, Bank performance is rated as unsatisfactory. Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory NOTE ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness. NOTE: 7. Lessons of Broad Applicability: (i) The policy environment that inhibits private investment must be fixed first . Following foreign exchange and general liberalization of the economy, many oil marketing companies were able to make the investments needed without the use of IDA funds. (ii) It is important to ensure consistency in conditionalities in parallel projects . The condition for an agreement between TRC and the oil marketing companies on liability tariffs was not reflected in the Railways Restructuring project. (iii) Lack of exposure to Bank's procurement procedures among implementing agencies caused long delays which could have been avoided by providing sufficient training at the beginning of the project . 8. Assessment Recommended? Yes No Why? The project presents an interesting case where the objectives could have been approached primarily through specific investments or by supporting macroeconomic policy reform, or through a suitable combination of the two. A more detailed analysis of these options in the context of this project can yield valuable lessons for other projects . 9. Comments on Quality of ICR: . Data on several quantitive indicators The ICR covers all important issues in considerable detail and is organized and written well and train haulage volumes is provided, though additional indicative data may have further enriched the discussion of the outcome and impacts of the project (e.g. comparative truck haulage volumes, transit tade and petroleum price trends).