Niger - Energy Project

Document of The World Bank FOR OFFICIAL USE ONLY C4lZ ) t'fa-NirJ t Report No. P-4530-NIR MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 24.7 MILLION TO THE REPUBLIC OF NIGER FOR AN ENERGY PROJECTse January 26, 1988 lTs document has a restcted dlsrhto and may be used by ecients only in the perfonnance of ibeir oficial dutis Its content may not oerwise be didosed withu Wodd Bank asthorion.  CURRENCY EQUIVALENTS Currency Unit CPA Franc (CFAF) US$1 8 CFAF 329 WEIGHT AND MEASURES One Kilovolt (kV) 1,000 volts One Megawatt (MW) 1,000 kilowatts (kW) One Gigawatt hour (GWh) 1 million kilowatt hours (kWh) One barrel (bbl) - 0.16 cujic meters One ton of oil equivalent (t.o.e.) G about 7 bbl of crude oil 1 meter (m) ' 3.28 feet 1 ton (t) G 2,205 pounds PRINCIPAL ABBREVIATIONS AND ACRONYMS USED DANIDA - Danish International Development Agency DE - Direction de l'Energie DFF - Direction des Forgts et de la Faune EIB - European Investment Bank KfW - Kreditanstalt fUr Wiederaufbau MME - Ministere des Mines et de l'Energie NIGELEC - Soci6tg Nigerienne d'Electricit6 SONICHAR - Societe Nig6rienne des Charbons d'Anou-Araren Fiscal Year October.1 - September 30  FOR OFFIIAL USE ONLY NIGER ENERGY PROJECT CREDIT AND PROJECT SUMMARY Borrower: Government of the Republic of Niger Beneficiary: SociEte Nig6rienne d'Electricit6 (NIGELEC) Direction de l'Energie (DE) Direction des For^ets et de la Faune (DPF) Amount: SDR 24.7 million (US$31.5 million equivalent) Terms: Standard Onlending Terms: The Government would relend 82% of the Credit (US$25.7 million) to NIGELEC at the prevailing Bank interest rate for 20 years including 5 years of grace. NIGELEC would bear the foreign exchange risk on that amount of the Credit. An amount of US$2.6 million equivalent would be passed on to NIGELEC as equity. US$ Million Financing Plan: Government/NIGELEC 16.7 IDA 31.5 KfW 10.0 EIB 16.3 DANIDA (See Schedule A for details) 11.5 Total 86.0 Economic Rate of Return: Household Energy Component 30% Power Transmission Line 16% Staff Appraisal Report: No. 6766-NIR MLap: 20108 January 26, 1988 IThis document has a restricted distribution and may be used by recipients only in the performan=c of their official duties. La contents may not otherwise be disclosed without World Bank authorization.  MEIORANDTIl AND RECOMMIENDATION OF TPE PRESIDENT OF THE INTERNATIONAL DEVELOPMFNT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO TRE REPUBLIC OF NIGER FOR AN ENERGY PROJECT 1. The following report on a proposed development credit to Niger for SDR 24.7 million (US$31.5 million equivalent) is submitted for approval. The proposed credit would be on standard IDA terms and help finance the development of the energy sector in the countrv. Background 2. Although per capita energy consumption in Niger is among the lowest in the world, the country faces an energy crisis, particularlv in the household energy subse'-tor. The increasing consumption of fuelwood and the predatory and inefficient wav it is cut and consumed has had a deleterious impact on the environment and the economy. In the past, the Government gave priority to reducing imports and looked to the development of its domestic resources (hydro, solar, petroleum, coal anc forestry). This approach has met with only limited success. Under its Structural Adjustment Progr--. the Government is now reformulating its energy sector policies that will lead, in .he short or medium term, to increased imports but would provide Niger with needed energy at much lower economic cost compared to providing it from domestic sources. 3. Firewood resources account for 87% of energy consumption in Niger and are used by 99% of households for cooking. The main reason for the uncontrolled exploitation of natural forest cover, apart from land clearing and demographic pressure, is the fact that the standing stock of wood is perceived as a free good. Nei.het the land on which the wood is standing, nor the wood itself belongs to those who cut it. As a result, firewood prices are low and consumers have no incentive to use energy efficiently. If nothing is done and if present consumption trends continue, the immediate area around urban centers will not be able to meet the demand for firewood in the next 10 to 20 vears, with disastrous consequences for the environment and the economy. Given the rapidlv rising costs to the economy of supplying firewood, Government strategy focusses on firewood conservation through the use of improved woodstoves and substitution of firewood with other fuels, such as gas and kerosene. This approach would require that taxes on firewood be increased substantially and that taxes on kerosene and gas be reduced. On the supply side, the reafforestation efforts of the Government will have to be complemented by measures to better protect and manage the forest cover around urban areas at a price the country can afford. This would require that local communities be vested with property rights so that they can manage and protect the forest cover and legally keep others from exploiting their land and investment.  -2- 4. In the power sector, studies have shown that over the medium term, it is more economical for Niger to continue importing electric power from neighboring Nigeria to supply both the Niger Valley and the more important load centers in eastern Niger. However, for the power sector to develop satisfactorily, the institutional and organizational set up, as well as the financial situation of the powcr utility, NIGELEC, will need to be improve In particular, NIGELEC's accounts receivable is unsatisfactory and affecting the company's liquidity position. Also, the adequacy and justification for a uniform national tariff schedule ard consumer connection policy needs to be examined. 5. With regard to the petroleum sector, studies have concluded that, for the time being, it would be cheaper for the country to continue to import oil rather than develop the small fields discovered to-date in the Agadem basin, although this evaluation could change if exploratior. by private companies now being undertaken results in significant discoveries. In the meantime, Niger should continue to strengthen its capacity to administer petroleum exploration by private companies and attempt to attract other companies to explore on acreage that is free or that will be relinquished in the future. 6. Niger is a country rich in solar energy, with an average of 3,200 hours of sunlight per year, the daily duration of sunlight varying from 8.5 to 9.5 hours. Although work has been done in solar energy in Niger, the activities to-date have been in the field of basic research. The Government is changing the direction of activities in solar energy to applied research so that practical use can be made of the excellent solar insolation in the country. 7. Rationale for IDA Involvement. The proposed project deepens and extends the initial strategy for the energy sector agreed to under the SAL and complements the measures agreed to under the Public Enterprise Sector Adjustment operation. IDA has taken a leading role in the development of a household energy strategy which emphasizes managing household energy demand as well as increasing the supply of forestry resources and transferring the responsibility for management of fuelvood supply from the state to local communities. IDA has also taken a leading role in preparation of studies relating to power system planning and organization and petroleum that have led to the definition of a investment program in the sector. IDA's continued involvement in the sector is needed in order: (i) to ensure that energy sector investments are directed to projects of high prioritv; (ii) to help resolve the institutional and organizational issues; (iii) to ensure that energy prices reflect both economic costs and fiscal considerations; and (iv) to mobilize financing from other donors. 8. Project Objectives. The project aims to address in a comprehensive manner the various and interconnected energy problems facing the economy by developing policies and programs to redress the growing imbalance between energy demand and supply. It is based on a strategy for the energy sector initially developed as part of the Government's Structural Adjustment Program. Specifically, the project would assist the Government in: (i) promoting fuelwood conservation, substitution of energy sources and a more effective management of the natural forest cover; (ii) promoting the development of renewable energy technologies; (iii) promoting the conservation of electric  3- power and providing electricity at least-cost; and (iv) upgrading local capabilities to administer petroleum exploration. 9. Project Description. The project comprises elements of policy reform as well as investment. Policy reforms would focus on: (i) adjusting household energy prices to encourage efficient use of energy; (ii) changing the way fuelwood supply is managed, on a pilot basis, by handing over control anid exploitation of woodstock to local communities; and (iii) helping implement needed institutional and organizational changes in the power sector, such as providing NIGELEC with greater autonomv, along the lines recommended by studies financed by the Government and IDA. On the investment side, and in the houshold energy sector, the project would consist of the following: (a) the development of a firewood trade monitoring and taxation system, including the construction of firewood checkpoints and provision of vehicles, equipment, training and technical assistance to the local forestry agencv; (b) zoning of areas around urban centers by firewood potential, preparation of firewood supply management and incentive plans, and establishment of rural firewood markets and production areas; and (c) promoting the manufacture, import, sale and use of improved wood, kerosene and gas stoves by carrying out extensive advertizing and public awareness campaigns, extension work, trainiing of local blacksmiths, consumer surveys and stove testing programs. In the power subsector, the project would finance a large part of the investment program of NIGELEC, including extension and rehabilitation of the distribution grid in urban areas, the construction of the Nigerien portion of a new power interconnection with Nigeria and the rehabilitation of a transmission line in the north. In the petroleum subsector, tne project would finance the retrieval and reprocessing of geological and geophysical data so that a strategy and synthesis of the petroleum geology of Niger could be prepared which would allow the Government to more effectively understand its potential hydrocarbon endowment and administer its exploration. With regard to other renewable energy, particular attention will be paid to develop a pilot solar energy program to test and disseminate mini-photovoltaic systems for lighting, refrigeration and small-scale pumping in isolated centers. 10. The total cost of the project is estimated at US$78.5 million equivalent, I/ including the cost of the line on Nigerien territory, with a foreign exchange cowponent of US$60 millior. (76%). The European Investment Bank and KfW of Germany have expressed an interest in financing the Niger-Nigeria interconnection, an important component of the proposed project, and have agreed, in principle, to provide about US$26.3 million equivalent toward project costs. The Danish authorities (DANIDA) have agreed to finance the household energy component of the proposed project in an amount equivalent to US$10.3 million and have also agreed to finance any increases in costs due to inflation which we estimate will bring the total Danish contribution to US$11.5 million. IDA will administer the funds provided by DANIDA. IDA financing would focus primarily on power distribution facilities, engineering and supervision as well as on the petroleum component. A breakdown of costs and financing plan are shown in Schedule A. Amounts and methods of procurement and disbursement, as well as the disbursement schedule are given 1/ Excluding interest during construction.  -4- in Schedule B. A timetable of kev project processing events and the status of Bank Group operations in Niger are given in Schedules C and D, respectively. A map showing location of project activities and delineating the areas having petroleum potential are attached. The Staff Appraisal Report No. 6746-NIR, dated January 8, 1988, is also attached. 11. Agreed Actions. The Government has agreed on the following actions: (a) significantly increasing the taxes on fuelwood and reducing taxes on kerosene and kerosene stoves; (b) reducing receivables of NIGELEC to an average level of three months by December 31, 1988; (c) applying the results of the tariff study, including making needed adjustments to tariff levels so that NIGELEC can maintain a reasonable contribution to its investment from internally generated funds; (d) limiting NIGELEC's indebtedness; (e) making provision for revaluation of NIGELEC's fixed assets; (f) establishment of revolving funds and audit of NIGELEC's accounts and DE's and DFF's project accounts; (g) adopting a revised Electricity Code and performance contract and new statutes for NIGELEC which the authorities are in the process of doing; (h) reviewing annually the policies, investment program and strategy for the energy sector and seeking IDA's approval for investments in the energy sector of over US$10 million. Execution of a subsidiary loan agreement between the Government and NIGELEC is a condition of Credit effectiveness. The following are conditions of disbursement for the relevant components: (a) agreement or. a regional petroleum study; (b) agreement on the need and timing of the Ganbou hydroelectric projec.; (c) effectiveness of cofinancing; (d) signed agreements between Niger and Nigeria and NIGELEC and NEPA for supply of power and construction of transmission line; and (e) agreement on a pilot solar energy program. 12. Justification. The main benefit of the household energy component is the protection of the fragile environment around urban areas. The rate of firewood consumption would be reduced in half, resulting in savings of firewood of about 180,000 tons a year. The increased use of kerosene and gas stoves would also reduce cooking time and make food preparation easier. The mait benefits of the power component would be to reduce the net energy import bill and provide a reliable power supplv at the least-cost to the eastern part of Niger. Power in the eastern part of Niger is now supplied by plants burning diesel fuel that, even by today's low world prices is expensive because of high transportation costs. The most immediate benefit of the petroleum component would be that the Government would more effectively understand the country's petroleum potential and competently administer the ongoing petroleum exploration by foreign companies. It would also help the Government de-"lop a strategy for future use so that its petroleum potential could be fully evaluated. 13. Risks. The most important risk is asse,ciated with the household energy component. The component is novel, may encounter social and political obstacles and may be difficult to administer. However, given that the alternatives are so few and unpromising and the cost of deforestation so high, the risks associated with these relatively small investments are well worth taking. The risks on the power component are small, given NIGELEC's technical experience under the previous power project. There are no special risks associated with the petroleum subcomponent.  -5- 14. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington D.C. January 26, 1988  (6) Schedule A Page 1 of 2 REPUBLIC OF NIGER ENERGY PROJECT Estimated Costs a/ Local Foreisn Total - (US$ Million) A. Household Energy (a) Consulting Experts, studies, and training 1.0 2.0 3.0 (b) Provision of office facilities, firewood control points, equipment, vehicles, etc. 0.3 1.5 1.8 (c) Operational Support 3.0 1.0 4.0 (d) Renewable energy 0.1 0.5 0.6 Sub-Total 4.4 5.0 9.4 B. Electric Power (a) Construction and rehabilitation of transmission lines 5.0 24.6 29.6 (b) Rehabilitation and extension of distribution facilities 3.2 12.9 16.1 (c) Office space, equipment, vehicles, training, technical assistance and studies 1.4 6.4 7.8 Sub-Total 9.6 43.9 53.5 C. Petroleum (a) Preparation of geological synthesis and strategy 0.1 1.4 1.5 (b) Promotion, training, and equipment 0.0 1.0 1.0 (c) Refinancing of PPF advance - 0.5 0.5 Sub-Total 0.1 2.9 3.0 Base Cost 14.3 51.6 65.9 Physical Contingencies 1.3 4.8 6.1 Price Contingencies 3.1 3.4 6.5 Total Project Costs 18.5 60.0 76.5 Interest During Construction 6.3 1.2 7.5 Total Financing Required 24.8 61.2 86.0 8/ Project is exempt from taxes and duties. Includes the cost of the line on Nigerian territory amounting to about US$3.5 million.  (7) tchedule A Page 2 of 2 Financing Plan / Total Government /NIGELEC 16.7 KfW 10.0 EIB 16.3 DANIDA 11.5 IDA _1.5 Total 86.0 a/ The Danish authorities (DANIDA) have agreed to finance the household energy component of the proposed project in an amount equivalent to US$10.3 million and have also agreed to finance any increase in the costs of this component due to inflation which we estimate will brlng the total Danish contribution to US$11.5 million. January 26, 1988  (8) Schedule B Page 1 of 2 REPUBLIC OF NIGER ENERGY PROJECT Procuremer.t Method Project Component ICB LCB Other a/ N.A. Total (a) Household Energy (i) Goods 2.4 2.4 (ii) Civil Works 0.3 0.3 (ii4) Consultant Services, 8.8 8.8 Studies' and Training Sub Total 0.3 11.2 11.5 (b) Electric Power (i) Transmission 2.7 29.8 32.5 (2.2) (2.2) (ii) Distribution 18.6 18.6 (14.9) (14.9) (iii) Buildings 1.1 1.1 (0.5) (0.5) (iv) Tools and Vehicles 3.6 3.6 (2.9) (2.9) (v) Studies, Engineering 5.a 5.9 and Supervision (5.9i (5.9) (vi) T.A. and Training 1.9 1.9 (1.9) (1.9) Sub Total 21.3 1.1 41.2 63.6 (17.1) (0.5) (10.7) (28.3) (c) Petroleum (i) Consultant Services, 2.9 2.9 Training and T.A. (2.7) (2.7) (ii) PPF Refinancing 0.5 0.5 (0.5) (0.5) Sub Total 2.9 0.5 3.4 (2.7) (0.5) (3.2) Total 21.3 1.4 55.3 0.5 78.5 (17.1) (0.5) (13.4) (0.5) (31.5) ,.m i ..;mm a/ Ahout US$20 million represents consultant services and training. Note: Figures in parentheses are amounts financed by IDA credit. All amounts include contingencies.  (9) Schedule B Page 2 of 2 IDA Disbursements Category Amount Percentage (US$ Million) 1. Household Energy 0.0 2. Power Component (i) Transmission 1.9 ) 80Z of total expenditures (ii) Distribution 12.0 ) 80X of total expenditures (iii) Training 1.2 ) 100% of total expenditures (iv) Technical Assistance 0.5 ) 1002 of total expenditures (v) Studies and consulting services 5.4 ) 100% of total expenditures (vi) Equipment and tools 2.5 ) 802 of total expenditures (vii) Civil Works 0.5 502 of total expenditures Sub Total 24.0 3. Petroleum 2.4 1002 of foreign expenditures 4. Unallocated 4.6 5. Refunding Project Preparation Advance 0.5 Total 31.5 =am Estimated IDA Disbursements IDA Fiscal Year 88 89 90 91 92 93 94 95 -