Guinea - Second Power Project

C-~~ c{ / l(,e - 7 / - Document of The World Bank FOR OFFICIAL USE ONLY F:.-Jp': "1)1. 1. I',1 . . ' :;.1. ;WIJ. E ReportNo. 10442-GUI STAFF APPRAISAL REPORT REPUBLIC OF GUINEA POWER II PROJECT JULY 7, 1992 Industry and Energy Division Occidental and Central Africa Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS Currency Unit - Franc Guinea (GF) I/ US$ 1 GF 800 GF I US$0.00125 GF 1,000 US$1.25 PRINCIPAL ABBREVIATIONS AND ACRONIMS ASP Agence de Services de P6trol3 AfDB African Development Bank BCRG Banque centrale Republique de Guin6e CIDA Canadian International Development Agency EIB European Investment Bank CCCE Caisse Centrale de Cooperation Economique EDF Commission of European Community/European Development Fund GTZ Deutsche Gesellschaft fuer Technische Zusammenarbeit KfW Kreditanstalt fuer Wiederaufbau USAID United States Agency for International Development ENELGUI Entreprise Nationale d'Electricite de Guin6e SNE Societ6 Nationale d'Electricite (Predecessor to ENELGUI) NPP The National Power Plan for the period 1986-2000 JV .oint Venture managing ENELGUI MRNEE Ministry of Natural Resources, Energy and the Environment NICG Net Internal Cash Generation ICB International Competitive Bidding LCB Local Competitive Bidding LIB Limited International Bidding LRMC Long-Run Marginal Costs ONAH Office National des Hydrocarbures MEASURES AND EOUIVALENTS One kilovolt (kV) 1,000 volts One Megawatt (MW) 1,000 kilowatts (kW) One Gigawatt hour (GWh) 1,000,000 kilowatt hours (kWh) One barrel (bbl) 0.16 cubic meter One ton of oil equivalent (toe) about 7 bbl. of crude oil One kgoe kilogram of oil equivalent ENELGUI Fiscal Year January 1 to December 31 .1/ Annual Average, Guinean Francs per US Dollar: 1987 GF 428 1988 GF 474 1989 GF 591 1990 GF 661 1991 GF 792 SAR-17.GUI  FOR OMCIAL USE ONLY - il - REPUBLIC OF GUINEA POWER II PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Paae Nos CREDIT AND PROJECT SUMMARY . ...... .. . . ... . iv-vi I. ENERGY SECTOR AND POWER SUB-SECTOR . . . . . . . . . . . . . . . 1 Enerav Sector . . . . . . . . . . . . . . . . . . . . . . . . 1 A. Energy Resources, Production and Consumption . . . . . . . 1 B. Institutional. Setting . . . . . . . . . . . . . . . . . . 2 Power Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 C. Existing Power Supply Facilities . . . . . . . . . . . . 3 D. Existing Power Market . . . . . . . . . . . . . . . . . 4 E. Forecast Demand For Electricity . . . . . . . . . . . . . 4 F. Power Strategy and Investment Planning . . . . . . . . . . 5 G. The Power Utility (ENELGUI) . . . . . . . . . . . . . . . 7 H. Bank Group Experience with Past Lending . . . . . - . . 8 r. Bank Group Strategy and Rationale for Involvement . . . . 9 II. THE PROJECT . . . . . . . . . . . . . . . . . . . . . . . . . . 10 A. Background .. . . . . . . . . . . . . 10 B. Project Objectives . . . . . . . . . . . . . . . . . . . . 10 C. Project Description ..11 D. Project Costs . . . . . . . . . . . . . . . . . . . . . . 11 E. Project Financing . . . . . . . . . . . . . . . . . . . . 12 - Disposition Fund ..13 F. Project Implementation ..14 G. Monitoring and Reporting Requirements . ... . . . . . . . 15 H. Procurement ...................... . 16 I. Disbursements . . . . . . . . . . . . . . . . . . . . . . 18 J. Environmental Aspects . . . . . . . . . . . . . . . . . . 18 Ill. FINANCIAL ANALYSIS . . . . . . . . . . . . . . . . . . . . . . 19 A. Past Operating Results and Present Financial Position of ENELGUI .19 B. Results of the 1990-1991 Management Reforns .20 C. Proposed Recapitalization of ENELGUI . . . . . . . . . . . 23 D. Billing and Collection .24 E. Tariffs . . . . . . . . . . . . . . . . . . . . . . . . . 25 F. Accounting, Audit and Insurance . . . . . . . . . . . . . 26 G. Financing Plan .26 H. Financial Outlook . . . . . . . . . . . . . . . . . . . . 27 IV. ECONOMIC JUSTIFICATION . . . . . . . . . . . . . . . . . . . . 28 A. Introduction . . . . . . . . . . . 28 B. Economic Rate of Return . . . . . . . . . . . . . . . . . 29 C. Risks . . . . . . . . . . . . . . . . . . . . . . . . . . 32 V. AGREEMENTS REACHED AND RECOMMENDATION . . . . . . . . . . . . . 32 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - j1.1 - T A B L E S 1.1 Consumption of Commercial Energy by Sector (in %) . . . . 2.1 Summary of Program Cost Estimate . . . . . . . . . . . . . 12 2.2 Financing Plans . . . . . . . . . . . . . . . . . . . . . 13 2.3 Procurement Arrangements . . . . . . . . . . . . . . . . . 1' 3.1 ENELGUI - Key Financial Performance Indicators 1988-1991 ...................... . 19 3.2 Summary of ENELGUI's Sources and Application of Funds 1988-1991 ... . . . . . . . . . . . . . . . . . . . . 22 3.3 ENELGUI Capitalization at end-1991 . . . . . . . . . . . . 23 3.4 Summary of ENELGUI Financing Plan 1992-1997 . . . . . . . 27 3.5 ENELGUI: Forecasted Financial Perforn.ance 1992-1997 Key Indicators . . . . . . . . . . . . . . . . . . . . 28 A N N E X E S 1.1 Energy Balance - 1990 1.2 ENELGUI - Present Organization Chart 1.3 Self-Producers in the Conakry-Kindia Service Area 1.4 Power Facilities in the Conakry-Kindia System 1.5 Sales and Generation Forecast (GWh) 1.6 Least-Cost Generation Expansion Program Most Likely Scenario 1.7 Letter of Sector Development Policy and Action Matrix 1.8 ENELGUI - Management Contract Objectives for 1992 2.1 Project Description 2.2 Petroleum Component 2.3 Detail Project Costs 2.4 Project Financing Plan 2.5 Project Implementation Schedule 2.6 Disbursement Schedule 3.1 ENELGUI Generation 198&-1997 3.2 ENELGUI Revenues 1988-1997 3.3 ENELGUI Income Statements 1988-1997 3.4 ENELGUI Balance Sheets 1988-1997 3.5 ENELGUI Sources and Applications of Funds 1988-1997 3.6 ENELGUI Financial Projections 3.7 ENELGUI Debt Tables 3.8 Proposed Financial Objectives for Power Sector 4.1 Economic Analysis 5.1 Documents Contained in the Project File MAP IBRD No. 23585. This report is based on the findings of an appraisal mission consisting of Messra. Ranu Skelton (Cask Manager/Scnlor Project Ofricer), DmiDa Ba (Opeations Officer) (AFI E), T. Mpoy-Kamulayi. Sr. Counsel (LEGAF) and Gregory Fazzari (eonsultan), who visited (Ouinea in ebruary 1992. Mr. Said Mikhail, Senior Power Engineer, (AFIE) and Mr. Hari Bhat (consutant AFT) conAbtited to the analysis and drafting of the report. Mr. Gutetr Schrunm tlENDR) was lead adviser. Mc. Luis Conza tSenior Power Engineer) (AFTIE) was peer reviewer. Secrarial esaiatance was provided by Me. Nadia Gouhier and Eisa Torre. Mecs. fain T. Christie (AFIIE) and Michael J. Giliette (APIDR) are the managing Division Chief ud Department Ditetor, respectively. SAR.1?7.UI  - iv - REPUELIC OF GUINEA POWER II PROJECT CREDIT AND PROJECT SUMMARY Borrower: Republic of Guinea (GOG) Beneficiaries: Entreprise Nationale d'Electricit6 de Guin6e (ENELGUI) and GOG Amount: SDR 36.5 million (US$50.0 million equivalent) Terms: Standard IDA, with 40 years maturity Relending Terms: GOG would relend to ENELGUI US$40.0 million equivalent of the Credit at the prevailing Bank interest rate for 20 years including 5 years of grace; ENELGUI would bear the foreign exchange risk. This amount would also refinance PPF advances of US$1.5 million. The credit balance of US$10.0 million remains with GOG to finance the reorganization and strengthening of the Energy Department of the MRNEE, and the petroleum component. Co-financiers: African Deve'opment Bank (AfDB) Caisse Centrale de Coop6ration Economique (CCCE) Canadian international Development Agency (CIDA) European Investment Bank (EIB) Commission of European Community (European Development Fund) Deutsche Gesellschaft fuer Technische Zusammenarbeit (GTZ) Kreditanstalt fuer Wiederaufbau (KfW) United States Agency for International Development (USAID) Project Obiectives. The project aims at ensuring sustainability in the electricity sector through a program of reform to: (a) create an appropriate policy framework; (b) assist the Government to disengage from power operations and strengthen its regulatory and policy functions; (c) attract private operators and investors progressively to the sector, as a first step, by turning management of the utility over to a qualified operator on a long-term, incentive basis; and (d) finance the costs of the transition to private management. The project also aims to improve the regulatory framework in the petroleum products sector to oversee the enterprises which replaced ONAH, the state-owned monopoly formerly responsible for petroleum distribution. Proiect Descrintion. IDA appraised a priority investment program of US$155 million, agreed by the Government and the donor community as essential to support privatization. Within the program, IDA will finance the following components: (a) technical assistance to implement the privatization of ENELGUI's management; extension of the current management contract to ensure smooth transfer to the eventual operators; technical assistance to implement the power and petroleum regulatory framework and training (US$20.6 million); (b) the foreign cost portion of essential services and materials to improve operation and maintenance (US$10 million); and (c) modular diesel units up to 30 MW (to be financed jointly with EIB) (US$38.7 million). In addition, the program includes components which will be financed in parallel by the other donors, including: (i) rehabilitation of the transmission network (US$ll million); (ii) rehabilitation and expansion of the distribution network (US$27 million); (iii) rehabilitation and expansion of the Tombo I and Tombo II stations (US$12.2 million); and (iv) communication equipment, tools and spares (US$5 million). The balance includes interest during construction and contingencies. Benefits. The project would help to produce electricity more efficiently which would improve living conditions for consumers in the capital area and provide a more favorable business climate. Subsidies to the power sector would be minimized and fuel import bills reduced as diesel fuel is replaced by SAR-17.GW  - v - heavy fuel oil, and small private generators are replaced by utillty supplLed power, Risks. The risks are LnstitutLonal and managerial. G00 i committed to privatLzatLon, regulatory reform and an agreed investment program am met out in its Letter of Sector Development Policy. If the commitment weakens, the gains made to date will be shirt-llved. Extension of the current (short-term) management arrangements to December 1992 is desLgned to mLnimize this eventuality. Although there have been expressions of interest, there is also the rLsk that no acceptable bld wlll be received ln response to the tunder for an lncentive based operator to manage the sector. Thls risk is mLtlgated by the phasing of project components (the credlt would be suspended in th. event of no satLifactory privatization) as well as the solldarity of support of the donor communlty for sectoral reform. Summary of Proaram Cost Estimate (US$ millions) i ,fin . !w . . Foretan e Totnl .. Genef4tlon Rhabi litation, R:intorcew;nt & Extmnion 10.9 4.0 54.9 80 43 Network Rehabilit'tlon and fxtension 8.9 29.3 38.2 -.: 30. GenroL Plant 0.5 12.5 13.0 96 1 Onetftutionel Suport 2L0- 18.3 ..20.3 90: 1. Pe:trQleu Coenent 1.14 1.5 90 1 . -Total Base Cost 22.4 10S.5 127.9 2 Cont ingenc oi.. *Physical : . 2.0 8.0 :10.0 :-60 .:. Price 10.10 1.: 83. . --- -. : . :,- ., - :f. : . ......... . ... 5- ...... C fU....... :. . .. . - :.. . - : ..'...s:.. , .s, otL ProJt..Ct. : 26.5 :-123.5 -: 150.0 82-. Interest During0 Cos' trctf on ..- : ; - Total norw"- *s r .15; TotL Pnpins Rewuired .14. J a.- Excluding customs duties and taxes. IAA.l17.0UI  - vi - Financina Plan (USS million equivalent) . tor.Lgn Local Total ENRLGAUI O.0 237 - -.7 IDA 47.4 2.6 - 50.0 RIB 20.8 4.2 25.0 COFINANCIERS 5-- :TOTASL ; 23.5::- Estimated Disbursements USS million: IDA FISCAL YEAR 1953 1994 1995 1996 1997 1998 Annual 6 11 13 9 8 3 Cumulative 6 17 30 39 47 50 Program Economic Rate of Return: approximately 31%. MAP: BRD No. 23585 SMRWM7.GM  REPUBLIC OF GUINEA POWER xI PROJECT I . ENERGY SECTOR AND POWER SUB-SECTOR ENEROY SECTOR A. Enernv Resources. Production and Consumotion 1.1 Guinea is well-end.'owed in *.iergy, particularly hydro-electric potentirl and fuelwood resources. Biomass (wood and charcoal) are the most prevalent forms of energy, and production capability far surpasses consumption. While it does not posseas identified petroleum reserves as yet, geological indicators point to some potential for petroleum as well. However, available geological and geophysical data indicate that any reservoirs that might exist would probably be small and deep, and unit costs and risks of development would probably be high, an unfavorable situation for attracting petroleum companies. There are no known deposits of coal. 1.2 Guinea's energy sector is significantly under-developed and there is considerable room for improvement. Energy consumption per capita is estimated at just under 500 kilograms of petroleum equivalent (kgoe) vs 700 - 1000 in neighboring countries, and if the mining sector is excluded, the figure drops to below 300 kgoe/capita. Neither electricity noL petroleum products are wiAAly or easily available across the country. Enercgy supply bottlenecks ha sw become one of the major constraints to economic development, ar a corollary, a major cause of environmental degradation. policy reforms in the energy sector, accompanied by selective esse I.- 4nvestment, are critical to future economic development in Guinea. 1.3 The sectoral bree.kdown of commercial energy consumption, excluding fuelwood and charcoal whic.. ire .-ol.ly consumed by households, is shown in Table 1.1 below. Annex 1. 1. shows -he overa.Li energy balance for Guinea in 1990. Two characteristic, are noteworthy: the mining sector is responsible for over 50% of the petroleum r, ct and electricity consumption, and other industrial users account .7or a relatively small share (15%) of electricity use. Table 1.1 Consumption of Commercial Enerorv by Sector (in %) 2/ Octer- 0 Petrole Electricity Total -7ndustry. 2.9; - 151 lS. 0.7 14i*ing -> - -57.9 ;0 54.3 7.6 Transport 31. 1' --- 3.3 H&useho.ld- 6.2 - 12.3 72.5 Government/ 0.9 .18.3 15.8 fCommerce- Agriculturef 1.0 --- 0.1 Construction '50tal 100.0 100.0 100.0 1.4 ionmas. Fuelwood makes up the preponderant share of energy consumption, with an estimated 85% of the total, in part because potential demand by consumers for commercial energy (petroleum products and electricity) cannot be satisfied. Over nine households out of ten have 2/ Total includes fuelwood and charcoal.  been obliged to turn to biomass for their energy requirements even though this source may not necessarily correspond to their preference. (Gross natural fuelwool production, in accessible areas, is estimated at 14 million m3/year, or nearly twice present estimated consumption.) For most of Guinea. fuelwood production is not of itself a direct cause of deforestation but rather a byproduct of forest clearance for agricultural purposes. In the vicinity of some large urban areas, however, notably Conakry and Kankan, fuelwood resources are being exploited for the sole purpose of satisfying commercial fuelwood demand. This is leading to over- exploitation, particularly of the mangrove forests along the coast. Severe environmental damage and loss of fishery resources, e.g. shrimping, results from this situation. 1.5 Petroleum. Hydrocarbon products have been practically unavailable for most consumers outside Conakry, except for consumers in positions of authority. There has been a distinct regression in availability of petroleum products and quality of service in the petroleum subsector since international companies' operations were nationalized in 1970 and transferred to a new public enterprise. Supplies reaching the interior tend to do so through informal distribution channels at prices that bear little relation to official rates. The insecurity of supply of transport fuels has a damaging effect on other sectors of the economy. For example, agricultural produce cannot be taken to market at reasonable cost, and the transport component in the cost structure of manufactured goods is unacceptably high. With respect to petroleum product distribution, the Government placed high priority on the liquidation of Office National des Hydrocarbures (ONAH), the state-owned monopoly, and its replacement by a joint private sector/public enterprise company in its structural adjustment program. After several years of trying to negotiate a consortium with private oil firms, in April 1990 the Government decided to proceed with liquidation of the parastatal and obtain private sector distribution under a competitive framework. This process is expected to result in four private firms providing service in Guinea in 1992. 1.6 Electric Power. Power markets are small and separated by hundreds of kilometers. Although hydro-electric potential has been roughly estimated at 26,000 Gwh/year (6,000 KW) under average hydrological conditions 3/, currently only 1%, some 43 MW (200 G -jyear), has been developed. This meager development of the hydro potential reflects the small size of the power markets, their isolation, and the seasonal pattern of rainfall. Due to the six-month long dry spell, large and costly reservoirs are required to ensure year round operation. Even within the context of Sub-Saharan Africa, access to electrical utility service is minimal, with less than 20% of the population -- about 60,000 consumers at moot -- having some form of service from the public utility. In addition, private users have installed generating capacity nearly equivalent to that of the power utility. This capacity consists of a multiplicity of inefficient small generators which operate at considerable economic cost to the country and at exorbitant financial cost to owners (para. 1.10). In addition, the public utility is poorly managed and provides poor quality service at relatively high cost with wide voltage swings, and prolonged daily outages for most consumers. S. Institutional Settina 1.7 The energy sector in Guinea is the responsibility of the Ministry of Natural Resources, Mines, and Energy (MRNEE). This Ministry groups a range of departmental units whose objectives and responsibilities are often ill-defined and which lack the means to monitor the sector and develop energy policy. Overlapping of functions and duplication of effort exists between the power utility and MRNEE staff. This fragmentation has resulted in no unit having the capability to meet requirements, and it has diluted accountability. In the hydrocarbons sector, responsibilities are divided / Source: Guinea - Water Resources Master Plan (1984). SR I?7.0UI  - 3- between the MRNEE through its Service den Hydrocarbures, and the Secretariat of State for Commerce in the Ministry of Economy and Finance. The MRNEE also supervises the use of Gui.nea's forest resources through its Secretariat of State for Water, forests, Wildlife, and Fish Farming. POWER SECTOR C. Existina Power Sunplv Facilities 1.0 Electric power faciiities in Guinea consist of a number of separate systems, not interconnected with each other, which can be grouped into three distinct types. A conventional state-owned public utility, Entreprise Nationale d'Electricit6 de Guin6e (ENELGUI), supplies the capital, Conakry, and a number of smaller towns within 100 km with an estimated total of 1.2 million inhabitants. Three mining enterprises operate as industrial enclaves and supply their employees and some villages in the vicinity, with an estimated total population of 0.4 million people. And finally there are 24 small diesel and run-of-the-river hydro stations in various towns and district capitals of the interior presently under nominal ENELGUI management; their operation is sporadic, inefficient and unreliable, due to the lack of a regular supply of spare parts and of fuel, and to shortage of water for the hydro plants in the dry season. Thus, the remainder of the country, with an estimated population of 5.0 million people, does not have access to a functioning supply of electricity from a public source. 1.9 ENELGUI's facilities in the Conakry area include: (a) three small hydro generating plants in the Samou River Valley, an inter-seasonal reservoir at Baneah, with a peak production capability of 37 MW during the rainy season and a yearly energy production of approximately 180 GWh; and one diesel generating plant (Tombo) in the city with a dependable capacity of approximately 24 MW and a yearly energy production capability of maximum 160 GWh; (b) two high-voltage transmission linea approximately 80 km long, one operating at 66 kV, and one at 110 kV, which connect the Samou hydro plants with the three main transformer stations in Conakry; and (c) a distribution system supplying approximately 40,000 users in the Conakry and ir the Kindia area. The primary distribution voltage is generally a: l5kV, and the secondary at 220/380 Voltc. 1.10 In addition to the utility-owned facilities, many privately owned small and medium-sized diesel generators are installed in the Conakry area. These have been purchased by industries, enterprises, and government institutions in an effort to secure for their own use the dependable power supply that the utility has been unable to deliver since the 1970s. A 1990 survey (Annex 1.3) indicated that over 72,300 KVA (approximately 56 MW) of such capacity is installed in the Conakry-Kindia area; generation associated with this capacity is roughly estimated at some 70 GWh/year. (No statistics are kept of their dependable capacity, load, or production.) ENELGUI, however, has accepted responsibility for providing manpower, fuel, and spares to ensure the operation and maintenance of eight diesel plants belonging to various government entities in the city. 1.11 The condition of the utility-owned facilities is between poor and tolerable. The three small hydro plants have undergone extensive renovations during the last four years; the civil works and the generating plant are now in acceptable condition, but their high voltage equipment has yet to be improved. The diesel plant at Tombo has also been rehabilitated during the last four years, but requires additional work. Protection, measuring and control equipment are generally in poor condition, both in the generating plants and in the transformer stations, and so are several MAR-17.GLO  of the high voltage circuit breakers and power transformers. Further details on the power system in the Conakry-Kindia system appears in Annex 1.4. Due to the absence of reliable measuring equipment in its substations, ENELGUI's operating statistics must be treated as indicative only. This affects particularly the calculation of losses. Large parts of the distribution system are in need of extensive rehabilitation. These conditions are the result of ineffectual management and neglect of maintenance. In the past, the utility and its personnel were neither given targets to meet nor held accountable for performance. 1.12 The power production facilities of the three mining companies are kept up to international *ndustrial standard;, despite the fact that on average their equipment is older than ENELGUl's. The service they provide to their employees is also good. The distribution facilities in othex towns of the interior are generally in poor condition. D. Existing Power Market 1.13 The quality of electric service is poor and consumption has been constrained by supply limitation rather than by lack of demand. There is a considerable amount of unsatisfied demand, and there is also a large quantity of un-metered consumption. Since the available metering and the billing records are neither complete nor reliable, they are a poor base for estimating the ability of yet unserved clients to pay for service, and any calculation of potential demand is uncertain. This is particularly the case outside Conakry, where electricity when available has normally not been metered but charged as a lump sum (forfait). The same practice used to prevail in parts of Conakry, but is now being corrected with the installation of meters. The current estimates of demand are therefore still only baaed on production statistics and on educated guesses as to the size of system losses. E. Forecast Demand for Electricity 1.14 The load of the Conakry area is mainly residential and commercial (49%); the next largest category is Government buildings (18%), followed by industrial (including inining) loads, which represents 33% of the total (Figure 1.1). By 1990, the number of users in Conakry was approximately 40,000, of which 28,000 have electricity meters, and the remainder are billed on estimated consumption. While seven thousand new electricity meters were installed in 1990 and 1991, it will be necessary to install an additional 15,000 over the 1992-1993 period. New users will be mainly households of moderate means and their consumption would not likely represent a large percentage increase on in overall system basis. 1.15 Recent investments in rehabilitation and expansion succeeded in increasing the production of electricity in the Conakry area from 152 GWh in 1985 to 334 GWh in 1990 (244 GWh z'y ENELGUI and 90 GWh by self- producers). Unsatisfied demand wa.. -stimated at an additional 40 GWh in 1991. Estimates of the future growth rate vary widely 4/, but in the absence of a more reliable data base, an average yearly rate of growth in production of approximately 5% is considered reasonable through year 2000, including mee:ing the unserved connected load. Until recently, only a small proportion of users were billed and actually paid for electricity service. The proportion of kWh consumption billed was 60% of what was produced in 1989; by the beginning of 1992, this had improved to 75.4%, reflecting, in part, the improvements in billings (see Figure 3.2) where the number of customers billed increased from 55% from the beginning of 4/ A detailed load forecast of the Conakry-Kindia system was prepared in June 1991. Average annual rate of growth of system sales, after adjusting for elasticity of demand, for the ten-year period 1990-2000 was forecasted for three growth scenarios: low (5.1%); average (7.9%); and high (9.9%). SAR-17.GUI  -5- ENELWI System SDales by Custorner Class Total in 1990 (with losses): 290 GV\H Residential Comnerclal 4% Mning sector Goyerrrrsent 18% Industrial 25% Source: June 1991 Forecast Figure 1.1 1990 to 97% of total customer count at the end of 1991. Tariffs were increased by 300% in 1991, more than half related to a new petroleum products tax. These rate increases will have an immediate dampening effect on demand growth; but long-run impacts will only become better known as experience is gained. Further, the present projections of GDP expect a 4.5% increase per year, mainly supported by mining and small industrial activities in the -aterior. Thus, it would not be realistic to expect a greater growth of demand in the capital area. 1.16 In contrast to an annual growth rate of 5% in production, ENELGUI billings are projected to increase by 12%. Improvements under the project, such as rehabilitation of distribution and connections should lead to reducing non-technical losses and help ENELGUI meet the bulk of the currently connected but unserved load. And, as new capacity id installed, more customers will transfer from self-generation to utility-provided power. Figure 1.2 below shows these relationships graphically for the years 1990 and 2000. 1.17 In summary, production of utility power under the constrained environment envisaged, and considering a gradual switch-over from the self- generation capacity to the utility system, is forecast to grow at a rate of about 5% per annum between years 1990 and 2000. Details are shown in Annex 1.5. F. Power Strateov and Investment Plannina 1.18 The environment which has prevailed in the electricity sector during the last ten years haa been conducive neither to the formulation nor to the implementation of a coherent power strategy. The inabilJty of ENELGUI to generate funds for new investment, or even for regular maintenance needs, has been a major problem. Long-term planning has been neglected. The fundamental problem, moreover, remains unsolved: addressing management weakness in the organization and the emergency situation resulting from under-investment which now exists. SAR-17.OUI  ENELGUI Load Forecast Consumption - Billings - Generation 'Likely Scenario' 1990 - 2000 GWh 600 - 2000 1990 Auto-generation 400 . ................ .............. .. .......... . .. ........ Diesel Generation v _lCHydro Generation 300 . .. .. ............. .. .......... . .. ........ 3 Non-Technical Losses ~ , ETechnical Losses 200. .... .. ............. ............. ...; ........ Uniserved Load Billings 100 .... .< ............. ........... .. ............ .. _ 0 Consump'n Gen Consump'n Gen Figure 1.2 1.19 The introduction of competent management in the utility is a precondition for any improvement and expansion of service, and the success of the new management in establishing a sus-ainable operation is necessary to attract investment. GOG has made the policy choice of "privatizing" the sector in a phased program which will take several years to complete, starting with privatization of management. The program is designed to induce private enterprises to invest more in the sector as a regulatory environment is created and its credibility with investors is established. 1.20 The Conakry-Kindia area is the largest and most developed market for electricity, which can both absorb a substantial quantity of investment and pay its real cost. The distribution system must be improved in order to provide acceptable service and to reduce losses. The production facilities must be expanded to satisfy suppressed demand. While large by Guinean standards, the market is small by utility norms; the yearly load growth will remain of the order of magnitude of 5 MW for the next ten years* 1.21 As indicated under para. 1.8, a number of small, isolated electricity systems exist in the country. There is no expectation to expand or interconnect them in the foreseeable future. Management of these systems may be decentralized to allow municipalities, cooperatives or private enterprises to provide the service that ENELGUI has been unable to furnish. Generation in these systems will continue to rely orn medium-speed diesel generators, and thus any expansion of electricity service will depend on the availability of fuel in the interior at an affordable price. Small hydro plants with seasonal production can also be competitive in some localities. Rehabi'litation and expansion in the interior will be a slow process even if foreign donors are willing to lend support. Expansion of SAR17.Au  - 7 - the service in the areas surrounding the mining enterprises will become possible if viable distribution enterprises can be established; production could be handled in cooperation with these firms. 1.22 The least-cost generation expansion program for the Conakry-Kindia service area was updated in February 1992. A dietribution master plan for the Conakry-Kindia area covering the next 15 years was completed in February 1992. The generation study builds upon the October 1990 hydro- electric feasibility studies for the Guinea maritime area (see map in annex), and examined all feasible supply alternatives: hydro (run-of-river; inter-seasonal reservoir schemes), and thermal (medium-speed diesels; low- speed diesels; conventional steam units; gas turbines; combined cycle units). The study concluded for the "likely scenario" that the next generation additions should be a series of medium-speed diesel units. The units would utilize heavy fuel (bunker-C), be sized in the 10-15 KW range, and be installed at the existing Tombo generating station in Conakry (Annex 1.6). A major (50 MW or larger) hydro-electric development may be considered later if it can be designed to fit the cost constraints of the system. 1.23 The Government's "vision" of the institutional/policy aspects of the sector are reflected in its sector strategy in the form of a detailed Letter of Sector Development Policy (Annex 1.7) which was agreed at negotiations. Primary policy objectives provide for: the development of domestic energy resources in the context of least-cost generation and transmission expansion programs; the reduction of the cost of energy supplies to the economy through rehabilitation, appropriate maintenance programs for facilities in the petroleum and electricity sub-sectors, as well as through regional cooperation; the dieengagement of GOG, in a phased program, from its role of owner, investor and manager of all facilities of production and distribution in the sector; the establishment of an appropriate regulatory framework to permit the private sector to participate in the development and operation of the sector; and access of the population to energy throughout the national territorv. These policies are supported by a set of actions (see Action Matrix, Letter of Development Policy under Annex 1.7). G. The Power Utility JENELGUI) 1.24 Status and Oraanization. Enabling legislation and corporate statutes for a new parastatal enterprise were promulgated in August 1987. This legislation replaced the Societe Nationale d'Electricit6 (SNE) with ENELGUI, a financially autonomous public corporation with a board of directors whose members came from the public, the employee union, and the private sectors of the economy. ENELGUI owns all electric assets previously held by SNE, has monopoly rights for electric utility service throughout Guinea except in the mining enclaves, and nominally has full autonomy for day-to-day operations. Notably, it also has broad latitude for the planning and execution of its own investment program. Under the same legislation, the role of the MRNEE was defined: its previous full planning and day-to-day operational control of the sector was changed to one more focussed to sector policy formulation and regulatory oversight. 1.25 Performanc-. ENELGUI, however, did not perform better than its predecessor at first. It failed to master commercial operations, from billing to revenue collection, and was unable to manage its operations well. In spite of its statutes, ENELGUI's recruitment remained encumbered by heavy-handed Government intervention. ENELGUI, which has not serviced its long-term debt since its formation in 1988, is a burden on the Government's budget, which remains a serious cause for concern. Cash flows were inadequate in past years; less than 50% of the electricity supplied was paid for. Over 50% of registered consumers did not have meters, and a large number of consumers utilized illegal connections. Faced with this serious situation, the Government, in consultation with IDA, took drastic action to rectify the situation (paras. 1.29-1.31). SAR-17.GUI  - 8 - 1.26 Staffing. At the beginning of 1992, ENELGUI had a staff of about 1,362, of which 170 are university-educated professionals (including 13 expatriate managers) and 535 are technicians. The number of professionals and supervisory staff is relatively low, ind several positions at the level of section or subsection head are vacant. At the working level, however, there is excess staff. In 1991, ENELGUI laid off some 175 staff as part of a program to streamline operations. ENELGUI is in the process of further reducing its complement by reduction-in-force plans and natural attrition. The capabilities of the remaining personnel are being upgraded through in- house training (especially on-the-job training, short courses and seminars), as well as speciali:ed training at ENELGUI's training center. Reforms in the human resources area are closely linked to the privatization program to be implemented under the proposed project. H. Bank Group Experience with Past Lending 1.27 The First Power Proiect (Power I. Cr. 1085-GUI). This project became effective in 1982 and was fully disbursed and closed by October 1986. The original project was intended to: rehabilitate, reinforce, and extend SNE's distribution facilities in the Conakry II area; establish and staff a training center and program; provide 36 staff-years of TA; provide consultant services for organizational and feasibility studies for a second project; and provide refinancing of a PPF used in project identification. Although the project attained its physical objeztives, management provided poor direction and supervision of operations, and there was limited managerial autonomy, excessive staff, poor training and poorly motivated personnel. The Project Completion Report (PCR No. 7235) concluded that in the absence of radical reform there was little prospect for a turnaround. 1.28 The Second Power Fngineering and TA Proiect {Cr. 1595-GUI}. This project also put heavy emphasis on technical assistance. However, there was a reluctance to confront the systemic issues of fraud, patronage, and corruption in the utility. In retrospect, it is clear that GOG was then unwilling to confront real institutional reform whic,, might have allowed the utility to redress the situation. A major institutional study was completed in mid-1986, recommending a complete overhaul of the power sector. A new management team was put in place as a result, but little substantive change in SNE occurred. In July 1987, in the absence of specific improvements, the project was suspended. In response, the Government agreed to take a first major step toward reforming the sector, including the liquidation of SNE and the creation of a new utility, separate from MRNEE. The new utility (ENELGUI) was to have operational autonomy under an independent Board of Directors; it was structured as a traditional state-owned power authority. 1.29 Mid-term Review. By early 1989, the need to change the approach taken in Power I and Cr. 1595 had become fully accepted. ENELGUI had been created but with little substance, due to a lack of forceful direction and unwillingness of MRNEE to let the new utility act independently. A concerted donor and consultant proposal to the Government, led by IDA and endorsed by several ministers, argued that a radical change in "approach, form, substance, program design, as well as management of the TA program be made to better take into account lessons learned over the past 10 years." As a result, a "plan de d6blocage/d6marrage d'ENELGUI" was introduced that identified key impediments and offered specific remedies. 1.30 By early 1990, agreement on all parts of the plan was achieved and invitations to independent firms to tender for the management of ENELGUI were issued. The contract was awarded to a joint venture (JV) of consultants and power operators following Bank procedures. A diagnostic report on short-term needs was then conducted, and an emergency action program was agreed. By the end of 1990, management and operational control was transferred to the JV. To ensure freedom of action, ENELGUI's Director General was replaced and its Board of Directors was temporarily suspended. The JV reports formally to the Ad-hoc Committee of the Council of Ministers (Comit6 de Slivi). The 5-member committee is comprised of the Minister of  - 9 - the Planning, the Minister of MRNEE, the Minister of Finance and of the Economy, the Governor of the Central Bank, and the Secretary of State for Energy. 1.31 Results of the Reforms 1990-1991. After more than a year in place, initial actions to change the "management culture" seem to have taken hold and results have been encouraging. Key performance indicators are discussed in paras. 3.4 - 3.9 below, and among recent actions, the following merit particular attention: (a) Operating management. Department managers have been replaced by expatriate managers each working with a Guinean deputy, and competent Guineans have been promoted; (b) Personnel Policy. New, more responsive personnel policies (wage scales, performance reviews, discipline, etc.) have been put in place, along with a program to reduce the labor force. Salaries were increased more than 200% and paid for by improvements in efficiency and layoffs; (c) Financial Credibilitv. Treasury operations were taken out of the hands of Government and credible internal financial controls put in place in ENELGUI for the first time, with a dramatic reduction in fuel theft and other losses of goods and services that the organization had routinely incurred; and (d) Commercialization. A new commercial department and a new materials management department were organized and staffed: (i) collections to billing ratios have improved markedly: from 40% in 1989 to over 84% by end-1991. Average collection arrears and numbers of non-payments were reduced by 30% and 60% respectively; (ii) technical and non-technical losses were reduced from more than 40% of production to 26.8% at end-1991; and (iii) a new billing system has been put in place. I. Bank Grout Strateov and Rationale for Involvement 1.32 IDA's strategy for the energy sector in Guinea is to support expanding energy sources as a catalyst to development, with a target of 5% growth, in line with regional strategy. This would be achieved by: (a) encouraging GOG to emphasize efficiency in the regulatory, planning and policy environment; (b) supporting a commercial approach to utility operation and privatizaticn; and (c) seeking greater efficiency in the supply and distribution of petroleum products. In the electricity sector, we seek to improve tha supply, transmission and distribution of electricity utility service with due regard to efficiency as well as equity. This requires improved institutional relationships; greater operation efficiency and better financial management; and tariffs which, while establishing utilities financial viability, encourage reduction in factor costs and thus improve competitiveness. In practice, this requires: (a) an appropriate regulatory, pricing and policy framework; (b) commercial operating practices; (c) least-cost investment planning taking into account environmental issues; (d) better utilization of existing assets; and (e) regional integration where appropriate (e.g., through interconnection of power grids). Within this framework, we encourage association of the private sector through contracting for limited services (billing and collections) to full management of utilities' operations, and possibly private ownership of generation, transport and distribution assets (including BOTs). 1.33 Donor coordination. IDA has been a leading donor in the sector since the late 1970s along with CCCE, KfW/GTZ, CIDA, Italy, Japan and USAID. IDA has helped GOG to develop a long-term policy on privatization and a regulatory framework appropriate for the power sector. This project SAR.I7.GUI  - 10 - is designed to continue IDA'u sectoral support to GOG and help it implement the new sector policies in a coherent, cost effective manner that avoids the pitfalls GOG experienced during its 1986-89 privatization program of public enterprises. IDA's continued support is essential to help Government manage the current process for ENELGUI, to attract private investment and to assure the sustainability of the programs put in place. Apart from the need to complete the institution-building effort, IDA's involvement in the sector is important support for the ongoing public enterprise reform being undertaken in the framework of structural adjustment. Finally, continued IDA support in establishing an appropriate regulatory framework in the power sector of Guinea is key to implementing the strategy of attracting the private sector into the electric utility sector. II. THE PROJECT A. Background 2.1 The adjustment program supported by the Bank and the IMF requires privatization and restructuring of PEs, with specific reference to ENELGUI. IDA is thus supporting GOG in its commitment to progressive privatization of the power sector. In its letter of Sector Development Policy (para. 1.23), GOG sets out its plan to progressively privatize the sector. The first phase of privatization started in 1990 under the Second Power and TA project, as discussed above (para. 1.29). This has been very successful, but as it is a time-based contract, it cannot be maintained indefinitely. The contract has been extended until December 1992 to provide a bridge until a new operator can be brought in. The second chase of GOG's privatization program, supported by the proposed project, involves the transfer of management of ENELGUI to qualified operators under more permanent, incentive-based arrangements, which would principally involve a management contract or leasing arrangement for the main generating and distribution systems in Conakry/Kindia. This phase will also include arrangements for selected systems in the interior. In the future, under a third phase, further privatization is envisaged toward a goal of complete privatization of the sector (e.g., sale of assets) by the end of the decade. 2.2 The project grew out of the management reforms under Cr. 1595 and the need to provide extended support to the sector. Two PPFs for a total of US$1.5 million were used to develop the priority investment program and to fund the engineering and technical studies under the project. In addition, other studies funded by various donors provided inputs for the design of the project, including technical and managerial audits, master plans and feasibility studies. There was close coordination with the public sector reform program, through studies on the financial relationships between Government and a national approach to regulation of the various public enterprises. These studies are available in the Project File. B. Proiect Obiectives 2.3 The project aims at ensuring sustainability in the electricity sector through a program of reform to: (a) create an appropriate policy framework; (b) assist the Government to disengage from power operations and strengthen its regulatory ard policy functions; (c) attract private operators and investors progressively to the sector, as a first step, by turning management of the utility over to a qualified operator on a long- term, incentive basis; and (d) finance the costs of the transition to private management. The project also aims at improving the regulatory framework in the petroleum products sector by establishing a regulatory framework to oversee the enterprises which replaced ONAH, the state-owned monopoly formerly responsible for petroleum distribution. SAR-17.GUI  - 11 - C. Prolect Description 2.4 The proposed program would consist of the following componentu which are detailed in Annexes 2.1 and 2.2: (a' an Institutional Reform Program of the Sector which will include: (i) consulting services to plan and implement the transfer of operation and management of ENELGUI to private partners and define and implement a regulatory framework and functions; (ii) reorganization and strengthening of the energy department of the MRNEE to develop a capacity for policy formulation; (iii) management of ENELGUI during the transition period by the JV; and (iv) a set of studies to prepare future projects and identify alternative strategies and plans for supply of electricity to the interior of the country; (b) an Investment Program comprising the priority investment program over the period 1992-1996 identified to raise service standards to ensure a succesful privatization, including: (i) generation rehabilitatio-n and expansion; (ii) transmission and distribution rehabilitation, reinforcement and extension; (iii) telecommunications equipment and works; and (iv) vehicles and working capital in the form of tools, materials, apare parts, and office equipment; (c) a Technical Assistance Proaram for the Petroleum Sector to assist GOG in establishing the framework and capacity to regulate private sector operations in the distribution of petroleum products; and (d) Essential Goods and Services to improve maintenance and operation of ENELGUI. Funding of this component will assist ENELGUI in fulfilling its obligation to create and fund a disposition fund (see discussion in para. 2.9). 2.5 The priority investment program was established jointly by the donor appraisal teams, the ENELGUI JV management team, the Bank, and the MRNEE on the basis of detailed studies. It is limited to those project components which meet high pay-back criteria, which were judged to be absolutely essential to meet the service quality obligations, and which were deemed necessary to create a viable environment to attract qualified operators. It will not meet all load demand. Overall sector needs were assessed at US$250-300 million for the period 1991-1996, but a reduced program of US$155 million has been retained under the proposed project. Unserved load and load shedding will continue in the near-term as commercial viability is established. Capacity additions in both generation and distribution were selected so as not to compromise least-cost planning principles. Cutbacks from an "optimum" investment program were made as indicated above to provide the necessary time to meet the institutional development objectives of the project. D. Proiect Costs 2.6 The total program is estimated at US$154.8 million equivalent, including interest during construction (IDC), of which the foreign exchange component is US$123.5 million (82% of total cost). The base project cost is in January 1992 prices and is as estimated in the two feasibility studies carried out by consultants for the generation, and the transmission and distribution components. These estimates were reviewed by IDA's appraisal mission and are considered to be reasonable for this type of project. Physical contingencies of 10% for goods and works and 5% for etudies and technical assistance and price escalation based on the Unit A 17.GUI  - 12 - Value Index of Manufactured Exports (MUV index) inflation index from the G- S industrial countries (3.9% for 1993 and 1994, and 3.8% thereafter until 1997) were added. The detailed program cost estimate is shown in Annex 2.3 and is summarized in Table 2.1 below. It is estimated that 400 man-months of consultant services are required at an average cost of US$17,000 per month for expatriates and US$4,000 for local staff. These include the privatization component and cover studies, technical assistance and management support (details are shown in Annex 2.1). Table 2.1 Summary of Proaram Cost Estimate (US$ millions - January 1992 prices) Foreign as Total as Local of Forefgn Total bl X of Total X of Total Generat!on Rehabilitation, Reinforcement & Extension 10.9 44.0 54.9 80 43 Transmission & Distribution Rehab., Reinf. & Extension 8.9 29.3 38.2 77 30 General Plant 0.5 12.5 13.0 96 10 Institutional Support 2.0 18.3 20.3 90 16 Petroleum Component 0.1 1.4 1.5 90 1 Total Base Cost 22.4 105.5 127.9 82 700 Contingencies Physical 2.0 8.0 10.0 80 Price 2.1 10.1 83 Totat Project Cost 26.5 123.5 150.0 82 Interest During Construction .8 0 4.8 0 Totat Finwacing Required 31.3 154.8 80 a/ Excludes customs, duties, and taxes. b/ Totals may not foot as figures rounded. E. Proiect Financin@ 2.7 A project financing plan is summarized in Table 2.2, with details given in Annex 2.4. An IDA Credit of US$50 million equivalent is proposed to the Republic of Guinea. Of the IDA Credit, US$40.0 million will be on- lent by GOG to ENELGUI for 20 years including 5 years grace at IBRD's interest rate. ENELGUI will bear the foreign exchange risk on this amount. The credit balance of US$10.0 million remains with the Government to finance the reorganization and strengthening of the Energy Department of the MRNEE and the petroleum component. Signature of an on-lending agreement between GOG and ENELGUI that is satisfactory to IDA is a condition of Credit effectiveness. IDA would finance 100% of the foreign exchange cost of training, privatization studies, management support, studies to prepare the next investment program, the construction supervision for all works under the project, studies in the petroleum subsector and essential goods and spares necessary to improve ENELGUI's operations, and miscellaneous equipment. In addition, the IDA Credit would also finance 50% of the foreign exchange component of the Tombo III diesel plant expansion and a service contract, jointly with EIB. ENELGUI would finance about 75% of the local cost of the project (US$23.7 equivalent) SAR.17.GW  - 13- from internally generated funds and equity contributions from Government equivalent to import duties (US$16.1 million equivalent). Table 2.2 Financing Plan (US$ million equivalent) Foreign Local Total ENELGUI 0.0 23.7 23.7 IDA 47.4 2.6 50.0 SIB 20.8 4.2 25.0 COFINANCIERS 55.3 . 0.8 56.1 TOTAL 123.5 31.3 154.8 2.8 Cofinancine. A cofinancing plan is shown in Annex 2.4. The key contract is that for Tombo III, which IDA is financing jointly with EIB. Fulfillment of all conditions of effectiveness of a loan between GOG and EIB is a condition of credit effectiveness. It should also be noted that neither IDA nor EIB would disburse against the Tombo extension until the new management contract to operate ENELGUI is implemented (para. 2.14). The cofinanciers are expected to arrange parallel financing in direct negotiation with GOG within the framework of the overall program. Loan Agreements have already been signed between GOG and the following donors: CCCE; EDF; GTZ; and USAID. These loans are effective and are being disbursed. The remaining donors (AfDB, CIDA, and KfW) are expected to proceed with their loans using the same conditionality package as IDA. In the event that loan agreements with one of these cofinanciers does not materialize according to schedule, then alternative cofinancing would be mobilized from other donors who are ready to increase their contribution. Therefore, cross-effectiveness with these cofinanciers is not warranted. The financing plan was discussed at appraisal and was confirmed at negotiations. 2.9 Disposition Fund. In the current political environment and the new policy framework in Guinea, private operators will be willing to submit bids to operate the utility provided they are given suitable guarantees -- inter alia, that they do not have excessive cash flow risk in the normal course of business. Experience in the sector in Guinea and elsewhere has demonstrated that there are inevitably problems in finding counterpart funding, delays in timely implementation of contractual obligations, particularly when dealing with the public sector. To offset this likelihood, third party guarantees are often arranged through mechanisms such as performance bonds or escrow accounts. In the proposed project, GOG has agreed to provide such coverage through a disposition fund to be constituted from Guinean funds. ENELGUI would make regular payments into this fund up to a ceiling of US$10.0 million. To assist ENELGUI in fulfilling its obligation to create and fund the disposition fund, IDA would finance essential spares, parts and services under the project. The fund would be established in an offshore bank acceptable to IDA, would be jointly managed by the Central Bank and ENELGUI, and would remain in effect for the duration of the management contract (up to 10 years). Specific modalities were discussed at negotiations and adoption of terms and conditions for the constitution and management of the fund are a condition of effectiveness. SAR-17.GUI  - 14 - F. Proiect Implementation 2.10 The investment component of the proposed project would be carried out by ENELGUI, while the institutional building component would be executed by the Ministry of Natural Resources, Energy and the Environment (MR1EE). The principle role of the MRNEE under the project would be to sup'irvise the selection of the utility operator and to strengthen its capacity to regulate both the power and petroleum sectors. To ensure that this is done effectively, the Department of Energy and the Department of Hydrocarbons will be strengthened by the addition of advisors in key positions on terms and conditions acceptable to IDA. Counterpart staff will also be appointbd and given appropriate training (Annex 2.2). 2.11 ENELGUI, or its successor, will report to the Ad Hoc Committee of the Council of Ministers, chaired by the Minister of Energy (see para. 1.30). For implementation of the project, ENELGUI will rely on its Directorate of Programs and Planning (DPP), which was set up under earlier projects and which has performed well in the implementation of physical works. Under the project, MRNEE would delegate responsibility for implementation of IDA-financed investment components to ENELGUI. In addition, it was agreed during appraisal with the cofinanciers that the responsibilities for execution of the investment component by IDA and the other donors would be assumed by ENELGUI. To assure coordination amongst donors and to lessen the administrative burden on ENELGUI, at appraisal the donors asked and IDA agreed to fund project management consultants to strengthen DPP. Agreement was reached at negotiations that project management consultants whose qualifications, experience and who would be retained on terms and conditions satisfactory to IDA, will assist in the implementation of part "B" of the project; i.e., the rehabilitation and expansion of the Tombo power plant, and of the distribution network. Signature of such an agreement is a condition of disbursement. 2.12 ENELGUI has engaged an engineering consulting firm under termn acceptable to IDA (competitive bidding) to complete detailed engineering (through bid evaluation stage) of the Tombo III diesel plant. ENELGUI also plans to use the same consultant to assist in construction supervision at the Tombo station should their performance continue to be of a satisfactory quality, provided they reach agreement on terms and conditions satisfactory to IDA. This is reasonable considering the risk of delay as well as the risk that a new consu'.tant may wish to reexamine all engineering aspects of the new plant. 2.13 The project implementation schedule, reporting requirements and supervision plan, is provided as Annex 2.5. The schedule provides adequate time to recruit a private operator prior to letting of the turn-key contract for the Tombo III station. IDA is satisfied that ENELGUI, with the help of consultants (paras. 2.11 and 2.12) can complete the project according to the proposed schedule. 2.14 Selection of Overators. The overall objective of the project is to turn management of ENELGUI over to private hands on an incentive-based contract. Irreversible steps toward that end are considered essential for its success. Thus, implementation of the institutional component, and also of the conversion of Tombo I to heavy fuel (which permits immediate cost saving benefits), are most important. GOG agrees with this assessment and agreement was reached at negotiations that, although preparation of all components would be started, their implementation (including award of contract) would be contingent upon conclusion of contractual arrangements, satisfactory to IDA, for the transfer of ENELGUI management to a private operator. To measure progress, a detailed monitorable program of critical milestones was agreed at negotiations. Disbursements for components, other than the conversion of Tombo and the institutional component, would only be made upon submission of acceptable evidence of the following: SAR-17.0UM  - 15 - (a) a new regulatory framework and program for its implementation has been enacted and agreement reached on an arrangement for holding sector assets (GOG and utility); and (b) contractual arrangements satisfactory to IDA aimed at tranoferring the management of ENELGUI to a private operator have been concluded. The cofinanciers under the program will be consulted regularly and are expected to adopt the same phasing and prioritization. At negotiations, it was agreed that the launching of tenders for the selection of operators and a regulatory framework would be a condition of effectiveness. 2.15 To ensure that there is competition among operators for the management contract under the project, GOG has retained a consulting firm to review options and to make recommendations on appropriate arrangements. This work also includes draft bidding documents; contract arrangements and the definition of a regulatory framework; and pre-qualification of possible bidders. The consultants will use background work already done as direct inputs to their work, including among other studies, those related to the privatization of the petroleum distribution companies, power sector and PE studies; management and financial audits of ENELGUI for the past two years; and the national Policy and System of Regulation Study for PEs, completed in October 1991 (see Project File). The consultants are expected to submit the recommendations and draft documents in late July 1992. 2.16 The exact terms of the performance contract are being defined by the consultant, building on the current JV contract and will be designed so as to permit a smooth integration with the new management structures being put in place at ENELGUI. Additional models include contract documents for the water utility in Conakry and the electricity utility in Cote d'Ivoire, which was privatized successfully about a year ago. Key elements of the draft contract include: (a) detailed agreement on the split of revenues between the operator and Government; (b) the freedom to operate independently of civil service personnel and procurement policies, as well as of political interference; (c) timely payment of bills by government agencies; and (d) audited baseline performance measures achieved under the JV. The new contractor would agree to further improve performance on the basis of a set of monitorable criteria, e.g., production plant availability factors, employees per MW, and losses due to technical and non-technical factors. The draft documents will detail allocation of revenues between the parties, treatment of fuel and other operating costs, debt service burden, taxation and insurance arrangements. Additional matters to be covered in the documents include clear statement of objectives for management control and the rights and obligations of the parties; a personnel policy including local and expatriate staff and training of Guainean staff. As it will take a number of years to develop an independent regulatory capacity, the main tool for regulating operators will be the management contracts, with partial automaticity for the primary regulatory variable, tariff setting. The operators would also be consulted concerning investment programs for the sector. G. Monitorina and Reporting Reauirements 2.17 The proposed project would require careful coordination and frequent IDA supervision, particularly in the initial years of the project (see Annex 2.5). Monitoring the institutional performance would involve the MRNEE. The Interministerial Committee (CIS) (para. 1.30) has been established for this purpose and it would be assisted bjy management consultants financed under the project. Overall coordination and report preparation would be carried out by DPP. Quarterly progress reports would be made to ENELGUI's Board, the CIS, MRNEE, IDA and other cofinanciers. Detailed reporting requirements were discussed during appraisal and SAR-17.GUI  - 16 - finalized during negotiations. An annual review of the implementation of all aspects of the proposed project, including achievement of agreed performance targets would be undertaken by ENELGUI, GOG, and IDA, as well as a mid-term review of the project, the latter to be conducted no later than June 30, 1995. Representatives of the co-financiers will be invited to participate in the reviews. At the end of the project, the MRNEE will present a Project Completion Report no later than 6 months after the closing date of the Credit. H. Procurement 2.18 The project procurement arrangements are summarized in Table 2.3 below. 2.19 The supply and erection of Tombo III diesel plant (3xlOMW) along with a five-year service contract will be procured in a single supply and erection contract following an open pre-qualification of potential contractors from eligible countries. Pre-qualification documents are now under preparation and will be advertised to the international community through the proper channels. The service contract will be bid as an option. It will provide for supervision of overhauls and all spares required for a given period of operation. As this component is being cofinanced with EIB, the possibility exists that a successful bidder from an IDA eligible country would not be included in EIB's own list of eligible countries. The appraisal team determined that this eventuality is remote given the limited number of known manufactures of medium-speed diesel engines in the 10 to 20 MW range. However, should the bidding turn out differently at the pre-qualification stage, then bid packages could be split into discrete components (engines/powerhouse/switchyard) and a parallel financing arrangement with EIB would be entered into. General plant equipment up to an aggregate of US$3.2 million to purchase spare parts, software, miscellaneous equipment and proprietary original equipment manufacturers spare parts will be procured in a combination of: (a) limited international bidding following receipt of at least three quotations from different geographical areas; and (b) sole sources. Procurement under international bidding will be packaged in lots of over US$200,000. Consultants will be employed on terms and conditions satisfactory to IDA. All IDA-financed contracts for amounts of US$150,000 equivalent or more, as well as all consultant contracts, will be subject to prior review. Other contracts will be subject to selective post-award review. 2.20 All procurement for items not financed by IDA will be carried out according to the guidelines of the respective financing agency. 2.21 Advance procurement and retroactive financing. Out of the proposed credit, GOG has proposed to use up to US$4.1 million (or 8.6% of the total credit) for advance procurement and retroacL4ve financing of essential consulting services for the management and restructuring of ENELGUI and for the privatization of ONAH. Such advance procurement is considered necessary by GOG to continue the restructuring of the utility in anticipation of its privatization and would continue the momentum achieved during the implementation of the Second Power and Technical Assistance Project (para. 1.31). It would also avoid the creation of a gap between the restructuring efforts initiated under the former project and the proposed project. Alternative sources of finance are not available. The JV was selected under competition following IDA guidelines (para. 1.30) is therefore being continued for assistance to ENELGUI. Further, all retroactive financing is expected to be within the maximum period of twelve months prior to the expected date of credit agreement signature. SAR-17.GUI  - 17 - Table 2.3 Procurement Arranaements (USS million equivalent) Procurement Method Project Components ICa Direct Other NBF Total Cost I. GOODS AND WORKS 1.1 Rehabilitation of 7.79a 7.79 Tombo I diesel (--) plant 1.2 Expansion of 6.46a 6.46 Tombo II plant (--) 1.3 Construction of 42.75b 42.75 Tombo III (17.10) (17.10) 1.4 Fuel Storage and 3.56k 3.56 Piping (--) (-) 1.5 Transmission 11.10a 11.10 System (--) Rehabilitation 1.6 Distribution 33.90a 33.90 System (--) Rehabilitation and Extension 1.7 General Plant 4.20 3.35c 7.25a 14.80 (spares) (4.00) (3.21) (7.21) II. CONSULTANCIES 2.1 Privatization 1.05d 1.05 Cons. (0.95) (0.95) 2.2 Training 3.60d 3.60 (3.24) (3.24) 2.3 Construction 4.71d 4.71 Supervision (4.25) (4.25) 2.4 Utility Management 11.64 11.64 Contract (10.00) (10.00) - Advance Procurement 4.8d 4.8 (4.8) (4.8) 2.5 Prep. of next 2.17d 2.17 Investment (0.95) (0.95) 2.6 Technical Assistance 1.67d 1.67 Petroleum Distribution (1.50) (1.50) TOTAL 62.15 3.35 18.00 66.50 150.00 (31.10) t 3.21) 15.69) (50.00) Note: Figures in parenthees are the amounts ftnanced by IDA. N.B.F.: Not Bank Funanced.