Guinea - Second Power Project

Document of The World Bank FOR OFFICAL USE ONLY t~~~~~~~~o omaius ) \ 4'' ~~~~~~~~~~~~~~~~~~eotNeb P-.5822-GUI MEMORANDUM AND RECOMMNDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATIO' - Z - TO THE 4 C 2 EXECUTIVE DIRECTORS *" r, 'T ON A PROPOSED CREDIT IN THE AMOUNT EQUIVALENT TO SDR 36.5 MILLION TO THE REPUBLIC OF GUINEA FOR A POWER II PROJECT July 7, 1992 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) 1/ US$1 - GF 800 GF 1 - US$0.00125 GF 1,000 - US$1.25 PRINCIPAL ABBREVIATIONS AND ACRONYMS ASP Agence de Services de Petrole AfDB African Development Bank BCRG Banque Centrale R6publique de Guin6e CIDA Canadian International Development Agency RIB European Investment Bank CCCE Caisse Centrale de Coop6ration 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 NELGUI Entreprise Nationale d'Electricit6 de Guin6e SNE Soci6t6 Nationale dl'lectricit6 (Predecessor to ENELGUI) NPP The National Power Plan for the period 1986-2000 JV Joint Venture managing ENELGUI HREN 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 ONAN 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 kgos kilogram of oil equivalent ENELGUI Fiscal Year January 1 to December 31 Annual Average, Guinean Francs per US Dollar: 1987 GF 428 1988 GF 474 1989 GF 591 1990 GF 661 1991 GF 792  FOR OMCIAL USE ONLY - Li - REPUBLIC OF GUINEA POWER .I 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 Relendina 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$10.0 million would remain with GOG to finance the reorganization and strengthening of the Energy Department of the Ministry of Natural Resources, Energy and the Environment (MRNEE) and the petroleum component. Co-financiers: African Development Bank (AfDB) Caisse Centrale de Coop6ration Economique (CCCE) Canadian International Development Agency (CIDA) European Investment Bank (EIB) Commission of European Community (European Development Fund) Deutsche Gesellschaft fuer Technische Zusammenarbeit (GTZ) Kreditanstalt fuer Wiederaufbau (KfW) United States Agency for International Development (USAID) Financincu Plan (US$ million equivalent) -~~~~~~~~~~~~~~~~~~~~. . . X ,'. . . . . . . ,. : DA - --it - - 47.4 . ;5v.X QQNA)K~~~~~~~~~~~~~ .. Sj;'R. . v ........ 56. 1'.:- S Proaram Economic Rate of Return: approximately 31%. Staff AoDraisal ReDort: No. 10442-GUI M: IBRD No. 23585 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 authorizatiton.  INTENTIONL MM FOR RECONSTRUCTION MM DEVELOPM AND INTERNATIONALELPMENT ASSOCIATION MEIORANDM AND RBCO)OSIEDATION OF TIM PRESIDENT OF THE INTERINATIONAL DEOPMENT ASSOCIATLON TO TH E21CCUTIVF DIRECTORS ON A PROPOSED CRZDIT TO TIM REPUBLIC OF UINEA FOR A POWER It PROJECT I submit the following report and recommendation on a proposed development credit to the Republic of Guinea for an equivalent of US$50 million on standard IDA terms with a maturity of 40 years to help finance a project for the privatization and improvement of the regulatory framework in the power sector, and a parallel program of priority investments. US$40.0 million of the credit would be relent to E'E WUI for 20 years including 5 years of grace, with interest at 7.5 percent per annum. The remainder of the credit, US$10.0 million, would remain with GOG to finance the reorganization and strengthening of the Energy Department of the MRNEE &nd provide technical assistance to GOG to regulate the distribution of petroleum products. The European Investment Bank (SIB) would co-finance the generation expansion component of the project jointly for an equivalent of US$25.0 million. Additional cofinancing will be provided on a parallel basis for a total of US$56 million equivalent. 1.1 Backgaroud. Energy consumptide per capita in Guinea is estimated at just under 500 kilograms of petroleum equivalent (kgoe) versus 700-1000 in neighboring countries (below 300 kgoe/capita, if the mining sector is excluded). Neither electricity nor petroleum products are widely or easily available across the country, except in three mining enclaves. In the capital area of Conakry-Kindia, about a third of the one million inhabitants have intermittent electricity at high prices% 70 KW provided by the national power utility, ENELGUI, and 55 MW from scattered privately-owned units. The National Power Plan for the period 1986-2000 was prepared in 1985. Updates were made in 1991 in consultation with donors. The NPP summarizes OGa's proposed investment and policy in the sector, is based on a recognized least-cost planning methodology and is consistent with IDA's country strategy. As a first priority, it provides for the following in the Conakry-Kindia region: (a) a program of rehabilitation of the distribution and thermal generation facilities to reduce losses and improve service levels for current users; (b) generation expansion based on heavy-fueled medium- speed diesel units in the medium-term; and (c) within the context of least-cost generation expansion programming, a program of hydro-electric capacity expansion in the longer term, to capitalize on the country's hydro potential. 1.2 In 1988, ENELGUI emerged, as part of the economic and financial reforms of the new regime, as an autonomous public power utility under the Ministry of Natural Resources, Energy and Environment (MRNEE). However, as it did not perform much better than its predecessor, a first phase of privatization of the sector started in 1990, supported by the IDA Second Power and TA project. At that time, under a Presideatial decree, GOG granted full management responsibility to a joint venture (JV) of management consultants and an operating utility to operate and restructure ENELGUI. This operation, which was put in place following IDA guidellnes, 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 the second phase is operational. The second phase 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. In the future, under a third Shase, further privatization  - 2 - is envisaged towards a goal of complete privatization of the sector (e.g. sale of assets) by the end of the decade. 1.3 Proiect Descri2tion. 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 componentss (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 tbs 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$11 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. The breakdowns of the project cost and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursement, and the disbursement schedule are presented in Schedule B. A timetable of key project processing events and the status of Bank Group operations in the Republic of Guinea, including key economic indicators, are given in Schedules C and D respectively. 1.4 IM2lmentation. The proposed project would be under the Ministry of Natural Resources, Energy and the Environment (MRNEE). Its principle role under the project would be to supervise 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 efficaciously, 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 appointed and given appropriate training. 1.5 Under the project, MRNEE would delegatei responsibility for implementation of IDA-financed investment components to ENELGUI. In addition, to assure coordination amongst donors and to lessen its administrative burden, ENELGUI would retain the services of project management consultants. For implementation of the proj.ct, 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. ENELGUI will report to the Ad Hoc Committee of the Council of Ministers, chaired by the Minister of Energy. 1.6 Projoct Objectives. 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 at improving the regulatory framework in the petroleum products sector to oversee the enterprises which replaced the Office National des Hydrocarbures (ONAh), the state-owned monopoly formerly responsible for petroleum distribution. 1.7 Lessos Learned and Prolect Desion. Power I (Cr. 1085-GUI), part of GOG's 1980-1984 plan to reinforce, rehabilitate and extend power supply in the Conakry-Kindia area, was only partially successful. The  - 3 - PCR for the project concluded that while physical objectives were met, key institutional development goal. were not. Under the Second Power Engineering and Technical Assistance Credit (Cr. 1595-GUI), the restructuring of the Societe Nationale d'Electricite (SNE, predecessor to ENELGUI) initiated under Power I was continued. However, as institutional bottlenecks continued to hinder sector development, the project was reformulated in 1989 under radically new arrangements, a first phase of which was an independently appointed management team for ENELGUI. A retrospective study of the lessons learned from the Guinea Privatization Program (during the 1986-1990 period GOG privatized 28 public enterprises and liquidated 28 others) identified a number of critical elements for the effective privatization of public enterprises in Guineas the need for openness and transparency in selecting partners; the need to make sure that the businesses being privatized were viable on a stand-alone basis; and the need to address the shortage of counterpart funds and of foreign exchange for parts and services. These factors are being addressed in the project design through: the ustablishment of a priority investment program to rehabilitate and render the sector operationally viable; a financial restructuring plan to recapitalize ENELGUI; tariff adjustments; and the establishment by the implementing agency (ENELGUI) of an offshore DisDosition Fund. This fund is designed to mitigate private investors' implementation risks, including the failure to make timely paymeats for electric supply and other contractual services and delays in obtaining foreign exchange. 1.8 Advance Drocurement and retractive financing. Out of the proposed credit, GOG has proposed to use up to US$4.3 million (or 8.6% of the total credit) for advance procurement and retroactive financing of essential consulting services (para. 1.2 above) for the interim management and restructuring of ENELGUI and for the privatization of the national oil distributing company (ONAH). Such advance procurement is considered necessary by GOG to complete the privatization of ONAH and to continue the restructuring of the utility in anticipation of its privatization and would continue the momentum achieved during the implementatior, of the Second Power and Technical Assistance Project. 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. Further, all retroactive financing is expected to be within the maximum period of twelve months prior to the expected date of credit agreement signature. 1.9 Rationale for IDA Involvement. 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 privatization; and (c) seeking greater efficiency in the supply and distribution of petroleum products. in the electricity sector, we seek to improve the 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 practicee. (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 interconnectLon 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.  -4- 1.10 Actions Agreed. At negotiations, key sector policy objectives and the action plan for ENELGUI*s financial and debt restructuring were agreed, including an automatic tariff increase mechanism and a new tax rate for heavy fuel. The Government has adopted the Letter of sector Development Policy and Action Matrix and an acceptable cofinancing plan has been agreed. Conditions of effectiveness will be: (a) issuance of tenders for the selection of a private operator for the utility; (b) adoption of a plan of action to put in place a new regulatory framework for the power sectorl (a) signature of EI8 Loan Agreement; (d) signature of relending agreement between ENELGUI and GOG; (e) terms and conditions of operation of the Disposition Fund; (f) conclusion of the capital restructuring of ENELGUI; and adoption of a new satisfactory tariff structure. 1.11 It was further agreed at negotiations that the undisbursed balance of the Credit would be cancelled if no acceptable operator is found within the stipulated time and that physical components would not be implemented until this condition was satisfied. To this end, with the exception of the institutional and conversion program at Tombo, the following would be conditions of disbursement: (a) retention of a project management team to support the ENELGUI project implementation unit; (b) a new regulatory framework and program for its implementation has been enacted and agreement reached on an arrangement for holding sectir assets (GOG and utility); and (c) contractual arrangements satisfactory to IDA aimed at transferring the management of ENELGUI to a private operator have been concluded. 1 12 Environmental Asnects and Proaram obiective Cateaories. The proposed project is Class B, requiring a limited environmental assessmnt. Expanding diesel generation within the Conakry area may raise some air quality issues and proper disposal of used lubricating oil must be arranged. These issues were addressed in the feasibility study and preventive measures were agreed at appraisal. The proposed project, in addition to being part of GOG's program of public enterprise reform and prepared in close cooperation with the Public Enterprise Restructuring TA Project, supports IDA's antipoverty strategy as it promotes least-cost generation of electricity with a life line rate structure for low-income consumers, and promotes increased availability in urban areas, where it is reaching lower income groups. 1.13 Ptroiect Benefits. The project would help to produce a more reliable and affordable supply of electricity for consumers which would improve living conditions in the capital area and reduce the reliance of the productive industrial and commercial s&ctors of the economy on costly self-generation. Subsidies to the power sector would be minimized and fuel import bills reduced as diesel fuel is replaced by lower cost bunker C fuel, and small private generators are replaced by utility supplied power. The institutional reforms introduced through the project will create a favorable environment for increased local and private investment in the sector, while contributing to the design of viable and sustainable long-term solutions to the supply of electricity in the country. 1.14 Pt iect mustaiaNbilutZ. To achieve its institutional reform and capacity building objectives, the project adopts an innovative, focused and operational approach. It targets primarily the institutional and regulatory environment and aims at strengthening the capacity to manage the power sector efficiently through disengagement of the State from management of the utility in favor of a private operator; and focusing the role of GOG on policy definition and sector regulation. A step-by- stop transparent process of privatization has been designed and commitment to its implementation obtained. In parallel, a regulatory framework will be established, including the restructuring and strengthening of government institutions in the power sector. The regulatory and sector policy management capabilities will be supported  by training and focused short-term technical assistance. This approach is intended to ensure Guinean participation and ownership in the process of defining their new role as regulators and sector policy managers, and to establish an environment conducive to foster the role of the private sector in the development of the power sector. 1.15 Risks are institutional and managerial. GOG is committed to privatization, regulatory reform and an agreed investment program. If the commitment weakens, the gains made to date will be short-lived. Extension of the current (short-term) management arrangements to December 1992 is designed to minimize this eventuality. Although there have been expressions of interest, there is also the risk that no acceptable bid will be received in response to the (long-term) privatization tender. This risk is mitigated by the phasing of project components which would be cancelled in the event of no satisfactory privatization, as well as the solidarity of support of the donor community for sectoral reform. 1.16 Recommedation. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washington, D.C. July 7, 1992  -6- SCHEDULE A REPUBLIC OF GUINEA POWER IU PROJBCT Eatimated Costs and Financing Plan Summarv of Prooras Cost Estimate (US$ millions) * "w