Madagascar - Petroleum Sector Reform Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 11762-AG STAFF APPRAISAL REPORT MADAGASCAR PETROLEUM SECTOR REFORM PROJECT JUNE 30, 1993 Industry and Energy Operations Division South Central and Indian Ocean Department Africa Region 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 EOUIVALENT Currency Unit = Malagasy Francs (FMG) US$ = FMG 1,899 (March 1993) MEASURES Metric System, except: 1 barrel (bbl) = 0.159 cubic meter 1 metric ton of oil (AP134) = 7.35 barrels ABBREVIATIONS AND ACRONYMS BPD = Barrels per day CFD = French Development Agency DGE = Directorate of Energy and Mines ESMAP = Energy Sector Management Assistance Program FANALAMANGA = Forestry Company FMG = Malagasy Franc FY = Fiscal Year GDP = Gross Domestic Product GWH = Gigawatts hours IBRD = International Bank for Reconstruction and Development IDA = International Development Association JIRAMA = Electricity and Water Company KGOE = Kilograms of oil equivalent KV = Kilovolt LPG = Liquified Petroleum Gas MEM = Ministry of Energy and Mines MW = Megawatts OMNIS = National Military Office for Strategic Industries PPF = Project Preparation Facility SEPT = Port of Toamasina Operating Corporation SOLIMA = Malagasy Petroleum Company TOE = Tons of oil equivalent UNDP = United Nations Development Programme FISCAL YEAR January 1 - December 31 MADAGASCAR FOR OFFCIAL US ONLY STAFF APEPISAL REPORT Table of Contents Page No. CREDIT AND PROJECT SUMMARY ............. ...... .hill L. THEENERGYSECTOR .................................... -1- Country Background ..................................... - Energy Consumption ..................................... - Energy Resources ....................................... -1- Institutional Organization .................................. -2- BankActivitiesInthe Sector ................................ -3- H. THE PETROLEUM SECTOR . .-3- Petroleum Consumption ................................... -3 - Petroleum Product Distribution ...............................- 5- TheRefinery ........................................... -6- Petroleum Terminal at Toamasina ............................. .-7- Petroleum Pricing and Taxation .............................. -7- Petroleum Exploration .....................................r S - III. THE IMPLEMENTING AGENCY ............................. -9- Organization and Management ............................... .-9- Personnel ........................................... -10 - AccountingandAuditing ................................. .-10- Insurance ........................................... -10 - Operations .......................................... -10 - Procurement of Crude Oil and Products ........................ - 11- IV. THEPROJECT ........................................ -12- Project Objectives ...................................... .-12- Project Description ..................................... -12- Liberalization and support to the privatzation of thepetroleumsector ............................... .-13- Rehabilitation and support to the privatization of the refinery ...... - 14- Basic improvements In the petroleum storage and transport infrastructure .................................... .-15- New petroleum loading/unloading facility at Toamasina ......... . -16- LPOPromotionProgram ............................ .-16- ProjectPreparation ..................................... .16- This report is based an the findings of an appraisal mission to Madagascar in June/July 1991, which consisted of Messrs. Patricio Millan. Principal Economist (Task Manager); T.S. Nayar, Principal Refiing Engineer; Arnaud Dormel, Finacial Analyst; Michel Paton, Energy Specialist; and William Mathews, Petroleum Economist. Post-Appraisal missions were undertaken in September 1992 and February 1993 by Mesars. Millan. Dorael and Paton. Messrs. Stephen Gaull and Nourmedine Bounher (AP3IE) also contributed to the report. Mr. James Bond was the Lad Advisor. Ms. Liliane Yomakpo, Bilingual Staff Assistant, provided secretarial support for the preparation of the teport. Mr. Michael Sards and Mr. Francisco Aguirre-Secasa are the managing Division Chief and the Department Director respectively for the operation. This document has a restricted distribution and may be used by recipients only in the performance of their omcial duties. Its contents may not otherwise be disclosed without World Bank authorization. IV. (continued) Project Costs ......................................... -17- Financing Plan ........................................ -18- Project Implementation ................................... - 18- Disbursements ........................................ - 19- Procurement . ......................................... -21- MonitoringandReporting .................................. -23- Environmental Aspects .................................... -23- V. FINANCIAL ANALYSIS ................................... -24- Financial Performance of SOLIMA ........................... -24- Capital Structure .................................... -24- Profitability ....................................... -24- Working Capital .................................... -24- Financial Projections .................................... -25- Financial Covenants .................................... -27- VI. PROJECT JUSTIFICATION AND RISKS ....................... - 28- Project Benefits ....................................... - 28- Project Risks ......................................... - 31- VII. AGREEMENTS AND RECOMMENDATIONS ................... - 31- Conditions of Credit Effectiveness ............................ - 33 - Conditions for Disbursements ............................... - 33 - Recommendation ...................................... - 33- TEXTIABLES 2.1 Petroleum Products Demand Projection ........................... - 4- 2.2 Refinery Yields .......................................... -7- 4.1 Project Cost Summary ......................................-17- 4.2 Project Financing Plan ......................................- 18- 4.3 Disbursement Schedule......................................- 19- 4.4 Estimated Disbursements .................................... 20- 4.5 Summary of Proposed Procurement Arrangemet .....................- 21- 5.1 SOLIMA- Summarized Financial Statements ........................- 25- 5.2 SOLIMA Refinery- Summarized Financial Projections ..................- 26- 5.3 SOLIMA Refinery- Financial Rates of Return- Sensitivity Analysis ........... -27- 6.1 Refinery Rehabilitation- Economic Rates of Return- Sensitivity Analysis -29- 6.2 New Petroleum Loading/Unloading Facility- Economic Rates of Return ........ -30- 1.1 Energy Balance 1990 2.1 Consumption of Petroleum Products 1984-1991 2.2 Petroleum Depots and Storage Capacity 2.3 Recommended Improvements In Storage and Oil Movements 2.4 Refinery Running Plan 2.5 Recommended Improvements for the Refinery 2.6 Petroleum Prices and Taxes 3.1 Organizational Chart of SOLIMA AlNEIE (continued) 3.2 Organizational Chart of the Refinery 3.3 Summary of Operating Costs of the Refinery 4.1 Terms of Reference- Restructuring of SOLIMA 4.2 Terms of Reference- Establishment of an Open Access System 4.3 Terms of Reference- Establishment of a Petroleum Regulatory Authority 4.4 Terms of Reference- Management of the Refinery 4.5 Detailed Cost Tables 4.6 Implementation Schedule 4.7 Disbursement Schedules 4.8 Supervision Plan 4.9 Terms of Reference- Project Coordinator MEM 4.10 Terms of Reference- Experts to be Employed by SOLIMA 4.11 Terms of reference- Project Management Consultant- SOLIMA 4.12 Indicators for the Achievement of Objectives 5.1 SOLIMA- Historical Financial Statements 5.2 SOLIMA- Financial Projections 5.3 Notes and Assumptions for Financial Projections 6.1 Economic Analysis of the Rehabilitation of the Refinery 6.2 Economic Analysis of the New Petroleum Loading/Unloading Facility at Toamasina 6.3 Economic Analysis of the LPG Investment Program 7.1 Letter of Petroleum Sector Policy 8.1 Selected Documents Available in the Project Files  -1- MADAGASCAR PEROLEUM SECTOR REFORMZPO.ECT Credit and Project Summary Republic of Madagascar enfid im: Ministry of Energy and Mines (MEM) and Malagasy Petroleum Company (SOLIMA) Amount: SDR 36.7 million (US$51.9 million equivalent) Terma: Standard IDA terms, with 40 years maturity. Relending Terms: The Government of Madagascar will onlend a maximum of SDR 23.6 million (US$33.3 million equivalent) from the proceeds of the Credit to SOLIMA at an 8 percent interest rate for a period of 20 years (including a 5 year grace period). SOLIMA will bear the foreign exchange risk on these funds. SDR 10.5 million (US$14.9 million) will be made available to SOLIMA on a grant basis. Project Objectives: The project aims at enhancing the efficiency of the economy through support to key reforms and infrastructure in an important sector. The specific objectives of the project are to: (I) open up the petroleum sector to private sector participation and create an appropriate framework for a competitive environment; (Ii) support the basic infrastructure investments required to increase operational efficiency and to attract private operators and investors; and (ill) develop institutional capacity for the efficient regulation of the sector. Proiect Descripion: The project includes the following components: (a) liberalization and support to privatization of the petroleum sector; (b) rehabilitation and support to privatization of the existing petroleum refinery at Toamasina; (c) basic improvement in the petroleum storage and transport infrastructure; (d) construction of a new petroleum loading/unloading facility at the port of Toamasina; and (e) a program to promote the use of liquified petroleum gas (LPG) by residential households. Project Beefits and Risks: The introduction of market signals and of a competitive environment in the petroleum sector will increase efficiency and promote economic growth. The elimination of the monopoly of the State over the petroleum sector approved in January 1993, the increased competition in petroleum distribution, the introduction of open competitive bidding for the procurement of crude oil and the basic rehabilitation of existing infrastructure, will save scarce foreign exchange. In relation to the situation existing in 1990, these savings have been estimated at US$10 million per year after project completion. With the new price and tax regime, the petroleum sector has increased its contribution to fiscal revenues from US$5.4 million in 1991 to US$19.8 million in 1992 and the Government has used these additional revenues to satisfy priority economic and social needs. The proposed rehabilitation program for the refinery consists of house cleaning activities and minimum investments required to bring back to working conditions assets that have been damaged, and will allow the refinery to compete against imports in a non-subsidized environment. The project will improve the safety and environmental standard of petroleum loading/unloading at the port of Toamasina, as well as reduce transport costs for petroleum imports. The LPG Promotion Program will replace storage and distribution equipment that has reached the end of its useful life and will decrease the demand for woodfuels. The main project risks relate to fluctuations in commodity prices, which could affect refining margins worldwide and the availability of private funds for the privatization of the refinery. The implementation of Phase I of the rehabilitation program for the refinery will substantially reduce these risks and will make the refinery attractive to the private sector. EAtimate Costs: Local Foreign Total 5 of % of Curr. Exch (FE) Cost (TC) FE (2) TC (3) A. LiberatIzation and Privatization 1. Restructuring of SOLINA 0.0 1.1 1.1 100.0 2. Open access systen 0.0 0.3 0.3 100.0 3. Regulatory authority 0.0 0.4 0.4 100.0 4. Priate t of the refine .4 3.6 4.0 90.0 B. Infrastructure Imrovemnts 1. Rehabilitation of the refinery 0.3 6.5 6.8 95.0 2. Storage & transport facilities 1.2 10.8 12.0 90.0 3. Petroleus terminal at Tosasine 1.3 11.7 13.0 90.0 4. LPG onotion progran 0.0 6.0 6.0 100.0 C. Prolact Preceration and Coordination 0.0 2.6 2.6 100.0 Physical contingencies 0.4 4.7 5.1 Price conicIe 0.3 3.7 4.0 - lii - F1nancing Source: US$ million % Total IDA 51.9 65.5 SOLIMA 1.8 2.3 Government 1.6 2.0 Sub-total Private Sector (Phase I) 23.9 30.2 TOTAL 79.2 100.0 FY94 FY95 FY96 FY97 FY98 FY99 US$ million Annual 2.5 9.1 13.4 12.5 10.0 4.3 Cumulative 2.5 11.6 25.0 37.5 47.6 51.9 Economic Rate of Return: 16 percent for the refinery rehabilitation component, 13 percent for the new petroleum loading/unloading facility at Toamasina and 27 percent for the LPG promotion program. ai IBRD 20035R 響 MADAGASCAR PEIROLEEJK SECTOR REFORM PR 1. THE ENERGY SECTOR Counta Badamnd 1.1 Madagascar is a large Wand with an area of 587,000 square kilometers, sparsely populated by about 12 million inhabitants. With an average per capita income estimated at US$ 230 in IM, Madagascar is among the poorest countries in the world. Modest growth from independence to 1972 was followed by stagnation until 1980 and sharp deterioration between 1980 and 1982. After a reverse in inward looking and dirigist economic policies the country reassumed a slow growth path and in 1988-1990 it experienced for three consecutive years some modest increases in per-capita GDP. In mid-1991, political turmoil swept the country, accelerating the pace of transition towards a more open society but disrupting economic activity and derailing the adjustment process. GDP declined by 6 percent in 1991 and is projected to increase by about I percent in 1992, below the population growth rate of 2.9 percent. A new goverment committed to adjustment policies is expected to be installed in the middle of 1993 fbllowing presidential and parliamentary elections. En= Consumg1lon 1.2 Annual energy consumption in Madagascar is about 2.4 million tons of oil equivalent (toe), representing about 219 kilograms of oil equivalent (kgoe) per capita. Fuelwood and biomass account for 93.3 percent of total energy consumption, while petroleum products and electricity account for 13.5 and 3.0 percent respectively. A national energy balance for 1990 is provided in Annex 1. 1. The per capita consumption of modern fuels (petroleum and electricity) is 34 kgoe, one of the lowest levels in the Southern Africa regionl/, and reflects the low income and urbanization levels, the predominance of subsistence agriculture in the economy and the small size of the industrial sector. Petroleum products account for more than 80 percent of commercial energy and play a crucial role in the development of the economy. Enwa Resources 1.3 Madagascar is entirely dependent on Imports of petroleum products, which weights heavily on the balance of payments. These imports have normally absorbed between 15 and 30 percent of the foreign exchange earnings generated by exports. However, Madagascar has long been known as a country with good prospects fbr commercial oil and gas discoveries. All the elements for oil accumulation exist to some degree: thick sedimentary sections, plentifid fault- related structures and surface oil in the fbrm of tar sands and heavy oil. Two sedimentary basis, Morondova in the west and Mahajanga in the north, have the best potential. Several seismic and drilling programs have been undertaken, but no discovery of commercial interest has been made to date. 1.4 The main renewable energy resources are fuelwood and hydropower. The area under natural forests is estimated at 12 million hectares, to which should be added 300,000 hectares of dedicated state and private plantations. Total wood consumption for energy purposes amounted in 1990 to 3.0 million toe (approximately 7.9 ton of air dried wood). Data on the sustainable JrMe equivalent figures for selected African countries are: Tanzania: 36 kgoe; Mozambique: 86 kgoe; Zambia: 376 kgoe; Mauritius: 402 kgoe; and Zimbabwe: 527 kgoe. (Source: Nsffm Develggment R=rt, World Bank, Washington, D.C. 1990). -2- annual yield of wood is unreliable (estimates range from 6 to 50 million ton of air dried wood), but there are several regions where demand is greater than supply. Since wood cannot be economically transported from surplus to deficit regions, the forest stocks are being heavily depleted in these areas. 1.5 The hydropower potential of Madagascar is large. According to recent estimates, there are over 300 known sites with a combined power potential of 14,000 MW and an estimated annual generation of 60,000 GWH a year. The present installed capacity is 106 MW and represents a tiny fraction of the potential. However, the economic viability of exploiting additional sites has not been determined and is affected negatively by the fact that the population is widely dispersed and has very low loads, which does not allow for the construction of large power plants. 1.6 Madagascar also has coal, lignite and peat resources, but they have not yet been exploited commercially because of their physical remoteness, lack of industrial demand and the heavy investments required. The main coal deposits are in the SAKOA basin, with estimated total reserves of about 1,000 million tons. However, most of these reserves can only be mined by expensive underground methods. Uranium-bearing minerals were discovered in the late 1940's and some small scale mining was undertaken and subsequently abandoned. The United Nations Development Programme (UNDP) has financed some exploration activities, but they have not yet resulted in commercial exploitation. Geothermal sites with adequate temperatures have also been identified, but the economics of their development is also doubtful. Institutional Organization 1.7 The Ministry of Energy and Mines (MEM) is responsible for the energy sector. The activities are carried out by a Directorate of Energy (DGE) that is in charge of formulating and implementing all planning and policy actions. The Ministry directly supervises the Malagasy Petroleum Company (SOLIMA) and the Electricity and Water Company (JIRAMA). SOLIMA is responsible for the importation, refining and distribution of petroleum products and until 1993, exercised the monopoly of the State over the petroleum sector. JIRAMA is responsible for the generation, transmission and distribution of electricity all over the country. 1.8 The National Military Office for Strategic Industries (OMNIS) is in charge of the exploration, research and development of hydrocarbons. OMNIS is an autonomous organism created in 1976 under the direct authority of the President of the Republic. OMNIS has sponsored substantial research to establish the potential of hydrocarbons in Madagascar and entered into joint venture and risk services contracts with private oil companies interested in carrying out petroleum exploration activities in Madagascar. 1.9 The management and development of the national forests is the responsibility of the Forestry Department of the Ministry of Water and Forests. Within the Forestry Department, the Service for the Promotion of Forestry Products is responsible for forest resources inventory, management, exploitation and reforestation. The other main institution in the sub-sector is the parastatal agency FANALAMANGA, which was set up in the 1960's to develop a new pine plantation at Haut Mangoro and supply raw materials to a pulp and paper industry that was never established. -3- Bank Activities in the Sector 1.10 The first Bank activity in the sector was Credit 817-MAG for the Andekaleka Hydropower Project approved in June 1978 for a total of US$ 33.0 million. A supplemental Credit to finance cost overruns (Cr. 817.1- MAG) for US$ 10.0 million was approved in January 1980. The project included the construction of a dam, a power plant with two 29 MW generating units and a 138 KV transmission line to Antananarivo. A Project Completion Report was distributed to the Board in May 1991. Lessons learned from the project included the need to improve demand analysis, the importance of up-front implementation of electricity tariff adjustments and the control that must be exercised over the supervising engineer. 1.11 A Petroleum Exploration Promotion Credit (Cr. 1016-MAG) for US$ 12.5 million was granted in 1981 and helped the Government establish the legal and fiscal framework for petroleum promotion and exploration. As a result of this project, four major oil companies (Mobil, Occidental, Agip and Amoco) signed exploration/production contracts and invested a total of over US$ 300 million in geophysical surveys and in the drilling of 8 wells. An additional Credit (Cr. 1298-MAG) for US$11.5 million was approved in 1982. While this Credit was given to finance the exploration of the Tsimiroro heavy oil field, the work was prematurely terminated because the initial results indicated that the project was not economically attractive and the left- over funds were used for a second exploration promotion campaign. This has resulted in additional exploration contracts with private oil companies (Shell, Maxus Energy and BHP) that are under execution. A Project Completion Report on both projects was distributed to the Board in October 1992. This report emphasized the importance of petroleum exploration legislation, fiscal regime and model contracts to get interest from private oil companies in exploration. 1.12 A Credit for the Energy I Project (Cr. 1787-MAG) was approved in 1987 for an amount of US$ 25.0 million. This Credit financed some priority investments for the rehabilitation of the power system of JIRAMA, the establishment of a least-cost master plan for the power sector, a study of electricity tariffs, the development of improved charcoal making techniques and the execution of energy audits in the industrial sector, and provided technical assistance and training to the Ministry of Energy on energy planning and household energy issues. The implementation of the project is proceeding satisfactorily and completion is expected by December 1994. 1.13 Under the joint UNDP/World Bank Energy Assessment Program (ESMAP), an energy assessment of Madagascar was conducted. The report, published in January 1987 (Report No. 5700-MAG), concluded that the main energy problems are: (i) the growing fuelwood crisis, and (ii) the growing burden of oil imports. The Bank also undertook in 1989, a complete review of the petroleum sector (Report No. 7986-MAG) and the conclusions and recommendations of this study served as the basis for the design of the present operation. H. THE PETROLEUM SECTOR Petroleum Consumption 2.1 Madagascar depends on imports to meet all its petroleum requirements. Total consumption is about 300,000 tons per year. This represents only 26 kilos per capita, approximately one-fifth of sub-Saharan Africa's average per capita consumption level. About 55 percent of petroleum is consumed in the form of diesel, of which about 40 percent is used for -4- electric power generation. Gasoline represents 18 percent of consumption and kerosene, used mainly for lighting by low income households, represents 11 percent. The quantities of petroleum products sold between 1984 and 1991 are shown in Annex 2.1. 2.2 Trends in overall petroleum consumption indicate an average annual increase of 2.6 percent In the 1984-1990 period. The growth rate was 4.8 percent in 1989 and 7.4 percent in 1990, but there was a decline of 7.8 percent in 1991 due to the economic downturn and political Instability. Consumption of fuel oil shows a downward trend over the period because some larger industrial plants have been closed or have reduced their production levels. Consumption of liquified petroleum gas (LPG) has been stagnant due to irregular supplies from SOLIMA, inadequate stock of bottles that have not been replaced in more than 15 years and other marketing and production deficiencies. 2.3 Demand for petroleum products is closely linked to the general trend of economic activity. For projection purposes, a 4 percent annual increase in GDP has been assumed, which translates into similar growth rates for diesel and fuel oil. For gasoline, it was assumed that new imported vehicles will be more fuel- efficient and will reduce the growth rate to 3 percent. This is equivalent to a 9 percent improvement in average fleet efficiency over the 10 year forecast period. Kerosene, used primarily for rural lighting, exhibits very low consumption growth rates in most developing countries (0 to 1 percent per year) due to changes in the rural-urban structure and the penetration of alternate sources of energy, such as electricity and LPG. However, Madagascar has shown in the past a steady growth in the consumption of kerosene of about 3 percent per year. For projection purposes, we have reduced this growth rate to only 1.5 percent per year. 2.4 The potential market for LPG is estimated to be at least 15 percent of the urban household cooking energy use. This is equivalent to some 20,000 tons per year. However, given the poor state of the existing infrastructure, even private operators would have difficulties in developing supply systems to sustain very high annual growth rates. Therefore, for projection purposes, it was assumed that there would be a 5 percent growth in the consumption of LPG in the first years, followed by a period of 12 percent growth per year. In the year 2000, consumption will only reach about 6,000 tons, which is far below the potential market but duplicates the present level. The forecasted consumption for all products is presented in Table 2.1 below. Tabte 2.1 Petrotem Pout mm Prolectimn 1991 1995 2000 LPG 2.9 3.4 6.0 GASOLINE 51.6 58.1 67.3 KEROSENE 42.3 44.9 48.4 DIESEL 164.7 192.7 234.4 FUEL OIL 27.2 31.8 38.7 BTN .3 2.7 3.3 .~ ~ ~ ~ ~ ~ 9 ............. -5- Petroleum Product Distribution 2.5 SOLIMA is the only agency involved at the present time in the import, transport and distribution of petroleum products. All imports of crude or finished products are brought by ship into the storage tanks at Toamasina. The total storage capacity at this depot is 143,754 m' for crude oil and 118,578 m' for refined products. Approximately half of all finished products are taken by ship to eleven coastal storage depots and the other half is moved by railway to Inland depots. Annex 2.2 is a map of Madagascar which shows the depots, their storage capacities and the amounts of each product delivered to each depot during 1990. 2.6 Supply by sea can never be guaranteed within a week or so due to the possibilities of bad weather, breakdowns or other disruptions. It is therefore prudent to try to keep a minimum storage reserve of two weeks of consumption in each coastal depot. Because of the relatively small storage capacity, this is not possible and many of the depots require a large number of ship visits. In order to secure reliable supply stock levels and improve the efficiency of shipping movements, the building of larger storage tanks at some of the coastal depots is required. With the elimination of the monopoly of the state over the petroleum sector, which is supported by the project, it is expected that the private sector will build this additional storage capacity. For the delivery of products to the coastal storage depots, SOLIMA owns and operates three tanker ships and several barges and tugs. One of the ships was built in 1966 and has a short remaining seaworthy life. The others were built in 1978 and 1989 and could provide adequate service for some years if managed efficiently. 2.7 The tank capacity at the inland depots is also very small and for many products there Is less than two weeks of storage capacity. There is no strategic reserve for the case of breakdown in supply, as demonstrated during 1992 in Antananarivo with the failure of the rail link to Toamasina. SOLIMA owns a fleet of 79 rail tankers, of which all have been used more than 12 years (28 have been used more than 30 years). The project will finance the acquisition of 18 new rail tanker wagons to be placed under a common carrier system. The Railway Company Is responsible for tanker wagon movements and major maintenance works and SOLIMA is required to pay the transport fees fixed by the Ministry of Transport. The rail line from Toamasina to Antananarivo is a single track with passing loops at most of the stations along the route. The track is in bad condition for about some 40 km and has lots of narrow curves, which limit the safe operating speed of the trains and increase transport costs and time. However, the development of alternative means of transport (pipeline) is too costly and the economic studies have demonstrated that it is not profitable. 2.8 In spite of the difficulties and high costs, the petroleum transport system has operated satisfactorily in normal circumstances. Shipments from Toamasina by rail are done daily in special trains of 10-12 tanker wagons and the turnaround times are not excessive. There have not been large supply interruptions to the coastal depots and the breakdown rate of the ship tankers is reasonable, although cost of maintenance at the state owned shipyard Is high. A specialized consulting firm was hired as part of the project preparation to study the improvements required to increase efficiency in the transport and distribution of refined products. The main recommendations are presented in Annex 2.3. Those recommendations that required little or no investment are being executed at the present time by SOLIMA. Among the investment projects proposed, SOLIMA has installed the new communication system between the depots and the refinery, while all the other actions will be financed within the proposed project. However, a major investment proposal not financed is to increase product inventory levels around the island to reduce the number of shipping movements and other costs. -6- 2.9 From the coastal and inland depots, road tankers supply petroleum products to the distribution stations, airports, industrial plants, government facilities and other major consumers. SOLIMA owns about 36 road tankers, while others are owned by the private sector. There are 236 distribution stations, all run by private operators. However, SOLIMA owns 124 of these stations and has leased them to private operators. The other 112 stations are privately owned and operated. The Reflne 2.10 The petroleum refinery located at the port of Toamasina was established in 1966 as a simple hydro-skimming facility with a processing capacity of 10,000 barrels per day (450,000 tons per year). The capacity was increased in 1972 to about 16,500 barrels per day (750,000 tons per year) with the addition of a pre-flash and a merox unit. The configuration was supplemented in 1982 with a visbreaker, a gasoil hydrosulfurization unit and a bitumen unit. At the present time, only the old hydro-skimming facilities are used. Annex 2.4 shows the running plan for present operation when the feed is 12,000 barrels per day of Iranian light crude. The pre-flash and merox units have not operated since 1980 and the visbreaker since 1989. Prior to that year, the visbreaker only operated occasionally and very erratically and this constitutes the major problem for the economic operation of the refinery. 2.11 In general, the refinery operation, condition and management are poor compared to modern industrial standards required for efficient and economic operation. This is due in part to the historical lack of foreign currency to pay for adequate maintenance materials and facilities, and also because of deficiencies in management, supervision and skilled personnel. The consultants hired as part of the project preparation to study ways to increase efficiency in the production and distribution of petroleum products (para. 4.16), identified large leaks of hydrocarbons and losses of steam, but fortunately, it is possible to eliminate these leakages with minimal investments. Sub-standard and undersized power generators, acquired through bilateral financing, contribute to the unreliability and shutdowns of refinery operation. Even though the mechanical condition is generally poor, there are no areas bad enough to need widespread replacement. 2.12 The consultants also identified several improvements that can be made to the operation of the refinery. These recommendations are presented in Annex 2.5. A crucial action to improve refinery operation is rehabilitating the visbreaker complex. This complex was the object of a detailed technical inspection in July/August 1992, conducted by a specialized engineering firm, to precisely determine the rehabilitation works that are needed and to estimate the costs. The estimated costs are not large (US$3.5 million) and will be financed under the proposed project. Included in the improvements recommended by the consultant is the installation of a vacuum gasoil thermal cracking unit, which has been designated as Phase U of the rehabilitation program and will substantially raise refining profitability. It is expected that this second phase will be financed by private investors. Table 2.2 summarizes the yields of current operations and of Phases I and I of the rehabilitation program. The main technical effect of this program is to decrease the amount of fuel-oil produced and the losses, and to increase the production of diesel, which is in short supply from the production of the refinery and has to be imported. -7- Table 2.2 Naedeener- Reffonery l*ds for Iranfan Ltdat Crd tin ercentape) Current situation Rehabf tftat on Program Phase I Phase II LPG 2.0 1.2 1.3 Regular GasoLifne 14.1 15.4 17.6 Premfum GasoLfne 1.1 1.1 1.1 Kerosene 9.6 13.5 14.2 Dieset 21.5 32.2 37.6 Fuet ofit 44.3 28.5 19.6 Bitumen -3.6 3.6 FueL and Losses 7.4 4.5 5.0 Petroleum Terminal at Toamasina 2.13 All crude oil imports and a large proportion of the refined petroleum products distributed within the country, transit via the port of Toamasina. le present loading facilities at the port are a weak link in the distribution system, on the grounds of operation, safety, economics and the environment. The existing loading facilities are situated in the middle of the general cargo area and there are difficulties of berthing in the limited space available. Tanker loading and unloading are done through flexible hoses causing frequent oil spillage that pollutes and endangers the harbor safety. 'Te entire operation is inefficient, unsafe and environmentally unacceptable and involves risks to life and the surrounding port facilities. In addition, the size of the ships that can deliver crude oil to Madagascar is limited to 50,000 tons and advantage cannot be taken of the lower freight rates available in larger tankers. Furthermore, in the future, it is foreseen that the 50,000 tons tanker will become increasingly rare. Studies undertaken have proved the need for a new mooring dolphin away from the general cargo area. A specialized port consulting firm was hired to study the technical and economic viability of this alternative and concluded that it is the best solution to eliminate the weakness of the present situation. The construction of the new petroleum loading/unloading facility is included in the project. Petroleum Pricing and Taxation 2.14 Until April 1992, the prices of petroleum products were fixed by Government's decrees and revised at irregular intervals. Decree No. 91-431 of August 1991 indicated that prices of refined products should fluctuate following the evolution of international prices, the exchange rate and local costs. ArrOt6 No. 2089-92 from the Ministry of Energy and Mines, dated April 17, 1992, freed the prices of LPG, jet-fuel and fuel-oil and established a formula for maximum prices of gasoline, diesel and kerosene based on the import parity concept, to be applied directly by the operators without the need for Government's intervention. This formula is based on international prices plus transport costs, converted into local currency at the market foreign exchange rate. The political authorities did not accept the regional differentiation of prices based on specific internal transport costs and Arr6td No. 4451-92 of the Ministry of Energy and Mines, dated July 28, 1992, modified the parameters of the pricing formula and established single national prices with a per-equation on domestic transport costs. Since then, petroleum prices have been adjusted monthly by the existing operators without Government interference. The present pricing system -8- is satisfactory, but the regional differentiation of prices will be necessary when a competitive market is established to provide incentives to supply outlying areas. The disbursement of project funds for works related to the basic improvements in storage and transport will be conditional to the adoption by the Government of appropriate actions to allow prices in the regions to reflect differences in transport and storage costs (para. 7.3 (b)). 2.15 Before July 1991, petroleum taxation was based on "ad valorem" tax rates, but these rates had no economic or practical impact. Given that domestic petroleum prices were sometimes even below cost, SOLIMA could not pay the posted petroleum taxes without substantial financial losses. Therefore, actual petroleum taxes paid were the result of yearly negotiations between the Ministry of Finance, the Ministry of Energy and SOLIMA. By reducing the actual taxes paid from the posted values, petroleum prices were kept at low levels, sometimes below costs, and SOLIMA was allowed to show profits in its financial statements. This practice eliminated the incentives to reduce operating costs and improve efficiency and blocked all possibility of participation of private operators in petroleum activities. 2.16 An amendment to the Finance Law, dated July 1991, introduced "specific taxes" for each petroleum product. These taxes are added to the import parity prices, calculated in accordance with the procedures described in paragraph 2.14, to obtain the prices at the level of the consumers. The impact of petroleum taxes on prices have now been made transparent and direct. The environment is now appropriate for private sector companies to operate and there are incentives to improve efficiency within SOLIMA. Annex 2.6 indicates the existing taxes, as well as price levels. Fiscal revenues from petroleum taxes were US$4.5 million in 1990 and US$5.4 million in 1991 and increased to US$19.8 million in 1992 as a consequence of the changes in the pricing system and the increases in the tax rates. The taxation for 1992 corresponds to an average rate over all petroleum products of 20 percent. The 1993 Finance Law introduced further changes in the rates of petroleum taxes and fiscal revenues from this source are expected to reach US$31.6 million in 1993, or 30 percent of sales revenues, which is considered a satisfactory level. During negotiations, agreement was reached with the Government that its policies related to petroleum products, prices and taxes will be examined each year during project execution and that actual petroleum prices and taxes will reflect the exchange of views with the Bank (para. 7.1 (e)) Petroleum Ehploration 2.17 Petroleum exploration efforts in Madagascar started in 1948 with the activities of the Socit6 de P6trole de Madagascar (SPM), a subsidiary of the Bureau des Recherches de Ptrole of France which later became the French oil company ELF. Between 1948 and 1969, SPM carried out airmags, gravity and seismic surveys and drilled a total of 40 wells in the western basins of Madagascar. These efforts were complemented in the late 1960's and early 1970's, by Conoco, Chevron, Copetma, Agip and Tenneco, who also carried out studies and drilled about 16 wells. All exploration activities were suspended in 1975 after the nationalization of the petroleum sector. 2.18 The National Military Office for Strategic Industries (OMNIS), created in 1976, requested the financial assistance of the Bank to promote new petroleum exploration activities and, as indicated above (para. 1.11), Credit 1016-MAG for US$12.5 million was approved in 1981. This Petroleum Exploration Promotion Credit helped the Government in establishing the legal and fiscal framework for petroleum exploration. A geological study undertaken by an exploration consultant, led to a first round of contracts with four major oil companies (Mobil, Occidental, -9- Agip and Amoco). A total of eight wells were drilled and while traces of hydrocarbons were found, no commercial discovery was made. 2.19 Using funds available in the Tsimororo Heavy Oil Project (Cr. 1298-MAG), a new round of exploration promotion activities was held in 1988 and 1989. As a result, SHELL, Maxus Energy and BHP signed exploration contracts that are still active. Acquired data was disappointing with regard to both on-shore Mahajanga and off-shore Cap Saint-Andrd, but the large off-shore Mahajanga and Morondava basins have given inconclusive results and remained under-explored. In the Karroo Corridor, results again indicate traces of hydrocarbons. OMNIS has requested further assistance. The Bank is following the situation to determine future actions needed to maintain the interest of the private sector in petroleum exploration. I. THE IMPLEMENTING AGENCY 3.1 The proposed Credit would be made available to the Government of Madagascar. SDR 23.6 million, the equivalent of US$33.3 million, from the proceeds of the Credit will be onlent to the Malagasy Petroleum Company (SOLIMA) at an 8 percent interest rate for a period of 20 years, including a 5-year grace period and SDR 10.5 million, the equivalent of US$14.9 million, will be made available to SOLIMA on a grant basis. The present situation of this company is described below. However, as part of the project, SOLIMA will be subject to a restructuring and corporatization program as described in para 4.7 below, in which part of the debt will be assumed by the new companies to be created. Organization and Management 3.2 SOLIMA is a state owned company established in 1976 by the law that nationalized the assets of the then existing petroleum companies (Elf, Total, Caltex, Esso, Shell and Agip). The organizational structure is presented in Annex 3.1. The management of SOLIMA is the responsibility of a General Director, who is assisted by two Deputy Directors, one for distribution and operations and the other for refinery. A Board of Directors of nine persons is appointed by the Government. At the present time, the Board is integrated by the Ministers of Energy and Transport, the Director General of OMNIS and other high level civil servants. The Manager of the refinery and two representatives of the personnel are also directors. 3.3 The Operations Division plans and undertakes the import of crude oil and refined products, manages the transport between Toamasina and the intermediate depots throughout the country and operates the transport fleet. The Distribution Division manages all depots except Toamasina and all the distribution stations, which are divided into six regions. The refinery operates as an independent unit with separate divisions for operations, maintenance and administration and finance. The organizational structure of the refinery is presented in Annex 3.2. To ensure that the rehabilitation program achieves its expected benefits and that the refinery is run efficiently during the transition period, the Government has agreed to entrust the management of the refinery to a team of experts financed from the proposed Credit during a transition period before the opening up of SOLIMA's capital to the private sector. The employment of these experts will be a condition to disburse the funds available in the Credit for the rehabilitation of the refinery (para. 7.3 (a)). - 10 - Personnel 3.4 SOLIMA has a staff of 1,550 employees. The company is overstaffed and short of skilled personnel with appropriate qualifications and knowledge. The refinery employs 330 persons, of whom only 6 percent are professionals. It is also overstaffed and its overall organization is inefficient, considering the small size of the refinery and its low complexity. The restructuring and privatization of the company (para. 4.7) will result in a reduction of personnel, while the private management of the refinery will enable some on the job training to improve skills and performance. Accounting and Auditing 3.5 Financial statements of SOLIMA for 1987/88, 1988/89, 1989/90 and 1990/91 were reviewed by external auditors and certified without qualification. According to the auditors, SOLIMA's general accounting system gives a reliable picture of the company. Fixed assets are valued at historical cost and foreign currency debt is revalued annually in keeping with international standards. Preparation of the 1990/91 financial statements was delayed due to the political difficulties in the country and the change to a fiscal year coinciding with the calendar year, but has now been satisfactorily completed. During negotiations, SOLIMA agreed to submit annually its audited financial statements not later than six months after the closing of each fiscal year (para 7.1 (i)). 3.6 The Distribution and the Refining Departments maintain separate financial accounts, which are consolidated annually by the Finance Division. However, refining and distribution costs are not clearly identified. For instance, the cost of crude oil imports and related expenses (freight, insurance, letter of credit, fees, etc), as well as interest incurred on loans for the installation of the visbreaker, are charged to Distribution. The refinery is considered as a processing unit and it charges a fee equal to its costs to the Distribution Department and, therefore, has no incentive to improve its efficiency and performance. At the present time, both Departments use complex, semi-manual accounting systems that are divided into an excessive number of cost centers. Monthly statements provide very detailed data on the expenses of each cost center and these expenses are periodically compared with the budget. However, these statements are of limited value to top management because they do not provide key indicators on the performance of major functions. The consultant that will assist in the restructuring of SOLIMA will also help in developing appropriate management information systems. During negotiations, the Government agreed to make the refinery a separate legal entity, established as a joint-stock company under commercial law (paras. 4.7, 4.8 and 7.1 (c)). Insuran 3.7 SOLIMA is insured with the two existing state-owned insurance companies (Aro and Ny Havana), which are themselves reinsured by foreign underwriters. The refinery, including the Toamasina depot, is insured against fire, explosion, cyclone, lightning and related risks and premia are moderate. No improvements in this area are required. OprtIons 3.8 SOLIMA is quite efficient in the distribution of petroleum products despite Madagascar's difficult geography and deficient railway and telecommunications systems. The average - 11 - distribution cost is estimated at US$55 per ton which is not excessive. The major problems faced are: (i) deficient supply planning due to the uncertainty in refinery's operation, poor communications and insufficient storage capacity at certain locations, (ii) abnormally high operating cost of the ship tankers, due in part to the high prices charged by the state owned shipyard at Antsiranana for repair and maintenance work, and (iii) deficient loading and unloading facilities which results in low utilization rates for the vessels. The project includes specific actions to address these issues and further increase operational efficiency in petroleum distribution and transport. 3.9 As indicated above (para. 2.11-2.12), the operation of the refinery is generally poor in term of losses and quality control. Maintenance is wholly inadequate and the refinery does not undertake the full scope of maintenance services normally required within the industry. The operating costs of the refinery are presented in Annex 3.3. Marginal operating costs (excluding depreciation and financial charges) are estimated at US$6.8 million, which represent US$19.4 per ton for a processing volume of 350,000 tons, as is the present market of Madagascar, or US$ 12.4 per ton if the refinery is used at its present nominal capacity of 550,000 tons. Data for refineries of different complexities and sizes indicate that operating costs in the region of US$15- 17 per ton are not unusual, which would indicate that the present costs of the refinery at Toamasina are higher than the norm, but not by a large amount. As calculated in Chapter VI, the operation and condition of the refinery can be improved with little investments to a level where it can supply products at a lower price than direct imports. The most important measures are to fix the leaks, to recommission the visbreaker complex and to provide good operating, maintenance and management stewardship. All these measures are included in the proposed project. Procurement of Crude Oil and Products 3.10 The appropriate procurement of crude oil and petroleum products is essential for the efficient operation of the petroleum sector. Due to the shortages of foreign exchange, SOLIMA was not able in the past to base its import decisions on prices and technical suitability for the refinery. Purchases of crude oil were based on bilateral arrangements available to the country and the payment terms offered by suppliers. For example, during the period 1985-1989, the refinery processed crude oil provided by the ex-Soviet Union and prices paid by SOLIMA were sometimes as much as US$ 8 per barrel higher than international market levels. The situation has changed and in 1992, the procedure of open and transparent competitive bidding was used for the first time, with the participation of 23 suppliers. However, the political authorities did not fully accept the results of the bids and forced a sharing of the market among two suppliers at the least cost price. A similar open competitive bidding process was successfully conducted in March 1993 and the country was able to obtain attractive supply prices and reduce the foreign exchange cost of petroleum purchases. During negotiations, agreement has been reached that the procurement of crude oil and products will be done through competitive bidding procedures acceptable to the Bank (para. 7.1 (g)). For this purpose, the Government and SOLIMA will adopt, before Credit effectiveness, standard bidding documents and will furnish each year, for Bank's review, the invitations for bids (para. 7.2 (c)). After completion of the selection process, SOLIMA will also furnish to the Bank, a copy of the bid evaluation report. - 12 - IV. THE PROJECT Project Objectives 4.1 The specific objectives of the project are to: (i) open up the petroleum sector to private sector participation and create an appropriate framework for a competitive environment; (li) support the basic infrastructure investments required to increase operational efficiency and to attract private operators and investors; and (iii) develop institutional capacity for the efficient regulation of the sector. The proposed project will have a direct impact on economic growth, which is one of the objectives of the country strategy. The introduction of both a competitive environment in the petroleum sector and of a pricing regime based on opportunity costs, will improve the efficiency in the use of energy and the allocation of economic resources. The improvements in the operational and commercial efficiency of the petroleum sector will save scarce foreign exchange and reduce the cost of supplying petroleum products to all economic activities, with a direct impact on economic growth. The new petroleum pricing and tax system has permitted a large increase in fiscal revenues. All these issues are dealt with in the Government's Letter of Petroleum Sector Development Policy (Annex 7.1). The project will also contribute to the environmental objectives of the country strategy. One of the project's components (LPG promotion program) will result in a decrease in the demand of woodfuels in urban areas and have some positive environmental consequences, while improvements in the operation of the refinery and the construction of the new petroleum loading/unloading facility at Toamasina will reduce pollution from leakages and spillage and increase safety. 4.2 The liberalization process and the establishment of a competitive environment received a big push by the legal elimination of the monopoly of the State over the import, refining transport, storage and distribution of petroleum products. Law No.93/002 of January 8, 1993, and Decree No. 93-136 of March 24, 1993, allowed private operators to open and operate distribution and service stations and, after a transition period of three years, these private operators will also be permitted to import refined products. The system of setting official prices for petroleum products by Government decrees and keeping them below opportunity costs has also been replaced by a formula for maximum prices based on the import parity concept. Maximum prices are calculated by the operators and market prices are freely set by them within the limits. At the present time, petroleum prices have fluctuated since August 1992 according to market conditions without Government interference. Petroleum taxes have been made transparent for all operators by the introduction of a specific tax for each product that would be adjusted every year, and fiscal revenues from petroleum taxes are increasing from US$4.5 million in 1990 to an estimated US$31.6 million in 1993. To promote further the competitive environment, the project will include the establishment of rules for the open access of all operators to certain basic loading, storage and transport infrastructure, as well as the restructuring, corporatization and privatization of SOLIMA and other measures that will further promote efficiency within the sector and ensure that it makes adequate contributions to the growth objectives. Project Description 4.3 The project includes the following components: (a) Liberalization and support to the privatization of the petroleum sector; - 13 - (b) Rehabilitation and support to the privatization of the existing petroleum refinery at Toamasina; (c) Basic improvement in the petroleum storage and transport infrastructure; (d) Construction of a new petroleum loading/unloading facility at the port of Toamasina; and (e) Program to promote the use of LPG by residential households. 4.4 Liberalization and support to the privatization of the petroleum sector. The first step in the liberalization of the petroleum sector was to allow the private sector to import and distribute lubricants. Private sector activities in this area effectively started In the middle of 1990, but the appropriate legislation was only approved on August 12, 1991 (Law No. 91-022). As indicated above (para. 4.2), the elimination of the legal monopoly of the state over the import, transport and distribution of all petroleum products was accomplished through Law No. 93/002 dated January 8, 1993. Decree No. 93-136 of March 24, 1993, defines the terms and conditions for the implementation of the law, allows private operators to immediately open service stations and fixes a transition period, going to December 31, 1995, during which private distributors are required to purchase gasoline, diesel and kerosene from the existing refinery in Toamasina at an import parity price. During this transition period the refinery will be subject to a basic rehabilitation and improvement program financed under the project and will be managed by a team of experts under a management contract, allowing it to compete efficiently with imports of refined petroleum products. Private distributors are expected to soon open and operate new service stations and distribution posts. Some international oil companies have already started this process. The regulatory framework for the future competitive market will also be fully defined during this transition period. 4.5 At the same time, as explained above (para. 2.14), the Government has moved decisively to eliminate price controls on petroleum products and create adequate conditions for the development of a private competitive market. Decree No. 91-431, published on August 13, 1991, terminated all controls over the price of fuel-oil, jet-fuel and LPG, and established that gasoline, diesel and kerosene are subject to fluctuating maximum prices based on the import parity concept. Under this concept, prices cannot surpass a theoretical price based on international prices, the exchange rate and the cost of transport and unloading. The parameters that defined the maximum prices were established by decisions Nos. 2089/92 and 4451/92 of the Ministry of Energy and Mines, dated April 17, 1992, and July 28, 1992, respectively. Within the limits of these maximum prices, each operator is now free to fix its selling price, which SOLIMA has done since August 1992 without the Government's interference. The defined pricing policy, together with the new taxation policy described in para 2.16 above, provides an appropriate framework to achieve the privatization and competition objectives of the project. 4.6 The next steps in the liberalization process are: (i) the restructuring, corporatization and the opening up of SOLIMA's capital to private sector participation; (ii) the establishment of clear and transparent rules for the operation of a system of open access by all operators to certain key infrastructure facilities; and (iii) the organization of a national regulatory authority to set standards and protect competition in the petroleum sector. The project will finance consulting services and training to implement adequate measures in these areas, as well as a team of foreign experts that will run the refinery during the transition period. The cost of all these consulting - 14 - services is estimated at US$ 5.8 million. Terms of reference for these consulting services are included in Annexes 4.1 to 4.4. 4.7 The objective of the restructuring of SOLIMA is to create several joint-stock companies ("soci6tds anonymes") under commercial law, to replace the existing state enterprise. It is envisaged that shares of these companies, including those of the refinery, will be sold to the private sector. As indicated above, some international oil companies are expected to start operations in Madagascar within a short time. There are, at the present time, 112 privately owned distribution stations that could be affiliated to these companies, if conditions are sufficiently attractive. Since the final objective is to have competition among different distribution companies, open access to some key infrastructure (especially the loading/unloading facility at Toamasina) will be guaranteed and a system of tolls will be defined. The manager of the common facilities will be independent and will give appropriate assurances of fair play to all operators. In particular, it will not be an operator which is an individual distributor or a retailer of petroleum products. A national regulatory authority will be established to oversee the competitiveness and the adequate functioning of the petroleum sector and make sure that all operators satisfy minimum technical, safety and environmental standards. During negotiations (para. 7.1 (b)), agreement was reached with the Government that: (i) the refinery company will be legally created as a separate joint-stock company, wholly-owned subsidiary of SOLIMA, under commercial law (para. 7.1 (c)); (ii) a proposal for the restructuring of SOLIMA will be submitted before June 30, 1994; (iii) a study on the establishment of a system of open access by all operators to key infrastructure petroleum facilities will be submitted before March 31, 1994 (para. 7.1 (e)); and (iv) a study for the establishment of the Petroleum Regulatory Authority will be submitted before June 30, 1994 (para. 7.1 (f)). The establishment of the open access system and of the Petroleum Regulatory Authority will be a condition for the disbursement of funds for works related to the improvement of petroleum storage and transport (para. 7.3 (b)). The creation of SOLIMA's subsidiary, the adoption of the restructuring plan for the rest of SOLIMA and the taking of all steps required to allow private sector participation in SOLIMA subsidiary's capital, will be a condition for the disbursement of funds for the new loading/unloading facility at Toamasina (para. 7.3 (c)). 4.8 Rehabilitation and support to the privatization of the refinery. Studies undertaken by specialist consultants have concluded that the economic and financial viability of the refinery depends on recommissioning the visbreaker complex (which ran only for some months after its installation in 1982 and was damaged by a fire in 1988), rehabilitating the electric system, eliminating steam and hydrocarbon leaks, and on improving overall efficiency and reliability of operations. A Realistically Achievable Performance Program (RAP) was defined for these minimum house cleaning activities that will put the refinery in a position where it can compete with the direct import of refined petroleum products (para 2.12 and Annex 2.5). The cost of this program is estimated at US$ 6.8 million. A condition for disbursement of Credit funds for this activity will be the hiring of the team of experts that will manage the refinery during a two-year period, as indicated in para. 4.6 above (para. 7.3 (a)). The management contract will be based on performance indicators and payments will be linked to results. Terms of reference are included in Annex 4.4. Upon completion of these rehabilitation works, the refinery and all assets and liabilities related thereto will be transferred to the new refinery company that will be established (para. 3.6.), on terms and conditions satisfactory to the IDA. The rehabilitation program will be executed in parallel with the restructuring of SOLIMA and upon completion of both components, the capital of the new refining company and of some of the companies created from the present SOLIMA will be opened to the participation of private capital. - 15 - 4.9 A second phase of the rehabilitation program for the refinery includes the addition of new equipment to the existing visbreaker complex to allow for thermal cracking of vacuum gas oil. The cost of this phase, which is not included in the project, is estimated at US$ 23.9 million and will result in attractive refinery margins and profits due to increase in the amount of diesel that would be produced. The second phase will be initiated only after the refinery has been opened to the participation of the private sector, which is expected to finance the physical investments. After the completion of Phase I, the refinery will be a profitable entity that would be in condition to attract private capital. The private operators of service stations, who are gaining some experience with the domestic market, are the obvious candidates for these investments. 4.10 Basic improvements in the petroleum storage and transport infrastructure. To increase the efficiency and reliability of petroleum supply the project will finance: (i) the purchase of additional rail tankers and other minor equipment; (ii) repairs to the existing crude and product storage tanks; (iii) the replacement of the pipelines from the port of Toamasina to the storage facilities; (iv) improvements in the petroleum unloading facilities at Mahajanga and Manakara; and (v) studies to Identify faster and safer methods to unload petroleum products at some localities, as well as the acquisition of software packages to improve planning of transport and distribution, and training. The total cost of all these components is estimated at US$12.0 million. 4.11 The main problem to improve the reliability of the supply of petroleum products in Antananarivo and the central highlands is the poor condition of the rail system between Toamasina and Antananarivo. The alternative of constructing a pipeline has been studied, but the results indicate that this is not economically justified. Improvements in the rail system and the purchase of additional locomotives are being undertaken under Cr. 1694-MAG, co-financed by the Caisse Franaise de Ddveloppement (CFD). The proposed Credit will finance the purchase of 18 additional rail tankers to replace old and obsolete equipment. The cost of this component is US$2.3 million. Other minor equipment for distribution is estimated at US$0.5 million. 4.12 Two of the six crude oil storage tanks in Toamasina are out of commission with floating roofs defects and a third is in a dubious condition. To get the freight benefits of the larger tankers that could supply Madagascar it is necessary to have all six crude oil tanks fully operational. The cost of these repairs is estimated at US$1.0 million. The product storage tanks need miscellaneous minor works on the level indicators, fire protection systems, agitators, bond wall and others, at a cost of US$0.5 million. 4.13 The four pipelines that run from the petroleum terminal at the port of Toamasina to the storage tanks were originally either buried below ground level or in an elevated pipetrack between concrete slabs, but are now exposed in many places. The cathodic protection is of uncertain quality on the crude pipeline and has been totally disconnected in the other pipelines. In addition, new houses have been built along the right of way of the pipelines and population density has increased with the result that the pipelines do not meet normally accepted petroleum industry safety standards. The most appropriate solution is to build new pipelines on a different route. This is estimated to cost US$4.4 million. 4.14 Mahajanga is Madagascar's second largest port and could be a second source of supply of products to Antananarivo, but is suffering high rates of silt deposition. Over the years, it is estimated that up to 2.5 meters of the depth in the port has been lost and at the present time maximum draught at the SOLIMA berth is given as 7.5 meters. The existing tankers cannot arrive fully loaded and the present discharge operation is dangerous and cannot be attempted at - 16 - night or during bad weather. Under Credit 1752-MAG, a dredger has been rehabilitated and some limited dredging at Mahajanga will be undertaken. To improve the unloading facilities, a new pontoon will be built in an area that allows the arrival of fully loaded and larger vessels. In Manakara, the petroleum tanker anchors about 900 meters outside the breakwater, where there is adequate depth, and small barges provide a shuttle service to the terminal. These barges cannot operate during low tides conditions. A transport sector project under preparation is expected to finance dredging activities, but to provide reliable and safer methods of unloading, a pipeline will be built from the storage depot to an off-shore mooring. The cost of both these investments is estimated at US$3.0 million. Studies to improve unloading facilities, as well as the acquisition of software packages to improve the planning of transport and distribution will be financed at a cost estimated at US$300,000. 4.15 New petroleum loading/unloading facility at Toamasina. As indicated in para. 2.13, the existing petroleum loading/unloading facilities at Toamasina are situated in the port itself, mixed with the general cargo area, and there are difficulties of berthing in the limited space available. Flexible hoses are left at the bottom of the sea, retrieved for loading/unloading, and small spillages are frequent due to the type of operation and the state of the facilities. Because of the location, there is also an ever-present danger of fire and explosion, with considerable risk to life and to the surrounding port facilities. In addition, the size of ships is limited to about 50,000 ton tankers, which are becoming increasingly rare. In the present situation, advantage cannot be taken of the lower freight rates available in larger tankers. Consultants identified a dolphin mooring as an attractive solution to the problems of the existing terminal. Another specialized consultant examined the feasibility of the new facility, confirmed that a dolphin with sufficient manoeuvering space was the best alternative, provided design and cost estimates and conducted an initial environmental analysis. The new facility will be the property of the Government and will be available to all petroleum operators under the open access system. The cost of this component is estimated at US$13.0 million. A condition for the disbursement of Credit funds for this component will be the completion of an additional environmental analysis and agreement on the implementation of a satisfactory mitigation plan (para. 4.38), as well as the signing of a convention between SOLIMA and the Socidtd d'Exploitation du Port de Toamasina (SEPT) for defining the modalities for the execution of the works and the use of the new petroleum facility (para. 7.3 (c)). 4.16 LPG Promotion Progam. Sales of liquified petroleum gas (LPG) in Madagascar are about 2,900 tons per year, which are very low even by African standards. Existing filling plants Are in urgent need of rehabilitation and obsolete equipment need to be replaced. The project will finance the rehabilitation of the existing infrastructure and the replacement of obsolete equipment, as well as additional storage capacity and transport equipment, so as to increase the reliability of supply and start the development of the domestic market. These investments are expected to have an immediate impact in increasing the consumption of LPG, providing an alternative to the use of woodfuels. The cost of this program Is estimated at US$6.0 million. Project PEparation 4.17 In the first semester of 1989, the Bank conducted a detailed review of the petroleum sector and published a sector report (Report No. 7986-MAG dated July 13, 1989). Following this review, an advance under the Project Preparation Facility (PPF) was approved and consultants (KBC Process Technology) were hired to review the operation of the refinery and of the distribution system and to make recommendations to increase efficiency. The study of the consultants was published in May 1991 and presented a detailed improvement program for the - 17 - refinery and the distribution system, together with an economic analysis of alternatives. This report constituted the basis for the preparation of the proposed project. Some of the conclusions were elaborated in a second report published in July 1991, which further defined the scope of some of the activities of the proposed project, including Phase H of the rehabilitation program for the refinery. 4.18 The stu'dies undertaken by KBC Process Technology had identified that the economic and financial viability of the refinery depended on recommissioning the visbreaker complex. In order to establish with more certainty the economics of the rehabilitation of the refinery, a specialized company (ORTEC) was hired to carry out a complete mechanical inspection of the visbreaker and estimate the costs of the required works. This inspection confirmed that the measures taken to protect the process units had been successful and that the costs of the rehabilitation were reasonable (approximately US$3.5 million). At the same time, another specialized consultant (BCEOM) examined the problem of the petroleum loading/unloading facility at Toamasina and confirmed that the safety, operability and environmental aspects of the port would be greatly improved by the construction of a new loading/unloading dolphin. They also undertook a detailed cost estimation for this work. Both these reports were examined by KBC Process Technology, that further issued a Project Definition Report in October, 1992. These studies and reports have been examined by SOLIMA and the Bank's missions and constitute the basis of the proposed project. Prolect Costs 4.19 Project costs are detailed in Annex 4.5 and summarized in Table 4.1 below. Total costs, including contingencies but excluding taxes, are estimated at US$55.3 million, of which US$51.4 million (93.0 percent) are foreign exchange costs. The costs of Phase I of the rehabilitation program for the refinery are not included in these figures. They will be financed by private investors. Physical contingencies of 15 percent were used for the petroleum loading/unloading facility and 10 percent for all other works, equipment and for all consulting services. Price escalation for foreign costs is based on the expected increases in international prices estimated by the World Bank, while local inflation is estimated at 15 percent in 1993, 10 percent in 1994 and 6 percent thereafter. Tab@ 4.1 Local Foreign Totat X of % of Curr. Exch (FE) Cost CTC) FE (2) TC (3) A. LiberaLization and Privatizatian 1. Restructuring of SOLIMA 0.0 1.1 1.1 100.0 2. Open acess systm 0.0 0.3 0.3 100.0 3. Regulatory authority 0.0 0.4 0.4 100.0 4. Private mnageant of the refinery 0.4 3.6 4.0 90.0 . Infrastructure Imrovements 1. RehabiLitation of the refinery 0.3 6.5 6.8 95.0 2. Storage & transport facilities 1.2 10.8 12.0 90.0 3. PetroLt tersinat at Tomasina 1.3 11.7 13.0 90.0 4. LPG 0romotion .roarm 0.0 6.0 6.0 100.0 C. Proleat Preneration and Coordination 0.0 2.6 2.6 100.0 Physical contingencies 0.4 4.7 5.1 Price conti ees 0.3 3.7 4.0 - 18 - 4.20 Total cost of the project, including Phase II, is estimated at US$79.2 million. Details of the financing plan are presented in Table 4.2. The foreign exchange cost of the program under Phase I will be financed by the proposed Credit (US$51.4 million). The Credit will also finance the local cost of the consulting services (US$0.5 million). The contributions of the Government of Madagascar (US$1.6 million) and of SOLIMA (US$1.8 million), will cover other local expenditures. The private sector will finance Phase II of the rehabilitation program, for an amount estimated at US$23.9 million. Tabte 4.2 Prolect Finacrin Ptan (USS miLLion) Local Foreign Totat % of Total IDA 0.5 51.4 51.9 65.5 SOL IM4A 1.8 - 1.8 2.3 GOV. OF MADAGASCAR 1.6 - 1.6 2.0 SUB-TOTAL 3.9 51.4 55.3 69.8 PRIVATE SECTOR PHASE II) 1.2 22.7 23.9 30.2 TOTAL 5.1 7?4.1 79.2____ 100 4.21 The proposed IDA Credit of US$51.9 million would be made to the Government of Madagascar, which will retain US$3.7 million for the liberalization and privatization component, excluding the team of experts for the private management of the refinery. An amount equivalent to US$33.3 million will be on-lent to SOLIMA at an interest rate of 8 percent (at approximately 1.1 times the standard IBRD rates) with a 20- year repayment period including a 5-year grace period. The balance of US$14.9 million will be made available on a grant basis to SOLIMA, who will implement on behalf of the Government the construction of the new petroleum loading/unloading facility at Toamasina. To facilitate implementation. However, this terminal will remain the property of the Government. Execution of a subsidiary loan agreement between the Government and SOLIMA will be a condition of Credit effectiveness (para. 7.2 (a)). The portion of the Credit proceeds on-lent for the rehabilitation of the refinery will be assigned to the refinery company upon its legal establishment. Project Implementation 4.22 The Directorate of Energy of the Ministry of Energy and Mines will be responsible for implementing all the components related to liberalization and privatization of the petroleum sector, excluding the team of experts for the private management of the refinery. A Project Coordinator will be named for this purpose before Credit effectiveness under terms of reference acceptable to the Association (para. 7.1 (b) and Annex 4.9). SOLIMA will be responsible for all other components, and a qualified manager, a mechanical engineer and an accountant selected within the present staff of SOLIMA, will be employed for this purpose before Credit effectiveness under terms of reference acceptable to the Association. SOLIMA will also hire before Credit effectiveness an experienced engineering consultant to assist the company in the management of the project and to complete the final bidding documents for the rehabilitation of the refinery (para 7.2 (c)). The terms of reference of these experts are included in Annex 4.10 and those of the consultant in Annex 4.11. 4.23 Qualified foreign contractors will be hired for the rehabilitation works at the refinery and for the construction of the new petroleum loading/unloading facility at Toamasina. The Project Definition Report mentioned in para. 4.18 above includes preliminary bidding documents for these activities, as well as terms of references to request proposals for the private management of the refinery during the transition period (Annex 4.4). The terms of reference for the restructuring of SOLIMA, the establishment of the rules for the operation of the open access system on key petroleum facilities and the organization of the - 19 - national regulatory authority (Annexes 4.1-4.3) were originally prepared by Bank's staff and further defined after discussions with the Malagasy authorities. The implementation schedule for each project component is presented in Annex 4.6, which also includes a table linking the time schedule of investments and the key reform actions in the sector. Disbursements 4.24 The project will be implemented over a five and a half year period and the Closing Date will be December 31, 1998. As indicated in Table 4.3 below, the IDA Credit will finance 100 percent of foreign expenditures and 80 percent of local expenditures for rehabilitation works and 100 percent of foreign expenditures for equipment and materials. Consulting services, technical assistance and training will be disbursed against 100 percent of total expenditures, excluding taxes. Table 4.3 Disbursement Schedule Description Pteentage F1nanced ITAl A. GOVERNMENT (1) Consultants' Services and Training: 100% 1.9 B. SOLIMA (2) Works: (a) Visbreaker 100% of foreign expenditures 2.6 80% of local expenditures (b) Tanks and Other Repairs; 100% of foreign expenditures 8.7 Replacement of Pipelines; and 80% of foreign expenditures Loading/Unloading Facility at Mahajanga/Manakara (c) Loading/Unloading Facility 100% of foreign expenditures 13.5 at Toamasina 80% of local expenditures (3) Equipment and Materials 100% of foreign expenditures 13.4 (4) Consultants' Services and Training: (a) Private Management 100% 4.2 of the Refinery (b) Project Management: 100% 1.5 Hydrographic and other Studies, C. OTHER (5) Refunding of the PPF Amounts Due 1.5 (6) Unallocated TOTAL L2 -20 - 4.25 A summary of the estimated disbursement by year, derived from the implementation schedule, is presented In Table 4.4. Complete details on disbursements are included in Annex 4.7, together with a comparison of the expected disbursement profile of this project with the standard disbursements profiles of all energy projects in Africa and all projects in Madagascar. The disbursement profile of the proposed project falls slightly behind that of all energy projects in Africa in the first two years, but thereafter it does somewhat better than the two standard profiles. This is explained by the nature of the rehabilitation works to be financed that do not require extensive construction periods. Tabte 4.4 FY94 2.5 2.5 FY95 9.1 11.6 FY96 13.4 25.0 FY97 12.5 37.5 FY98 10.0 47.6 FY99 4.3 51.9 4.26 To expedite project execution and give the implementation agencies rapid access to the funds of the Credit, two Special Accounts in foreign exchange will be opened under the responsibility of the Ministry of Energy and Mines and SOLIMA, with an authorized allocation of US$0.5 and US$1 million respectively, in a commercial bank in Madagascar acceptable to IDA. The authorized allocations cover four months of eligible expenditures. All withdrawal applications will be fully documented, except for payments of contracts for less than US$25,000 equivalent which will be made on the basis of Statements of Expenditure (SOEs). Documentation for withdrawals under SOEs would be retained for review by IDA staff during supervision missions and by the external auditors. All payments under US$50,000 equivalent must be made through the Special Accounts. 4.27 Separate accounts of the project will be kept by the Directorate of Energy and by SOLIMA. Annual auditing of the project accounts will be performed by external auditors satisfactory to the Bank. These audits will include the Special Accounts and the Statement of Expenditures (SOEs). Dling negotim. agreement was reached that the Bank will receive the report of the auditors within six months after the end of each fiscal year. Audits of the funds on-lent and made available to SOLIMA will be done in the context of the overall audits of the company (paras. 5.9 and 7.1 (i)). -21- Procurement 4.28 The Table below summarizes the project elements, their estimated costs and the proposed mnethod of procurement. TabLe 4.5 8~ary of Prmen Pr:m Arn at 1.1 Rehabititation of Visbreaker 3.0 - 3.0 (2.8) (2.8) 1.2 R feira of Tanks 1.7 - 1.7 (1.6) (1.6) 1.3 Replacement of Pipelines 5.3 • 5.3 (4.8) (4.8) 1.4 Loadinh/Untoading Facilities 3.6 • 3.6 at Mahajanga and Manakara (3.2) (3.2) 1.5 Loading/LUoading 16.5 16.5 Faciity at ToamusIna 14.914 >~ X...... . 2.1 Power Generatlon 3.9 3.9 (3.7) (3.7) 2.2 Minor Equipment and Spar@ Parts - 0.6 0.3" 0.9 for the Refinery (0.6) (0.3) (0.9) 2.3 Rail Tankers 2.7 • 2.7 (2.4) (2.4) 2.4 Ninor Equipment and Spar Part- 0.5 0.11 0.6 for Storage and Transport (0.4) (0.1) (0.5) 2.5 Equipment and Vchicles for LPG 5.4 1.5 0.2W 7.1 Program (5.4 (1.5) (0.2 (7.1) 3.1 Restructuring SOLINA 1.3 1.3 (1.3) (1.3) 3.2 Establishment of Open Access 0.3" 0.3 System (0.3) (0.3) 3.3 EstablIshmmnt of ReguItory 0.3" 0.4 Authority (0.3) (0.4) 3.4 Management of the Refinery 4.6" 4.6 (4.6) (4.6) 3.5 Rydrographic and other studies 0.3" 0.3 (0.3) (0.3) 3.6 Project Mnm~gmmnt 1.3" 1.3 (1.3) (1.3) 3.7 Training 0.2 0.2 (0.2) (0.2) 4. Refunding of PPF 1.5 1.5 TOTAL _zJA,> hgg Figures in perenthesi are the respective amunts financed by the International Dcvelopmnt Assocation. a/ Includes proprietary spares direct from mfpLiera (UM80.2 mittion) and international shopping (USS0.1 mil.ion). b/ International Shopping. c/ ConsuLtentsf services should be proured in accordence with UorLd Bank, Gude i % gton mt Wortd Ban Borrowers and by the WorLd Bank as Executina Aancy (Usshington D.C., Augst ). - 22 - 4.29 The rehabilitation of the visbreaker and of the electric system, the repair of the storage tanks, the replacement of the pipelines and the improvements in the petroleum loading/unloading facilities at Mahajanga, Manakara and Toamasina would be procured by international competitive bidding (ICB). ICB procedures would also be used to purchase the power generation equipment, rail tankers and the major equipment required for the LPG promotion program. Minor equipment for the rehabilitation of the refinery and for storage and transport, as well as for the LPG promotion program, which are difficult to package, would be procured by limited international bidding (LIB) acceptable to IDA. The LIB procured contracts would range between US$0.1 million and US$0.5 million and have an aggregate limit of US$2.5 million. Small items and spare parts in lots of less than US$100,000, with an aggregate limit of US$400,000 would be procured by international shopping. Proprietary spare parts for the rehabilitation of the refinery, with an aggregate limit of US$200,000, would be procured directly from original suppliers. 4.30 Procurement of goods and works will be the responsibility of SOLIMA, which is familiar with the competitive bidding procedures of the World Bank. Consultants will be retained by SOLIMA to prepare bidding documents and assist in the supervision of the investment component of the project, as well as to manage the refinery during the transition period (para. 4.8). The contract for the preparation of final bidding documents and supervision may be awarded to the same engineering firm that undertook the basic studies for the project and prepared preliminary bidding documents for major components (para. 4.17), which was originally contracted in accordance with the World Bank guidelines. The procurement of the other consulting services would be the responsibility of the Directorate of Energy of the Ministry of Energy and Mines, which is at this time implementing the Energy I project (Cr. 1787-MAG), and has frequently used the World Bank guidelines for the use of consultants. 4.31 Madagascar's cumbersome procurement regulations have been a major constraint to the implementation of Bank- financed projects. Following a comprehensive review by the Bank of the country's procurement regulations (Country Implementation Review- December 1990), the Government Issued in January 1991, new regulations to streamline procedures and accelerate project implementation. A follow-up Country Implementation Review was undertaken in March 1992, resulting in the Government decision to use the Bank's Sample Bidding Documents (Prime Minister's decree No. 892/92 of March 6, 1992). This is expected to speed up procurement and project implementation. 4.32 The Project Implementation Schedule is presented in Annex 4.6, from which the estimated disbursements (Table 4.3) have been derived. As indicated above (para. 4.23), preliminary bidding documents for major investment components and for consulting services have already been prepared. 4.33 During project supervision, IDA- financed contracts for works and equipment above a threshold of US$150,000 would be subject to prior review procedures. These include bidding documents, invitations to bid, proposed award and final contracts. The review process will cover about 95 percent of IDA financing. All contracts for consulting services will also be subject to IDA prior review. 4.34 Procurement information will be collected and recorded as follows: a) prompt reporting of contract award information by the Directorate of Energy and SOLIMA; b) comprehensive quarterly reports to IDA by the Directorate of Energy and SOLIMA (assisted by consultants) indicating: (I) revised cost estimates for individual contracts and for the total project, including best estimates of allowance for physical and price contingencies; (ii) revised timing of procurement actions, including advertising, bidding, contract award and completion - 23 - time for indicated contracts; and (iii) compliance with aggregate limits on specified methods of procurement; c) a completion report by SOLIMA within six months of the Credit Closing Date. Monitoring and Reportin 4.35 Progress reports will be submitted to the Bank every three months. The structure of these reports will be defined during the first supervision mission. The proposed supervision plan is detailed in Annex 4.8. A mid-term review will be held by December 1995 and will cover, among other aspects, the following: (i) an assessment of the restructuring of SOLIMA and of the operations of the refinery; (ii) the functioning of the competitive market in the sector; (iii) the pricing and taxation of petroleum products; and (iv) the overall implementation of the petroleum sector reform program. Annex 4.12 includes a set of project indicators, agreed with the Government and SOLIMA, to measure the achievement of project objectives. During the review, the Government and IDA will agree to the changes that are necessary in project implementation. As indicated below (para 5.9), IDA will receive the report of the external auditors within six months after the end of each fiscal year. Environmental Aspects 4.36 The first phase of the rehabilitation program for the refinery will eliminate all leaks of hydrocarbons that at the present time lead to risks of fires and pollute the environment. Large quantities of scrap oil, that are found all over the refinery site in drums tanks, lagoons or soaked into the ground, will be cleaned up and will be disposed of, or recovered into fuel oil. Collection sumps, from which hydrocarbons will be pumped, will be built to reduce the chance of contaminating the groundwater. Firewater monitors and fire hydrants will be overhauled, replaced whenever necessary and subject to a rigorous preventive maintenance schedule. The waste water treatment system will be improved and the level of effluent contamination will be regularly measured to make sure it satisfies modern environmental standards. 4.37 The transfer of the petroleum loading/unloading facility at Toamasina outside the bulk cargo area of the commercial port will improve security and safety, as well as reduce the possibility of oil spillages. As indicated below, the location of the proposed new facility will be determined on the basis of a detailed environmental analysis. Pipelines will be emptied by ship pumps or shore pumps at each operation before being disconnected and therefore no spills are expected to occur. The new structure itself is relatively small and will be barely visible from the shore. It consists of eight dolphins, which are open structures on steel pipes driven into the bed at a depth of 19 meters below sea water level. Since the structure is open, no sediment deposits should occur in its vicinity. The pipelines for crude oil and products leaving the new facility will be installed in a shallow trench dredged in the sea bed and this will cause some turbidity for a short time. However, since spoils will be left close to the trench, existing currents will make them drift back to the trench ifter the pipelines are installed and the sea bed condition will end up being the same as initially. 4.38 The new petroleum loading/unloading facility will result in much less risk than the present facilities. Oil tankers now have to manoeuver in the middle of a busy port and there are risks of collision with bulk carriers, which become very dangerous when there are sudden wind gusts. The project will remove an important traffic from a busy port and from the narrow part of the access channel to it, eliminating collision risks. A specialized environmental consultant will be hired to select the most appropriate location of the facility, to evaluate the construction and operations of the proposed facility on the surrounding marine and coastal environment, to prepare a mitigation plan and to help SOLIMA -24 - in the preparation of an oil spill contingency plan. The project will finance equipment and materials for rapid and environmentally sound response in the eventuality of an oil spill. No Credit funds will be disbursed for the new loading/unloading facility at Toamasina until agreement is reached between IDA and the Government on the implementation of a satisfactory mitigation plan (para. 7.3 (c)). 4.39 The LPG promotion program that will also be financed with the Credit, will foster some small scale reduction in the consumption of woodfuels and will help in the fight against deforestation and for the protection of national forests. This program constitutes a first step in developing the consumption of an alternative fuel, which at the present time is in Madagascar at a very low level, even by African standards. V. FINANCIAL ANALYSIS Finandal Performance of SOLIMA 5.1 SOLIMA's past financial performance is summarized in Table 5.1. Figures are given in U.S dollars, the currency in which most of SOLIMA's expenses are incurred and on which domestic petroleum prices are now indexed. Further details are provided in Annex 5.1. 5.2 CApital Structure. Since the late 1980s, SOLIMA has built up a sound capital structure. As of June 30, 1990, SOLIMA's equity stood at US$29.7 million, comprised of $17.7 million in shareholders' subscriptions and $12.0 million in quasi-equity. The latter consists of a State contribution received in the mid-1970s when SOLIMA was created and of the assets of the now-defunct Caisse de Pdrdquation and Caisse des Hydrocarbures, which SOLIMA took over in the early 1980s. As a proportion of total assets, equity increased steadily from 19.3 percent in 1988, to 27.2 percent in 1991. Foreign currency indebtedness has been moderate in relation to cash generation, and the long-term debt to equity ratio stood at 21:79 in 1991. 5.3 Profitability. Prudent management, together with a monopolistic control of the market and a negotiable tax burden, have allowed SOLIMA to enjoy a relatively high profitability since the late 1980s. In particular, the lower procurement costs resulting from the steep decline in international prices that occurred in the second half of 1988 allowed SOLIMA's earnings before tax to soar from US$2.6 to US$8.1 million between FY 1988 and FY 1989. In FY 1990, the company had earnings before taxes of US$10.5 million and a net profit of U$6.5 million on revenues of US$103.4 million. In FY 1989 and 1990, profit before income tax was 9 and 10 percent respectively of sales revenue; operating margin was a healthy 17 percent in both years and return on equity was 21 and 22 percent, respectively. In 1991, operating income and profit before income tax declined to 4 and 2 percent of sales, respectively, because the increase in domestic prices did not fully reflect the increased cost of crude oil and product imports, and because SOLIMA paid higher taxes on petroleum products (see para. 2.16). However, because domestic prices are now indexed on international petroleum prices, SOLIMA's profit margins are expected to become more stable in the future. 5.4 Working Cgital. Over the past few years, SOLIMA was able to improve its working capital position, as the current ratio increased from 1.4 in FY 1988 to 1.9 in FY 1991. Accounts payable (a substaniial part of which are tax liabilities) dropped from 241 days of sales in FY 1989 to 126 days in FY 1991. Accounts receivable increased moderately from 38 days in FY89 to 52 days in FY91, because of some payment delays from the administration. -25- Toble 5.1 1988 1989 1990 1991 1/ A- Ine* Statm Sales Revenuæ 95.1 93.4 103.4 176.7 pean Ct (n) 85.9) (77.2) %86.2> (167.3> Net FinancaL Expenxe (3.1) (4.9) (0.1) (0.6) Ineome Tax (0.8) (.6) (.0) (1.0) I- Ualnc Uheet. current Assets 87.5 61.1 76.4 82.1 Fixed Assets 13.2 10.3 11.0 13.7 Current Liabllttls 64.5 33.0 32.9 42.7 Long-Term Døbt 10.0 8.5 8.8 7.0 Provisions 6.8 8.8 16.0 20.0 Total Equity 19.4 21.1 29.7 26.1 C- Finnial Ratio Current Ratio 1.36 1.85 2.32 1.92 ................................... E vt otal Assets 19% 30% 34% 27% Profit before tax/sales 3% 9% 10% 2Z 1/ Fiscal yoar of 18 onths anded esanber 31, 1991. FInancial Prolectons 5.5 The projected financial performance of SOLIMA Refinery is summarized In Table 5.2 below. Detailed projections for its Income statement, funds flow statements and balance aheets ar* given in Annex 5.2. These projections are based on SOLIMA's preliminary financial statements for FY91, which provides information on the assm and operating costs of the refinery, and Include Phases I and I of the refinery rehabilitation project, which has a financial rate of return of 17.9 percent and a net preent value of US$20.0 million at a discount rate of 10 percent. Under a Phse I configuration alone, thoe figur would bo 22.9 percent and US$16.4 million, repectively. The assumptions used In thea projections are fully detalled in Annex 5.3 and 6.1. The rehabilitation Investmnt and the management contract to bo financed by the project are expected to increase the Input/output efficiency of the refinery, a well a result In cost savings of 25 percent on purchases of materials and spare parts made possible by Improved maintenance practica. It is also assumed that Implemntation of Phae II would bo financed by equity subscriptions or quas-equity instruments arranged by private shareholders, totalling $23.0 million In 1995-1996. The rate of return on shareholdera' equity during the life of ausets Is projected to be 15.8 percent. - 26 - 5.6 Financial projections show that the refinery after its separation from the rest of SOLIMA will incur losses during 1993 and 1994, because petroleum prices based on the import parity concept will not cover all refining costs. However, with the implementation of Phase I of the rehabilitation project, the refinery can expect to have a net operating income of US$2.2 and US$3.0 million in 1995 and 1996, respectively, and profit before taxes of US$0.8 and US$1.4 million, respectively. In 1997, profit before income tax would increase to about 6 percent of sales and return on average equity (excluding provisions) would be about 7 percent. Over the remaining course of the project, these returns would rise to 6.6 percent and 10.5 percent, respectively. The cash-flow position would be tight during the first two years of operations as a result of the projected losses and the higher working capital requirements because of the initial build-up in petroleum inventories. These are presently carried by the Distribution Department of SOLIMA, but would be transferred to the refinery. Debt service coverage would become satisfactory beginning in 1995, with a minimum multiple of 1.5 from 1996 onwards. Table 5.2 N0LIMl - Sumerized Financl Prolectfans (cstant 1992 US million) 1993 1/ 1994 1995 1996 1997 1998 A- Ince Statemnts Sales Revenue 23.2 44.3 61.8 72.7 85.4 98.9 Operating Cost (inc. (23.3) (44.3) (59.6) (69.7) (79.5) 91.8 depreciation) Operating Income (0.1) 0.0 2.2 3.0 5.9 7.1 Other Expenses (0.3) (0.9) (1.4) (1.6) (1.6) (1.6) Prof it before Incer Taxes (0.4 (0.9) 0. - 1.4 4.5 S. 1- Balance Shets Current Assets 10.1 13.5 16.2 17.9 19.4 21.5 Net Fixed Assets 5.5 11.0 26.4 39.2 38.2 36.3 .t.. Aets5......................... . ... . 1 57. 7.7 Current Liabilies 6.5 10.5 12.9 13.6 14.4 16.1 Long Term Liabilities 5.1 10.4 13.0 14.0 13.7 12.0 Provisions 1.2 1.3 1.4 1.6 1.7 1.8 Total Equity 2.9 2.2 15.3 27.9 27.9 27.9 C- Finmcial Ratfes Current Ratio 1.57 1.29 1.26 1.32 1.35 1.34 Equity/Assets 18 92 36% 492 48% 482 Operating Income/Sales (0.4%) 0.1% 3.6% 4.1% 6.92 7.2% Profit before Ta/WSates (22) (25) 1 55 6% 4. Retur an Avg. Equity neg. neg. 52 3% 75 9z Debt Service Coverage 0.56 0.54 1.17 1.52 2.48 2.46 J/ Six months from July 1 to December 31, 1993. - 27 - 5.7 The base case financial projections were subjected to a sensitivity analysis to measure the impact of changes in several key variables: capacity utilization, project cost, the volume of domestic demand, export sales, and the ratio of international prices between refined products (gasoline, diesel and kerosene) and crude oil. The results are summarized in Table 5.3. The analysis indicates that adverse movements in these key variables do not provoke unattractive financial returns. If the refinery were to run at 80 percent of its scheduled 12,000 bpd capacity, the project would still generate a 16.0 percent financial rate of return. An increase of 20 percent in capital costs would reduce the rate of return to 15.5 percent, whereas a 20 percent decline in domestic demand would cause it to recede to 15.6 percent. However, the project is more sensitive to exports sales and international price relationships between refined products and oil. If exports drop by 20 percent, the rate of return would subside to 12.3 percent, whereas a 10 percent reduction in the refined products/crude price ratios would cause the rate of return to slip to 13.9 percent. Tabte 5.3 SOLINA - Financial Rates of Return Sensitivity Analysis Financial Rate Equity of Return Rate of Return Base Case 17.9% 15.8% Exports Decline 10 15.0% 12.8% Exports Decifne 202 12.3% 9.5% Domestic Demand Declines 10% 16.8% 14.7% Domestic Demand Declines 20% 15.6% 13.4% Capacity Utitization Decifnes.102 17.22 14.5% Capactty Utilization Decifnes 202 16.02 12.6% Prolect Cost Increases 10% 16.6% 14.1% ProJect Cost Increases 20% 15.5% 12.6% Crude/ Refined Product Price Ratio Declines 52 15.92 13.5% Crude/Refined Product Price Ratio Dectines 102 13.92 11.22 Finandal Covenants 5.8 SOLIMA and the refinery that will be established as a separate entity during project implementation, would each be required to: (a) maintain a debt-service coverage ratio of at least 1.0 in FY95 and of 1.5 starting in FY96 and every year thereafter; and (b) consult and obtain prior approval from the Association before making capital investments exceeding US$2.0 million (para. 7.1 (i)). 5.9 SOLIMA and the refinery company, would be required to submit annually to the Association long-form financial statements audited by independent auditors acceptable to the Association, within 6 months of the close of each accounting year. The auditor's reports are to include a memorandum on internal control, an audit of project accounts, including specific references to Statement of Expenditures, an audit of the Special Account, and other such information as the Association may reasonably request. -28 - VI. PROJECTIJUSTIFCATION AND RISKS Project Benefits 6.1. The introduction of market signals and of a competitive environment in the petroleum sector will increase efficiency and promote economic growth. The system of setting official prices for petroleum products by Government's decree and keeping prices below opportunity costs was eliminated in July 1992. As explained above (para. 2.14), the Government has freed the prices of LPG, Jet-fuel and fuel-oil and established a formula for maximum prices of gasoline, diesel and kerosene based on the import parity concept. Maximum domestic petroleum prices are now equal to international prices plus transport costs converted into local currency at the market foreign exchange rate, plus internal unloading and transport costs. Maximum prices are calculated by the operators and freely set by them within the limits, with the Government reserving itself the right to do an ex=st revision only. Since August 1992, petroleum prices have fluctuated each month according to international market conditions and reflected opportunity costs, and this will tend overtime to improve efficiency in the use of petroleum products and the allocation of economic resources, thus promoting economic growth. 6.2. The elimination of the monopoly of the State over the petroleum sector, the increased competition in petroleum distribution, the introduction of open competitive bidding for the procurement of crude oil and the basic rehabilitation of the existing infrastructure, will save scarce foreign exchange. In relation to the situation existing in 1990, these savings have been estimated at about US$10.0 million per year after project completion. At the same time, with the new tax regime, the petroleum sector has increased its contribution to fiscal revenues from about US$5 million in 1990 and 1991 to US$19.8 million in 1992 and an expected US$31.6 million in 1993. The Government will be able to use these savings and additional revenues to satisfy priority economic and social needs. 6.3. The LPG promotion program will foster small-scale substitution of LPG for charcoal and will have positive environmental consequences by alleviating the country's deforestation problems. Given the incentive structure created through the project, it is expected that these LPG promotion efforts will be replicated in the future. The elimination of hydrocarbons leaks at the refinery and the improvements in the loading/unloading facilities at Toamasina will also have positive environmental effects. 6.4. The economics of the rehabilitation of the refinery has been assessed by comparison with the option of closing it down and supplying the domestic market entirely with imported products. As explained below (para. 6.7), the implementation of Phase I would generate savings to the country in the order of US$2 - US$4 million annually compared to the direct import of refined products, while Phase II would generate additional savings of US$5 million per year. The refinery rehabilitation component has an expected economic rate of return of 15.7 percent if only Phase I is implemented and 17.0 percent after implementation of both Phases I and H. The net present value at a discount rate of 10 percent is US$8.8 million after Phase I and US$20.9 million when both phases are implemented. The details of these calculations are presented in Annex 6.1. 6.5. A sensitivity analysis was carried out to assess the impact of changes in capital cost, domestic demand, capacity utilization and prices. A 20 percent increase in the cost of the project would cause the rate of return to fall to 13.5 percent for Phase I and 14.3 percent for both Phases I and I. With respect to capacity utilization, should the refinery run at only 80 percent of the scheduled utilization of 12,000 bpd, the rate of return would fall to 12.0 percent and 13.6 percent, respectively. Similarly, a 20 percent reduction in the volume of domestic demand would lower the rate of return to 13.5 percent for Phase I and 15.2 percent for both phases. Changes in freight cost or in the price of crude would have no substantial impact on the rate of return of the refinery rehabilitation project. -29 - 6.6. However, the results are sensitive to the relation between the prices of refined products to the prices of crude oil. The base case used the average price ratio over the period 1986-1992. Should this ratio decrease by 5 percent, the rate of return will fall to 10.7 percent for Phase I and 14.2 percent for both phases. If the ratio decreases by 10 percent, the economic rate of return will decrease to 5.4 percent under Phase I and 11.4 percent under Phase U. Price sensitivity analysis show that the implementation of Phase U makes the project more robust if the relation between international product prices and crude oil prices falls across the board. The results of all the sensitivity analysis are presented in Table 6.1. Table 6.1. Rehbilitation- Economic Rates of Return SeMitivity Anavs .... ...... Base Case 15.7 17.0 Project Cost Increases 10% 14.6 15.6 Project Cost Increases 20% 13.5 14.3 Domestic Demand Dectines 10% 14.9 16.2 Domestic Demand Declines 20% 13.5 15.2 Capacity Utitization Dectines 10% 14.1 15.6 Capacity Utilization Declines 20% 12.0 13.6 Crude/Refined Product Ratio Declines 5% 10.7 14.2 Crude/Refined Product Price Ratio Declines 10% 5.4 11.4 6.7. The rehabilitation of the visbreaker unit would ameliorate the yield pattern of the refinery by reducing the output of excess fuel oil and increasing the output of scarce diesel oil (see Table 2.2). Together with the other rehabilitation measures, this will increase the overall yields of the refinery from the present 92.6 percent to 95.5 percent, reduce the purchase of spare parts and materials through increase maintenance and debottleneck the processing capacity of the refinery to an average operation of about 550,000 tons per year. Taking 1999 as an example, the composite ton of crude oil processed with the Phase I configuration would be worth US$11.8 per ton more than direct import of products (gross refining margin). With fixed operating costs of US$5.6 per ton, the rehabilitation of the refinery will bring about net savings of US$6.2 per ton, which will represent economic savings to the country in the order of US$2-US$4 million annually compared with the direct import of refined products. The addition of a thermal cracking facility under Phase U will further improve refinery yield patterns by converting more fuel oil into middle distillates. The gross refining margin will increase to US$20.2 per ton and the economic benefits over the import of refined products to US$14.6 per ton, generating additional benefits of US$5.0 million per year compared with only Phase I. 6.8. Another simulation was carried out to assess the profitability of the rehabilitation of the refinery over the direct import of refined products taking into account the price fluctuations observed over the past six years. The results, detailed in Annex 6.1, show that operation of the refinery under Phase I and Phase U configurations would have been less costly to the country that direct import of products, while the present configuration of the refinery gives negative results. Phase I configuration would have incurred losses only under the depressed relative prices prevailing in 1986 and 1987. Phase R configuration would have proven to be more resilient and would have made an economic loss only in 1986. 6.9 As mentioned in para. 2.13, the petroleum terminal in Toamasina is a weak link in Madagascar's supply system. Because of insufficient water depth, oil tankers moor using anchors and cables at some - 30 - distance from the petroleum jetty, in the middle of the general cargo area, and are loaded/unloaded through flexible hoses. These operations pose unusually high collision, explosion and environmental hazards, involving risks far above levels acceptable by international standards. They may also result in hydrocarbon spillage. In addition, loading/unloading operations are slow and result in high lay times and demurrage payments for visiting oil tankers. For environmental and safety reasons, it is therefore desirable to transfer the present oil handling operations away from the main cargo area. The new terminal would also fit well in Madagascar's new strategy of opening up the petroleum sector. By improving safety and environmental standards of oil handling operations, the proposed terminal would make Madagascar more attractive for foreign petroleum operators and would foster increased competition from foreign suppliers. In addition to the above safety, environmental and competition considerations, the new terminal has certain quantifiable economic benefits in terms of reductions in transport costs, with an economic rate of return estimated at about 13 percent. These benefits would accrue from the reduced freight costs incurred with the larger 80,000 dwt crude tankers that could be accommodated in the new location; from reduced ship loading/unloading times, with resulting savings in demurrage costs; from lower insurance premia; and from increased maneuvering flexibility for non-petroleum cargo in the existing port. The assumptions used in the calculations are presented in Annex 6.2, while sensitivity results to changes in the main variables are summarized in the table below. Table 6.2 New Petroleum Loading/Unioading Facility at Toamasina Economic Rates of Return- Sensitivity Analysis ...................P.......... ....hase Phase1 Base Case 12.5 12.5 Project Cost Increases 20% 10.2 10.3 Savings in transport cost reduced in 20% 10.6 10.6 Savings in supply premium reduced in 20% 12.3 12.4 No benefits for the present port 9.3 9.3 6.10 The LPG Promotion Program will finance the replacement of key storage and distribution equipment that has reached an end of its useful life. Without the investments included in the project, consumption of LPG is expected to decline from the present low level and be replaced by the use of woodfuels, with negative environmental consequences. The project will also finance rehabilitation of existing filling plants, and new storage tanks and equipment that would allow an increase in consumption to about 6000 tons in year 2000. It should be noted that this level of consumption is still low even by African standards, and that further increases would only be possible as a result of the additional investments that are expected from the private sector. However, the development of the LPG market on a large scale is not expected to be a priority for the private investors and may take some time to develop. The economic rate of return of the proposed LPG program is about 27 percent. Sensitivity analysis indicates that this rate of return declines to 20 percent if demand is 20 percent lower than the one that is projected. The details of the economic analysis and sensitivity calculations are presented in Annex 6.3. -31- 6.11 The rehabilitation of the refinery, the new petroleum loading/unloading facility at Toamasina and the LPG Promotion Program represent about 80 percent of the total investments of the project. The rest consists of repairs to existing facilities (storage tanks, unloading terminals), replacement of essential equipment that has reached an end of its useful life (tank wagons, pipelines) and spare parts, for which the calculation of an economic rate of return is not appropriate. These investments are necessary to maintain the present level of petroleum supply; without them demand would not be satisfied and the normal functioning of the economy will be disrupted. To a certain extent, disruptions in the supply of petroleum products have already occurred in Madagascar in recent years because the lack of foreign exchange has prevented normal maintenance and the replacement of obsolete equipment in the sector. This has had an effect on the growth rate of the country. The project will provide financing for the rehabilitation of basic infrastructure that is urgently needed for economic growth. Project Risks 6.12 All rehabilitation and investment works will be executed by foreign contractors and supervised by consultants with broad experience in carrying out similar works. The Government has already approved the crucial reforms in the pricing and tax system and promulgated the law eliminating the monopoly of the State over the petroleum sector and the decree establishing the rules for private operators to open distribution stations. There is broad consensus in the country about the need to improve competition in the petroleum sector and there is almost no risk that the Government will backtrack from implementing the additional measures required. The main risk regarding the project is the inherent business risk relating to commodity prices. An increase in oil prices could alter the global demand/supply balance of refined products, since a movement in the supply of the latter changes more slowly than shifts in demand. Unless marginal refineries are closed to adjust the global supply of refined products to a decrease in demand, then an oversupply would cause prices to fall and refining margins to narrow. As indicated before, the implementation of Phase H of the refinery rehabilitation program makes the project more robust to support wide fluctuations in relative prices. 6.13 A relatively minor financial risk exists to the extent that during the first 18 months following Phase I, the refinery would a have a very tight debt service coverage ratio. This condition is principally a result of increases in working capital owing to greater capacity utilization and from the need to finance initial stocks of raw materials, which previously were borne by SOLIMA's distribution department. It is expected that the refinery would finance this incremental working capital through short-term borrowing, and in so doing would also be able to cover its obligations on principal repayments. Another risk relates to the availability of private sector funds to complete Phase I of the rehabilitation program for the refinery. This risk is substantially reduced after the completion of Phase I, which will have converted the refinery into a profitable entity, able to compete against imports in a non-subsidized environment. Also, private operators will already be participating in the domestic distribution markets and will be interested in owning a share of the least cost supply source for their sales in Madagascar and other islands of the region. The privatization process through the selling of shares allows the tapping of funds from various sources, which also reduces risks, and contributes to promote the competition objectives of the project. VII. Agreements and Recommendations 7.1 During negotiations, the following agreements have been reached: (a) the Government will: (i) onlend to SOLIMA up to a maximum of US$33.3 from the proceeds of the Credit at an 8 percent interest rate for a period of 20 years, including a 5-year grace period, for which SOLIMA will bear the foreign exchange risk; and (ii) - 32 - make available to SOLIMA on a grant basis up to a maximum of US$14.9 million (para. 4.21); (b) the Government shall submit before June 30, 1994, a proposal for the restructuring of SOLIMA and thereafter implement said proposal (para. 4.7); (c) the refinery shall be separated from the rest of SOLIMA and established as a separate joint-stock company ("socidt6 anonyme") under commercial law, and wholly-owned by SOLIMA (paras. 3.6 and 4.7); (e) the Government shall submit before March 30, 1994, a study for the establishment and operation of a system of open access by all operators to key infrastructure petroleum facilities and thereafter shall implement the recommendations of said study (para. 4.7); (f) the Government shall submit before June 30, 1994, a study for the establishment and operation of a Petroleum Regulatory Authority and thereafter shall take all necessary steps to establish said authority (para. 4.7); (g) the procurement of crude oil and products shall be done through competitive bidding procedures acceptable to IDA and SOLIMA shall furnish to the Association for its review the bidding documents related thereto; in addition, once the supplier has been selected, SOLIMA shall furnish to the Association a copy of the bid evaluation report (para. 3.10); (h) a mid-term review will be undertaken by December 31, 1995 and will cover, among other aspects, the following: (1) an assessment of the restructuring of SOLIMA and of the operations of the refinery; (ii) the functioning of the competitive market in the petroleum sector; (iii) the pricing and taxation of petroleum products; and (iv) the overall implementation of the petroleum sector reform program in relation to the agreed performance indicators (para. 4.35); (1) SOLIMA and the refinery company that will be established as a separate entity will: (i) employ qualified and independent external auditors; (1) send to the Association, not later than six months after the end of each fiscal year, audited financial statements that would comprise audits of the project accounts, including the Special Account and the Statement of Expenditures; (iii) maintain a debt service coverage ratio of a least 1.0 in FY95 and of 1.5 starting in FY96 and every year thereafter; and (iv) obtain the approval of the Association before making capital investments larger than US$2.0 million (paras. 3.5, 4.27 and 5.8); (j) the Ministry of Energy and Mines will send to the Association no later than six months after the end of each calendar, audited project accounts which will include audits of the Special Account and of the Statement of Expenditures (para. 4.27); (k) upon completion of the first phase of the rehabilitation of the refinery, SOLIMA will transfer this facility and all assets and liabilities relating thereto to its wholly-owned subsidiary, SOLIMA Refinery (para. 4.8); (1) on an annual basis, the Government will exchange views with the Association with regard to petroleum product prices and taxes and establish and maintain said prices and taxes taking into account the results of such exchange of view (para. 2.16); - 33 - Conditions of Credit Effectiveness 7.2 The following conditions of effectiveness have been reached: (a) the subsidiary loan agreement between the Government and SOLIMA shall have been executed (para. 4.21); (b) the Project Coordinator within the Ministry of Energy and Mines shall have been appointed under terms of reference acceptable to the Association (para. 4.22); (c) SOLIMA shall have employed a qualified Project Manager, a Mechanical Engineer and an Accountant, under terms of reference acceptable to the Association, and SOLIMA shall have employed an engineering consultant to assist it in the management of the project (para. 4.22); (d) final bidding documents for the rehabilitation of the refinery shall have been received by the Association and found acceptable (para. 4.22); (e) standard bidding documents for the procurement of crude oil shall have been adopted by the Government and SOLIMA (para. 3.10). Conditions for Disbursements 7.3 The following condition of disbursements have been reached: (a) disbursements of funds for the rehabilitation of the refinery shall be made only after the team of experts that will manage the refinery during a transition period has been hired (paras. 3.3 and 4.8); (b) disbursements of funds for works related to the basic improvements in petroleum storage and transport will be made only after the Government: (i) has established the open access system and the petroleum regulatory authority with operating rules satisfactory to the Association (para. 4.7); and (ii) the Government has taken all steps required to allow refined petroleum products prices to reflect regional differences in transport and storage costs (para. 2.14); (c) disbursements of funds for works related to the new petroleum loading/unloading facility at Toamasina will be made only after the Government: (i) has reached agreement with IDA on the implementation of a satisfactory mitigation plan (para. 4.38); (ii) a convention on the modalities for the execution of the works and the use of the new facility has been signed between SOLIMA and SEPT (para. 4.15); (iii) the refinery has been established as a SOLIMA subsidiary, the restructuring plan for the rest of SOLIMA has been adopted and the Government has taken all steps required to allow the participation of private sector capital in SOLIMA's refinery (para. 4.7) and (iv) the import of refined products has been liberalized (para. 4.4). 7.4 With the above agreements, the project is suitable for an IDA Credit of SDR 36.7 million (US$51.9 million equivalent) on standard terms.  Prnry Enorgy Peo~eum Produc Crde Hydro Une om Coa Energy Fuulwood Boe~ Chscoaul Eluetty LPG Gan Karoen. G« ol Fuel o TOami Tota~. Groes supply Production 29.4 2995.7 72.9 30 Imprt 289.9 3.8 1.1 16.5 24.A 113.2 155.4 449.1 Expot -87 -87 -87 Sock Changes 13.3 -0.1 3.4 -0.5 -1.4 7.5 8.9 22.2 TotalOAveale 303.2 3.8 29.4 2995.7 72.9 1 19.9 24.1 111.8 -79.5 77.3 3482 N 0 Conver~ion 2.M1. P01eum Ralning -293.5 2.8 73.1 32 U.G 118.9 203.5 0 Pw geneso~n -29.4 -10.5 84.9 -30.3 -14.7 0" acol podu -219.1 219.1 00ø n ntern COn. I L~ae -9.7 -1051.3 -11.9 -10790 t o Net Supply Avalble 3.8 1725.3 62.4 219.1 73 3.6 93 58.4 150.1 22.7 325.8 2409.48 ø 1 n Consumplan by rt M Industry & Minig 3.8 204 62.4 5.4 32.3 0.2 3.5 30.4 14.4 48.5 358.40 0 Trp 93 20.8 103.8 4.1 221.7 221. Agrmk: e 4 4 4 Househok~a 1484 167.4 25.4 2.9 32 34.9 1711.7 COmmerce & 0 r Sevce 37.3 46.3 15.3 0.5 0.1 11.9 4.2 16.7 115.6 Total Conuunp 3.8 1725.3 62.4 219.1 73 3.6 93 58.4 150.1 22.7 325.8 2400.4 n Source: MEM und mis~n esate ANNEX 2.1 MADAGASCAR PEROIEUM SECOR REFORM CONSUMPION OF PETIROLBUM PRODUCS 1984-1991 (in thowand ton) 1984 1985 1986 1987 1988 1989 1990 1991 1992 LPO 2.4 2.7 2.7 2.5 2.5 2.6 3.1 2.8 2.6 Premium 1.9 1.6 1.9 1.7 1.9 2.0 3.0 2.5 R*gular 51.5 52.8 54.7 53.3 50.2 52.7 55.1 48.4 54.2 Avga 1.0 0.7 0.7 0.7 0.7 0.7 0.9 0.7 Met pud 17.2 20.7 17.8 20.2 21.8 19.0 17.5 9.3 49.2 zeroa. 26.3 27.4 29.7 29.9 28.7 30.1 34.1 32.2 D~esI 127.8 131.3 146.4 143.7 141.7 154.5 166.7 165.1 178.7 o§el O 41.2 52.5 32.1 31.6 30.8 30.1 32.9 27.0 26.1 MADAGASCAR- Petroleum Sector Reform ANNEX 2.2 Depots SOUMA. MADAGASCAR. * *o ..m c.." oers aan an - I vemld OWa . we ..t.a yewo "Wmm. l.W. a . P-0.t 1= =10 "Joe& m" 0.0n" ANNEXL23 MADAGASCAR A. Non Investment or minor investment items. 1. Replace worn-out flexibles 2. Equip refinery and quay with VHF radio units 3. Check distance between mooring buoys at Mahajanga 4. Fit steel pipe bends to avoid knuckling on ships and quays 5. De-ballast tankers and then load 6. Install relief valves 7. Review barge replacement program 8 Review standards of barge maintenance 9. Replace stand-by pump on 12" line at the refinery 10. Investigate alternative to "fuel oil-operation" (import crude line is back-filled with fuel-oil before the incoming tanker departs). B. Investment Projects 1. Increase stock levels of refined productsl/ 2. Install communications system between the coastal depots, the inland depots, the refinery and the head-office in Antananarivo 3. Purchase 18 new rail tanker wagons 4. Install "Discrete Event Model" software package to improve distribution planning 5. Install booster pumps at Mahajanga 6. Commission study for pantoon manifold at Mahajanga 7. Commission study for pick-up buoy mooring at Manakara 8. Improve standard of refits on SOLIMA tankers 9. Replace "Isle de France" barge at Mahajanga 10. Repair/replace 10" line from refinery to port 11. Install new dolphin oil berth in the port of Toamasina 12. Consider installation of marine loading arms on SOLIMA tankers 13. Appoint an expert to appraise the storage and oil movement activities Source: Study for the improvement in Production and Distribution of Refined Products- Phase I Repo. KBC Process Technology, May 1991. 1/ Not included in the project. T*,..,( -% 1.38 0.740.64 S.03ac FUEL GAS 1.38 2.0 0.22, , 0.38 0.90 , 0.72 , ,0 ~CAL^1pcAH T S BUTANE 1.39 2.05 S1.15 3.22 1.0 * 10ee SPU-....3 -.- -az 20. 7.18 REGULAR 10.28 15.1 87 RON 9.43 7.g1 0.42 PREIUM 0.75 1.1 95 RON 71 T7.19 10.6 -X FP ABEL-411 FREEZE -53C GASOL 15.47 22.75 I 15.47I 0 fl .54 FM t 30.54 44.9 RMJEL 0 0 31.54 54 0 No 2 0 1EIbNERY FUEL 1.0 1.5 68.0 100 FLOATES GIVEN IN loh( SOLIMA REF~NRY MADAGASCAR REFREERY REHAEITATION STUDY PROCESS BASE CASE REFINERY RUNNING PLAN Ao.1 20-04-76 LAY '91 ANNEX 2.5 Page 1 of 3 MADAGASCAR Refier Rehabilitation and Improvement Progrm I- NON OR MINOR INVESTMENT ITEMS A- Yield Improvenent Ni Assure effective reformer operation: Improve Gasoline Yield N2 Control reformer severity and lead addition: Improve Gasoline Yield. N3 Control gasoline RVP with Butane: Reduce giveaway. On-grade products. N4 4 Additional trays in C-1303. Upgrades gasoline to kerosene. N5 Improve gasoil residue fractionation. Upgrades residue to gasoil. N6 Install overflash loop. Improve control to increase N5 benefit. N7 Install superheat loop on Fl 101 atomizing steam. Improved operation. N8 Develop alternative fuel oil markets. Improved selling price for surplus ftel oil. N9 Produce Bitumen from visbroken tar. Upgrades fuel oil. Needs P4. B- Energy and Lea Improvement (Units Andennes only) NI0 Fix steam & hydrocarbon leaks. Reduce losses. N11 Reduce gas to flare, fully utilize fuel gas. N12 Improve furnace efficiency and excess air control. Save fuel. N13 Fix up deaerator to permit operation at design temperature: Reduce refinery wide corrosion. N14 Restore design vacuum to reformer RCO turbine condenser: Save fuel. ANNEX 2.5 Page 2 of 3 MADAGASCAR C- Safety & Reliability Improvemnt N15 Clean out the water Intake areas in the Canal. N16 Clean out onsite canal water concrete pump tanks. N17 Fit automatic remote start to diesel drive firewater pump. NI Modify sump strainers for cooling water/firewater. N19 Improve access using new stairs, walkways, ladders. N20 Install lifting beams over equipment needing regular removal N21 All gas bottles to be chained. Unused bottles protected. N22 Plan to remhove or upgrade all temporary wiring. N23 Overhaul leaking fire hydrants. N24 Overhaul defective safety showers. N25 Overhaul defective firewater monitors. N26 Consider reinforced concrete wall in front of Control Room. N27 Adopt conalatent color coding for lines based on contents. N28 Install welding flash screens. D- General Items N29 Improve API Separator Performance. N30 Improve Recovery/Disposal of Scrap Oil. N31 Dismantle & remove redundant equipment. N32 General review of pipe supports. N33 Repair tank level gauges. N34 Repair No. 6 Crude Tank Roof. N35 Replace broken lights, tubes, fittings- especially workshops. ANNEX 2.5 Page 3 of 3 MADGASCAR II- INVESTMENT ITEMS A- Yield Improvement P1 New Reformer Catalyst and pressure reduction: Improved gasoline yield. P2 Supplement C1303 reboiler: Upgrade gasoline to kerosene. P3 Improve crude preheat: Help achieve NS. (Also save energy) P4 Rehabilitate No. 2 Extension (visbreaker and bitumen complex) & install soaker: Residue upgrading. P5 Install gas leak detector/fuel gas scrubber: Safety and corrosion improvements. P6 VGO Thermal Cracker: Residue upgrading. B- Energy and Las Improvement (UnitAs Ancienes only). P7 Replace gasoil by fuel oil as generator fuel: Cheaper fuel. PS Preheat deaerator feedwater: Improved operation and fuel savings. P9 Install additional power generation and improve electrical distribution: Needed for P4. PIO Install better design reformer charge pumps: Required for Ni. P11 Reroute cooling water to bypass API separators: Improve effluent quality. P12 Upgrade treatment of refinery waste water: Improve effluent quality. Sourc Study for the Improvement in Production and Distribution of Refined Products- Phase I Report, KBC Process Technology, May 1991. ANNEX 2.6 MADAGASCAR A- Petroleum Prices and Taxes- February 1993 (US cents per liter1/) PETROLEUM PRICE CIF USERS PRICES TAXES TOAMASINA LPG 3.6 16.4 27.92/ PREMIUM 26.3 14.3 50.6 GASOLINE REGULAR 21.0 13.2 43.6 GASOLINE KEROSENE 0.0 15.5 24.8 DIESEL 5.8 15.5 30.5 FUEL OIL n.a n.a 14.92/ 1/ Exchange rate- US$1= FMG 1,899 Z/ Unregulated prices. The indicated price for fuel-oil is for non-special clients in Antananarivo. B- Fiscal Revenues from all taxes paid by the Petroleum Sector billion FMG million USS 1990 7.1 4.5 1991 9.3 5.4 1992 36.7 19.8 1993 60.0 31.61/ I/ Estimated Source: SOLIMA ANNEX 3.1 MADAGASCAR PETROLEUM SECTOR REFORM SOLIMA ORGANISATION DO Audit (Business Support) 0 GSA DGA Distribution -Refinery Finance/Adin Personet Projects Operations Distribution (1) 2) &Sales Functions which are Important to the Present Study * mesiers of the Selis Main Board of Directors (1) The person in this position was previously a Refinery Engineer and is a qualified Or Ing. in Chemical Engineering (2) This is a position held by a delegate from the Personnel Unions ANNEX 3.2 8 - a. ifn: .9 -- 1 ji 21 -J UJ] zs >a ,u..- cc i - l LE ANNEX-3. MADAGASCAR PERURMSTRREFORMMPRJEC[ Summary of Operadng Costs of the Refinery at Toamasinal/ (US thousands) TOTAL LOCAL FOREIGNZ/ Materials/Spare Parts 3,300 300 3,000 External chargesj/ 1,000 - 1,000 Taxes 1,400 1,400 - Financial Chargesj/ 2,200 200 2,000 Catalysts & Chemical 700 - 700 Staff Salaries/Wages 400 400 - TOTAL 9,000 2,300 6,700 (Excluding Financial Charges) 6,800 2,100 4,700 I/ Taken from SOLIMA "Operating Costs" summary for 1990, excluding depreciation. Z/ Estimated foreign content. I/ Paid to service companies outside Madagascar. 4/ Repayments on loans already incurred. ANNEX 4.1 Page 1 of 3 MADAGASCAR PETROLEUM SEC'IOR REFIORM PROJECT ASSISTANCE TO THE RESTRUCTURING OF SOLIMA TERMS OF REFERENCE BACKGROUND 1. SOLIMA is a state owned company established by Law No. 76-021 dated June 25, 1976, with the responsibility of implementing the policies of the Government in the petroleum sector Until recently, the import, transport, storage, transformation and distribution of petroleum products was an exclusive monopoly of the State and SOLIMA was the only entity authorized to undertake these activities in Madagascar. 2. Starting in 1991, the Government of Madagascar embarked in a liberalization process of the petroleum sector. Law No. 93/002 of January 8, 1993 allowed private operators to open and operate distribution stations. Decree No. 93-136 of March 24, 1993 established a transition period, going until December 31, 1995 where all operators are required to buy refined products from the refinery at Toamasina. After this date, imports by any operator will be allowed. 3. As part of the restructuring process of the sector, the refinery at Toamasina has been made a separate entity. With the support all the World Bank, the refinery will be rehabilitated to efficiently compete with inputs of refined products. The Government is committed to create a competitive environment for the petroleum sector. For this purpose, it has decided to restructure SOLIMA, guarantee a system of open access by all operators to certain key infrastructure now owned by SOLIMA and establish a Petroleum Regulatory Authority. It is envisaged that some shares of the new companies to be created from the restructuring of SOLIMA will be sold to the private sector. OBJECIT 3. The main objectives of this assignment are: (i) to explore various options and to develop a strategy for restructuring the State Oil Company (SOLIMA); (ii) to define and develop a plan of action which will include policy and institutional changes required to carry out the restructuring process as well as an implementation schedule; (iii) to undertake the necessary preparatory work for the restructuring process including the valuation of assets; and (iv) to assist the Government and SOLIMA in all aspects of the restructuring process. 4. The study will be developed bearing in mind that the Government objectives in the petroleum sector are to promote liberalization, increase competition and private sector participation and ensure the efficient use of public resources. SCOPE OF WORK 5. The scope of work includes the following: ANNEX 4.1 Page 2 of 3 - Analysis of restructuring options, including the merits of breaking up of SOLIMA into competitive companies at the distribution level, and of establishing an independent service company to own or operate the facilities that should be used by all operators. - Asset identification and evaluation. Estimate of the value of assets should be done employing various methods, including Obusiness potential" or discounted cash flow models, liquidation values and recent sales of similar facilities. Sufficient detail should be given in these calculation to support the restructuring process. A sensitivity analysis should be included, and value ranges should be suggested. - Analysis of alternatives of privatization, including public offering of shares, auctions, direct negotiations, etc. - Selection of a preferred spin-off configuration and privatization option. - Technical assistance to assist in implementing the restructuring and privatization process. This may include the preparation of bidding and other documents that are required, as well as counsel and advice on the selection process and other implementation measures. 6. As a result of the analyses, the consultants would recommend a specific institutional structure for SOLIMA and a plan of action for its implementation, iqcluding objectives, strategy, responsibilities, schedule and organigram of the new companies. The output will be in a form of a report with the following basic outline: - Objectives of the restructuring process; - Structural options and their evaluation; - Detailed presentation of the preferred options for restructuring SOLIMA; - Privatization and ownership of assets. Required regulatory framework and laws. Recommended strategy. Implementation plan. - Implications of the proposed restructuring and privatization on: (i) investments; (li) operational efficiency and human resources; (ii) human resources and overstaffing; (lv) financial results, and (v) Government revenues and pricing policy; - Transition to a new structure and steps required, including the development of a transitional manpower program; - Asset identification and evaluation. Methodology, methods, results and sensitivity analysis; - Recommended division of assets. Assets values. ANNEX 4.1 Page 3 of 3 QUALIFICATIONS The consultants for this assignment must have extensive, practical experience in the restructuring and privatization of state-owned enterprises in the petroleum sector (especially in refineries and other downstream activities). Asset valuation techniques are expected to be a critical part of the effort, thus firms should demonstrate their capabilities In this field. Consultants should also be qualified to support the Government and SOLIMA in the organization of joint-stock companies ("socidtds anonymes") and the selling of shares to investors. ANNEX 4.2 Page 1 of 2 MADAGASCAR PETROLEUM SECTOR REFORM PROJECT ASSISTANCE IN ESTABLISHING RULES FOR THE OPEN ACCESS BY ALL OPERATORS TO KEY INFRASTRUCTURE FACILITIES TERMS OF REFERENCE BACKGROUND 1. The Government of Madagascar, with the support of the World Bank, embarked in the reform of the publicly owned enterprises in the energy sector, focusing on the one hand on generating an environment of open competition and on the other hand on restructuring and privatizing a host of commercial activities carried out by these enterprises. As a result of these guidelines the Government has already begun the transformation process towards a more efficient hydrocarbon sector through the deregulation of petroleum products' prices and the liberalization in August 12, 1991 (Law 91-022) of the import, transport and distribution of lubricants. The monopoly of the State in the conduct of these activities was eliminated by Law No. 93/002 of January 8, 1993, which extended the liberalization to all petroleum products. Decree No. 93-136 of March 24, 1993 of the Ministry of Energy and Mines (MEM), allowed immediate operation of private distributors, but established a transition period up to the end of 1995 in which all imports of gasoline, diesel and kerosene will be centralized by SOLIMA. 2. To avoid duplication and inefficiencies in opening up the market to the private sector, a system should be put in place that would guarantee an open but fair competition and access by all operators to certain key infrastructure facilities. OBJECTIVE 3. The objective of the assignment is to assist the Government in establishing clear and transparent rules for the access of all operators to certain key infrastructure facilities that would promote a competitive environment in the petroleum sector. SCOPE OF WORK 3. The scope of work includes the following: - Work closely with the consultants hired for the design and establishment of the Petroleum Regulatory Authority (PRA), with a view of designing a regulatory framework fully compatible with the institution set to carry it through. - Design of rules and regulations that would ensure the promotion and maintenance of effective competition to: (i) prevent abuses of economic power and thereby protect the interests of consumers and operators. For this reason, provisions against monopolization and abuse of dominant market position by any operator should be formulated as well as a system ANNEX 4.2 Page 2 of 2 for resolving disputes arising therefrom; and (ii) encourage economic efficiency in the import, refining, transport and distribution of petroleum products in Madagascar; Establish minimum technical, safety and environmental requirements to be satisfied by all operators, in line with industry standards; Identification and description of the facilities to be used by all operators. The facilities would in particular include the petroleum terminals and storage facilities; Definition of formulae for fees to be paid by an operator for the use of such facilities.The fees will take account of all costs relating to the facilities, and provide a return on capital employed. The level of the fees should, however, be fair and not become an instrument for hampering market entry. In the case of sales to the local market, the fees will be payable in Malagasy Francs. For transit or other foreign exchange earning business, the fee will be payable in US dollars. ANNEX 4.3 Page 1 of 2 MADAGASCAR ESTBLSHMNTOF THE PTOLEUM, REUAxYUHRT 1. The Government of Madagascar through the Ministry of Energy and Mines (MEM) is developing general policy guidelines in the petroleum sector based on the following principles: (1) the energy policy would be established within the framework of the country's macroeconomic policy stressing the need for an open economy where price deregulation, open competition and the private sector would play the key roles; (ii) given the constraints on government resources, the private sector would play an important role in all aspects of the petroleum sector; (i) in order to promote optimum allocation of financial resources, prices of petroleum products would reflect their economic costs; and (v) pricing policy and other measures are needed to promote energy efficiency, conservation and environmental protection. 2. In line with this sector policy, the Government of Madagascar, in conjunction with the Malagasy Petroleum Company (SOLIMA), is implementing a program for the restructuring and privitization of the Malagasy petroleum sector as well as putting into place an enabling environment for private sector participation in petroleum sector activities. 3. Consultants are being hired to design the regulatory framework, including the draft legislation, upon whose approval by the Government of Madagascar, the independent regulatory authority for the petroleum sector can be established. Consultants are to be hired to assist the Government of Madagascar in preparing the detailed design and organization structure of the regulatory authority, setting up the required regulatory systems and procedures, and establishing the Petroleum Regulatory Authority and making it operational. 4. 7Ie objective of the assignment is to assist the Government in establishing the Petroleum Regulatory Authority and making it operational. SCOPE OF WOIRX 5. The consultants would be required to: - Work closely with the consultants hired for the design of the regulatory framework with the view of preparing an implementation program, identifying the stafflag needs, computer systems and other facilities; - Assist the Petroleum Regulatory Authority in the recruitment of the recommended staff and provide training; ANEX 4.3 Page 2 of 2 - Prepare operational guidelines for the Petroleum Regulatory Authority (PRA), which will delineate the powers and responsabilities of the PRA (especially In keeping an open but fair market for petroleum and petroleum products), and their interface with the Ministry of Energy and Mines (MEM), other branches of the Government, as well as with the corporate entitles to be regulated; - Prepare clear guidelines on the process of regulation, i.e. when do the regulated companies approach the PRA for various kinds of approvals, the method of approach, the time frame that will be required by the PRA to take decisions, etc..; - Prepare the list of information, including formats that will be required to be submitted by the corporate entities to PRA for various kinds of decisions; - Prepare the administrative structure, budget, salary structure, sources of fndlng, etc. for the PRA. ANNEX 4.4 Page 1 of 8 MADAGASCAR PETROLEUM SECTOR REFORM TERMS OF REFERENCE FOR REFINERY MANAGEMENT SERVICES CONTRACT Contents A1.5.1 Introduction A1.5.2 Refinery Operation and Facilities A1.5.3 Scope of Work A1.5.4 Management Team A1.5.5 Solima Representation A1.5.6 Remuneration Tables A1.5.1 Refinery Facilities A1.5.2 Profiles and Job Descriptions envisaged for Management Team Figures A1.5.1 Refinery Site Overview ANNEX 4.4 Page 2 of 8 TERMS OF REFERENCE FOR REFINERY MANAGEMENT SERVICES CONTRACT A1.5.1 Introduction Solima is the state company of Madagascar responsible for oil refining and product marketing. They own and operate a hydroskimming refinery at Tanatave that includes also a mothballed visbreaking complex. They are presently in the initial phase of recommissioning this complex and refurbishing the refinery generally. The Government of Madagascar has decided to separate the refining and product marketing functions into two separate sectors. It is envisaged presently that the product marketing sector will be opened to external participation, but that the refining sector will remain the exclusive responsibility of Solima in the immediate future. However, in order to facilitate an improved level of operating stewardship of the refinery and also to assist in the general rehabilitation and refurbishment programme, Solima wish to retain an oil refining company to provide a small team of experienced managers and technicians to manage the refinery on their behalf. The team will include a refinery manager, and have full authority for the execution of its designated tasks. The contract is envisaged initially for a period of 3 years, renewable on an annual basis thereafter, subject to mutual agreement. Solima wish also that the management team will undertake to train selected local personnel who will ultimately take over the positions the team members will be occupying while the contract is in force. This document sets out the basis upon which invited companies are requested to respond with their proposal for provision of the management services, and from which the final contract will be developed. A1.5.2 Refinery Scope of Services It is envisaged that Solima will, in the immediate future, retain exclusive responsibility for the planning and procurement of crude/products as well as operation of the refinery. However, these two activities are to be separated into a trading division and a refining division. The trading division will own the crude/products, supplying crude to and accepting products from the refinery. It will also-supply any other marketing companies operating within Madagascar with their product requirements on an import-parity formula pricing basis. It will undertake all necessary planning and procurement activities, although will liaise with the refinery in the formulation of its supply plans. ANNEX 4.4 Page 3 of 8 The refinery therefore will run purely as a processing refinery, refining crude supplied by and returning products to the trading division. It will however be responsible for the operations associated with crude/product import/export, and also for the storage of these materials within the refinery tank farm, and will necessarily liaise with the trading division to coordinate the agreed refinery production plan. The refinery will undertake all functions necessary for proper stewardship of its facilities, including maintenance as well as operations, and will report directly to the main Solima board. The management team's responsibilities will be limited to those of the refinery, excluding those of the trading division. The facilities included within the refinery are listed in Table A1.5.1. Note they include all those facilities required for operation of the refinery, including control room, laboratory, workshops etc. Figure A1.5.1 presents an overview of the refinery site. It is envisaged that the refinery will undergo a rehabilitation and refurbishment programme. This programme is planned in two phases: Phase 1 Rehabilitation of Visbreaker complex (presently mothballed) Refurbishment of selected sections of the general facilities (process, utilities and offsites). Phase 2 Installation of thermal cracking facilities to the existing visbreaker complex. Phase 1 of this programme is expected to start in the near future, and the management team would be expected to participate as Solima's project representative during the associated works. Phase 2 will be conditional upon successful implementation of the first phase, and also upon demonstrating acceptable performance levels by the refinery. A1.5.3 Scope of Work (for Management Services Contractor) The Management Services Contractor will be required to: 3.1 Structure and source an effective, resident management team to manage the refinery on behalf of Solima. 3.2 Make available on an occasional, as-needed, basis specialist technical & stewardship personnel (eg. metallurgist, training specialist, etc.). Need for such services to be from the initiative of the management team, and subject to the approval of Solima. 3.3 Monitor the performance of their resident management team on a routine basis, and review this with Solima. The management team will be required to: ANNEX 4.4 Page 4 of 8 3.4 Control all refinery activities related to the receipt, processing and storage of hydrocarbons and the delivery of finished products to the depot. The activities will include the planning and supervision of all operational, technical, engineering and administration services together with the accounting, auditing, training and human resources functions. 3.5 Review existing refinery manning and manpower capabilities and recommend an effective refinery organisation. Work with Solima to implement this revised organisation. 3.6 Develop with Solima an implementation plan for introduction of local personnel into the key management positions. 3.7 Introduce training programmes, as necessary, to improve the skills of the work force. 3.8 Introduce international safety and environmental standards for all refining operations and prepare a programme for their enforcement. 3.9 Introduce and enforce international industry practices and standards to improve the efficiency, reliability, tidiness and sustainability of refining operations. 3.10 Establish an engineering workshop and relevant practices for essential repairs and maintenance. 3.11 Supervise maintenance of marketing company's adjacent bulk storage facilities, which will be undertaken on a contract basis. 3.12 Act on refinery's behalf in working with the company managing the Phase 1 rehabilitation project. The refinery manager should be the single point of contact, assisted at his discretion by other members of the management team. A1.5.4 Management Team 4.1 The Management Contractor will assign a team of experienced individuals, who will assume direct responsibility for their designated tasks. The team should include the following core members: 1. Refinery manager 2. Operations manager 3. Maintenance manager 4. Instrumentation/Electrical technician 5. Mechanical technician Table A1.5.2 outlines the profile and job description envisaged for these positions. ANNEX 4.4 Page 5 of 8 However, Management Services Contractor may propose additional personnel beyond these core requirement, and any such proposal will be reviewed by Solima on its merits. All personnel should have the necessary professional experience to meet the defined positions, preferably with overseas experience in a similar working environment. 4.2 The refinery manager as the senior representative of the Management Contractor on site will be responsible for all matters in Madagascar relating to the refinery. All other members of the team will report ultimately to him. He will report directly to the main Solima board. 4.3. The Management Team will be functional in the refinery before the commencement of Phase 1 of the rehabilitation project. 4.4 A working procedure, which takes account of Solima's on-going refinery interests during operation of the Management Services Contract, will be agreed by Solima and the contractor. A1.5.5 Solima Representation Solima will nominate a senior Solima company representative to liaise on a routine basis with the refinery manager (from Management Services Contractor), and will delegate authority to the nominee at their discretion. However, the nominee will not be empowered to override the authority of the refinery manager, who ultimately reports directly to the Solima main board. A1.5.6 Remuneration (for Management Services Contractor) The Management Services Contractor will be remunerated in three parts: * fixed fee for agreed management team * 'reimbursable costs for any extra manpower provided (and agreed to by Solima) * performance fee, reflecting commercial and technical and performance achieved by refinery over the year. The commercial fee will be based upon a fraction of the refinery's gross margin (including variable, but excluding fixed costs). The technical fee will be based upon successful completion of an annual refinery test run. ANNEX 4. 4 Page 6 of 8 EQUIPMENT WITHIN REFINING COMPANY AREA Process units (all zone 'A') . Unit capaity TPD Two stage crude fractionation unit 1600 Wide cut kerosene + naphtha hydrotreater 590 Semi-regen catalytic reformer unit 250 Crude preflash section for crude unit capacity expansion 2340 Visbreaker unit 1080 - Gasoil hydrotreater 515 Vacuum unit and bitumen blower 195 Merox unit (Capacity not available) Tankage (All zone 'A' except for bitumen storage) 6 x 25000 m3 crude storage tanks 6 intermediate gasoline blend stock tanks of total volume 5700 m3 10 proposed new finished product tanks of total volume 25000 m3 2 x 25 MT butane storage bullets 3 x 350 m3 bitumen storage tanks Hydrogen storage Utlties (All zone 'A') 3 package steam boilers 2 diesel generators (1 @ IMW, 1 @ 1.6 MW) Electrical substation Cooling water basin for water drawn from canal Fire water basin for water drawn from canal Raw water well 2 instrument air compressors Oiher facilities (All zone 'A' other than bitumen rail loading) Single combined process unit control room Laboratory Refinery stores in 3 locations (main store, chemicals store, site store) Workshop Gasoline lead addition facility Bitumen rail loading facility Flare Fire station API separator PROFILES AND JOB DESCRIPTIONS ENVISAGED FOR MANAGEMENT TEAM TITLE REFINERY MAINTENANCE OPERATIONS INST/ELEQ MECHANICAL MANAGER MANAGER MANAGER TECHNICIAN TECHNICIAN PROFILE AGE Over 40 35-50 35-45 35-55 35-55 OUAUFICATIONS Degree + B.Tooh or better + long Degree + B. Tech + 8.Toch preferred but experience, or degree + Speclilst courses craft skill vital. EXPERIENCE Over 10 yrs Refinery Refinery Mtoe. Refinery Ops Mgt Min 15 years in Maintenance DESIRED management at group background at least 10 plus knowledge of Instruments. Must workshop knowledge level years vlabreaking, etc. At know pneumatics & mgt experience least 10 years and electronic Insts. essential - over 15 years. JOB MAIN JOB Introduce typical Industrial Shake up Mtoe Dept. Review skills of Continue present Review work order DESC. practices, codes and and organise effective present work force, trainee procedures and standards. Assess use of resources. set up training development. workshops practices. potential of existing staff Assess potential of programme. Set Review spares and Set up craftsman and develop improvement existing people and set operations targets for consumptions. grading and testing. programme. Set targets up training schedule and output, quality, etc. Monitor p.m. Assess workshop for production, reliability, trade testing. Review Set work priorities for schedules for requirements and site Improvement. critical spares. Mice to maximine up effectiveness. submit proposals for time and profit. upgrading. REPORTS TO: Solima Main Board Refinery Manager Refinery Manager Mtce. Manager Mice. Manager 0 P% A N ZONE A PROCESS UMTS ZONE PRO~UCT TORA~E DEPOT UMTuY MTS ZONE 'D LP IUILLE CRUDE STORAE PRODUCT RU~X STORAGE LAS/W sOPS ET ZONE 'r WUMEN STORACE & LOACING FAUES ZONE 'E' ZONE 'A' EZONE 'B' ZONE 'D 14000 M SOUMA REFMERY. MADACASCAR a TEL REFINERY & DEPOT ON TECHNO~? COMPANY SEPARATION r'.1-4-7 rJAY92 Madagascar Petroleum Sector Reform Project Table 1. Liberalization and Privatization of Petroleum Detailed Costs (US 000) Quantities Unit Base Cost Unit 1993 1994 1995 1996 1997 Total Cost 1993 1994 1995 1996 1997 Total I. Investment Costs A. Restructuring of Solima Subsistence allocation months 12 24 12 - - 48 3 36.0 72.0 36.0 - - 144.0 Travel trips 2 2 2 - - 6 4 8.0 8.0 8.0 - - 24.0 Two foreign experts staffmonths 12 24 12 - - 48 20 240.0 480.0 240.0 - - 960.0 Subtotal Restructuring of Solima 284.0 560.0 284.0 - - 1,120.0 B. Establistment of Open Access System Subsistence allocation months 6 6 - - - 12 3 18.0 19.0 - - - 36.0 Travel trips 1.5 1.5 - - - 3 4 6.0 6.0 - - - 12.0 One foreign expert staffmonths 6 6 - - - 12 20 120.0 120.0 * * - 240.0 Subtotal Lstablistment of Open Access System 144.0 144.0 - - * 288.0 C. Regulatory Authority Subsistence allocation months - 12 - - - 12 3 - 36.0 - - 36.0 Travel trips - 3 - - - 3 4 - 12.0 - - - 12.0 One foreign expert staffmaths - 12 - - - 12 20 - 240.0 - - * 240.0 Training amount 50.0 50.0 - - - 100.0 Subtotal Regulatory Authority 50.0 339.0 - - - 399.0 D. Private Management of the Refinery /a amount 1,000.0 2,000.0 1,000.0 - - 4,000.0 Total 1,478.0 3,042.0 1,284.0 - * 5,804.0 \a Cost estimates supplied by KBC. Tue Apr 20 11:43:13 1993 0 Mi U Liberalization and Privatization of Petroletan Sector Madagascar Petroleum Sector Reform Project Table 2. Infrastructure Iprovaments Detailed Costs (US$ *000) Base Cost 1993 1994 1995 1996 1997 Total I. Investment Costs A. Rehabilitation of the Refinery 1. First phase Viabreaker 600.0 2,000.0 - - - 2,600.0 Power Generation 400.0 1,500.0 1,500.0 - - 3,400.0 Minor Improvements for the Refinery /a - 500.0 100.0 100.0 100.0 800.0 Subtotal First phase 1,000.0 4,000.0 1,600.0 100.0 100.0 6,800.0 B. Storage and Transport Facilities 1. Tanks and other Repairs - 1,000.0 500.0 - - 1,500.0 2. Replacement of Pipelines Materials - - 1,050.0 1,050.0 - 2,100.0 Construction - - - 950.0 950.0 1,900.0 "agineering - 400.0 - - - 400.0 Subtotal Replacement of Pipelines - 400.0 1,050.0 2,000.0 950.0 4,400.0 3. Rail Tankers - 575.0 1,150.0 575.0 - 2,300.0 4. Minor Equipment for Distribution - 125.0 250.0 125.0 - 500.0 5. Improvements in Unloading Facilities at Mahajanga and Manakara - 500.0 1,000.0 1,000.0 500.0 3,000.0 6. Hydrographic and Other Studies 100.0 100.0 100.0 - - 300.0 Subtotal Storage and Transport Facilities 100.0 2,700.0 4,050.0 3,700.0 1,450.0 12,000.0 C. Petroleum Loading/Unloading Facility at Toamasina - 1,000.0 3,000.0 4,000.0 5,000.0 13,000.0 D. Gas Promotion Program 1. LPG Tanks and Other Equipment 273.9 551.1 1,098.9 1,098.9 277.2 3,300.0 2. Rail Tankers 58.1 116.9 233.1 233.1 59.8 700.0 3. Trucks and Other Vehicles 83.0 167.0 333.0 333.0 84.0 1,000.0 4. Spare Parts 83.0 167.0 333.0 333.0 84.0 1,000.0 Subtotal Gas Promotion Program 498.0 1,002.0 1,998.0 1,998.0 504.0 6,000.0 Total 1,598.0 8,702.0 10,648.0 9,798.0 7,054.0 37,800.0 \a Refurbishing of instruments, upgrading of boiler feedwater system, and small process improvement projects. Tue Apr 20 11:43:21 1993 0 Infrastructure Improvements msagascar Petrolem Sector Reform Project Table 3. Project Preparation and Coordination Detailed Costs (US$ '000) guantities Unit Bame Cost Unit 1993 1994 1995 1996 1997 Total Cost 1993 1994 1995 1994 1997 Total I. Investment Costs A. Project aNagemnt Consultant staffmcnths - 12 12 12 12 48 20 - 240.0 240.0 240.0 240.0 960.0 S. Training staffmnths 6 - - - - 6 20 120.0 - - - - 120.0 C. Refunding of PPF amount 1 0 0 - - 1,500.0 Total 1,WM 240.00 -240 .-0 240.0 2,580.0 Tue Apr 20 11:43:27 1993 0* PIr Project PrqWaation and Coordination Petrol~u sector pefoar Project Diburseent Accounts by Financiers (Us* '000) Govr nt International of Develognt Local Duties Madagascar Salia Association Total tor. (Excl. 6 ~munt % ~int Ji - nt % ~ont Exch. Tax*9) Taxos warks 1,634.8 5.4 1.197.6 4.0 27,332.7 90.6 30.165.1 54.6 27,332.7 2,32.3 - G~ed. and Equipnt - - 565.8 3.7 14,752.0 96.3 15,317.6 27.7 14,752.0 565.8 - C~ulting Services - - - - 0.303.1 100.0 8,303.1 15.0 7,049.5 453.5 - ~efunding Of PPF - - - - 1.500.0 100.0 1.500.0 2.7 1.500.0 - - Total 1,634.9 3.0 1,763.4 3.2 51,887.0 93.9 55,206.0 100.0 51.434.3 3,851.7 - Tue Apr 20 11:43:56 1993 0. Dibu nt Jccounts by Fi=mneiers Madagascar Petroleum sector Reform Project Components by Financiers (US$ '000) Government International of Development Local Duties Madagascar Solima Association Total For. (Excl. & Amount 6 Amount % Amount I Amount I Exch. Taxes) Taxes 1. Liberalization & Privatization of Petroleum Sector - - - - 6,670.1 100.0 6,670.1 12.1 6,216.6 453.5 - 2. Infrastructure Improvements 1,634.8 3.6 1,763.4 3.8 42,430.0 92.6 45,828.2 62.9 42,430.0 3,396.2 - 3. Project Preparation and Coordination - - - 2,787.7 100.0 2,767.7 5.0 2,77.7 - - Total Disbursement 1,634.6 3.0 1,763.4 3.2 51,887.6 93.9 55,286.0 100.0 51,434.3 3,651.7 - Tue Apr 20 11:44:02 1993 0,90 Ln 0 Components by Financiers Madagascar Petroleum Sector Reform Project Expenditure Accounts by Financiers (US$ 000) Government International of Development Local Duties Madagascar Solima Association Total For. (Excl. 6 Amount 8 Amount % Amount t Amount 8 Exch. Taxes) Taxes I. Investment Costs A. Civil Works 1,634.8 5.2 1,083.1 3.4 28,736.4 91.4 31,454.2 56.9 28,736.4 2,717.8 - B. Equipment - - 680.4 4.8 13,348.4 95.2 14,028.7 25.4 13,348.4 600.4 - C. Consulting Services - - - * 9,554.9 100.0 9,554.9 17.3 9,101.4 453.5 - D. Training - - - - 248.2 100.0 248.2 0.4 246.2 - - Total Disbursnt 1,634.8 3.0 1,763.4 3.2 51,887.8 93.9 55,286.0 100.0 51,434.3 3,851.7 - Tue Apr 20 11:44:07 1993 OQ 0. Ependitue Accounts by Flamlera Putrolem Sector hafam Project Procarment Accants by Financiers (U$ *000) Govermnt International of Develagment Local Duties Madagascar solm Association Total For. Iftc1. a Amount I Amount 4 mount 0 Amount 0 EAch. Taxes) Taxes A. Works 1. Rehabilitation Viabreaker - - 146.4 4.9 2,828.9 95.1 2,975.3 5.4 2,828.9 146.4 - Repairs of Teaks - - 170.9 9.8 1,548.0 90.2 1,739.9 3.1 1,549.0 170.9 - Replacemnt of Pipelines - - 525.5 9.9 4,792.1 90.1 5,317.6 9.6 4,792.1 525.5 - Loading/Uloadiag facilities at Mahajanga and Neakara - - 354.8 9.9 3,239.7 90.1 3,594.5 6.5 3,239.7 354.8 - Petroleum loeadiag/Uioading facility at Tomaia 1,634.8 9.9 - - 14,904.0 90.1 16,538.8 29.9 14,904.0 1,634. - Subtotal Works 1,634.8 5.4 1,197.6 4.0 27,332.7 90.6 30,165.1 54.6 27,332.7 2,832.3 - B. Goods 1. Equipmet, Mchinery and Spare Parts Pawer Generation - - 194.0 4.9 3,748.8 95.1 3,942.9 7.1 3,748.6 194.0 - Minor Equipment and Spare Parts for the Refinery - - 46.3 4.9 894.5 95.1 940.7 1.7 694.5 46.3 - Rail Tankers - - 267.4 9.9 2,445.8 90.1 2,713.3 4.9 2,445.8 267.4 - Minor Equipment and Spar. Parts for Distribution - - 58.1 9.9 531.7 90.1 509.8 1.1 531.7 59.1 - Equipment and Vehicles for LPG Program 7,131.1 100.0 7,131.1 12.9 7,131.1 Subtotal Goods - - 565.8 3.7 14,752.0 96.3 15,317.8 27.7 14,752.0 565.8 - C. Consultancies /a 1. Technical Assistance and Training Restructuring Solima - - - - 1,298.7 100.0 1,298.7 2.3 1,298.7 - - Establishment of Open Access System - - - - 327.4 100.0 327.4 0.6 327.4 - - Regulatory Authority - - - - 332.0 100.0 332.0 0.6 332.0 - * Managemnt of the Refinery - - - - 4,598.4 100.0 4,598.4 8.3 4,144.9 453.5 - Training - - - - 248.2 100.0 248.2 0.4 248.2 - - Subtotal Technical Assistance and Training - - - - 6,804.6 100.0 6,804.6 12.3 6,351.1 453.5 - 2. Design and Supervision Hydrographic and Other Studies - - - - 345.3 100.0 345.3 0.6 345.3 - - Project Management - 1,153.2 100.0 1,153.2 2.1 1,153.2 Subtotal Design and Supervision 1,498.4 100.0 1,493.4 2.7 1,498.4 Subtotal Consultancies - - - - 8,303.1 100.0 8,303.1 15.0 7,049.5 453.5 - D. Miscellaneous Refunding of PPF 1,500.0 100.0 1,500.0 2.7 1,500.0 Subtotal Miscellaneous - - - - 1 .100.0 1,500.0 2.7 1,500.0 Total 1,634.8 3.0 1,763.4 3.2 51,887.8 93.9 55,286.0 100.0 51,434.3 3,051.7 - \a Consultants' services should be selected in accordance with World Bank. Guidelines: Use of Consultants by Werld bank Borramrs and by the World bank as Executing Agency (Mashington, D.C., August 1992). Tue Apr 20 11:44:14 1993 -) 0 Procurment Accounts by Financiers Madagascar Petroleum Sector Reform Project Project Cost Sumiary (MSF Million) (Us$ 1000) 0 % % Total I Total Foreign Bass Foreign Base Local Foreign Total 9xchange Costs Local Foreign Total Exchange Costs 1. Liberalization & Privatization of Petroleum Sector 650.0 9,186.8 9,866.8 93 13 400.0 5,404.0 5,804.0 93 13 2. Infrastructure Iprovemmnts 4,777.0 59,43.0 64,260.0 93 £2 2,810.0 34,990.0 37,S00.0 93 92 3. Project Preparation and Coordination 4 386.0 4,386. 100 6 - 2,580.0 2,580.0 100 6 Total BSELI)m oon 5,457.0 73,055.8 78,512.8 93 100 3,210.0 42,974.0 46,184.0 93 100 Physical Contingencies 656.2 0,045.1 8,701.3 92 11 386.0 4,732.4 5,118.4 92 11 Price contingencies 1,970.1 25,572.5 27-542.7 93 35 255.7 3,727.9 3,983.6 94 9 Total PF4JWT Coon 8,083.3 106,673.4 114,756.7 93 146 3,851.7 51,434.3 55,2806.0 93 120 Tue Apr 20 11:44:28 1993 0*c Project Ca- Sumar Petol~m ector Rafom Projact project coat --y <MW Million) (Us$ '000) 9 I 9 Total I Total Frreign Base ~reiga Das Local roraign Total Xchae Costa Local reign Total Eacha~ Cost i. Invesnt Costa A. Civil Mrks 3,791.0 39.99.0 43,690.0 91 56 2,230.0 23.470.0 25,700.0 91 56 a. Zqi~t 906.0 19,074.0 20,060.0 95 26 580.0 11.220.0 11,800.0 95 26 C. C~nsulting Services 60.0 13,700.8 14,308.8 95 1* 400.0 0.064.0 8.464.0 95 1 D. Traiming - 374.0 374.0 100 - - 220.0 220.0 100 - Total ~AIæ CTS 5,45".0 73,055.8 76.512.8 93 100 3.210.0 42,974.0 46,114.0 93 100 ~hysical Contingencies 656.2 0,045.1 0.701.3 92 11 386.0 4.732.4 5,110.4 92 11 Price Cæatiagecieas 1.970.1 25.572.5 27.542.7 93 35 255.7 3.727.9 3,93.6 94 9 Total P~3CT 0TS 8,083.3 106.673.4 114.756.7 93 146 3.51.7 51.434.3 55,296.0 93 120 Tue Apr 20 11:44:34 1993 (D 0 j •i Project Coat Smmary Madagascar Petroleum Sector Reform Project Expenditure Accounts by Components (US$ *000) Liberalization a Project Privatization Preparation Physical of Petroleum Infrastructure and Contingencies Sector Improvements Coordination Total Amount I. Investment Costs A. Civil Works - 25,700.0 - 25,700.0 12.5 3,220.0 B. Equipment - 11,800.0 - 11,000.0 10.0 1,180.0 C. Consulting Services 5,704.0 300.0 2,460.0 8,464.0 8.2 696.4 D. Training 100.0 - 120.0 220.0 10.0 22.0 Total 1BLIU COSTS 5,04.0 37,800.0 2,580.0 46,134.0 11 1. Physical Contingencies 580.4 4,430.0 108.0 5,111.4 - - Price Contingencies 285.7 3 5".2 99.7 3,983.6 10.7 424.9 Total PROJlCT COSTs 6,670.1 45,828.2 2,787.7 55,286.0 10.0 5,543.3 Taxes - - - foreign Exchange 6,216.6 42,430.0 2,787.7 51,434.3 10.0 5,123.6 Tue Apr 20 11:44:40 1993 0 o ui Expenditure Accounts by Components Petrolem sector ~afom Project Project ca -ta by Tear (U"N 0001 aae Cost 1993 1994 1995 1996 1997 Total 1. Liberalizationa Privatigatloc of Petroleum setor 1.470.0 3,042.0 1,204.0 - - 5,004.0 2. Infrastructure Iprov~ats 1,596.0 8,702.0 10.648.0 9,790.0 7,054.0 37,000.0 3. Projeact Peration aad Coordination 1.620.0 240.0 240.0 240.0 240.0 2.580.0 Total AsELIE COMT 4,696.0 11,94.0 12.172.0 10,036.0 7,294.0 46.114.0 Phygical coatingencies 319.6 1,248.4 1,367.2 1.203.3 979.4 5.110.4 Price Comtiagencies laflatic Local 12.4 174.5 296.1 332.5 343.4 1,150.9 Eorøiga 63.7 593.1 904.5 1.006.2 1.000.5 3.727.9 subtotal aflation 76.0 767.6 1,200.6 1,410.7 1,423.9 4,136.0 Devaluation -9.9 -152.3 -242.6 -252.2 -246.2 -903.2 Subtotal Price Comting*cies 66.2 615.2 956.0 1.166.5 1.117.7 3.983.6 Total PIT COT 5,031.3 13,47.6 14,497.2 12.403.3 9,451.1 55.286.0 TamEs - Foreiga Uxchnge 4,914.3 12,94.5 13.466.2 11,455.5 8.613.9 51,434.3 Tue Apr 20 11:44:46 1993 00 Project C ~t* by Y-a Madagascar Petrols Sector Peform Project Project Components by Year (US$ '000) Totals Including Contingencies 1993 1994 1995 1996 1997 Total 1. Liberalization a Privatization of Petroleum Sector 1,656.3 3,501.6 1,512.2 - - 6,670.1 2. Infrastructure Improvements 1,791.0 10,069.4 12,702.0 12,116.6 9,149.2 45,820.2 3. Project Preparation and Coordination 1,634.5 276.6 283.0 291.7 301.9 2,717.7 Total PRAJCT COSTS 5,081.8 13,847.6 14,497.2 12,40.3 9,451.1 55,286.0 Tue Apr 20 11:44:51 1993 I- 0 Project Components by Year Madagascar Petroleum Sector Rafozm Project Expenditure Accounts breakdown (US$ *000) Physical Base Cont. Costs + Plus Base Cost Physical Contingencies Price Contingencies Total Incl. Cont. Price Price Local Duties Local Duti.s Local Duties Local Duties Cont. on Cont. on For. (Excl. s for. (Excl. a For. (Exc. 4 For. (KC1. 6 Base Physical Each. Taxes) Taxes Total Exch. Taxes) Taxes Total Exch. Taxes) Taxes Total Rxch. Taxes) Taxes Total Costs Cont. I. Investment Costs A. Civil Marks 23,470.0 2,230.0 25,700.0 2,932.0 288.0 - 3,220.0 2,334.4 199.8 - 2,534.2 28,736.4 2,717.8 - 31,454.2 27,941.0 3,513.2 B. Equipment 11,220.0 500.0 - 11,600.0 1,122.0 58.0 - 1,180.0 1,006.4 42.4 - 1,048.7 13,348.4 600.4 - 14,028.7 12,753.4 1,275.3 C. Consulting Services 8,064.0 400.0 - 8,464.0 656.4 40.0 - 696.4 381.0 13.5 - 394.5 9,101.4 453.5 - 9,554.9 6,822.6 732.3 D. Training 220.0 220.0 22. - 22.0 6.2 6.2 246.2 246.2 225.6 22.6 Total 42,974.0 3,210.0 -46,164.0 4,732.4 386.0 -5,118.4 3,727.9 255.7 -3,903.6 51,434.3 3,651.7 -55,266.0 49,742.6 5,543.3 Tue Apr 20 11:45:07 1993 0- Expenditure Accounts Breakdown MADAGASCAR PETROLEUM SECTOR REFORM PROJECT IMPLEMENTATION SCHEDULE Liberalization and Privatization Base Cosl Procurement 1994 1995 1996 1997 1998 of Petroleum Sector US$ Mn. Method 01 02 03 04 01 02 03 04 01 02 03 04 01 02 03 04 Q1 Q2 03 Q4 Restructuring of Solima $1.1 Other Open Access System $0.3 Other Rexulatory Authority $0.4 Other Private Manaement of the Refinery $4.0 Other O* M, ' 0' MADAGASCAR PETROLEUM SECTOR REFORM PROJECT IMPLEMENTATION SCHEDULE Base Cos Procuremit 1994 1995 1996 1997 1998 Infrastructure Improvements US$ Mn. Method 01 Q2 Q3 04 0102 Q3 04 01 02 03 04 01 Q2 03 Q4 01 02 Q3 04 Rehabilitation of the Refaer, Visbreaker $2.6 ICB Power Generation $3.4 ICB Minor Equipment and Spare Parts $0.8 LIB/Int Shop/ for the Refinery Direct Contract Storas and IaMort Facilities Tanks and Other Repairs $1.5 ICB Replacement of Pipeline Engineering $0.4 ICB Materials $2.1 ICB CoAnstruction $1.9 ICB Rail Tankers $23 ICB Minor Equipment and Spare Parts $0.5 LIB/ for Distribution Intl Shopping Improvements in Unloading Facilities $3.0 ICB at Mahajanga and Manakara Hydrographic and Other Studies $0.3 Other Petroleum Loading/Unloading Facility at Toamasina $13.0 ICB LPG Promotion Program $6.0 ICB/LIB/ Intl Shopping MADAGASCAR PETROLEUM SECTOR REFORM PROJECT IMPLEMENTATION SCHEDULE Project Preparation and Coordination Base Cos Procurement 1994 1995 1996 1997 1998 US$ MR. Method 01 02 Q3 04 Q102 Q3 04 01 Q2 03 Q4 01 02 03 04 Q1 02 03 04 Project Manammentfl'rainint $1.1 Other Reftnding of PPF $1.5 Other 0* Mt O MADAGASCAR Petroleu Sector Reform Projec m A l and emt Pam "easures lst asmeter 2nd semster let smster 2nd seemster 1st someter 2nd samster lt semster 2nd already taken 1993 1993 194 19%4 1995 1995 196 semester A- AERlglMOTIIIS 1- Pricing and MeNw systm taxation reform effective frem July 1992 2. ELimination of Approvd Distribution Private State Mnopoly. January 1993 open to sector is Sector open to (Law 93/002) private aLlowed to private sector operators. import participation Decree No. ref ind 93-136 of produts Ninistry of Energy 3- Competitive Impleontad in bidding for January 1993 petroleum purch.ses 4- Restructuring, corporstiastion and privatization of SOLINA a) Refinery Separation Conmultants Consultants Legal Consultants Shares sold to approved by invited to examina legal establishment examine alt private sector Board of submit and physical of joint-stock aspects Directors in preposa issues company related to Nerch 1993 setting of shares Shares sold to b) Rest of the Consultants Consultants Restructuring Legal private sector calwen invited to hired study is establishment abit sutmitted of joint- proposals stock (som as coopenis refinery) I0 seasures 1st samster 2nd semster lst semster 2nd semester 1st semester 2nd saster 1st samaster 2nd aLready taken 1993 1993 1994 1994 1995 1995 1996 semster 1996 5. Establ ishmnt of Comultants Consultants open access rules for open invited to submit study systs is acces syste to suait impLemanted certain p ts and infrastructure hired facilities I 6. PetroLeumn Conultants Conultants Regulatory Regulatory hired submit study Authority Authority establ, I shed B- INIESINM PRGMM I- Rehabilitation of Refinery a) Phase I Studies Calt for Proposets Rehabilitation Rehabilitation compteted proposeLs to evaluated and works started works execute contract cmplated P1 a wra b) Phase II Feasfbilfty Studies torks study Conultants completaed started compteted Invited to (results sumi t neded for proposets for privatization) engineering studies 2. Repair of tanks Anlysis Cat for Proposal Works started works on tanks and replacmnt included in proposals evaluated and complated of pipatins report of contract consuttents signed 3. Purchase of rail Catt for Proposals Delivery of Delivery of tankers proposals evaluated nd equipment squipment contract starts compteted sinned 4. Mew Feasibility Envireimmtal Call for Studies Works started loading/utoading study studies proposals for completed. facility at completed complated detailed Catt for Tomaine engineering proposals for studies and works bidding documents M 0% ANNEX 4.6 I! Page 6 of 6 i 1 a 1111 11 - - . mib ANNEX 4.7 Page 1 of 3 MADAGASCAR Petroleum Sector Reform Project Summary of Disbursements Description % Financed Total A. GOVERNMENT (1) Consultants' Services and Training. 100% Restructuring of SOUMA; 1.9 Open Access System; and Regulatory Authority B. SOLlMA (2) Works: (a) Visbreaker 100% of Foreign Expenditures 2.6 80% of Local Expenditures (b) Tanks and Other Repairs; 100% of Foreign Expenditures 8.7 Replacement of Pipelines; and 80% of Local Expenditures Loading(Unloading Facility at Mahajanga and Manakara (c) Loading/Unloading Facility 100% of Foreign Expenditures 13.5 at Toamasina 80% of Local Expenditures (3) Equipment and Materials 100% of Foreign Expenditures 13.4 80% of Local Expenditures (4) Consultants' Services and Training. (a) Private Management of 100% 4.2 the Refinery (b) Project Management; 100% 1.5 Hydrographic and Other Studies C. OTHER (5) Refunding of the PPF Amounts Due 1.5 (6) Unallocated 4.7 TOTAL l ANNEX 4.7 Page 2 of 3 MADAGASCAR PETROLEUM SECTOR REFORM PROJECT DISBURSEMENT PROFILE Cumulative Amount Amount Fiscal Year Semester (US$ Million) (US$ Million) Percent * FY94 January 1994 2.5 2.5 5% FY95 July 1994 5.0 2.5 10% FY95 January 1995 11.6 6.6 22% FY96 July 1995 18.2 6.6 35% FY96 January 1996 25.0 6.8 48% FY97 July 1996 31.8 6.8 61% FY97 January 1997 37.5 5.7 72% FY98 July 1997 43.3 5.7 83% FY98 January 1998 47.6 4.3 92% FY99 July 1998 51.9 4.3 100% */ Project-specific disbursement profile. MADAGASCAR PETROLEUM SECTOR REFORM PROJECT DISBURSEMENT PROFILE COMPARISON 100% 90% 80% 8 70% 60% 50% 40% 30% 20% 10% m- 2 6 10 1 4 1 8 22 26 3 2 34 4 8 12 16 20 24 28 32 Quarter From Approval Date D Project Profile + Africa-wide Eaergy 0 Madagascar All Proj 0* ANNLEX 4. Page 1 of 3 MADAGASCAR PETROLEUM SECTOR REFORM PROJECT Project Supervision Plan A. Bank Supervsion The staff input indicated in the table below is in addition to regular supervision needs for the review of progress reports, procurement actions and other continual activities. These regular needs are estimated to require 8 staff weeks during the first year of project implementation and six staff weeks thereafter. Approximate Activity Expected Skill Staff Dates Requirements Weeks July 1993 Project Launch Mission: (a) issue Economist 6 invitations for restructuring of Financial Analyst SOLIMA, establishment of open Institutional Expert access system and private management of the refinery; (b) define bidding documents for refinery rehabilitation; and (c) define TOR for hydrographic studies to improve loading facilities. November 1993 Supervision Mission: (a) review Engineer 6 contracts for refinery rehabilitation; Economist (b) define bidding documents for Institutional Expert other rehabilitation works and for LPG promotion program; (c) review alternative privatization strategies for SOLIMA: and (d) agree on petroleum taxes for 1994 and review the evolution of petroleum prices. February 1994 Supervislon Mission: (a) issue Economist 4 invitations for regulatory authority Institutional Expert study; (b) supervise start-up of Phase I refinery rehabilitation; (c) review contracts for other rehabilitation works; and (d) prepare bidding documents for new petroleum terminal at Toamasina. ANNEXUM Page 2 of 3 June 1994 Sunervision Mission and Annual Engineer 8 Implenentation Review: (a) review Economist progress in petroleum sector reform Financial Analyst and liberalization measures; (b) Institutional Expert supervise progress in rehabilitation works; (c) review proposals for the restructuring of SOLIMA, open access system and Petroleum Regulatory Authority; and (d) review financial results of Solima. November 1994 Supervision Mission: (a) monitor Economist 4 implementation of petroleum sector Financial Analyst reform and liberalization measures; (b) review contract for new petroleum terminal at Toamasina; and (c) prepare new equity issue for thermal cracking unit. 1995 Three Supervision Missions. Engineer 18 Including Annual and Mid-Term Economist Implementation Review: (a) oversee Financial Analyst consolidation of petroleum sector Institutional Expert reform and liberalization measures; (b) monitor on-going Phase I rehabilitation works; (c) supervise initiation of Phase II by private operators; (d) supervise progress in other rehabilitation works; (e) review conclusion studies to improve loading facilities; (f) supervise implementation of port at Toamasina; (g) supervise implementation of gas promotion program (h) Prepare mid- term review and (1) undertake joint Government/Bank mid-term review. 1996 Three Supervision Missions, Engineer 16 including Annual Implementation Economist Review and implement Financial Analyst recommendations of mid-term Institutional Expert review. 1997 Three Supervision Missions, Engineer 16 including Annual Implementation Economist Review. Financial Analyst Institutional Expert ANNEXA Page 3 of 3 B. Borrowe's Contribudion (a) Progress reports are to be submitted at three months intervals with content to be agreed during the first IDA supervision mission. (b) Project review meetings with the participation of the Ministry of Energy, SOLIMA and other agencies will be held at least three times per year during IDA supervision missions. The meetings will be chaired by the Director of Energy. (c) Audit reports are to be submitted by the Ministry of Energy of SOLIMA within six months of the end of each fiscal year. ANNEX 4.9 Page 1 of 2 MADAGASCAR PETROLEUM SECTOR REFORM PROJECT PROJECT COORDINATOR IN THE MINISTRY OF ENERGY AND MNES 17RMS OFREFERECE BACKGROUND 1. The specific objectives of the Petroleum Sector Reform Project are to (i) open up the petroleum sector to private sector participation and create an appropriate framework for a competitive environment; (ii) rehabilitate facilities in petroleum refining, transportation and marketing to increase operational efficiency and attract private operators and investors: and (iii) develop institutional capacity for the efficient regulation of the sector. The Directorate of Energy of the Ministry of Energy and Mines (MEM) will be responsible for implementing all the project components related to liberalization and privatization of the petroleum sector. MEM will appoint a Project Coordinator to carry out these responsibilities with the Terms of Reference indicated below. TERMS OF REFERENCE 2. The scope of work of the Project Coordinator would include: (a) preparing terms of reference and reviewing bidding documents for the studies to be undertaken for: (i) the restructuring corporatization and privatization of SOLIMA; (ii) the establishment of rules for the system of open access by all operators to certain key infrastructure facilities; and (iii) the organization of the petroleum regulatory authority. (b) Monitoring project activities by periodically visiting project sites and discussing with the project implementation personnel. (c) Providing recommendations to MEM and IDA for corrective actions, and advanced planning whenever delays and/or cost over-runs are noticed. (d) Reviewing monthly, quarterly, and annual progress reports prepared by SOLIMA's experts and preparing recommendations to MEM and IDA. (e) Preparing a detailed work program with a specific time table for implementing all the components related to liberalization and privatization of the petroleum sector, liaising with all the government agencies concerned to get all the necessary approvals, initiating actions for Implementation in accordance with the stipulations in the IDA credit and other project agreements (in particular, restructuring of SOLIMA, establishment of petroleum regulatory authority, system of open access by all operators to key infrastructure facilities, maintaining satisfactory petroleum pricing mechanism, and establishing satisfactory petroleum procurement practices). (f) Liaising with all concerned government agencies to facilitate clearances with respect to customs duty, tax exemption, license, permits, land acquisition etc. for speedy implementation of the project components. ANNEX 4.9 Page 2 of 2 (g) Arranging to send IDA audited project accounts which will include Special Accounts and Statement of Expenditures no later than six months after the and of each calendar year. (h) Being familiar with IDA's Credit/Project Agreements, and environmental and procurement guidelines and making sure that they are adhered to in Implementation. QUALIFICATIONS AND EXPERIENCE 3. The candidate for the post of Project Coordinator should be a graduate of the University level with a minimum of 10 years experience in the energy sector. Past experience in the preparation of tender documents, tender evaluation, contract negotiations, project scheduling, project cost control, and preparation of project progress reports for management information is advisable. The candidate should have sufficient authority and initiative to liaise with senior government officials and prepare specific action programs. ANNEX 4.10 Page 1 of 2 MADAGASCAR PETROLEUM SECTOR REFORMPRJC EXPERTS TO BE EMPLOYED BY SOLIMA 1. SOLIMA, the national petroleum corporation, was established in 1976 and is under the jurisdiction of the Ministry of Energy and Mines (MEM). SOLIMA owns the only petroleum refinery in the country, bulk storage depots, inland distribution facilities, ocean transport facilities, and a number of other petroleum marketing facilities. SOLIMA has obtained IDA financing to support basic infrastructure investments required to improve operational efficiency and to attract private operators and investors. The proposed project includes, among other things, rehabilitation of the refinery at Toamasina, petroleum storage and transport facilities, construction of a new petroleum jetty at the port of Toamasina, and facilities to increase marketing of LPG throughout the country. In order to implement the project components under its responsibility (estimated to cost US$33 million) in an efficient manner, SOLIMA will employ experts to help in the implementation of the project before the IDA credit becomes effective. 2. The experts will be staff presently working within SOLIMA, which will be given the responsibility to supervise the Implementation of the project with technical assistance from the experienced Engineering Consultants. The experts will monitor and supervise all matters related to the project under SOLIMA's scope, and will report the project progress on a monthly and quarterly basis to SOLIMA management, MEM and IDA. The Engineering Consultants will provide all assistance necessary to prepare drawings and specifications, invite and evaluate tenders and help in project management, including the preparation of reports. 3. The experts will consist of a Manager with 5 years experience in project management, one Mechanical Engineer and a Cost Accountant, all with a least 5 years experience in their respective disciplines. 4. Specific scope of work for the experts is as follows: (a) Overseeing all arrangements for the project execution of project components under SOLIMA's responsibility; (b) Monitoring physical progress in project implementation. An updated schedule for physical progress by project component will be produced monthly, based on progress actually achieved and on a realistic projection of future progress; (c) Monitor the financial progress in the execution of the project, including disbursements of the IDA credit and the local contribution from SOLIMA; (d) Reviewing invitations to bid, contract documents, evaluations and awards for all project components; ANNEX 4.10 Page 2 of 2 (e) Arrange and conduct onsite inspection of the physical and financial progress of work; (f) Monitoring compliance with IDA Credit and Project Agreements and with the subsidiary loan agreement signed between the Government and SOLIMA, and acting as channel for information between IDA and SOLIMA; (g) Preparation of monthly, quarterly and annual reports for MEM, SOLIMA and IDA; and (h) Any other responsibilities entrusted to them by SOLIMA from time to time. ANNEX 4.11 Page 1 of 4 MADAGASCAR - PETROLEUM SECTOR REFORM PROJECT PROJECT MANAGEMENT CONSULTANT TERMS OF REFERENCE BACKGROUND 1. SOLIMA is a state owned company established in June 1976, with the responsibility of implementing the policies of the Government in the petroleum sector. Until recently, the import, transport, storage, transformation and distribution of petroleum products was an exclusive moi.opoly of the State and SOLIMA was the only entity authorized to undertake these activities in Madagascar. Starting 1991, the Government of Madagascar embarked in a liberalization process of the petroleum sector and the private sector has been allowed to open and operate distribution stations. With the financial support of the World Bank, the refinery will be rehabilitated to improve its operating efficiency and make its product prices competitive vis-a-vis price of imported finished products. Studies conducted by specialized Consultants prepared a realistically achievable modernization program designed to put the refinery in a position where it can compete with direct import of finished products. The investment cost of this program is estimated at around US$6.5 million. The consultants have also recommended a second phase of modernization which will include addition of new equipments to the existing visbreaker to convert it to a thermal cracker. This phase is not included in the project and will be initiated only after completion of the first phase and the refinery has been open to the participation of the private sector. PROJECT DESCRIN 2. The project includes the following components: (1) rehabilitation of the existing refinery at Toamasina; (2) basic improvements in the petroleum storage and transport infrastructure; (3) construction of a new petroleum loading/unloading facility at the port of Toamasina; and (4) program to promote the use of LPG. 3. The rehabilitation of the refinery consists of a number of work packages of different disciplines jointly aimed at improving the efficiency, safety and environmental aspects of operations. The work packages are listed below: (a) Mechanical refurbishment of visbreaker complex, which has suffered corrosion damage and also damage arising from a fire in its furnace. (b) Additional power generation equipment to provide adequate and reliable power supply. (c) New power distribution equipment to replace equipment which has outlived its useful life. (d) Upgradation of visbreaker instrumentation. (e) Various small process modifications (including the visbreaker soaker drum) throughout the refinery aimed at efficiency improvements. (f) Addition of a new instrument air compressor. (g) Miscellaneous rehabilitation works, including environmental works such as oil separators and incinerators, and upgrading of the boiler feedwater system. ANNEX 4.11 Page 2 of 4 4. In order to increase the efficiency and reliability of petroleum supply, the proposed project will also finance : (1) purchase of additional rail tank-wagons and other minor equipment; (2) improvements in the product unloading facilities at Mahajanga and Manakara harbors; (3) repairs to the existing crude and product storage tanks; (4) the replacement of the pipelines from the port of Toamasina to the storage facilities; and (5) software packages to improve planning of transport and distribution. The total cost of all these components is estimated at around US$12.0 million. 5. The existing petroleum loading and unloading facilities at Toamasina harbor are situated in the midst of the general cargo facilities posing an ever-present danger of fire and explosion.in addition, the size of tankers that can be handled is limited to 50,000 DWT maximum which reduces the advantage of obtaining lower ocean freight rates. The Consultants and other Marine spe,ialists who examined other alternatives came to the conclusion that a dolphin with sufficient manoeuvering space would be the most cost effective and environmentally safe option. The cost of this component alone is estimated at US$13 million. 6. In order to increase the sales of liquified petroleum gas (LPG) in Madagascar from about 3,000 tons to about 6,000 tons per year, the project will finance the replacement of the existing bottles, additional storage capacity, transport equipment, rehabilitation of existing filling plants, and installation of new skid mounted two-point filling stations. The cost of these facilities is estimated at about US$6 million. 7. SOLIMA will be responsible for the implementation of all these components and will employ experts for this purpose. To assist these experts, SOLIMA intends to hire the services of experienced engineering consultants with the main objectives of, among other things, planning, design of facilities, preparation of specifications and tender documents, tender evaluation, project management and commissioning of the completed facilities. TERMS OF REFERENCE 8. The scope of work of the Project Management consultants (PMC) would cover, but not limited to, the following : (a) Prepare a Basis of Design (BOD) as per Annex-1; (b) Review the existing feasibility studies prepared by SOLIMA'S consultants and prepare modifications and or additions, if required, in consultation with SOLIMA'S experts; (c) Select, in consultation with SOLIMA's experts, licensed technologies, if required, for various facilities included in the project (World Bank approval is required prior to making commitments); (d) Prepare basic design, project specification, drawings, etc. in sufficient details for each component and prepare turnkey tender documents and model contracts, to perform detailed engineering, procurement, transportation to site, construction and commissioning, in packets suitably arranged for awarding separate contracts; ANNEX 4.11 Page 3 of 4 (e) Indicate suitable provisions to install additional facilities to convert the existing visbreaker into a thermal cracker, if required in the future; (f) Prepare budgetary cost estimates for each bid package; (g) Prepare project construction schedule for each turnkey package including details for network analysis to monitor the physical progress of work; (h) Prepare project monitoring guidelines and formats for circulating information for project management control; (i) Issue invitations for turnkey bids as per IDA guidelines, assist in the evaluation of bids and prepare specific recommendations; (j) Provide home office support to the field staff in their supervision of construction, commissioning and start-up; (k) Prepare monthly progress report on the physical and financial progress of the project with specific recommendations with respect to slippage on the project schedule and project cost over-run as and when they occur; (1) Prepare procedures for observing safety and security through all stages of project implementation and operation thereafter; (in) Review additional charges or revisions, if any, required by the contractors and prepare specific recommendations with justifications; (n) Assist SOLIMA's experts in organizing commissioning of various facilities and obtaining performance guarantees as specified in each contract; (o) Assist SOLIMA's experts in obtaining legal remedies in respect of obtaining performance guarantees in the event of disputes; (p) Prepare a structure of the construction and commissioning team required, detailing individual job specification and responsibility. QUAFIC ND EXPERIENC 9. The engineering company selected for the PMC contract should have a minimum of 10 years of experience in providing similar services in refining, marine and surface transportation of petroleum products, and marketing. The individuals proposed for the PMC should have a minimum of ten years of experience in their respective fields. The Project Manager designated should have ten years of experience out of which at least five years should be as project manager for similar jobs. The company's experience should include, among other things, design, licensed process selection, engineering, procurement, inspection, supervision of construction, commissioning and start-up. In case one firm alone does not have all the relevant experience for the proposed work, proposals could be submitted in collaboration with others having the required qualification and experience. ANNEX 4.11 Page 4 of 4 SHEULE OF WORK 10. The PMC services are expected to take about 100 man-months out of which about 20 man-months are expected for works leading to bid evaluation and recommendation. The duration of the PMC work is expected to be around 36 months from the time the contract is effective. REPORT PRESENTATION 11. The basis of design (BOD) and bid documents should be prepared in draft and should be submitted to SOLIMA's experts and Word Bank for a joint review. The finalized draft of the bid documents and sample contracts should be forwarded to the World Bank for approval prior to release for bidding. During the supervision stage, monthly, quarterly and annual progress reports showing the physical and financial progress of the project components should be prepared and forwarded to SOLIMA and the World Bank. After commissioning the facilities, a Project Completion Report should be prepared and submitted to SOLIMA and the World Bank. MADAGASCAR PETROLEUM SECTOR REFORM PROJECT INDICATORS FOR THE ACHIEVEMENT OF OBJECTIVES Objectives Indicators 1. Open-up the petroleum sector to private sector Appropriate pricing policies. Adoption of measures for regional participation and create an appropriate framework for a price differentiation. competitive environment; Open access system to key infrastructure facilities established (target date: December 31, 1994) Private sector owns and operates petroleum distribution stations. Refinery is separated from SOLIMA and established as a joint- stock company (target date: June 30, 1994). SOLIMA is restructured and separate companies are established as joint-stock companies (target date: December 31, 1994). Shares of the refinery and of other companies born out of the restructuring of SOLIMA are offered to the private sector (target date: June 30, 1995). 2. Support the basic infrastructure investments required to Days of availability of the refinery (including the visbreaker): increase operational efficiency and to attract private operators 310 days per year. and investors; Crude oil refined: 12,000 bpd. 0. Reserves of refined products stored in Antananarivo: minimum of I week of consumption. LPG consumption: 1995: 3,400 tons 2000: 6,000 tons 3. Develop institutional capacity for the efficient regulation Establish a Petroleum Regulatory Authority (target date: of the sector. December 31, 1994). 0 O*,' ANNEX 5.1 Page 1 of 5 MADAGASCAR Solitany Malagasy (SOLIMA) Historical Income Statements Billion MGF Fiscal Year Ending June 30, 1988 1989 1990 1991 a/ Sales of Refined Products 139.3 159.0 174.6 338.7 Indirect Taxes (14.1) (13.7) (L2.) (20.2) Net Sales 125.2 145.3 162.2 318.5 Total Cost of Goods Sold 102.2 90.8 117.5 266.2 Commercial Margin 23.0 54.5 44.7 52.3 Labor (4.1) (4.9) (5.3) (10.4) Depreciation (4.0) (4.4) (3.6) (6.2) General, Sales and Administrative Expenses (9.8) (18.5) (9.6) (21.5) Other Income/(Expenses) 8.6 0.6 0.3 2.7 Net Provisions Income/(Expenses) (i.) (2.1) 0.5 (29) Subtotal: Operating Expenses (10.9) (29.3) (17.7) (38.3) Operating Income 12.1 25.3 27.0 14.0 Net Financial Expenses (4.0) (7.6) (0.1) (0.5) Exceptional Expenses b/ (4.7) (5.1) (10.4) (6) Subtotal: Other Expenses (8.7) (12.7) (10.5) (6.9) Earnings Before Tax 3.4 12.6 16.5 7.1 Income Tax -) .6) (6.2) (.0) Net Income Af4 a/ Fiscal Year 1991 had 18 months (July 1, 1990 - December 31, 1991). b/ Includes indemnization to ex-shareholders nationalized in 1974. ANNEX 5.1 Page 2 of 5 MADAGASCAR Solitany Malagasy (SOLIMA) Historical Balance Sheets Billion MGF Fiscal Year Ending June 30, 1988 1989 1990 1991 a/ Raw Materials 19.2 21.0 29.7 40.8 Finished Goods 25.2 7.7 18.2 30.8 Other Merchandise Inventory 9.6 20.0 12.2 15.3 Total Inventory 54.0 51.0 62.4 92.0 Cash/Banks 52.5 28.0 31.6 22.6 Accounts Receivable 13.0 15.9 16.5 32.7 Marketable Securities 0.5 5.1 4.6 0.0 Other Assets 5.3 0.7 0.8 3.2 Total Current Assets 125.2 100.7 115.9 150.5 Land & Equipment 16.5 15.2 14.0 15.1 Intangible Assets 0.7 0.5 0.2 0.0 Other Fixed Assets & Participations 1.7 1.2 2.6 9.9 Fixed Assets 18.9 16.9 16.7 25.1 TOTAL ASSETS 144.1 117.6 132.7 175.6 Accounts Payable 75.4 42.8 31.8 62.4 Other Debt b/ 7.6 9.5 14.5 12.3 Current Maturities of LTD 4.1 1.6 2.8 3.6 Other Liabilities 5.1 0.1 0.1 0.0 Current Liabilities 92.2 54.0 49.2 78.3 Net Long-Term Debt 14.4 14.0 13.4 12.8 TOTAL LIABILITIES 106.6 68.0 62.5 91.1 PROVISIONS 9.8 14.4 24.3 36.6 Shareholders' Funds 9.7 16.7 26.9 31.0 State Allocation c/ 18.1 18.5 19.0 16.9 Total Equity 27.8 35.2 45.9 47.8 TOTAL LIABILITIES & EQUITY 144.1 117.6 132.7 175.6 a/ As of FY-end December 31, 1991. b/ Excludes debt to the defunct CCH & Caisse de Perequation, which is treated as equity, but includes fiscal obligations to the State for MGF 7.6 billion in 1989 and MGF 11.9 billion in 1990. c/ Includes debt of MGF 13.1 billion to CCH & Caisse de Perequation, which is treated as equity. ANNEX 5.1 Page 3 of 5 MADAGASCAR Solitany Malagasy (SOLIMA) Historical Income Statements US$ Million Fiscal Year Ending June 30, 1988 1989 1990 1991 ai Sales of Refined Products 105.8 102.2 111.3 198.1 Indirect Taxes (10.7) (8.8) (7.8) (11.8) Net Sales 95.1 93.4 103.4 186.3 Total Cost of Goods Sold 77.6 58.3 74.9 155.7 Commercial Margin 17,5 35.0 28.5 30,6' Labor (3.1) (3.2) (3.4) (6.1) Depreciation (3.0) (2.8) (2.3) (3.6) General, Sales and Administrative Expenses (7.4) (11.9) (6.1) (12.6) Other Income/(Expenses) 6.5 0.4 0.2 1.6 Net Provisions Income/(Expenses) (1.2) (1.4) 0.3 (.7) Subtotal: Operating Expenses (8.3) (18.8) (11.3) (22.4) Operating Income 9.2 16.2 17.2 8. Net Financial Expenses (3.1) (4.9) (0.1) (0.3) Exceptional Expenses b/ (3.6) (3) (6.6) (27) Subtotal: Other Expenses (6.6) (8.2) (6.7) (4.0) Earnings Before Tax 2.6 8.1 10.5 4.1 Income Tax (0.8) (3.6) (4.0) U) Net Income 1.8 4.5 6.5 2.4 Avg. FY Exchange Rate (MGF/US$1) 1,317 1,556 1,569 1,710 a/ Fiscal Year 1991 had 18 months (July 1, 1990 - December 31, 1991). b/ Includes indemnization to ex-shareholders nationalized in 1974. ANNEX 5.1 Page 4 of 5 MADAGASCAR Solitany Malagasy (SOLIMA) Historical Balance Sheets US$ Million Fiscal Year Ending June 30, 1988 1989 1990 1991 a/ Raw Materials 13.4 12.7 19.5 22.3 Finished Goods 17.6 4.7 12.0 16.8 Other Merchandise Inventory 6.7 12.2 8.0 8.3 Total Inventory 37.7 30.9 41.1 50.2 Cash/Banks 36.7 17.0 20.8 12.3 Accounts Receivable 9.1 9.7 10.9 17.8 Marketable Securities 0.3 3.1 3.0 0.0 Other Assets 3.7 0.4 0.5 1.7 Total Current Assets 87.5 61.1 76.4 82.1 Land & Equipment 11.5 9.2 9.2 8.3 Intangible Assets 0.5 0.3 0.1 0.0 Other Fixed Assets & Participations 1.2 0.7 1.7 5.4 Fixed Assets 13.2 10.3 11.0 13.7 TOTAL ASSETS 100.7 71.4 87.4 95.8 Accounts Payable 52.7 26.0 20.9 34.0 Other Debt b/ 5.3 5.8 9.6 6.7 Current Maturities of LTD 2.8 1.0 1.8 2.0 Other Liabilities 3.6 0.1 0.0 0.0 Current Liabilities 64.5 32.8 32.4 42.7 Net Long-Term Debt 10.0 8.5 8.8 7.0 TOTAL LIABILITIES 74.5 41.3 41.2 49.7 PROVISIONS 6.8 8.8 16.0 20.0 Shareholders' Funds 6.7 10.1 17.7 16.9 State Allocation c/ 12.7 11.3 12.5 9.2 Total Equity d/ 19.4 21.4 30.2 26.1 TOTAL LIABILITIES & EQUITY 100.7 71.4 87.4 95.8 End FY Exchange Rate MGF/US$1 1,430 1,647 1,518 1,833 a/ As of FY-end December 31, 1991. b/ Excludes debt to the defunct CCH & Caisse de Perequation, which is treated as equity, but includes fiscal obligations to the State for MGF 7.6 billion in 1989 and MGF 11.9 billion in 1990. c/ Includes debt of MGF 13.1 billion to CCH & Caisse de Perequation, which is treated as equity. d/ Change in shareholders' equity differs from yearly net income, because the income statements and balance sheets are translated at different exchange rates. ANNEX 5.1 Page 5 of 5 MADAGASCAR Solitany Malagasy (SOLIMA) Financial Ratios liquidity/Capital Structure Ratios 1988 1989 1990 1991 Current Ratio 1.36 1.86 2.36 1.92 Quick Ratio 0.77 0.92 1.09 0.75 Net Working Capital/Total Assets 0.23 0.40 0.50 0.41 Equity/Total Assets 19.3% 29.9% 34.6% 27.2% LTD:LTD+Equity 34.66 28.72 23.77 21.79 Managen.ent Ratios Raw Materials Inventory (days) n.a. 117.9 119.3 82.7 Finished Goods Inventory (days) n.a. 43.4 73.3 62.4 Total Inventory (days) n.a. 286.7 251.0 186.4 Accounts Receiveable (days) 34.8 37.9 38.5 52.4 Accounts Payable (days) n.a. 240.6 127.8 126.4 Economic Ratios Fixed Assets Turnover (x) 7.2 9.1 9.4 13.6 Gross Return on Assets 2.6% 11.3% 12.0% 4.3% Value Added/Revenue n.a. 29.0% 23.5% 13.1% Profitability Ratios Commerical Margin/Net Sales Revenue 18.4% 37.5% 27.6% 16.4% Operating Margin/Net Sales Revenue 9.7% 17.4% 16.6% 4.4% Income Before Tax/Net Sales Revenue 2.7% 8.6% 10.2% 2.2% Income Tax/Net Sales Revenue 0.9% 3.8% 3.9% 1.0% Net Income/Net Sales Revenue 1.8% 4.8% 6.3% 1.3% Net Return on Equity 9.0% 21.0% 21.6% 9.1% a/ Fiscal Year 1991 had 18 months (July 1, 1990 - December 31, 1991). MADAGASCAR SOUMA REFINERY Projected Income Statements US$ Million (Constant 1992) 6 months 1993 1994 1995 19% 1997 1998 1999 Domestic Sales Revenue 19.5 37.0 52.5 60.6 71.9 76.6 81.2 Export Revenue 3.7 73 93 12.1 13.5 22.3 21.1 Total Sales Revenue 23.2 44-3 61.8 72.7 85.4 98.9 102.3 Raw Materials 20.0 39.5 55.7 65.4 73.8 86.1 88.3 Merchandise & Spares 1.0 1.6 1.6 1.6 1.6 1.6 1.6 Cost of Goods Sold 21.0 41.2 573 67.0 75.5 87.8 90.0 Gross Margin 23 3.1 4.5 5.7 9.9 11.2 12.4 General, Sales & Administrative Expenses 0.7 13 13 13 13 13 13 Labor 0.4 0.9 0.9 0.9 0.9 0.9 0.9 Depreciation 1.2 1.0 0.1 0.5 1.9 1.9 1.9 Operating Margin (0.1) 0.0 21 3.0 5.9 7.1 8.3 Net Financial Exp. (Income) on Short-Term Instruments 0.0 0.2 0.4 0.4 0.4 0.4 0.4 Financial Expenses and Fees on Long-Term Debt 0.2 0.6 0.9 1.1 1.2 1.1 1.0 Provisions 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Earnings Before Taxes (0.4) (0.9) 0.8 1.4 43 5.5 6.8 Income Tax 0.0 0.0 0.0 0.3 1.5 1.9 2.4 Net Profit 0. (0.9 0.& 1.1 2.8 3.6 4.4 Dividends 0.0 0.0 0.0 0.0 2.8 3.6 4.4 X Retained Earnings J4 (0.9 0.8 1.1 0.0 0.0 0.0 or MADAGASCAR SOUMA REFINERY Projected Sources & Uses Of Funds US$ Million (Constant 1992) 6 months SOURCES 1993 1994 1995 1996 1997 1998 1999 Net Income (0.4) (0.9) 0.8 1.1 2.8 3.6 4.4 Depreciation 1.2 1.0 0.1 0.5 1.9 1.9 1.9 Provisions 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Internal Cash Generation 0.8 0.1 1.1 1.8 4.8 5.6 6.5 Other Sources Long-Term Debt 1.2 6.1 3-3 1.8 0.9 0.0 0.0 Equity Subscriptions 0.0 0.3 12.2 11.5 0.0 0.0 0.0 External Sources 1.2 6.4 15.6 133 0.9 0.0 0.0 TOTAL SOURCES 2.0 6.6 16.7 15.1 5,7 5.6 65 USES New Project Assets 1.2 6.4 15.6 13.3 0.9 0.0 0.0 Repayment of Long- Term Debt 0.8 1.7 0.8 0.8 0.8 1.2 1.7 Dividends 0.0 0.0 0.0 0.0 2.8 3.6 4.4 Increase (Decrease) in Working Capital 1.5 1.7 1.4 0.8 0.9 1.1 0.2 Surplus (Deficit) Cash (1.5) (3.2) (1.1) 0.1 0.3 (0.2) 0.1 TOTAL USES 2.0 6.6 16.7 15.1 5.7 5.6 65 O* M tl 0~ Iti -h ON' MADAGASCAR SOUMA REFINERY Projected Balance Sheets US$ Million (Constant 1992) 6 months 1993 1994 1995 1996 1997 1998 1999 Raw Materials 1.6 32 4.6 5.4 6.1 7.1 7.3 Finished Goods 0.6 12 1.7 2.0 23 2.7 2.8 Other Merchandise Inventory 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Total Inventory 2.4 4.6 6.4 7.5 85 9.9 10.2 Cash/Banks 0.9 1.7 2.4 2.8 3.2 3.7 3.7 Accounts Receivable 03 0.6 0.8 1.0 1.2 1.4 1.4 Marketable Securities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other Assets 6.6 6.6 6.6 6.6 6.6 6.6 6.6 Total Current Assets 10.1 135 162 17.9 19.4 215 21.9 Land & Equipment 2.1 7.6 23.0 35.8 34.9 32.9 31.0 Intangible Assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other Fixed Assets & Participations 3.4 3.4 3.4 3.4 3.4 3.4 3.4 Fixed Assets 55 11.0 26.4 39.2 382 363 34.4 TOTAL A$SSS 15.6 24.5 42.6 57.0 576 57A8 563 Accounts Payable 1.7 3A 4.7 55 62 72 7.4 Short-Term Debt 2.2 55 6.6 6.4 6.1 63 6.2 Other Debt 0.8 0.8 0.8 0.8 0.8 0.8 0.8 Current Maturities of LTD 1.7 0.8 0.8 0.8 12 1.7 0.9 Other Liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Current Liabilities 65 105 12.9 13.6 14.4 16.1 153 Total Long-Term Debt 6.8 11.2 13.7 14.8 14.9 13.7 12.0 Less Current Maturities of LTD 1.7 0.8 0.8 0.8 1.2 1.7 0.9 Net Long-Term Debt 5.1 10.4 13.0 14.0 13.7 12.0 11.1 on TOTAL LIABILIHES 11.6 20.9 25.9 27.6 28.1 28.1 26.4 '"' Provisions 1.2 13 1.4 1.6 1.7 1.8 1.9 Total Equity 2.9 2.2 153 27.9 27.9 27.9 27.9 TOTAL LIABILMUESA EQUITY 15.6 245 42.6 57.0 57.6 57.8 563 MADAGASCAR SOUMA REFINERY Summary of Financial Projections 6 months 1993 1994 1995 1996 1997 1998 1999 Crude Oil Imported ('000 MT) 146 292 409 467 514 584 584 Sales Revenue 231 44.3 61.8 72.7 85.4 98.9 1023 Total Operating Expenses 233 44.3 59.6 69.7 795 91.8 94.0 Operating Income (0.1) 0.0 2.2 3.0 5.9 7.1 83 Other Income/(Expenses) (03) (1.0) (.4) (1.6) (.6) t1.6) (1.5 Net Earnings Before Tax (0.4) (0.9) 0.8 1.4 4.3 55 6.8 Net Profit (.4 (09 0.8 1.1 2.8 3.6 4.4 CurrentAssets 10.1 135 16.2 17.9 19.4 215 21.9 Net Fixed Assets 5.5 11.0 26.4 39.2 38.2 363 34.4 Total Assets 15.6 245 42.6 57.0 57.6 57.8 56-3 Current Liabilities 65 105 12.9 13.6 14.4 16.1 15-3 Term Liabilities 5.1 10.4 13.0 14.0 13.7 12.0 11.1 Provisions 1.2 13 1.4 1.6 1.7 1.8 1.9 Total Equity 2.9 2.2 153 27.9 27.9 27.9 27.9 Total Liabilities + Equity 15.6 245 42.6 57.0 57.6 57.8 563 Current Ratio 157 1.29 1.26 132 135 1.34 1.43 Equity/Assets 183% 9.2% 35.9% 48.9% 48.4% 483% 49.6% LTD:LTD+Equity 64*36 82:18 46-54 33:67 33-67 30:70 2&72 Operating Income/Sales -0.4% 0.1% 3.6% 4.1% 6.9% 7.2% 8.1% Net Profit Before Taxes/Sales -1.9% -2.1% 13% 1.9% 5.0% 55% 6.6% Net Profit/Sales -1.9% -2.1% 13% 15% 3.2% 3.6% 4.3% Return on Average Equity neg. neg. 5.0% 3.1% 6.6% 85% 105% Debt Service Coverage Ratio (x) 056 0.54 1.17 152 2.48 2.40 3.89 MADAGASCAR SOUMA REFINERY Sensitivity Analysis Sensitivity Analysis: FRR EARR Base Case 17.9% 15.8% Exports Dedine 10% 15.0% 12.8% Exports Decline 20% 123% 95% Domestic Demand Declines 10% 16.8% 14.7% Domestic Demand Declines 20% 15.6% 13.4% Capacity Utilization Declints 10% 17.2% 145% Capacity Utilization Declines 20% 16.0% 12.6% Project Cost Increases 10% 16.6% 14.1% Project Cost Increases 20% 15.5% 12.6% Crude/Refined Product Price Ratio Declines 5% 15.9% 135% Crude/Refined Product Price Ratio Declines 10% 13.9% 112% OQ Z Ln L 0,. MADAGASCAR PETROLEUM SECTOR REFORM PROJECT SOLIMA REFINERY Projected Rates of Return (US$ Mllies) Financial Rate of Return - Paject Investnent Costs 1993 1994 1995 I91 1997 1998 1999 2 20 0 2 2 2007 0 2009 2010 2011 2012 2013 2014 PPF Expenditures (0.75) Capital Investment (Excluding IDC) (1.15) (6.10) (14.84) (13.34) (0.92) Increase in Working Capital (.46) UL2 JL38) (0.85) (087) (106 (023) 0.06 0.07 0.07 0.07 0.07 (0.01) (001) (0.01) (001) ( O) (001) (00) 0.01) (001) Subtotal (3.36) (7.81) (16.22) (14.19) (1.79) (1.06) (0.23) (0.21) 0.06 0.07 0.07 0.07 0.07 (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) Add Back Net Inme (0.44) (0.95) 0.82 1.11 2.76 3.56 4.41 5.01 5.30 5.50 5.69 5.83 5.96 6.25 6.47 6.69 6.92 7.15 7.39 7.64 7.89 8.14 Depreciation 1.21 0.96 0.15 0.54 1.88 1.93 1.93 1.93 1.93 1.93 1.93 1.93 1.93 1.82 1.82 1.82 1.82 1.82 1.82 1.82 1.82 1.82 Net Financial Expenses/(Income) 0.28 0.87 1.27 1.47 1.53 1.50 1.41 1.29 1.15 1.00 0.86 0.71 0.57 0.45 0.34 0.22 0.11 0.00 (0.12) (0.23) (0.34) (0.42) Provisions 0.06 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 Recovery of Incremental Working Capital plus Salvage Value 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0 00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 10.62 Subtotal .11 1.01 2.36 3.25 6.29 7.21 7.88 8.35 8.50 8.56 8.60 8.59 8.58 8.64 8.74 8.85 8.97 9.09 9.21 9.35 9.49 20.28 Net Cash Flows (2.24) (6.81) (13.85) (10.94) 4.50 6.06 7.65 8.13 8.56 8.63 8.67 8.67 8.66 8.63 8.73 8.84 8.96 9.08 9.20 9.34 9.48 20.26 Financial Rate of Return (1993-2014) 17.9% NPV @ 10% $20.0 Rate of Retur on Equity - Private Sector 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Equity Injections (11.50) (11.50) 0.00 Dividends 0.00 0.00 2.32 3.00 371 421 4.46 4.63 4.78 4.90 5.02 5.25 5.44 5.62 5.82 6.01 6.43 6.63 6.84 Net Cash Flow on Equity (11.50) (11.50) 2.32 3.00 3.71 4.21 4.46 4.63 4.78 4.90 5.01 5.25 5.44 5.62 5.82 6.01 6.22 6.43 6.63 6.54 Equity Rate ofReturn (1995-2014) 15.8% Accumulated Equity Invested $11.5 $23.0 $23.0 $23.0 $23.0 $23.0 $23.0 $23.0 $23.0 $23.0 $23.0 $23.0 $23.0 $23.0 $23.0 $23.0 $23.0 $23.0 $23.0 $23.0 Private Sector Share Ownership 72.5% 84.1% 84.1% 84.1% 84.1% 84.1% 84.1% 84.1% 84.1% 84.1% 84.1% 84.1% 84.1% 84.1% 84.1% 84.1% 84.1% 84.1% 84.1% 84.1% b 0 ANNEX5. Page 1 of 2 SOLIMA Refinery - Notes and Assumptions for Financial Proiections A. General Assumptions 1. The financial projections are based on SOLIMA's accounts for FY 1991. These projections are developed in constant US dollars, which is the currency in which SOLIMA's expenses and export revenues are expressed, as well as the reference currency for the import parity pricing system to be implemented under this project. Average international inflation is projected at 3.9 percent in accordance with World Bank forecasts, with the FMG/USD exchange rate moving in accordance with the differential between international and Malagasy inflation. Assumptions concerning price levels, freight, demand and yields are detailed in Annex 6.1 (Economics of the refinery rehabilitation). B. Income Statement 2. Domestic Prices are set in accordance with the import parity pricing system described in Chapter II, para. 2.14, which includes an allowance (frais de passage) for expenses incurred by the petroleum terminal in Tamatave. These fees, presently estimated at $1.4 million p.a., are assumed to change in accordance with the annual growth in sales of refined products. 3. Estimations for operating costs are derived from SOLIMA's historical accounts and based on comparisons with other African refineries. At present, SOLIMA's cash operating costs are inflated because of over-staffing; deterioration of equipment, stemming from inadequate maintenance; and lax inventory management. Personnel costs and overheads are assumed to remain constant over time in real terms, but purchases of spares, chemicals and other materials are expected to decline by 25 percent after the refinery is placed under private management. 4. Depreciation. New assets are linearly depreciated over 20 years. 5. Sales and Income Tax. The sales tax (TUPP) schedule projected for domestic sales of petroleum products is detailed in Chapter II, para. 2.16. Income tax (IBS) is assumed to continue to be levied at the present rate of 35 percent. Losses are carried forward over a maximum period of 5 years. C. Balance Sheet and Cash-Flow Statement 6. fg.h. Minimum operating cash is taken as 15 days of cash operating costs. Surplus cash is assumed to be invested in short-term instruments, thereby maintaining its value in real USD terms. Deficit cash (overdraft) is supplied through short-term debt assumed to have an interest rate of 6 percent per annum in real terms. 7. Accounts Receivable. Domestic sales of petroleum products by the refinery to SOLIMA and other distribution companies are expected to be conducted on a cash basis. Consequently, accounts receivable are assumed to be 5 days of sales. Export sales are assumed to be paid within 30 days of shipment, in keeping with present practice. ANNEX 5.3 Page 2 of 2 8. Inventories. Average inventory levels are projected as follows: for crude oil 30 days of purchases; for products, 10 days of sales; for chemicals and maintenance materials, 30 days of purchases. 9. Plant and Equipment are based on the historical values taken from SOLIMA's accounts and from the investment program agreed upon under the Project. 10. Accounts Pagab are projected at 30 days for the supply of crude and refined products, in keeping with international trade practice, and 90 days for other creditors. 11. Financing Plan. The proposed IDA credit will fund all financial requirements under Phase I of the project, excluding interest during construction (approximately $1 million), which would be capitalized and converted into equity by the Government with no impact on SOLIMA's cash flow. IDA funds are assumed to be on-lent to SOLIMA at 1.1 times the interest rate applicable for IBRD lending (currently 7.43 percent) over 20 years including 5 years grace. Phase II of the project is assumed to be fully financed through foreign investment (equity and quasi-equity). ANNEX 6.1 Page 1 of 0 The details and basic assumptions underlying the economic analysis of the refinery rehabilitation are presented below. The analysis has been carried out in constant 1992 U.S. dollars, assuming fixed assets have an economic life of 20 years, with no residual value. 1. Processing Capacity. Phase-in The maximum achievable processing capacity will rise to 15,000 barrels per stream day (bpsd) of Iran Light API 34, or equivalent Arab Gulf light crude. The refinery should run 330 days a year, with the remaining 35 days earmarked for annual turnaround. However, the refinery would operate on average at only 85 percent capacity, being 13,000 bpsd or 584,095 tpa, allowing it to make up for unscheduled stoppages of up to 50 days in a year. The proposed phase-in schedules for both Phase I and Phase I are given in the table below: I22 129. 1224 126 1222 122 122 Phase I (Visbreaker) 0% 0% 60% 80% 90% 100% 100% Phase I (Thermal 0% 0% 0% 0% 70% 90% 100% Cracker) 2. Yield Pattern With optimal management, the present hydroskimming configuration could achieve a yield of 96.5 percent against the present 92.6 percent. Due to the energy consumed by the visbreaker an cracking facility, the yield would be 95.5 percent under Phase I, and 95.0 percent after Phase II. The yield patterns are given in the table below. Refinery Yields - Iran Light (% weight) Pren Optimized Phase Phase H Hydrosk. LPG 2.0 1.2 1.2 1.3 Gasoline 15.2 15.4 16.5 18.7 Kerosene 9.6 13.2 13.5 14.2 Diesel 21.2 24.2 32.2 37.6 Fuel Oil 44.3 42.5 28.5 19.6 Bitumen U 3A lb BW 2U 2U K&2 3. Domestic and Export Demand The growth rates for domestic demand after 1993 are projected as follows: Household kerosene 1.5 percent, Gasoline 3.0 percent, Jet Fuel 3.0 percent, LPG 12.0 percent (except in 1993, when a slower growth of 5.0 percent is assumed), Diesel Oil 4.0 percent, and Fuel Oil 4.0 percent. More details are given in paras. 2.1 to 2.4. The refinery is assumed to continue its exports of surplus fuel oil to Mauritius (75-85 KT p.a.). It is further assumed that the 30-40 KT surplus gasoline output that the refinery would produce after implementation of Phase H will be sold in neighboring export markets using gasoline grades similar to that of Madagascar. ANNEX 6.1 Page 2 of 4. Shipment Cost Crude is shipped from Arab Gulf (Ras Tanura) to the Toamasina terminal by 50,000 tons (cargo) vessels at a cost of $13.9 per ton. White products (gasoline, kerosene and diesel) as well as fuel oil are shipped by 20,000 dwt general purpose vessels. Freight cost from Arab Gulf to Toamasina is $20 per ton for white products and $17.4 per ton for fuel oil. Freight cost is estimated at $85 per ton for LPG and $50 per ton for bulk bitumen. Insurance and ocean losses, estimated at 1.5 percent of the FOB-plus-freight cost for crude and products, are included in the above freight rates. 5. Ooerating Cost The refinery's economic operating cost (spares and maintenance, materials, purchased utilities, administrative overheads, labor and provisions), presently estimated at $3.3 million p.a., is assumed to decline to $2.8 million through a 25 percent reduction in purchases of spares and materials as a result of improved maintenance resulting from the management contract. Fees for the management contract, estimated at $2.0 million p.a. plus contingencies over three years, have been counted in the cost of the rehabilitation investment. The cost of the Toamasina terminal operation, estimated at $1.3 million p.a., has not been included in the analysis, since it would be incurred in any case, whether crude or products are imported. 6. Price Projections for Petroleum Products The FOB price of Iran Light crude is assumed to fluctuate in real terms in accordance with the World Bank's Market Outlook for Major Commodities of October 1992. The crude/refined products FOB price differentials used in the projections are taken as the average price ratios posted during the period 1986-1992. The reference prices are FOB Arab Gulf for crude oil, and FOB Mediterranean for refined products and fuel oil. Naphtha prices have been taken as a surrogate for LPG, which has no formal reference spot market. The table below shows the computed average price differentials and their standard deviation. Average/ Weight % PrQjection Standard Deviation LPG / Naphtha 1.28 0.12 Premium Gasoline 0.40% 1.55 0.11 Kerosene 1.50 0.14 Diesel Oil 1.31 0.14 High-Sulphur Fuel Oil 0.63 0.05 7. Derivation of Economic Prices. In the economic analysis, the portion of the output sold locally is valued at import parity prices, i.e. FOB Arab Gulf plus freight, ocean loss and insurance to Toamasina. A discount of $12 per ton has been assumed for gasoline because of the lower octane and higher lead content of the domestic gasoline compared with the premium gasoline quoted on the reference Mediterranean market. Surplus products (fuel oil and some gasoline) are expected to be exported to Mauritius and La R6union. SOLIMA is already selling fuel oil to Mauritius. The cost of freight for shipments to Mauritius and La Rdunion is estimated to be the same, whether the cargo originates from the Arab Gulf or from Toamasina (although the latter route is shorter, it is also less travelled). Accordingly, products exported by the Toamasina refinery are valued at their FOB price ex Arab Gulf. Inputs are almost entirely imported and are valued at cost. ANNEX 6.1 Page 3 of g 6. Net Present Value The net present value of the refinery rehabilitation has been estimated using social rates of discount of 10 and 12 percent. With a social rate of discount of 10 percent, the refinery rehabilitation would have a not present economic value of $8.8 million under Phase I and $20.9 million under Phase I. With a social rate of discount of 12 percent, the net present value would be $4.9 million under Phase I and $12.7 million under Phase H. 7. Snsit Ana A sensitivity analysis has been carried out to assess the impact of changes in four critical variables: project cost, refined products/crude price ratios, the volume of domestic demand, and capacity utilization. It appears that the economic rate of return of the project is not strongly affected by increases in capital cost. Even with a 20 percent increase in project cost or a 20 percent fall in domestic demand, the rates of return for Phase I and Phase H remain above 13 and 14 percent, respectively. The differential between the FOB price of crude and products has a stronger impact. When international price margins between refined products (gasoline, kerosene, diesel) and crude oil fall by 10 percent, the return on Phase I falls to 5.4 percent, and that of Phase II to 11.4 percent. Finally, should the project run at 80 percent of the scheduled 13,000 bpd capacity, the rate of return falls to 12 percent under Phase I, and 13.6 percent for Phase II. ANNEX 6.1 Page 4 of 8- HISTORICAL PRICES OF PETROLEUM PRODUCTS CRUDE & PRODUCT PRICES Jan-Oct USD/Ton, FOB IM 1W 12 1 M 2 IM 21 122 92 Iran Light 93.1 126.8 98.2 119.2 154.7 127.8 130.5 139.6 Naphta 109.8 143.0 123.6 141.8 201.8 191.6 176.6 175.7 Premium 142.3 174.6 156.3 175.1 233.2 222.1 208.5 207.5 Kerosene 120.3 164.3 147.3 181.8 251.9 215.0 192.0 213.9 Diesel 100.2 145.0 125.4 159.1 208.1 195.5 176.6 194.8 Fuel Oil (HSFO) 53.6 91.1 62.9 78.7 95.5 75.7 76.7 95.3 Iran Light $/Bbl 12.7 17.3 13.4 16.2 21.1 17.4 17.8 19.0 PRODUCTS / CRUDE PRICE RATIOS Jan-Oct % weight im 11 1m 1m 12 1 22 9121 AM D Naphta 1.18 1.13 1.26 1.19 1.30 1.50 1.35 1.26 1.28 0.12 Premium 1.53 1.38 1.59 1.47 1.51 1.74 1.60 1.49 1.55 0.11 Kerosene 1.29 1.30 1.50 1.52 1.63 1.68 1.47 1.53 1.50 0.14 Diesel 1.08 1.14 1.28 1.33 1.34 1.53 1.35 1.40 1.31 0.14 High Sulfur Fuel Oil 0.58 0.72 0.64 0.66 0.62 0.59 0.59 0.68 0.63 0.05 Note: The prices are quoted FOB Arab Gulf for Crude Oil and FOB Mediterranean for Refined Products ANNEX 6.1 ECONOMICS OF REFINERY REHABILITATION Page of a REFINERY SHUT DOWN 1993 1994 1995 1996 1997 1998 1999 2000 2001 Crude Processed KT 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Imported Crude ($ million) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Imported Products 58.1 59.3 61.7 65.6 69.7 73.9 78.5 83.2 85.3 Export Revenue 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Annual Economic Cost 58.1 59.3 61.7 65.6 69.7 73.9 78.5 83.2 85.3 OPTIMIZED HYDROSKIMMING 1993 1994 1995 1996 1997 1998 1999 2000 2001 Crude Processed KT 584.1 584.1 584.1 584.1 584.1 584.1 584.1 584.1 584.1 Imported Crude 80.0 79.1 79.5 81.7 83.9 86.1 88.3 90.5 89.6 Imported Products 3.8 4.9 6.1 7.6 9.2 10.9 12.7 14.9 16.8 Export Revenue -25.0 -24.0 -23.5 -23.5 -23.5 -23.3 -23.1 -22.9 -22.0 Operating Cost 3.3 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 Annual Economic Cost 62.1 62.7 64.9 68.5 72.4 76.4 80.7 85.2 87.2 Less Import Parity Cost 58.1 59.3 61.7 65.6 69.7 73.9 78.5 83.2 85.3 Diff. Import Parity -4.0 -3.3 -3.2 -2.9 -2.7 -2.5 -2.2 -2.0 -1.9 PHASE I CONFIGURATION 1993 1994 1995 1996 1997 1998 1999 2000 2001 Crude Processed KT 292 292 409 467 526 584 584 584 584 Imported Crude ($ million) 40.0 39.5 55.7 65.4 75.5 86.1 88.3 90.5 89.6 Imported Products 25.1 26.6 11.6 7.5 4.1 1.4 3.0 4.8 6.5 Export Revenue -7.5 -7.3 -9.3 -12.1 -15.4 -19.6 -19.2 -18.8 -17.7 Operating Cost 3.3 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 Phase I Economic Cost 60.9 61.5 60.7 63.5 66.9 70.7 74.8 79.2 81.1 Less Import Parity Equivalent 58.1 59.3 61.7 65.6 69.7 73.9 78.5 83.2 85.3 Diff. Import Parity -2.7 -2.2 1.0 2.1 2.7 3.2 3.6 4.0 4.1 PHASE II CONFIGURATION 1993 1994 1995 1996 1997 1998 1999 2000 2001 Crude Processed KT 292 292 409 467 514 584 584 584 584 Imported Crude ($ million) 40.0 39.5 55.7 65.4 73.8 86.1 88.3 90.5 89.6 Imported Products 25.1 26.6 11.6 7.5 0.3 0.0 0.0 0.0 0.0 Export Revenue -7.5 -7.3 -9.3 -12.1 -13.5 -22.3 -21.1 -19.3 -16.6 Operating Cost 3.3 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 Phase II Economic Cost 60.9 61.5 60.7 63.5 63.4 66.5 69.9 74.0 75.8 Phase I Annual Cost 60.9 61.5 60.7 63.5 66.9 70.7 74.8 79.2 81.1 Differential Phase I 0.0 0.0 0.0 0.0 3.5 4.2 4.9 5.2 5.3 Differential Import Parity -2.7 -2.2 1.0 2.1 6.3 7.4 8.6 9.2 9.5 ANNEX 6.1. Page 6 of 8 ECONOMIC RATE OF RETURN 1993 1994 1995 1996 1997 1998 1999 Import Parity Cost 29.1 59.3 61.7 65.6 69.7 73.9 78.5 Phase I Cost of Sales 30.4 61.5 60.7 63.5 66.9 70.7 74.8 Phase I Investment 2.3 8.0 4.6 1.2 0.1 0.0 0.0 ERR Phase I / Import Parity 15.7% -3.6 -10.1 -3.6 0.9 2.6 3.2 3.6 Net Present Value at $4.9 NPV @ 10% $8.8 Phase II Cost of Sales 30.4 61.5 60.7 63.5 63.4 66.5 69.9 Phase II Project Cost 0.0 0.0 11.5 11.5 0.0 0.0 0.0 ERR Phase II / Import Parity 17.0% -3.6 -10.1 -15.1 -10.6 6.1 7.4 8.6 Net Present Value at $12.7 NPV @ 10% $20.9 Economic Return ($ million) 1993 1994 1995 1996 1997 1998 1999 Hydroskimming / Import Parity -4.0 -3.3 -3.2 -2.9 -2.7 -2.5 -2.2 Phase I / Import Parity -2.7 -2.2 1.0 2.1 2.7 3.2 3.6 Phase II / Import Parity -2.7 -2.2 1.0 2.1 6.3 7.4 8.6 Economic Return ($ per ton) 1993 1994 1995 1996 1997 1998 1999 Hydroskimming / Import Parity -6.8 -5.7 -5.4 -5.0 -4.6 -4.2 -3.8 Phase I / Import Parity -9.4 -7.5 2.5 4.5 5.2 5.5 6.2 Phase II / Import Parity -9.4 -7.5 2.5 4.5 12.2 12.7 14.6 ANNEX 6.1 Page 7 of8 SIMULATION OF REFINERY ECONOMICS BASED ON HISTORICAL PRICES 1986-1992 COVERAGE OF MARGINAL COST (USD/Ton, border prices) m m I 2 2 1 2 Optimized Hydrokimming -11.1 -7.7 -1.1 0.4 2.7 11.6 -0.5 Phase I Configuration -3.1 0.3 8.0 10.9 16.3 25.9 10.0 Phase II Configuration 3.1 6.5 15.1 19.1 27.5 37.7 18.4 USD/bbl, border prices Im m m m 2 2 1 Optimized Hydroskimming -1.5 -1.1 -0.2 0.0 0.4 1.6 -0.1 Phase I Configuration -0.4 0.0 1.1 1.5 2.2 3.5 1.4 Phase I Configuration 0.4 0.9 2.1 2.6 3.7 5.1 2.5 COVERAGE OF TOTAL COST (USD/Ton, border prices) 1 1 1 2 1 1 1 Optimized Hydroskimming -16.5 -13.1 -6.5 -5.0 -2.7 6.2 -5.9 Phase I Configuration -8.5 -5.1 2.6 5.5 10.9 20.5 4.6 Phase Configuration -2.3 1.1 9.7 13.7 22.1 32.3 13.0 USD/bbl, border prices iM 2m 1m 1m 12 12 12 Optimized Hydronkimming -2.3 -1.8 -0.9 -0.7 -0.4 0.8 -0.8 Phase I Configuration -1.2 -0.7 0.4 0.7 1.5 2.8 0.6 Phase I Configuration -0.3 0.1 1.3 1.9 3.0 4.4 1.8 [REFIMARG.XLSIA 1/8/93 5:16 PM ANNEX 6.1 - Page 8' of 8 SIMULATION OF REFINERY VIABILITY UNDER HISTORICAL PRICES Coverage of Variable Cost 70.0 50.0 - - - -- - - - - - - - - - -- - - -- - --- - -- 3 0.0 .--- ..-.-.. - .---- - 50.0 -2 0.0--- 30.0 ---- - -- - -- 5. 0.0 ------ _ _ -- - - --. - 410.0 -----.- .- -- - -__- - - - - - B ase Case ~- Phase I --Phane 11 Coverage of Total Coat 70.0 --- .- 60.0 - --- ----- -........... ........... ........-....... ............... 50.0 40.0 .. ..... 30.0 . ....................... ..... .... S 20.0 . ....... ........ . ......... 10.0 - -- 0.0 -10.0 .-- .-- -. .-- - - - -- . - - . . - .-- - . .--. -20.0 - - -30.0 ~ -00 - - - - - - --+-- Base Case ---- Phase I i Phase Il (REFIMARG.XLSIA 2/17/93 4:38 PM ANNEXL6. Page 1 of 4 MADAGASCAR PETROLEUM SECTOR REFORM PROJECT ECONOMIC ANALYSIS OF THE NEW PETROLEUM LOADING/UNLOADING FACILITY AT TOAMASINA The Present Situation 1. As mentioned in para 2.13, the existing loading/unloading facilities at the port of Toamasina are a weak link in the petroleum distribution system, on the grounds of operation, safety, economics and environment. The facilities are located in the middle of the general cargo area, and some of the port storage buildings have been built on top of the pipelines. A fire already occurred in August 1988, but fortunately it did not have serious consequences. Given the limited space available, the mooring of the tankers is a difficult operation which creates an unusually high risk of collision with other ships present or entering the port. 2. Tankers are unloaded through flexible hoses that lie on the bottom of the harbor when not in use. During operation, failures of the hoses are common, which cause spillages that pollute the harbor and delays that increase costs. After a failure and at the beginning of each operation, divers must attach a new rope to the flexible hoses, which creates additional delays. In addition, the size of the ships that can deliver crude oil to Madagascar is limited to 50,000 tons, thus precluding the advantage of the lower freight rates available in larger tankers. Economic Benefits 3. The transfer of the existing petroleum loading/unloading facility is justified on safety and environmental grounds. However, an economic analysis was undertaken considering the benefits form using larger tankers, from reduced ship loading/unloading time and from the increasing manoeuvering flexibility for non-petroleum cargo in the existing port. No safety on environmental benefits are included in this economic analysis. 4. Deliveries of crude oil to Madagascar are limited to tankers of 50, 000 tons, and availability of crude oil tankers of these cargo sizes from the Arabian Gulf is extremely limited. Consequently, a premium is charged for deliveries to Madagascar above those for similar sized vessels in other major trade routes. The construction of the new loading/unloading facility will allow the use of tankers of 80,000 - 100,000 tons and produce savings of at least 15 percent over the transport cost of present tankers are expected. Specialized consultants have estimated that this would represent about US$2.5 per ton of crude oil delivered. 5. The contracts for the supply of crude oil and refined products include a premium over FOB prices plus transport costs, that corresponds to profits, insurance, unloading time, demurrage cost, risk of operation and other costs. This premium was US$3.80 per ton in 1991 and is expected to decline with the reforms being introduced in the petroleum sector. Consultants have estimated that a decline of 5 percent over the indicated level (US$0.19 per ton) could be attributed to the new loading/unloading facility. ANNEX 6.2 Page 2 of 4 6. As presently done, the unloading/loading of petroleum products has a negative impact on the overall operations of the port. This negative impact will increase over time as hydrocarbon and non-hydrocarbon traffic increases. Consultants have estimated that the transfer of petroleum loading/unloading facilities will bring benefits to the port that can be estimated at the present time at 5 percent of actual revenues of the port (US$9.4 million). Therefore, these benefits are estimated as US$470,000 per year and it is assumed that they increase at 10 percent per year. 7. The basic data used in the calculation is presented in the attached tables. The internal rate of return is 12.5 percent. Sensitivity analysis was undertaken to increases in project costs and estimated at 14.7 percent under both a Phase I and a Phase II configuration, while the net pre:ent value at a 10 percent discount rate is estimated at US$4.1 million, respectively. A sensitivity analysis was conducted to assess the effects of an increase in investment costs and adverse changes in the quantifiable benefits. Should transport benefits decrease to US$2.0 per ton or should port benefits not increase over time, the project remains economically attractive. The project is more sensitive to changes in investment costs, yet even a 25 percent increase would still allow for reasonable economic returns. New Petroleum Loading/Unloading Facility Sensitivity Analysis Phase I Phase II Base Case 14.7 4.2 14.7 4.1 Cost Increases 25% 11.9 2.0 11.8 1.9 Savings in transport costs 13.0 2.6 13.0 2.6 reduced to US$2.0 per ton Savings in suppLy premium reduced 14.5 4.0 14.5 4.0 to USSO.15 per ton Benefits for the Port at a 12.5 2.0 12.5 2.0 constant level MADAGASCAR Petroleum Sector Reform Project Economic Analysis of the New Petroleum Loading/Unloading Facility at Toamasina Based on a Phase II Refinery Configuration (US$ Thousands) . Costs 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 A. Investment Costs 1,000 3,000 4,000 5,000 B. Maitenance Costs 1/ 22 22 22 22 22 22 22 22 22 22 22 22 22 22 22 22 C. Residual Value 2t (6500) TOTAL COSTS 1,000 3,000 4,000 5.000 22 22 22 22 22 22 22 22 22 22 22 22 22 22 22 (6478) II. Benefits A. Oude Imports ('000 tons) 584 584 584 584 584 584 584 584 584 584 584 584 584 584 584 584 B. ProductImports(000tons) 0 0 0 0 9 19 30 43 56 70 84 99 115 131 148 167 C. Reduction in Transport Costs 3/ 1.460 1.460 1.460 1,460 1,460 1,460 1,460 1.460 1.460 1,460 1,460 1,460 1,460 1,460 1,460 1,460 D. Reduction in Supply Premium 4/ 111 111 111 111 113 115 117 119 122 124 127 130 133 136 139 143 E. Benefits for the Port 470 470 470 470 470 470 470 470 470 470 470 470 470 470 470 470 TOTAL BENEFITS 2,041 2,041 2,041 2,041 2,043 2045 2047 2,049 2,052 2,054 2057 2060 2063 2,066 2,069 2,073 I. CASH FLOW SIREAM L=g 1=)(4.=)(50M 2.01 7,Q2 2 2.0 2,1 2.I M L.Z 2. . 2.5 2.I .04 29 2.0 551 Internal Rate of Return 12.5% Net Present Value at 10% $1,987 1/ The replacement of flexible hoses is not considered in the economic analysis, because it is similar to the present. 2/ Estimated at 50% of investment cost after 15 years of operations. The useful life of the new facility is at least 50 years. 3/ Estimated at US$2.50 per ton of crude oil delivered. 4/ Estimated at US$0.19 per ton of crude oil and refined products delivered. SENSITIVITY ANALYSIS Increase in 1. Projec IRR NPV 3. Supply Premium IRR NPV Base Case 0% 12.5% $1,987 Base Case $0.19 12.5% $1,987 Pessimistic Case 20% 10.2% $218 Pessimistic Case $0.15 12.3% $1,854 0Q 2. Traspo IRR NPV 4. Port Benefits IRR NPV o. Base Case $2.5 12.5% $1,987 Base Case 470 12.5% $1,987 Pessimistic Case $2.0 10.6% $426 Pessimistic Case 0 9.3% ($525) MADAGASCAR Petroleum Sector Reform Project Economic Analysis of the New Petroleum Loading/Unloading Facility at Toamasina Based on a Phase I Refinery Configuration (US$ Thousands) I. Costs 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 207 2008 2009 2010 2011 2012 2013 A. Investment Costs 1,000 3000 4,000 5,000 B. Maintenance Costs 1/ 22 22 22 22 22 22 22 22 22 22 22 22 22 22 22 22 C. Residual Value 2/ (6.500) TOTALCOSIS 1,000 3,000 4,000 5,000 22 22 22 22 22 22 22 22 22 22 22 22 22 22 22(6,478) II. Benefits A. Oude IMpaUs ('000 tens) 584 584 584 584 584 584 584 584 584 584 584 584 584 584 584 584 B. ProductlImports(ODtons) 7 15 23 32 43 54 66 79 92 106 120 135 151 168 189 210 C. Reduction in Transport Costs 3/ 1,460 1,460 1,460 1,460 1,460 L460 1,460 1,460 1,460 1,460 1460 1,460 1460 1,460 L460 1,460 D. Reduction in SupplyPrenium 4/ 112 114 115 117 119 121 124 126 128 131 134 137 140 143 147 151 E. Benefits for the Port 470 470 470 470 470 470 470 470 470 470 470 470 470 470 470 470 TOTAL BENEFIS 2,043 2,044 2,046 2,047 ,049 2052 2,054 2,056 2,059 2,061 ,064 2,067 2,070 2,073 2,077 2,081 I. CASH FLOW SREAM UuQ0){UM 000J100)2 gL - 2. = .Q . 2.-2 =. 2.0 2. I. 2.042 2.045 2.8 0 2g5 8.559 Internal Rate of Return 12-5% Net Present Value at 10% $2,016 1/ The replacement of flrible hoses is not considered in the economic analysis, because it is similar to the present. 2/ Estimated at 50% of investment cost after 15 years of operations The useful life of the new facility is at least 50 years 3/ Estimated at US$2.50 per ton of crude oil delivwed. 4/ Estimated at US$0.19 per ton of crude oil and refined products delivered. SENSITIVITY ANALYSIS Increase in 1. Project IRR NPV 3. SupplyPremium IRR NPV Base Case 0% 12.5% $2,016 Base Case $0.19 12.5% $2,016 Pessimistic Cae 20% 10.3% $248 Pessimistic Case $0.15 12.4% $1,877 2. Transport [RR NPV 4. Port Benefits IRR NPV M Base Case $2.5 12.5% $2,016 Base Case 470 12.5% $2,016 o Pessimistic Case $2.0 10.6% $456 Pessimistic Case 0 9.3% ($495) ANNEX 6.3 Page 1 of 2 ECONOMICS OF THE LPG VISTMENT PROGRAM The LPG investment program will replace key storage and distribution equipment that has reached the end of its economic life, and install new equipment necessary to support the growth in demand made possible by the LPG promotion program. Because of the high cost of shipping LPG in small batches, the surplus LPG produced by the refinery is not exported but flared with no benefit to the economy. The economic rate of return of this investment is estimated at 26.7 percent (not counting environmental benefits), based on the following assumptions: 1. Demand for LPG Demand tor LPG with the investment in LPG equipment is projected to increase 5 percent in 1994 and 12 percent per annum thereafter, reaching 6,000 tons in the year 2000. Similar or higher increases in LPG demand have occured in other African countries where demand has been constrained by run-down distribution facilities. Demand for LPG without the investment program is projected to decline by 20 percent per annum. 2. Marginal cost of su=oly The production of LPG by the refinery has no opportunity cost since LPG is a by-product that is not commercially exportable from Madagascar. The marginal cost of distributing LPG in Madagascar is estimated at $125 per ton, being 50 percent of the price mark-up that is charged by the distribution network. 3. Valuation of LPG supply The LPG supplied to Malagasy customers is valued at $575 per ton (including a 15 percent sales tax), which is the price they are currently paying. 4. A New assets are assumed to have an economic life of 15 years with no residual value. 5. Sensitivity A sensitivity analysis was carried out to assess the impact of errors in demand forecast and of a higher marginal cost of supplying LPG. The calculated rates of return for these sensitivity analysis are given below. Demand without project declines at 10 percent per annum instead of 20 percent: 22.7% Marginal cost of supply increases from $125 to $175 per ton: 24.3% Demand with the LPG investment is 20 percent lower than projected: 20.1% ANNEX 6. 3 Page 2 of 2 ECONOMIC ANALYSIS OF THE LPG INVESTMENT PROGRAM No LPG investment 1993 1994 1995 1996 1997 1998 1999 2000 Demand -20% 2,800 2,240 1,680 1,120 560 0 0 0 Retail price ($ per ton) 575 575 575 575 575 575 575 575 Marginal Cost of Supply ($/ton) (125) (125) (125) (125) (125) (125) (125) (125) Net benefit ($/ton) 450 450 450 450 450 450 450 450 Economic contribution ($) 1260000 1008000 756000 504000 0 0 0 Situation with LPG investment 1993 1994 1995 1996 1997 1998 1999 2000 Demand (tons) 2,800 3,000 3,300 3,700 4,200 4,700 5,200 6,000 Retail Price ($ per ton) 575 575 575 575 575 575 575 575 Marginal Cost of Supply (Vton) (125) (125) (125) (125) (125) (125) (125) (125) Net benefit ($/; ,) 450 450 450 450 450 450 450 450 Economic contribution ($) 1260000 1350000 1485000 1665000 1890000 2115000 2340000 2700000 Investment ($) -4000000 -2000000 Incremental benefit ($) -4000000 -1658000 729000 1161000 1638000 2115000 2340000 2700000 Economic Rate of Return 26.7% Sensitivity ERR Demand declines by 10 percent p.a. if no investment in LPG equipment 22.7% Marginal cost of supply increases from $125 per ton to $ 175 per ton 24.3% Demand with LPG investment is 20 percent lower than projected 20.1% ANNEX 7.1 Page 1 of 9 (Unofficial translation) Antananarivo, June 30, 1993 THE PRIME MINISTER, HEAD OF GOVERNMENT To Mr. Francisco Aguirre-Sacasa Director Department m ifrica Region World Bank Washington, D.C. Subject: Letter of Petroleum Sector Policy Dear Director: Within the overall framework of the Structural Adjustment Program, and In an effort to improve the efficiency of the petroleum sector's contribution to the Malagasy economy and society, the Government of the Republic of Madagascar undertook to perform an in-depth review of the principles underlying the sector's operation and management. A number of studies and reviews were carried out, which served to confirm the obvious: that despite the undeniable good health of the company Solitany Malagasy (SOLIMA), entrusted with the Government monopoly on imports, refining and distribution established in 1976, it had become essential to overhaul the system to allow the free play of competition, taking steps to preserve the gains already made, rehabilitate certain areas, such as refining, set new ground rules, and invest in other operations designed to improve performance, encourage new operators, and protect the environment. With the liberalization of lubricant sales in 1991, and the enactment of an ordonnance in January 1993 liberalizing all petroleum-sector operations, the Government of Madagascar set in motion its plan of action for the achievement of four clearly defined objectives: - assure the country of reliable oil supply, free of economic or other pressures likely to destabilize the national economy; - ensure such supply while seeking to minimize the country's overall oil bill; - develop petroleum sector operations capable of forming part of Madagascar's international trade; - liberalize petroleum sector operations and encourage the private sector to participate in them. ANNEX 7.1 Page 2 of 9 In its approach to supply, and until the Malagasy petroleum sector becomes competitive, the Government has decided to handle its oil import operations on the basis of systematic international competitive bidding, organized with maximum transparency. In any case, once the research and exploration conducted upstream by the Office Militaire National des Industries Strat6giques (OMNIS) yield positive results, the ground rules will be revised accordingly. A number of legislative and regulatory measures have already been enacted: - creating a legal environment favorable to liberalization of the sector; - putting a mechanism in place for the automatic setting of ceiling prices below which operators are free to price their sales; - introducing a specific per liter system of taxation for each product. The Government therefore intends to restructure SOLIMA to enable it to handle competition in its commercial activities and to give autonomy to its subsidiaries, such as the rehabilitated refinery. I am certain that the petroleum sector reform program, the details of which are attached, and of which the project submitted to you forms part, will enjoy the technical and financial support of your institution. Very truly yours, Guy Willy Razanamasy ANNEX 7.1 Page 3 of 9 THE PETROLEUM SECTOR IN MADAGASCAR LETTER OF DEVELOPMENT POLICY STRUCTURE OF THE PETROLEUM SECTOR 1. The Malagasy petroleum sector comprises three types of activities: a. supply and distribution of petroleum products with a view to satisfying national demand; b. refining, to help reduce the cost of product supplies for the country; c. prospecting for hydrocarbons, an activity that has been under way for several decades now, in the hope of locating reserves that will form the foundation for national oil production; d. liberalizing the activities of the petroleum sector to ensure private sector participation in these activities. 2. Petroleum product consumption, currently of the order of 400,000 t/a, posted a distinct drop over the past 10 years (from 410,000 tons in 1979 to 280,000 tons in 1989), but this decline now seems to have come to an end. 3. Refining also experienced numerous difficulties and interruptions over the past decade and the installations are still in very poor shape. In this connection, a rehabilitation program for the refinery is under study. INSTITUTIONAL SITUATION AND LEGAL FRAMEWORK 4. Nationalization All petroleum activities in Madagascar are conducted under the direct control of the State. An exclusive State monopoly was instituted by Order No. 76-020 bis of June 25, 1976 on all petroleum or petroleum-related activities: purchasing, transport, storage, processing and distribution. This measure was accompanied by nationalization of all assets of oil companies that had been operating in Madagascar coupled with establishment of SOLITANY MALAGASY (SOLIMA), a State oil company. 5. SOLIMA SOLIMA is a corporation whose capital is 100% owned by the Malagasy State. Nevertheless, under Order No. 76-021 of June 25, 1976 its articles of association do not exclude capital increases that could be subscribed by other stockholders. ANNEX 7.1 Page 4 of 9 SOLIMA is charged with implementing the Government's policy in the petroleum sector, but without directly holding the monopoly of the activities involved. SOLIMA's articles of association also specify that it can take up participations, establish branches and conclude service contracts with private enterprises in its field of activity. 6. Liberalization policy Up till now SOLIMA has been the sole operator in the field of supply, refining and distribution of petroleum products for all of Madagascar. Since 1991, in the context of Madagascar's economic policy, the liberalization of the petroleum sector has been started with the sale of lubricants, in accordance with Law No. 91-022 of August 12, 1991. This policy has been confirmed by Order No. 93-002 of January 8, 1993, which liberalized all petroleum product-related activities in Madagascar. 7. The Ministry of Energy and Mines (MEM) MEM is the governmental organ responsible for formulating the State's policy on oil supply, refining and distribution, and for supervising the implementation of this policy by SOLIMA. To help MEM perform this latter function, the State can appoint a controller general who attends all meetings of SOLIMA's Board of Directors and can block, under certain conditions, execution of the Board's resolutions if they are not in accordance with government policy. 8. Hydrocarbon prospecting As regards prospecting, the State grants permits to private operators who, in the event of a discovery of commercial importance, will be able to obtain production concessions. Several private oil companies currently hold exploration permits and are working in the context of agreements with the Government. The presence of hydrocarbons has been determined in several places, but no discovery of commercial significance has yet been made. 9. The Office Militaire National des Industries StratfgiQues (OMNIS) OMNIS is the government agency responsible for supervising hydrocarbon prospecting and implementing the State's policy in this sphere. It is the depository of the geological data derived from the exploration work performed. Established in 1975, OMNIS reports directly to the President of the Republic. OMNIS has used World Bank (IDA) credit funds to finance studies to summarize the findings of the exploration ANNEX 7.1 Page 5 of 9 work carried out and to promotion campaigns targeting major international oil companies to persuade them to invest in prospecting in Madagascar. OMNIS is authorized to conclude operating agreements with concession-holding oil companies and, if warranted, to take participations in mixed oil companies. BASIC OBJECTIVES OF GOVERNMENT PETROLEUM POLICY 10. The Government's petroleum policy centers around four permanent basic objectives: a. ensuring reliable supply for the country, unaffected by economic or other pressures that could adversely have an impact on the stability of the national economy; b. organizing this supply so as to minimize the country's total bill; c. developing petroleum activities capable of integration into international trade. d. liberalize petroleum sector operations and encourage the private sector to participate in them. During the past 10 years these objectives have been pursued by means of a centralized approach: the Government or its agencies have participated directly in the determining of the main orientations to be adopted and in decisionmaking. During this period the oil bill has represented about 20% of all imports and has been a major financial burden for the country, especially at times when prices were rising in the international oil market. 11. New orientation The adoption of a new economic policy focusing on openness and liberalization has led the Government to opt for a new strategy in the petroleum sector. The sector will have to become more efficient, which means that it will have to change its institutional structures and mechanisms while still concentrating on the four basic objectives referred to above. In this context, the Government will establish a national supervision and control organization to ensure the free play and good functioning of the petroleum sector. SUPPLY POLIC 12. Present position In the past, because of a chronic foreign exchange shortage, the Government has sought to arrange, through relationships of a political nature, reliable sources of supply by means of long- ANNEX=7. Page 6 of 9 term contracts (State-to-State supply agreements). These formulas have proven to be more costly than obtaining supplies on the spot market, for both crude and refined products. In recent years, thanks to a certain easing of foreign exchange availability, crude and refined products have been obtained from new suppliers on a basis of open competition on the international market. 13. Supply poliev In order to pursue and further develop these new arrangements, the Government intends: a. to conduct all purchasing for SOLIMA, for both crude and refined products, through international bidding; b. to progressively liberalize petroleum product imports, by authorizing other operators to import these products, either for their own use or for sale. 14. Bidding procedur Bids are requested each year for supply of crude and refined products, on a regular basis and with very open formulas, so as to ensure maximum flexibility in order to obtain the best price and delivery conditions. The number of potential suppliers asked to bid has been increased in order to maintain competition among them and also for considerations of security of supply. The invitation to bid is precisely drafted, in accordance with the options adopted, so that clear and easily comparable bids will be received. 15. Bid evaluation Bid opening is public, in the presence of the bidders. The bid evaluation committee is an ad-hoc committee made up of: - representatives of SOLIMA, appointed by its general manager; - representatives of the Ministry responsible for Energy; - a representative of the Finance Ministry; - a representative of the Central Bank; - representatives of the Government. The bid evaluation and contract award committee announces its decision and awards the contract at the same session. Its decision is final and takes effect without any other administrative approvals being required. ANNEX 7.1 Page 7 of 9 MEASURESTAKEN 16. Legal framework The progressive liberalization of importation and marketing of petroleum products necessitates revision of the existing legal framework in order to spell out under what conditions the State monopoly instituted by Order No. 76-020 bis applies. In this connection, the State affirmed the principle of liberalization of the petroleum sector by Order No. 93-002 of January 8, 1993: "Transitional arrangements, specified by decree, will define the modalities of progressive application of this liberalization." Decree No. 93-136 of March 24, 1993, sets out the arrangements for application of the liberalization order. This decree establishes a transitional period extending up till December 31, 1995, during which importation of sensitive products such as premium gasoline, regular gasoline, kerosene and diesel will be handled exclusively by SOLIMA. The decree details the conditions to be met and the procedure to be followed by economic operators wishing to participate in petroleum sector activities. 17. Petroleum product prices In the past, petroleum product prices were set by the Government on the basis of the costs incurred by SOLIMA. This system is not well suited for opening of the market and development of competition among operators. A system of automatic and periodic fixing of ceiling prices was accordingly instituted by Decree No. 91-431 of August 5, 1991. This system has been applied since May 1992 with respect to the four sensitive products, namely premium and regular grade gasoline, kerosene and diesel. It is based on the following principles: a. actual selling prices can be freely fixed by each operator in a spirit of open commercial competition, provided they remain below the ceiling set; b. the ceiling prices are calculated each month on the basis of the prices prevailing in the international oil market, the movement of the FMGIUS$ exchange rate, and the officially established rates for storage, transport and distribution, without direct reference to the actual costs of any particular operator or operators. This method of price setting, with monthly fixing of ceiling prices based on the international prices obtaining in the previous month together with annual fixing of official rates by types of operation (storage, transport, distribution), has been in effect since May 1992. The new prices are calculated and applied by the operators under their own responsibility. They are verified subsequently by MEM. ANNEX7 Page 8 of 9 The parameters of the calculation formula are set by MEM each year, in such a way as to motivate operators to continually improve their efficiency. 18. Taxation: Single taxes on petroleum products The "ad valorem" tax system has been dropped for petroleum products and replaced by a specific tax fixed in FMG per liter for each product. This system, in effect since July 1991, makes it possible to obtain reliable and predictable tax revenues. Total tax revenue in 1992 was FMG 30 billion, i.e. ... % of total product sales. For 1993, tax revenue of FMG 60 billion from petroleum products has been included in the budget law. It should be noted that while kerosene was still subsidized at FMG 80/liter in 1992, this subsidy was eliminated as of February 1993. REHABILITATION OF THE REFINERY 19. The refiny The presence of a refinery in a country's petroleum product supply system ought to be a twofold advantage giving: - access to direct crude supply and hence to the most important segment of the international oil market; - possibility of lowering the national oil bill. However, as a result of various technical and financial difficulties the Toamasina refinery has instead been a burden on the country's petroleum sector over recent years. Several studies have been made to clarify the role of the refinery and the steps that should be taken. The most recent of these studies is the one made by KBC Process Technology (United Kingdom) in 1991, which analyzes several rehabilitation/modernization/expansion alternatives for the refinery and proposes some urgent measures needed to reestablish normal operating conditions. 20. Rehabilitation program On this basis, the decision has been taken first to rehabilitate the existing installations and to consider measures for bringing operation back up to normal. After rehabilitation, the desirability of expansion by addition of a thermocracker will be studied. ANNEX 7.1 Page 9 of 9 21. Management of the refinerv The refinery will be managed as an independent unit and will be required to demonstrate its economic feasibility under conditions of open competition. Moreover, the Government is considering the possibility of opening the refinery's capital to other shareholders in order to raise new capital, strengthen its position in the regional market and ensure that it operates as cost-effectively as possible. INSITUTONAL STRENGTENING OF SOLIMA 22. The Government proposes to restructure SOLIMA in order to: - strengthen its commercial capability; - make its structures more flexible; - make all its units accountable by means of appropriate forms of organization and management. ANNEX 8.1 Page 1 of 2 MADAGASCAR SELECTED DOCUMENTS AVAIELABLE IN THE PROJECT FL I. Ordonnance No. 76-020 bis, June 25, 1976 2. Ordonnance No. 76-021, June 25, 1976 3. Ordonnance No. 76-022, June 25, 1976 4. Loi No. 91-022, August 12, 1991 5. Ordonnance No. 93/002, January 8, 1993 6. Ddcret No. 93-136, April 1, 1993 7. Dicret No. 91-431, August 13, 1991 S. Ministbre de l'Energie et des Mines, Arrht No. 2089, April 17, 1992 9. Ministbre de i'Energie et des Mines- ArrItd No. 4451/92, July 28, 1992 10. Industry and Energy Operations Division- Petroleum Sector Rert No. 7986-MAG. Jul 13. 1989, Report prepared by Messrs. Patricto Millan, Thuvara S. Nayar and Michel Patou 11. SOLIMA, Madagascar: Study for the improvement in production and distribution of refined products- Phase 1, Report prepared by KBC Process Technology Limited, May 1991 12. SOLIMA, Madagascar: Study for the improvement in production and distribution of refined products- Phase 2, Report prepared by KBC Process Technology Limited, July 1991 13. SOLIMA, Madagascar: Rehabilitation and imrovement 1rogra e- Project Definition . , Report prepared by KBC Process Technology Limited, October, 1992 14. Rdpublique de Madagascar: Proiet de Rdforme du Secteur Ptrolier- Raort sur les aspects juridiques et fiscaux de la soparation des activitds de raffinage et de distribution de la SOLIMA, Report prepared by Cabinet de Consells D'Entreprises, Madagascar, April 1993 15. R6publique de Madagascar: Etude de faisabilitf du diplacement du terminal paroller du port de Toamasina, Report prepared by BCEOM, October 1992 16. Mechanical Inspection Contract- SOLIMA Raffinere de Tamatave Report prepared by OR7EC, September 1992 ANNEX 8.1 Page 2 of 2 17. Convention réglant les conditions de l'activité de la société malgache de raffinerie sur le territoire de la République Malgache 18. SOLIMA, Madagascar: Etude sommaire sur la séparation des activités raffinage/distribution au sein de la Raffinerie SOLIMA-Toamasina 19. SOLIMA, Madagascar: Le GPL et la Protection de l'Environnement à Madagascar. 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