Malawi - First Energy Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15941 TIMPLEMENTATION COMPLETION REPORT MALAWI ENERGY I PROJECT (Credit 1990-MAI) August 6, 1996 Energy and Infrastructure Division Southern Africa 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 EQUIVALENTS The unit of Currency is the Malawi Kwacha(MK) MK 1.00 = 100 tambalas US$ 1.00 = MK 2.53 at appraisal MK 1.00 = US $0.39 at appraisal US$ 1.00 = MK 15 current MK 1.00 = US$ 0.067 current WEIGHTS AND MEASURES I gigawatt hour (GWh = I million kilowatt hours I kilovolt (kV) = 1,000 volts I kilowatt (kW = 1,000 watts I kilowatt hour (kWh) = 1,000 watt hours kVA, MVA = kilovolt ampere, Megavolt ampere I Megawatt (MW) = 1,000 kilowatts ABBREVIATIONS AND ACRONYMS CDC - Commonwealth Development Corporation EIB - European Investment Bank ESCOM - Electricity Supply Commission of Malawi ESMAP - Energy Sector Management Assistance Program FD - Forestry Department GDP - Gross Domestic Product KfW - Kreditanstalt fur Wiederaufbau MAI - Mean Annual Increment M & E - Monitoring and Evaluation MTR - Mid Term Review FISCAL YEAR April I - March 31  FOR OFFICIAL USE ONLY TABLE OF CONTENTS Page No. PREFACE EVALUATION SUMMARY ............................................................ i THE PROJECT AND ITS OBJECTIVES ............................................................ i IMPLEMENTATION EXPERIENCE AND SUMMARY OF FINDINGS ............................................................ i LESSONS LEARNED AND FUTURE OPERATICNS . ...........................................................i......................................... ni PART I: PROJECT IMPLEMENTATION ASSESSMENT .................... ........................................ I A. Introduction ............................................................ I B. Project Objectives and Description ............................................................ 2 C. Achievements of Project Objectives ............................................................ 3 D. Implementation Record and Major Factors Affecting The Project ............................................................ 5 E. Project Sustainability ............................................................ 14 F. Bank Performance ............................................................ 15 G. Borrower Performance ............................................................ 16 H. Assessment of Outcomes ............................................................ 16 1. Future Operations ............................................................ 17 J. Key Lessons Learned ............................................................ 18 PART 11: STATISTICAL ANNEXES Table 1: Summary of Assessments .................................................... 21 Table 2: Related Bank Loans .................................................... 23 Table 3: Project Time Table .................................................... 24 Table 4: Loan Disbursements: Cumulative Estimates and Actuals .................................................... 24 Table 5A: Key Indicators for Project Implementation (Power) .................................................... 25 Table SB: Key Indicators for Project Implementation (Wood Energy) .................................................... 28 Table 7: Studies included in the Project .................................................... 29 Table 8A: Project Costs .................................................... 30 Table 8B: Project Financing Plan, in million US dollars .................................................... 31 N.B. The local cost does not include interest during implementation .................................................... 31 Table 9: Economic Costs And Benefits .............2................. 32 Table 10: Status of Legal Covenants ............................. 40 Table 12: Bank Resources: Staff Inputs ............................. 43 Table 13: Bank Resources: Missions ............................. 44 APPENDICES A. ICR Mission's Aide Memoire B. Borrower Contribution to the ICR C. Map This document has restricted distribution and may be used by recipients only in the performance of their official duties. It contents may not otherwise be disclosed without World Bank authorization.   IMPLEMENTATION COMPLETION REPORT MALAWI ENERGY I PROJECT (Credit 1990-MAI) PREFACE This is the Implementation Completion Report (ICR) for the Energy I Project in Malawi, for which Credit 1990-MAI in the amount of SDR 34.8 million (US$ 46.7 million equivalent) was approved on March 14, 1989 and made effective on February 6, 1990. The Credit was closed on February 28, 1996, fourteen months after the original closing date of December 31, 1994 and after one extension. Final disbursement from the Credit was made on March 18, 1996. The Republic of Austria provided Austrian Shillings 277 million (US$ 26.4 million equivalent) in cofinancing for the purchase of turbines and generators for the Tedzani III power plant, a major project component. The Preferential Trade Area (PTA) Bank provided 6 million PTA units of account (US$ 8.4 million equivalent) to help finance the substations and the short transmission link. The draft of the ICR was prepared jointly by the co-Task Managers of the Energy I Project (Assefa Telahun of the Energy and Infrastructure Operations Division for the Power component and Paul Ryan of the Agriculture and Environment Operations Division for the Wood Energy component). Coordination of the inputs to the ICR was done by the Energy and Infrastructure Operations Division of Southern Africa Department. It was reviewed by Jeffrey S. Racki, Division Chief, and Jacomina de Regt, Acting Operations Advisor of the same Department. The Borrower provided comments that are included in the Appendix. Preparation of the ICR began during the Bank's ICR mission in February 1996 (Appendix A). It is based on the mission's findings and on information in the project files.   MALAWI ENERGY I PROJECT (Credit 1900-MAI) EVALUATION SUMMARY THE PROJECT AND ITS OBJECTIVES 1. The Energy I Project had two main components. (a) a Power Component, with its own subcomponents, and the Bank's fourth power project which the Bank helped finance in Malawi; and (b) a Wood Energy Component, also with a number of subcomponents, being the third wood energy project financed by the Bank, which replaced the IBRD funded second Wood Energy loan of US$ 16.7 million (Ln. 2670-MAI), which was canceled after disbursement of only US$ 777,057 (para. 50). 2. The specific objectives of the Energy I project were: (i) assisting Government and ESCOM implement the priority components of the least cost power development program; (ii) helping Government and the Forestry Department implement their comprehensive strategy for the management of wood energy on a cost effective and environmentally sustainable basis; (iii) ensuring that energy pricing policy signaled the economic cost of supply; and (iv) strengthening energy planning capability and enhancing the management information system of ESCOM. 3. To achieve these objectives, the Energy I project consisted of: a Power Component comprising: (i) 50MW of additional hydroelectric capacity through the construction of the Tedzani III power plant; (ii) rehabilitation of existing power plants; (iii) reinforcement of distribution and transmission facilities; and (iii) strengthening the power sector through studies and provision of computer hardware and software; a Charcoal Component comprising consultancy services to advise on and support activities related to the production and marketing of softwood charcoal from forest thinnings; and a Wood Energy Component consisting of: (i) institutional development through establishment of improved management and protection of indigenous woodlands; (ii) sustainability of wood production through promotion of tree growing by smallholder farmers coupled with Government plantations; and (iii) wood conservation through policy initiatives and assistance in charcoal production and marketing. IMPLEMENTATION EXPERIENCE AND SUMMARY OF FINDINGS 4. Tedzani III was substantially completed in December 1995, a delay of 18 months from the original completion date of June 30, 1994, mainly because of delayed effectiveness of the  - ii - IDA credit and procurement delays due in part to Government bureaucracy at the initial stages of implementation and problems encountered during bid evaluation. These delays, together with delays encountered during construction, coupled with a more robust design of the turbines and powerhouse structure contributed to a 26.9% cost increase over the original cost estimate in US dollar terms for the Power Component. The other Power subcomponents were completed within cost estimates and most of them ahead of schedule. The Wood Energy Component was also completed in time and without incurring additional costs. The overall cost increase of the Energy I project was 19.2% in US dollar terms (Table 8A). Actual increases in currency of payments are discussed in paragraph 18. The Republic of Austria and the PTA Bank assisted the Government and ESCOM in financing the additional cost increases; ESCOM was, however, still looking for sources of financing outstanding invoices totaling about US$ 6 million during the ICR mission. 5. The Power Component faced major claims by the Civil Works contractor and by the Electrical Contractor. The Civil Works claim, estimated at 41 % for foreign and 51.4% for local costs over the original contract amount, has been amicably settled, well within the presumptive contract sum ( which includes contingencies). The Electrical Works Contractor claim of over 170%, although rejected on legal grounds, is under discussion with a view to arriving at an amicable settlement. ESCOM appears confident that the revised cost to completion will not be exceeded in spite of the claims by contractors. Despite delays and cost increases the Power Component's main objective of providing the additional capacity of 50MW has been achieved. 6. Project management of the Power Component was satisfactory, including project accounting and progress reporting. Project coordination of the Wood Energy Component was weak until the Component's Mid Term Review, following which a dedicated Project Coordinator and a Financial Controller were assigned to the advantage of the Component. Bank's supervision of the two discrete components of the Project was regular at about two per year. Why the Charcoal component was not included as an integral part of the Wood Energy Component at project design is not clear. Its ownership, though specific in the legal documents, did not receive the required commitment by the Forestry Department during supervision. The major objective of privatizing the production and marketing was not achieved, and follow up operation is recommended (paras. 59, 60). 7. The lessons learnt from the Wood Energy I project (Credit 992-MAI) helped reorientate Wood Energy II (Loan 2670-MAI) away from direct wood production for fuel and poles by the Forestry Department towards the creation of an institutional and policy environment that encourages private sector production, wood conservation and its efficient utilization, thereby alleviating the gap between sustainable woodfuel supply and increasing demand. Due to Malawi's deteriorating external debt in the 1980s, the Borrower and the Bank agreed to cancel the IBRD loan and transfer the main activities to the Energy I Project, however, with no change in the stated objectives of Wood Energy II. The overall achievement of the Wood Energy Component of Energy I is considered satisfactory. 8. The Energy Pricing Study has achieved its objective in signaling energy pricing policy issues. The study has contributed to the removal of paraffin subsidies and the stabilization fund  - iii - for petroleum products. The study document is expected to be used as reference for principles and methodologies in setting energy pricing policies (paras. 15, 57). 9. Following the indications of Tables 5A and 5B and the component by component evaluation of this ICR, the overall Assessment of Outcome of the Energy I project is rated satisfactory. The economic rate of return of the Power Component is 5%, well below the SAR's estimate of 11%. This is mainly due to lower incremental energy benefits and low tariff levels (para. 22). That of the Wood Energy Component is the same as the SAR estimate of 14% for Government plantations and slightly higher at 21.5% than the SAR's estimate of 19.5% for smallholders (Tables 9B- 9D). ESCOM's financial situation has been deteriorating particularly following the devaluation of the Kwacha in early 1994, making ESCOM non-compliant in its financial covenants of 30% internal cash generation for investment. Table 5A shows the ratio to be 17%, 2% and negative in fiscal years 1993/94, 1994/95 and 1995/96 respectively. Borrower's performance in the power sector is hence rated deficient (Table 1). 10. The Credit of SDR 34.8 million (US$ 46.7 million equivalent, of which US$ 31.9 million was on-lent to ESCOM and US$ 14.8 million was earmarked for the Government's Wood Energy Component and Energy Pricing Study), was approved by the Board on March 14, 1989, and made effective on February 6, 1990. The original closing date of December 31, 1994 was extended to February 28, 1996, after one extension. The final disbursement was made on March 18, 1996. LESSONS LEARNED AND FUTURE OPERATIONS 11. The lessons to be drawn from the implementation of the Power Component are the following: (i) due to erosion of ESCOM's autonomy (para. 61), its financial performance has lately been adversely affected, although there was no change either in ESCOM's ownership or in its legal status. Government's role should move from approving individual tariff proposals to providing tariff policy guidelines and empowering ESCOM's Board to set tariffs within prescribed guidelines; (ii) different scenarios for exchange rates and for inflation should be examined at the project preparation phase, with indicative indexation formula for average tariff rates; (iii) the need for a mid term review to restructure, if need be, the financial covenants (para.28) and to assess additional financing requirements, if any, including sources of financing (paras. 18-20); (iv) to ensure sustainability, future operations should stress the need to accelerate the commercialization and corporatization of ESCOM and the role the private sector could play in the power sector (paras. 45, 58). 12. The Charcoal Component has brought forth the lesson that utilizing surplus softwood in Government plantations could be an effective strategy for least cost woodfuel supply. However, the ambitious objective of commercializing its production and marketing has underestimated the impracticality of confiscating hardwood charcoal, the high transport cost from the Viphya forest and the lack of an extensive market network, particularly for the domestic sector. Encouraging participation of the private sector for the production and marketing of softwood charcoal from Mulanje plantations, where transport cost is less of a constraint, should pave the way for the commercialization of similar operations elsewhere in Malawi.  - iv - 13. The following main lessons (paras. 56, 63) emerge from the experience on the Wood Energy Component: (a) the establishment of market linkages is a critical incentive for growing wood by the private sector; (b) greater effort should be made to involve local communities in the protection and management of woodlands, together with collection and sharing of revenues; (c) the need for the legislative framework to legitimize the establishment of forest areas, including the management and protection by communities. 14. Strengthening the planning, monitoring and evaluation capabilities of the Forestry Department, encouraging commercialization and privatisation of softwood charcoal operations, and supporting extension services to disseminate knowhow and best practices, are essential to put into effect the lessons learnt from the Wood Energy component' (paras.47 50, 53, 60, 62). Borrower's input to the ICR states that "...the report falls short of making recommendations for follow-up actions by the Bank, other funding agencies and the Government of Malawi..."and adds .. "It has been pointed out to both the latest Bank Supervision and ICR draft missions that the view of the Forestry Department is that the Environmental Support Programme (ESP) is not successor to either the Wood Energy or Charcoal Production Components." (Page 46).  PART I: PROJECT IMPLEMENTATION ASSESSMENT IMPLEMENTATION COMPLETION REPORT MALAWI ENERGY I PROJECT (Credit 1990-MAI) Project Identity Project Name: Energy I Project Credit Number: 1990-MAI Credit Amount: SDR 34.8 million RVP Unit: Southern Africa Department Country: Malawi Sector Energy A. Introduction 1. The first IDA Credit (178-MAI, Table 2) for US$ 6.09 million was made in 1970 to help finance the foreign exchange cost of the Tedzani I hydroelectric power plant. The second stage of Tedzani and a 15MW standby gas turbine plant were financed with a second IDA Credit (426- MAI) of US$7.5 million made in 1973 and a loan of US$ 6 million from the Commonwealth Development Corporation (CDC). A total amount of US$ 25 million was provided in three lots, of which two were loans and one a credit, all approved on March, 29, 1977, to finance the civil works component of the 80MW Nkula B hydroelectric power plant. CDC, the European Development Fund, the African Development Bank and KfW provided a total of US$ 82 million towards the cost of Nkula B. KfW provided additional funding for the installation of the fifth 20 MW unit at Nkula B commissioned late in 1993. 2. Assistance to periurban woodfuel plantation was provided in 1980 by the first forestry sub-sector credit (Cr 992-MAI) of US$ 13.8 million. A second loan of US$ 16.7 million was made in 1986 to reorient the Government away from wood production and towards the encouragement of private smallholder wood production, conservation and efficient utilization of biomass resources. Energy I Project approved in 1989 was the fourth project in regard to its Power component, accounting for 68% of the Energy I Credit of SDR34.8 million (US$46.7 million equivalent), and the third in regard to its Wood Energy component, accounting for the remaining 32% and replacing Wood Energy II loan, which the World Bank helped implement in Malawi. The Republic of Austria, with US$26.4 million equivalent, and Preferential Trade Area (PTA) Bank, with US$8.4 million equivalent, assisted in financing the Power component of the Energy I project.  - 2 - 3. In addition to Energy I, for which this ICR is prepared, the Bank together with CDC, EIB and KfW is assisting in the implementation of the ongoing Power V project for which a credit of US$ 55 million equivalent was approved in June 1992, and declared effective in December 1993 after a long delay due to temporary withdrawal of donors' support on grounds of alleged violations of human rights. B. Project Objectives and Description 4. The overall objective of the Energy I Project was to assist the Govermment to formulate and implement an integrated program to make the most economic use of Malawi's domestic and imported energy resources. The specific objectives of the Project were to: (i) assist the Government and ESCOM implement the priority components of the least cost power development plan adopted by the Government; (ii) assist the Government and the Forestry Department to implement their comprehensive strategy for the management of wood energy on a cost-effective and environmentally sustainable basis; (iii) ensure that energy pricing policy signals economic cost of supply; and (iv) strengthen energy planning capability and enhance the management information system of ESCOM. Consistent with the objective of 4(ii) above, substitution by softwood charcoal for woodfuels derived from customary land and consumed by flue-cured tobacco growers and urban households as well for imported and domestic coal for industries was set as a specific strategy for the Charcoal Production and Marketing Component. 5. The Project consisted of the following main components: the Power Component, the Charcoal Component and the Wood Energy Component. 6. The Power Component omprised the following parts: * Part - A: Tedzani III Hydroelectric Scheme: (i) Construction of an additional intake structure from Tedzani I and II dam; a 1052m headrace tunnel and surge chamber, a reinforced concrete box structured power house, a tailrace outlet system; installation of two Francis turbines coupled to two 25MW generators, and associated electromechanical equipment and switchyard; about 6km of 132kV transmission link to Nkula B; and additional SCADA and PLC systems; (ii) a 132/66kV substation at Blantyre West; and (iii) Engineering Services for the design and supervision of the power scheme. * Part - B: Generation Rehabilitation: (a) Increasing the reliability of Tedzani I and II power plants through (i) the systematic replacement of direct cooling by closed circuit water cooling, (ii) changing turbine governor parts to improve stability of Tedzani I by electronic automatic voltage regulators; and (b) Acquisition of spares for the existing hydro, gas and diesel power plants. * Part. - C: Institutional Strengthening of ESCOM: (i) Provision of computers to be installed in ESCOM's various branches to enhance the speed of information flow to headquarters and to strengthen its in-house planning capability; (ii) Studies on  - 3 - electricity tariffs and asset revaluation; and (iii) Transmission and distribution system studies. 7. Part - D: Charcoal Production and Marketing Component, providing for: (a) Consultancy services to: (i) advise on and monitor the performance of softwood charcoal production from forest thinnings and its marketing; (ii) advise on commercialization of charcoal production and marketing; (ii) advise Government and potential industrial and agro-industrial consumers on charcoal utilization; and (iv) prepare specifications for procurement of vehicles and equipment for charcoal production and performance monitoring; and (b) Procurement of vehicles and equipment for charcoal production and performance monitoring. 8. Part - E: Wood Energy Component, covered the following sub-components: * E(i): Institutional Development: involving: (a) establishment of an improved management and protection of indigenous woodlands; wood pricing reforms and improved revenue collection; (b) setting up of pilot extension schemes in nine districts; and (c) the establishment of a Monitoring and Evaluation Unit and a Planning Unit in the Forestry Department and the strengthening of the existing units. 3 E(ii): Wood Production: (a) promotion of tree growing by the private sector through provision of seedlings from Government retail nurseries, including the establishment of 60 retail nurseries to sell seedlings to smallholders and estates and provision of tree planting incentive bonuses to smallholders; and (b) establishment of some 2,800 ha of Government fuelwood plantations on the environmentally fragile slopes of Mount Mulanje.