Mozambique - Urban Household Energy Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 19449 IMPLEMENTATION COMPLETION REPORT MOZAMBIQUE URBAN HOUSEHOLD ENERGY Project (Credit No. 2033-MOZ) June 17, 1999 Energy Team Infrastructure Group 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 (Currency Unit = Meticais (MT) (Annual average) Year US$1.00 = MT. 1989 794 1990 932 1991 1,450 1992 2,433 1993 3,723 1994 5,918 1995 8,890 1996 11,294 1997 11,546 FISCAL YEAR OF BORROWER January 1 - December 31 ABBREVIATIONS AND ACRONYMS BADEA Arab Bank for Economic Development in Africa BDM Banco de Mocambique BEU Biomass Energy Unit BPD Banco Popular de Desenvolvimento DCA Development Credit Agreement DNE Direccao Nacional de Energia EDM Electricidade de Moanambique ERR Economic Rate of Return GOM Government of Mozambique ICR Implementation Completion Report LPG Liquefied Petroleum Gas Mocacor Distribuidora de Combustiveis, S.A.R.L. MIE Ministry of Industry and Energy MMRE Ministry of Mineral Resources and Energy NDF Nordic Development Fund PETROMOC Empresa Nacional de Petroleos de Mocambique Prolec Urban Electrification Program RPTES Regional Program for Traditional Energy Sector SAR Staff Appraisal Report Vice President : Mr. Callisto Madavo Country Director : Ms. Phyllis Pomerantz Sector Manager : Mr. Mark Tomlinson Task Manager : Ms. Yuriko Sakairi  IMPLEMENTATION COMPLETION REPORT FOR OFFICL USE ONLY MOZAMBIQUE URBAN HOUSEHOLD ENERGY PROJECT (Credit No. 2033-MOZ) Table of Contents Page No. Preface Evaluation Summary ................................................................... i - Viii Part I: PROJECT IMPLEMENTATION ASSESSMENT A. Background and Sector Context .......................................................1 B. Project Objectives .......................................................2 C. Achievement of Objectives .......................................................3 D. Summary of Project Implementation .......................................................6 E. Major Factors Affecting the Project ...................................................... 11 F. Project Sustainability ...................................................... 12 G. Bank Performance ...................................................... 13 H. Borrower Performance ...................................................... 15 I. Assessment of Outcome ...................................................... 16 J. Future Operations ...................................................... 17 K. Key Lessons ...................................................... 17 Annex 1: Implementation Record and Major Factors Affecting the Project ................................ 19 Part II: STATISTICAL ANNEXES Table I Summary of Assessments .26 Table 2 Related Bank Credits .28 Table 3 Project Timetable .28 Table 4 Credit Disbursements .29 Table 5 Key Indicators for Project Implementation. 30-33 Table 6 Key Indicators for Project Operation .34 Table 7 Studies Included in Project. 35-40 Table 8a Project Cost .41 Table 8b Project Financing .42 Table 9 Economic Costs and Benefits .43 Table 10 Status of Legal Covenants .44 Table I I Compliance with Operational Manual Statements .46 Table 12 Bank Resources: Staff Input .46 Table 13 Bank Resources: Missions .47 APPENDICES A: ICR Mission Aide-Memoires .......................... 48-56 B: Borrower's Contribution .......................... 57-72 C: Co-financier's Comments .......................... 73 Map: IBRD 29786 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.  IMPLEMENTATION COMPLETION REPORT MOZAMBIQUE URBAN HOUSEHOLD ENERGY PROJECT (Credit No. 2033-MOZ) Preface 1 This is the Implementation Completion Report (ICR) for the Urban Household Energy Project, for which a Credit of SDR 17.1 million (US$22 million equivalent) to the People's Republic of Mozambique was approved on June 8, 1989 and signed on September 28, 1989. The Credit became effective on April 27, 1990. The Credit was closed on April 30, 1998 after two extensions of the closing date. Last credit disbursement took place on September 9, 1998 and US$2.3 million not disbursed was canceled. Co-financing amnounting to US$16 million equivalent was provided by NDF and BADEA. 2. The ICR was prepared by Yuriko Sakairi, Economist, (AFTG1), Eric Daffern, Principal Economist/Financial Analyst, (EMTOG), and Assefa Telahun, Power Engineer, (AFTG1). It was reviewed by Messrs. Mark Tomlinson, Sector Manager, (AFTGI), Boris Utria, Sr. Economist, (AFTG1) and Joel Maweni, Sr. Financial Analyst, (AFTG1). The report was processed by Lily Wong, Team Assistant, (AFTG1). 3. The preparation of the ICR began in February 1998 followed by a mission carried out by Yuriko Sakairi and Sunil Mathrani in April-May 1998 (Appendix A: Implementation Completion Missions). The ICR is based on the Staff Appraisal Report, the credit and project agreements, supervision reports, correspondence with the Borrower, internal Bank memoranda, and interviews with staff of the Borrower. The Borrower's contribution on the ICR is attached, along with comments received from the co-financier.  IMPLEMENTATION COMPLETION REPORT MOZAMBIQUE URBAN HOUSEHOLD ENERGY PROJECT (Credit No. 2033-MOZ) Evaluation Summary Introduction i. The Urban Household Energy Project (UHEP) was prepared during 1987-88 in the midst of an armed conflict that showed little prospect of ending. The main urban centers were practically 'cut off from the surrounding regions and suffered a massive inflow of refugees fleeing the fighting. This resulted in increased levels of biomass consumption and rapid deforestation of the areas closest to the cities because of the difficulty of obtaining biomass fuels from points further away. Disruption of transport routes made the supply of coal and petroleum products erratic. Moreover, electricity supply suffered frequent cuts caused by sabotage of power networks. A peace agreement was reached in 1992 and during 1993 it became clear that peace would prevail. Accordingly, the attention of the Government of Mozambique (GOM) and the Bank slowly shifted from ensuring survival to reforming the sector (paras. 2-3). Project Objectives and Components ii. The physical objective of the project was to bring low-cost commercial fuels to a large number of households in urban areas in an efficient and cost-effective manner. The institutional development objective was to strengthen the government agencies and energy supply companies, managerially, operationally and financially. The broader project objectives were to slow down deforestation around urban areas, to improve air quality, to alleviate poverty through lowering the cost of fuel, to provide for testing of improved energy efficiency and management measures, to develop the use of indigenous natural resources, to encourage development of local institutions and provide opportunities for local industries (para 4). iii. To achieve the physical objectives the project consisted of: (a) power distribution system rehabilitation, reinforcement and extension in Maputo and eight other important cities; (b) commercial loans for house wiring and connection of 40,000 urban households to the power distribution system (Prolec program); (c) provision of households with about 50,000 electric stoves, 60,000 kerosene stoves, 80,000 kerosene lamps, 200,000 electric bulbs and a number of electric fans and solar panels for public buildings, as part of an energy efficiency program; (d) provision of coal stoves to about 50,000 households in Maputo, Beira and Tete and other areas with access to coal; (e) reinforcement of kerosene and LPG storage and distribution facilities in Maputo and five other cities; (f) rehabilitation of the cable factory; and (g) improvements in efficiency of woodfuel utilization through  - ii - development of improved charcoal production methods, improved wood stoves and charcoal stoves, and a woodfuel program for maintenance of plantations and forest inventory. The project also included commodity aid finance of fuels required to be imported during the 5-6 years duration of the project (about 47,000 tons of coal, 75,000 tons of kerosene and 40,000 tons of LPG), (paras. 5 and 7). iv. To achieve the institutional development objective the project included the establishing of a biomass energy unit in the Ministry of Agriculture, and technical assistance to Electricidade de Mocambique (EDM), Empresa Nacional de Petroleos de Mocambique (PETROMOC) and Distribuidora de Combustiveis, S.A.R.L. (Mocacor) and to DNE to support project coordination and implementation, and woodfuel and coal programs. Additionally, standard IDA covenants in the credit and project agreements were intended to introduce financial discipline in the energy sector (para. 6). v. The project was restructured in 1994 following a project mid-term review carried out in late 1992 at about the same time as the peace accord was signed. It also included a component to repair the damage inflicted to the northern power system by a cyclone in 1994 (paras. 8 and 9). vi. The project objectives were relevant to the conditions prevailing in Mozambique at the time of appraisal and during the early years of project implementation and were congruent with both the GOM objectives and IDA's policy for the energy sector. However, support of individual household connections through a loan program was probably ill-conceived because of its administrative complexity. With the coming of peace in 1992, the policy and reform agenda of Mozambique developed far beyond that envisaged at appraisal, and at the same time IDA policy for the energy/power sector began to shift towards a new paradigm -- enhanced private sector participation and less involvement of the government in the commercial functions of the energy/power sector, and government in charge of policy making and regulation functions. In view of this, the restructured project also supported energy sector reforms (para. 10). Implementation Experience and Results vii. The physical objectives of the project were partially achieved. The Prolec program was to provide commercial loans to households for house-wiring and connection to the distribution network, but did not perform as originally expected. Only about 500 households benefited from loans, 2,500 new customers were connected and 1,300 existing customers were switched over to the grid extended under the Credit. The Prolec target had to be reduced from 40,000 to 4,000 connections during the mid-term review. However, the rehabilitation and reinforcement of the power distribution system helped EDM deliver a large number of connections (about 60,000) that made up for the meager achievements of the Prolec program. Under the off-grid electrification project, 400 households were electrified and another 400 households will be electrified shortly. Also, about 5,000 prepayment electricity meters were installed under the project and another 15,000 meters are under  - 111 - installation. Kerosene supply increased by 80 percent since 1993 and is now sufficient to supply 250,000 additional households. LPG usage for households fell in the early 1 990s but has now recovered, surpassed the earlier usage level, and it is projected to increase sharply in the short-tern. Cost of imported LPG by rail from Johannesburg fell by 20 percent as a result of competition in imports (para. 11). viii. The institutional objectives of the project were substantially achieved. The project laid the foundations for broader reforms in the energy sector to the point that the achievements in the electric and petroleum sub-sectors have placed the Mozambican energy sector among the most reformed and open sectors in Africa (para. 12). ix. EDM, PETROMOC and Mocacor are now in a more sustainable financial position than they were in the past ten years, and none of them can rely anymore on monopoly status. EDM showed its strongest ever financial position in 1998. Its three-year performance contract, agreed with GOM in 1997, is an important step towards achieving better operational and financial performance. Results can be judged by the reduced number of black outs compared to ten years ago. PETROMOC is now profitable, and is competing with major companies. Mocacor has diversified its business, and its non-LPG business is growing strongly. It is already succeeding as a gasoline marketer and as a retailer of appliances and LPG bottles (paras. 13-16). x. The reforms in the energy sector have been satisfactory. The technical assistance provided by the project (paras. 31-33) succeeded in designing and implementing sector reforms. Legislation was enacted reforming both the power and petroleum sub- sectors. The elimination of EDM's monopoly over nationwide power supply was a major breakthrough and it has provided the basis for new decentralized initiatives to electrify small towns. EDM still has national electricity tariffs but the Government now realizes that tariffs based on cost recovery are essential for increasing access to electricity in Mozambique. Oil procurement has been made more cost-effective and transparent and the financing of imports has been rationalized. Specifications of petroleum products have been made compatible with the competitive supply sources and have resulted in lower costs. The deregulation of petroleum products distribution has attracted new distributors and made existing distributors invest in the upgrading of their facilities (para. 17). Also the first step towards privatization of PETROMOC, its conversion into a limited liability company governed by commercial law, was undertaken under the project. xi. The broader project objectives were achieved, partly because of the project, but also as a result of the return to peace conditions. Significant progress can be seen in terms of better air quality, low prices of commercial energy, improved energy efficiency and other factors. For example, the significant increase in the use of commercial fuels has replaced the use of large quantities of polluting woodfuels. Commercial energy prices for kerosene and for woodfuels have fallen in real terms. Electricity prices have risen. Pressure on the woodlands around the major cities has ceased as large numbers of people have returned to the rural areas after the ending of the armed conflict. Also, local industry is being  - iv - reinvigorated. For example, the cable factory was restored with help from the project and began to operate in a competitive manner (para. 19). xii. Implementation organization. Overall project co-ordination was in the hands of the Direccao Nacional de Energia (DNE) with support from the Ministry of Mineral Resources and Energy (MMRE). Project execution was spread among many institutions. For the power sub-sector components: EDM, Prolec unit, DNE, Interelectra, with support from Banco Popular de Desenvolvimento (BPD); for the petroleum sub-sector components: PETROMOC, DNE, Mo,acor (mainly LPG); for the biomass components: Ministry of Agriculture; and other components: DNE. The complex project implementation arrangements and the diffusion of responsibilities made it very hard for DNE to exercise authority to ensure timely implementation of the project (para. 20). xiii. Implementation time. Project implementation took nine years from June 1989 (Board approval date) to April 1998 (project completion date), i.e. 22 months longer than appraisal estimate. The physical components of the project financed by IDA were completed by April 1998, and the components financed by the Nordic Development Fund (NDF) and Arab Bank for Economic Development in Africa (BADEA) were to be completed only by end-1998 (see para. 50). BADEA funded the power system strengthening in Maputo, Beira and a number of other towns, and NDF financed the power system strengthening and the rehabilitation of the cable factory (paras. 22-30). xiv. Credit disbursement and closing date. Credit disbursement was very slow during the early years of project implementation. Only US$6.6 million (44.6 percent of appraisal estimate) was disbursed until 1993, four years after credit approval. This was caused by long delays in compliance with conditions of effectiveness and credit disbursement. Later, weak banking sector and cumbersome and lengthy Government review and approval of procurement of goods and recruitment of consultants delayed credit disbursement further. In addition to the 6 months allowed between estimated completion date and Credit closing date, IDA had to extend the closing date twice for a total of 16 months to allow for completion of the project. Thus, the project required 22 more months to complete than originally estimated at appraisal. Last credit disbursement took place on September 9, 1998 and US$2.3 million was canceled (para. 35). xv. Project cost andfinancing. The actual project cost is estimated to be US$41.9 million or 16 percent less than the US$49.3 million estimated at appraisal, excluding interest during construction and fuel imports. IDA financed US$20.4 million and catalyzed co-financing from BADEA (US$8.0 million), NDF (US$5.4 million) and Mozambican companies (US$2.9 million). The GOM financed US$5.3 million. No information is available about the actual cost of imported fuel financed by parallel financing by SIDA, NORAD and IDA. A co-financing pledge of US$3.0 million by the Government of Denmark did not materialize (paras. 36-37).  - v - xvi. Project economic performance. It was not possible to obtain actual data to make an ex-post recalculation of the project ERR. However, based on very conservative assumptions this ICR has calculated an ex-post ERR of 11 percent on the investment in the small town electrification program (para. 38), a small, but important component in terms of introducing cost-based tariffs and piloting an alternative mechanism for increasing access to electricity. Further, it is important to note that in the re-estimation of the ERR, the benefits are based on the current tariff and not the willingness to pay which, if used, could yield a significantly higher ERR. Major Factors Affecting Project Implementation xvii. Factors Outside Government Control. The armed conflict was the major factor affecting project implementation during years 1989-92. Later, project implementation was affected by the peace settlement in 1992, because the project had to be restructured to adapt it to a peace scenario. Also, the 1994 cyclone in northern Mozambique required making changes in the project (para. 39). xviii. Factors subject to Government Control. For many years GOM failed to meet its obligations related to the financial position of EDM and PETROMOC. The GOM was tepid in timely approving electricity tariff increases to keep pace with inflation and foreign exchange variations and frequently deferred tariff increases for political reasons. This affected the finances of EDM negatively. Further, the GOM (Ministry of Finance) limited the financial autonomy of EDM in the three-year performance contract agreed in 1997. Regarding PETROMOC, the GOM has never compensated it for the foreign exchange losses on oil imports caused by the initial pricing system imposed by GOM, and delayed proposals for the commercialization and restructuring of PETROMOC (para. 41). xix. Factors subject to control by the implementing agencies. EDM did not demonstrate commitment to the main project goal of increasing urban household electrification through Prolec. Until early 1997 it did not pay attention to financial management and production of meaningful and reliable financial data, despite the ample support given by resident experts and consulting firms. Only towards the end of the project, the performance contract agreed in 1997 with the GOM moved EDM to prepare a medium- term investment plan and assess its financial feasibility. Mocacor made little effort to promote the use of LPG, even after adequate bulk supplies were assured, because price controls left small profitability margins (paras. 43-45). Project Sustainability xx. Sustainability of the project is uncertain. Significant achievements have been made in terms of designing and implementing reforms for sustainable sector operations and in terms of institutionalizing financial and operational performance standards for the key sector entities (EDM, PETROMOC and Mocacor). With regard to reforms, the legal framework for a competitive electricity market has been created, need for cost-based tariffs  - vi - and for private sector participation has been recognized through the small scale rural electrification program, and the initial steps have been taken towards creating a modem regulatory system. In the petroleum sub-sector, PETROMOC is now operating in a commercial and competitive manner' and Mocacor is competing successfully in the retail market. With respect to financial and operational performance standards, EDM is maintaining its power stations in accordance with accepted utility standards. The electricity prepayment meters, financed under the project, have proved to be a good and reliable option for reducing billing, collection costs and accounts receivable. EDM is conducting its operations so as to meet the requirements of its performance contract and reduced its operating losses substantially in 1998. However, because the institutional and sector reforms came only towards the end of the project's life and their implementation remain to be completed, the environment for viable sector operations can only be considered fragile, hence the "uncertain" rating for sustainability2. Bank Performance xxi. Project design, preparation and appraisal was unsatisfactory 3. The project design proved to be too complex. Many components (power, petroleum, coal, biomass, technical assistance), entities (EDM, Prolec, PETROMOC, Mocacor, BEU, DNE), and two co-financiers (NDF, BADEA) were involved in project implementation. The conditionality included in the IDA credit was not realistic. IDA did not realize that the poor quality and quantity of critical financial information available in EDM, compounded with the low commitment of GOM to increase electricity tariffs, could not help EDM prepare the financial viability plan that was a condition of credit disbursement (paras. 47-49). xxii. Overall, supervision was unsatisfactory4, although it was satisfactory during the first and last few years of implementation. In the period 1993-1995 supervision was lax and the project drifted because two task managers lasted very short periods and the skill mix was not appropriate. But since 1995 supervision improved significantly with continuity in task management and an appropriate staff skill mix (paras. 50-52). Borrower's input to the ICR states that "The reforms introduced in the petroleum sector, mainly the removal of PETROMOC's import monopoly and price setting mechanism eased PETROMOC from a heavy financial burden with product imports and allowed a sustainable improvement of its financial results." (See section 5 of Appendix B). 2 Borrower's input to the ICR states that "The policy measures and market reforms introduced in the petroleum and electricity sectors are sustainable and will develop further in line with the objectives of increasing access to modem forms of energy, in a safe and efficient manner to increased parts of the country." (See section 5 of Appendix B). Borrower's input to the ICR states that "Performance by the Bank has been satisfactory but the supervision during the initial years of project implementation was not satisfactory." (See section 4 of Appendix B). 4 Borrower's input to the ICR states that "Performance by the Bank has been satisfactory but the supervision during the initial years of project implementation was not satisfactory." (See section 4 of Appendix B).  - vii - Borrower Performance xxiii. Overall borrower performance can be considered unsatisfactory, although several important accomplishments were made. On the positive side, the GOM supported energy sector reforms. BEU implemented the biomass components in a highly satisfactory manner. It made judicious use of limited expatriate technical assistance and did not become over-dependent on IDA funding for local operational expenses. PETROMOC executed the kerosene distribution component satisfactorily, but after a long delay. PETROMOC focused primarily on oil supply and oil procurement issues rather than on product marketing and distribution. PETROMOC is now operating well in a competitive environment without input from foreign experts. On the negative side, the Ministry of Finance was not proactive on matters affecting financial viability of the entities involved in this IDA project. DNE did not play a dynamic role in reorienting the project to respond to changing priorities. Mocacor did not succeed in promoting LPG sales and expanding the market timely. EDM did not pay much attention to the UHEP project. It was understandably preoccupied with day to day operations, dealing with sabotage on its power system and trying to keep the power service on. Financial viability was an unfamiliar concept for EDM. Only towards the end of the project did EDM's performance improve (paras. 53-59). Assessment of Outcome xxiv. Overall project outcome is considered unsatisfactory5. This is because its physical objectives were only partially achieved, institutional and policy reform objectives were substantially achieved only toward the end of the project, and sustainability of the gains remains uncertain. Further, while the original project objective of bringing low-cost commercial fuels to a large number of urban households was broadly achieved, this was partly because of the project, but also because of the return to peace conditions which resulted in an increased supply of these fuels. The outcome of the project's physical components was mixed and the failure to implement the Prolec component and the dropping of the coal pilot component tend to overshadow other achievements. On the positive side impressive gains were made in sector reforms for both the electricity and petroleum sub- sectors and in institutionalizing financial and operational performance standards for the key sector entities. A follow-up electrification project will continue to support the sector reform. Nevertheless, because the reforms came only towards the end of the project life and their sustainability remains uncertain, the overall project outcome is considered unsatisfactory. Borrower's input to the ICR states that "The general outcome of the project is satisfactory although some targets set initially were not achieved." .(See section 5 of Appendix B). Co-financier's comments state that "If the outcome is compared to the restructured project (as of 1994), the project, in our opinion, should be regarded as 'satisfactory'." (See Appendix C).  - viii - Future Operation xxv. Although the GOM has not submitted to IDA, a formal plan for future operation of the project, experience with this project suggests that the GOM has the capacity to develop and sustain a focussed energy sector strategy to meet the challenges of providing wider access to energy needs to rural and suburban population, including efficient utilization of biomass fuels (paras. 61-62). Further, both EDM and PETROMOC have developed and are implementing utility operational standards which should help to reduce uncertainty about the sustainability of the investments made under the project. Key Lessons Learned xxvi. The following lessons can be offered (para. 63): * Projects should be designed with a simple institutional organization and few components. A complex multi component project implemented through many agencies risks to spread responsibilities, dilutes 'ownership' of the project among agencies, and makes project coordination very difficult. * When the macroeconomic and political scenario in which a project was appraised experiences profound changes during project execution, a radical project redesign/re- appraisal may be required proactively as soon as it is clear that the changes are permanent. A mere piecemeal modification of the project components should be avoided. + Standard financial performance covenants in Loan/Credit Agreements are meaningless if the underlying performance data is unavailable. Rather than requiring compliance with rate of return or other complex financial covenants difficult to monitor and sometimes unfamiliar for the incumbent entity, it is preferable to require compliance with simpler and less ambitious indicators, easy to monitor but necessary to achieve basic financial survival of the entity. * By implementing natural resource management including cash generating activities to the community, villagers get incentives to protect natural resources and to utilize the resources in a cost effective and sustainable manner. * With timely and flexible intervention, it is possible to achieve some measure of success, even if initially the project has been poorly designed and managed.  IMPLEMENTATION COMPLETION REPORT MOZAMBIQUE URBAN HOUSEHOLD ENERGY PROJECT (Credit No. 2033-MOZ) PART I: IMPLEMENTATION ASSESSMENT A. Background and Sector Context 1. Mozambique has a population of about 16.9 million with a per capita income of US$210, i.e. one of the poorest countries of the world. It is well endowed with primary energy resources, particularly hydroelectricity, natural gas and coal. Yet, total commercial energy consumption is extremely low, 40 kgoe per capita, and hardly 20% of the urban population and virtually none of the rural population have access to electricity. 2. The Urban Household Energy Project (UHEP) was the second lending operation of IDA in the energy sector of Mozambique. It was prepared during 1987-88 in the midst of an armed conflict that showed little prospect of ending. The main urban centers were practically 'cut off' from their surrounding regions and suffered a massive inflow of refugees fleeing the fighting. This resulted in increased levels of biomass consumption and rapid deforestation of the areas closest to the cities because of the difficulty of obtaining biomass fuels from points further away. Disruption of transport routes made the supply of coal and petroleum products erratic. Moreover, electricity supply suffered frequent cuts caused by sabotage of power networks. The combined supply scarcity and demand pressure had doubled the economic cost of fuelwood, charcoal, kerosene, LPG and electricity. Consequently, the project was intended to diminish constraints on the urban residents' energy supply and to reduce the impact of war on the low income population. 3. A peace agreement was reached in 1992 and during 1993 it became clear that peace would prevail. Accordingly, the attention of the Government of Mozambique (GOM) and the Bank slowly shifted from ensuring survival to reform: policy, institutional, economic and financial. The project sought to respond to these evolving needs of the country.  -2 - B. Project Objectives Statement of Objectives 4. According to the Staff Appraisal Report, the main development objective of the project was to bring low-cost commercial fuels to a large number of households in urban areas in an efficient and cost-effective manner. A second major objective was to strengthen the government agencies and energy supply companies, managerially, operationally and financially. The broader project objectives were to slow down deforestation around urban areas, to improve air quality, to alleviate poverty through lowering the cost of fuel, to provide for testing of improved energy efficiency and management measures, to develop the use of indigenous natural resources, to encourage development of local institutions and provide opportunities for local industries, and to reduce demand on the limited transport capacity. Project Description 5. The original physical components of the project consisted of: (a) power distribution system rehabilitation, reinforcement and extension in Maputo and eight other important cities; (b) commercial loans for house wiring and connection of 40,000 urban houses to the power distribution system; (c) provision of households with about 50,000 electric stoves, 60,000 kerosene stoves, 80,000 kerosene lamps, 200,000 electric bulbs and a number of electric fans and solar panels for public buildings, as part of an energy efficiency program; (d) provision of coal stoves to about 50,000 households in Maputo, Beira and Tete and other areas with access to coal; (e) reinforcement of kerosene and LPG storage and distribution facilities in Maputo and five other cities; (f) rehabilitation of the cable factory; and (g) improvements in efficiency of woodfuel utilization through development of improved charcoal production methods, improved wood and charcoal stoves, and a woodfuel program for maintenance of plantations and forest inventory. 6. The institutional development component of the project included the establishing of a biomass energy unit in the Ministry of Agriculture, and technical assistance to Electricidade de Mocambique (EDM), Empresa Nacional de Petroleos de Mocambique (PETROMOC) and Distribuidora de Combustiveis, S.A.R.L. (Mocacor) and to DNE to support the project coordination and implementation and the woodfuel and coal programs. Additionally, IDA covenants contained in the credit and project agreements were intended to introduce financial discipline in the energy sector. 7. The project also included commodity aid finance of fuels required to be imported during the 5-6 years duration of the project (about 47,000 tons of coal, 75,000 tons of kerosene and 40,000 tons of LPG). 8. The project was restructured in 1994. The project restructuring was done following a project mid-term review carried out in late 1992 when the armed conflict was resolved. The original project objectives did not change but priorities changed and the project components were modified (para. 24).  - 3 - 9. The project was to be coordinated by the Ministry of Industry and Energy (MIE) and executed by EDM, PETROMOC, Mocacor and a number of small Mozambique enterprises. In 1994, the energy functions -- and overall project coordination -- were transferred to the Ministry of Mineral Resources and Energy (MMRE). Evaluation of Objectives 10. The project objectives were relevant to the conditions prevailing in Mozambique at the time of project appraisal, although support for individual household connections through a loan program was probably ill-conceived. They were also congruent with the GOM objectives and the IDA policy for the energy sector valid at time of appraisal and during the early years of project implementation (OMS 3.72 and OMS 3.78 of 1978 fostered a vertically integrated, centrally planned, state-owned power sub-sector, and private participation in the petroleum and gas sub-sector). With the coming of peace in 1992, the policy and reform agenda of Mozambique developed far beyond that envisaged at appraisal. Major changes in the Mozambican macroeconomic and political environment took place mid-way through the project. At the same time IDA policy for the energy/power sector shifted towards a new paradigm placing emphasis on enhanced private sector participation and less involvement of governments in the commercial functions of the energy/power sector, and reserving for governments the policy making and regulation functions. C. Achievement of Objectives 11. The physical objectives of the project were partially achieved. The target of 40,000 new connections set to the Prolec household electrification program was not met. The Prolec program provided commercial loans to the households for house-wiring and connection, but did not perform as expected. About 4,300 households were connected to the grid extended under the Prolec program: About 500 households benefited from loans, 2,500 new customers were connected and 1,300 existing customers were switched over to the Prolec grid. Under the off-grid electrification project, 400 households were electrified and another 400 households will be electrified shortly. However, the rehabilitation and reinforcement of the power distribution system helped EDM deliver a large number of connections that made up for the meager achievements of the Prolec program. As a result, over the past decade EDM increased access to electricity to about 60,000 new residential consumers in the power sub-sector as a whole. This was a 50 percent increase in the number of connections made over the previous decade and one of the highest connection rates in Africa. Also, about 5,000 prepayment electricity meters were installed under the project and another 15,000 meters are under installation. Regarding fuels, kerosene usage increased by 80 percent since 1993 due to better procurement methods, better cooperation on imports, and additional fuel distribution equipment supplied under the project. The higher availability of kerosene is now sufficient to supply 250,000 additional households. LPG usage for households fell in the early 1990s but has now recovered, surpassed the earlier usage level, and it is projected to increase sharply in the short-term. Cost of imported LPG by rail from Johannesburg fell by 20 percent as a result of competition in imports. New long-term contracts have locked in this lower price.  - 4 - 12. The institutional objectives of the project were substantially achieved. The project laid the foundations for broader reforms in the energy sector to the point that the achievements in the electric and petroleum sub-sectors have placed the Mozambican energy sector among the most reformed and open sectors in Africa. The project achievement in this front are highlighted below. (a) In the power sub-sector: * The Electricity Law passed by Parliament in 1997 eliminated monopoly of EDM in generation transmission and distribution. Private companies can now compete with EDM. * The electricity tariffs were changed to a simpler system. * Cost recovery based tariffs have been set for off-grid electricity systems. a The assets and liabilities of EDM have been defined. EDM has started to operate as a commercial entity.