Guinea - Second Power Engineering and Technical Assistance Project

DommIut of The World Bank FOM OMCAL USE ONLY cK 01- s- 5w Reps,t N P-3861-GEI REPORT AND RECOMMENDAIION OF THE PRESIDENT OF THE InTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPT CREDIT OF SDR 8.4 MILLION (USS8 MILLION EQUIVALENT) TO THE REPUBLIC OF GUINEA FOR A SECOND POWER ENGINEERING AND TECINICAL ASSISTANCE PROJECT April 18, 1985 This doemne ho a resticted distUmiem and my be ued by recipient ely i the perforance of their oBtia det. lb contest my no otherws be dicloed wit Word Bank authWizaio  CURRENCY EQUIVALENTS The official monetary unit is the Syli (GS) GS 1.00 = US$ 0.04 US$ 1.00 = GS 24 GS 1,000 = US$ 41.66 FISCAL YEAR Government : January 1 - December 31 SNE : January 1 - December 31 ABBREVIATIONS AND ACRONYMS AGCD Administration Getnerale de la Cooperation au Developpement (Belgium) CCCE Caisse Centrale de Cooperation Economique (France) CIDA Canadian International Development Agency ESIE Ecole Superieure Interafricaine d'Electricite GOG C-overnment of Guinea HQI Hvdro-Quebec International KEfW Kreditanstalr fir Wiederaufbau (Germany) ,1PNR Ministry of Planning and Natural Resources SNE Societe Nationale d'Electricite S10 Service National de l'Hydraulicue SSE Secretariat of State for Energy TA Technical Assistance UNDP United Nations Development Program MEASURES AND EQUIVALENTS Kilometer (km) 0 0.62 miles Kilovolt (kV) = 1.000 volts Kilowatt (kW) = 1,000 watts Megawatt (MW) = 1,000 kilowatts (kW) Gigavatt hour (GWh) 1 million kilowatt hours (kWh) Tons Crude Oil Equivalent (TOE) 7 bbl of crude oil One barrel (bbl) = 0.16 cubic meters  FOR OFFICUL USE ONLY THE REPUBLIC OF GUINEA PRESIDENT'S REPORT SECOND POWER ENGINEERING AND TECHNICAL ASSISTANCE PROJECT Table of Contents Page No. CREDIT AND PROJECT SUMMARY ................... i I. THE ECONOMY ............................,,,.. 1 Recent Performance .. 2 Foreign Assistance and External Debt .................. 4 Prospects ..............................,,,,,,,,, 5 II. BANK GROUP OPERATIONS IN GUINhEA ............................ 6 III. THE ENERGY AND POWER SECTOR ................................ 8 The Energy Sector. 8 Demand and Supply. 8 Institutions in the Energy Sector .................. 8 Sector Investments ................................. 9 Energy Pricing ..................................... 9 The Power Sector ...................................... 9 Background ....................................... 9 Existing System ..................................,.10 Future Development ................................. 10 Sector Organization ................................ 11 Accounts and Audit Arrangements .................... 13 Past Performance ................. 13 Future Finances and Tariffs ........................ 14 Bank Group Objectives and Rationale for Involvement ..........16..., ....... ,6 IV. THE PROJECT ...................,. ..... 16 Objectives ........,.,,............,.... 17 Description ......,. . . .......... 17 Status of Preparation ..................... 18 Cost Estimate ....,,,,,,,,,,. 19 Financing Plan........................ , ......... 19 Implementation ............... , ........... 19 Procurement ........... 20 Disbursement ........... 20 Project Benefits and Risks .20 V. LEGAL INSTRUMENTS AND AUTHORITY .21 VI. RECOMMDATION. .21 ' 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.  Page No. ANEE: 1 Guinea Social Indicators Data Sheet ........................ 22 2 Status of Bank Group Operations in Cuinea .................. 27 3 Supplementary Project Data Sheet ........... 29 4 Implementation Schedule .................................... 31 5 Amounts and Methods of Procurement .32 6 Disbursement Schedule .33 7 Selected Documents and Data Available in the Project File 34 MAP: IBRD 18167 (Power System and Potential Hydroelectric Sites)  THE REPUBLIC OF GUINEA SECOND POWER ENGINEERING AND TECHNICAL ASSISTANCE PROJECT Credit and Project Summary Borrower: Republic of Guinea Beneficiar_: Societe Nationale d'Electriciti (SNE) Amount: SDR 8.4 million (US$8.0 million) Terms: Standard Relending Terms: The Government of Guinea would onlend the amount of the Credit for a period of 20 years including a 5 year grace period, at the prevailing IBRD interest rate (9.29 percent). SNE would bear the foreign exchange risk. Project The proposed project would continue the efforts begun Description under the First Power Project to rehabilitate the existing facilities, organization and management of the power sector, SNE and the National Hydrology Service (SN1H)- The expected benefits are the definition of the future development for the power sector and improved efficiency in the operations of SNE and SNH. The project faces no special risks, although realization of the expected benefits will depend on the Government granting SNE autonomy in its operations and motivating the management and staff by improving compensation. The major project components are: (a) an extension of ongoing training and technical assistance to SNE; (b) an organizational and institutional study of the power sector, a power planning study, a feasibility study and detailed engineering of the first power plant recommended by the planning study, and a study for the rehabilitation and * extension of the subtransmissior. and distribution systems; (c) spare parts, equipment and materials, and a warehouse for SNE; and (d) technical assistance, training and equipment to imprwve SNH's operations. Estimated Cost: The proposed project is estimated to cost about US$20 million, excluding taxes and duties. The breakdown of the project cost estimate is as follows:  - ii - - US$Sillion Local Foreign Total 1. Consulting services and studies a. Power planning study 0.02 0.34 0.36 b. Sector organization study 0.03 0.40 0.43 c. Priority distribution system rehabilitation study 0.05 0.45 0.50 d. Feasibility and detailed engineering of the next power project 0.30 4.40 4.70 Subtotal 0.40 5.59 5.99 2. Technical assistance a. Technical assistance to SNE 0.30 4.16 4.46 b. Technical assistance to SNH 0 0.30 0.30 Subtotal 0.30 4.46 4.76 3. Training a. Training of SNE staff 0.05 1.30 1.35 b. Training of SNH staff - 0.12 0.12 Subtotal 0.05 1.42 1.47 4. Spare parts, equipment and material a. Urgent spares and vehicles for SNE 0.17 3.45 3.62 b. Material and equipment for SNH 0.25 0.20 0.45 c. SNE stocks 0.15 1.00 1.15 Subtotal 0.57 4.65 5.22 5. Renovation of Tombo Yard and Warehouse Building 0.03 0.30 0.33 6. Base Cost 1.35 16.42 17.77 7. Contingencies Physical 0.07 0.80 0.87 Price 0.23 1.13 1.36 Total Project Cost a/ 1.65 18.35 20.00 Financing Plan US$ Million Local Foreign Total IDA - 8.00 8.00 SNE 1.65 -- 1.65 CCCE - 5.20 5.20 CIDA 3.75 3.75 Germany (KfW) 0.70 0.70 AGCID 0.70 0.70 1.65 18.35 20.00 a/ Including up to uS$ 680,000 being financed under the Project Prepara- tion Facility # P299 GUI of August 2, 1984 for items 1 a) and b).  - iii - Estimated Disbursements (US$ mdllion equivalent) IDA FY 1986 1987 1988 1989 1990 1991 Annual 1.12 2.32 2.08 1.44 0.80 0.24 Cumulative 1.12 3-44 5.52 6.96 7.76 8.00 Rate of Return: Not applicable. Staff Appraisal Report: None. Map: IBRD 18167 (Power System and Potential Hydroelectric sites)  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 8.4 MILLION (US$8.0 MILLION EQUIVALENT) TIO THE REPUBLIC OF GUINEA FOR A SECOND POWER ENGINEERING AND TECHNICAL ASSISTANCE PROJECT 1. I submit the following report and recoimmendation on a proposed Development Credit to the Republic of Guinea for SDR 8.4 million (US$8.00 million equivalent) on standard IDA terms to help finance a second power engineering and technical assistance proiect. Additional financing for the project would be provided by the Caisse Centra'Le de Cooperation Economique (CCCE) in an amount nov estimated at the equivalent to US$5.20 million, by the Canadian International Development Agency (CIDA) in an amount equivalent to US$3.75 million, by the Federal Republic of Germany (KfW) and by Belgium's Administration Generale au Developpement (AGCD) in amounts equivalent to US$0.70 million each. PART I - THE ECONOMY 2. An Economic Memorandum (Report No. 4690-GUI) was discussed with the Government in November 1983 and distributed to the Executive Directors in February 1984. This section summarizes its contents, focusing on changes in Guinea's economic situation and policies in recent years. More specifically, the change in Covernment following the death of President Sekou Toure in March 1984 has resulted in a radically different political orientation which greatly enlarges the possibilities for close collabora- tion between Guinea and the Association, in the context of a major economic reform program (para.16). 3. Despite its mineral and agricultural potential, Guinea saw declining economic performance from Independence in 1958 until about 1973-74. Economic activity, with a stimulus from mining, grew rapidly between 1973-76. but again at a slower pace since then. At present, most of Guinea's 5.8 million inhabitants live at the margin of poverty. With a per capita income of about US$300 in 1983, Guinea belongs among the least developed cjuntries as classified by the United Nations. Life expectancy is only 44 years, infant mortality is about 17 percent, 90 percent of the population has no access to safe water, and 80 percent of the adult popula- tion is illiterate. 4. Since 1976, and particularly since 1979, Guinea has been re- examining its development policies, institutions, and relations with the outside world. Important first steps were taken towards improved economic management and decentralization of the economy: excessive money supply was  - 2 - gradually reduced; more explicit performance criteria and greater autonomy of public enterprises are being introduced; and a reform of the banking sector has been initiated. A new Government, which took office on April 1984. is now committed to more far-reaching economic reforms. There is explicit recognition of the need for economic pricing of resources and for technical assistance for planning, investment programming, and project preparation and execution. State retail trade has been discontinued, and many price controls have been permitted to lapse, thus liberalizing and encouraging the agricultural sector. Private investment, small and medi- um-scale enterprises, foreign direct investment. and the return of expatri- ate Guinean capital are being encouraged, and private enterprises have been allowed to import and export most goods and to borrow and hold foreign exchange. Primary education is to be revamped and strengthened. Enrolments in higher education have been severely reduced and more students are being directed to vocational training: manpower planning is being introduced, and the guarantee of state employment to school graduates is being reappraised. with a view to curtailing the increase in public employ- ment and the wage bill. These reform and liberalization measures, which will be extended during 1985, reflect a significant and broadly based attempt to address Guinea's deep-seated problems and poor economic performance, and represent fundamental changes from past policies. Recent Performance 5. Real output of the economy is estimated to have grown at an average rate of 1.6 percent in real terms between 1979 2nd 1983. Growth was more rapid in 1980 (2.6 percent) reflecting a recovery in agriculture and mining. However agriculture stagnated in 1981, mining and construction declined and overall growth fell to 0.6 percent. Recoverv in 1982 and 1983 - at 1.8 and 1.3 percent respectively, well below the rate of population increase of nearly 3 percent - resulted from an increase in construction activities, mainly for preparations for the OAU conference that was to be held in Conakry in May 1984. The primary sector rerained the most important throughout the period, representing 42 percent of GDP, although it produced well below potential for lack of incentives and adequate pricing policies. Secondary industries, mining and construction, contributed 23 percent of real GDP, although the manufacturing sector - mainly public enterprises - produced at less than 15 percent of capacity and registered heavy losses. The tertiary sector accounted for the remaining 35 percent of GDP, with real output in commerce declining by 4 percent from 1979 to 1983, reflecting the poor performance of state trading enterprises. 6. Surpluses in the trade account from 1979 to 1983 were more than offset by rising deficits in services and private transfers. Despite important official transfers, the current account consistently recorded deficits. Capital inflows were not sufficient to offset these current account deficits, which were joined by important errors and omissions - very likely reflecting heavv unrecorded capital flight. The overall balance of payments deficits increased from US$40 million in 1979 to US$85 million in 1983. Overall deficits were financed through reduction in net foreign assets and accumulation of external debt arrears, which at over  -3- US$200 million at the end of 1984 represent more than 40 percent of annual export earnings. 7. After registering a slight surplus in 1981, the Government's financial situation steadily deteriorated. In 1982 despite an increase in revenue the overall deficit approached 2 billion GS. This was largely because of transfers of 5.5 billion GS to the public enterprises following the liquidation of the accumulated debt to the banking system of the sectoral holding companies. which were abolished in 1981. In 1983. Govern- ment revenues were about 11 percent lower than in 1982. This reflected lower direct tax collections as well as falling customs duties and taxes on foods and services, as unrecorded private trade transactions grew to dominate the consumer sector. Non-tax revenues consisting of transfers from the parastatals to the equipment budget fell by 25 percent following a reduction in profits of Importex, the state trading company, as its de jure monopoly was eroded by private importers. The overall Government deficit tripled to 6.3 billion CS, or 38 percent of expenditure, the largest deficit recorded in recent years. In 1984 Government revenues continued to decline from 10.6 billion GS to 9.1 billion GS following a drop in profit taxes paid by the parastatals. The deficit, however, was contained at 4 billion GS by a reduction in capital expenditures and a sharp reduction in subsidies to the public enterprises. 8. Other than the enclave mining projects, most productive invest- ment in Guinea is of a public and parapublic nature. During the last development plan (October 1973 to December 1978), public and parapublic investment reached US$478 million (55 percent of planned expenditure) averaging 10 percent of GDP. Total investment was modest at 15 percent of GDP on the average. Two-thirds of centrally-planned investment was fi- nanced by foreign assistance. The ongoing plan (1981-85) projected much higher investments of US$1.6 billion (in 1980 prices), favoring collectiv- ized agriculture (31 percent) and industry (14 percent). As many of the proposed projects remained in preliminary stages of preparation, however, and their financing was not sure, the proposed investment targets could not be reached. During the 1981-83 period, public and parapublic investment represented about US$200 million per year in current terms, about the same proportion of GNP as in the previous plan exercise. The new Government has reviewed the investment program and, with the help of the Association, reassessed its project priorities, deciding in April 1985 to severely limit investments to on-going, viable projects with assured foreign financing. Investment planning and programming are to be improved under the Technical Assistance Project for Economic Management (Credit 1559-GUI) recently approved by the Executive Directors. 9. Recognizing the need to maintain and use existing capital assets better, the Government has increased the proportion of its recurrent budget for maintenance and repair. It is also undertaking a serious examination of the viability of state enterprises. The least successful ones (includ- ing the entire network of retail trade enterprises outside Conakry) will be closed down, while others have embarked on rehabilitation programs, mostly with external assistance. Recent policies in the parapublic sector aim at making parastatals financially self-sufficient, autonomous in their  -4- management, more responsive to market mechanisms, and more receptive to technical assistance. Foreign Assistance and External Debt 10. Since 1975-76, Guinea has been diversifying its sources of foreign assistance through renewed ties with the Western industrialized countries. expanded relations with Arab nations and with multilateral sources. Guinea qualified for drawings under the IMF first credit tranche and trust fund facilities, and successfully negotiated a Stand-By Agreement in 1982. However, this Agreement lapsed owing to the Government's inabili- ty to meet some of the agreed financial performance criteria, and to reach an understanding with the Fund on the issue of adjusting the overvalued exchange rate. A new Agreement with the IMF is being actively negotiated. 11. The accumulation of foreign debt to finance investments in infrastructure and public enterprises, as well as consumer goods, has resulted in a burden of foreign obligations which is, and will remain for years, a major problem. Guinea's outstanding public and private external guaranteed debt exceeded US$1.5 billion as of December 31, 1983 of which US$1.2 billion (66 percent of GNP) was disbursed. Service obligations on this debt are projected at US$132 million per annum over 1985-87. Foreign exchange shortages have hindered the payment of debt service, and outstand- ing arrears totalled US$220 million at the end of 1983. The ratio of public and publicly guaranteed debt service obligations to gross export earnings in 1983 was about 24 percent. Actual service payments on this debt amounted to about 17 percent of export receipts. Private non- guaranteed debt is estimated at US$300 million in 1983 (20 percent of GNP), and its debt service represented about 10 percent of the 1983 export earnings. 12. Although Guinea's debt servicing has shown some improvement, accumulated arrears are likely to increase in absolute terms unless there is new debt rescheduling or major changes in the present allocation of foreign exchange. In the past, the Government addressed the problem through bilateral debt rescheduling, and measures to improve debt manage- ment by the External Debt Department in the Central Bank, to which the Bank provided technical advice as part of its economic work. Government has also undertaken a stricter control of investments financed by external credits. The pressure on imports was somewhat relieved in recent years by official toleration of some private exports at the free rate outside official foreign exchange channels. However successful these operations may be, Guinea will have to rely on substantial amounts of foreign assis- tance on concessional terms during the next few years. This will be needed not only for investment purposes, but also to provide foreign exchange for intermediate and consumer good imports which are vital to stimulate econom- ic activity and relieve supply constraints, particularly in the rural sector. Furthermore, net public savings after debt service will be inade- quate until at least the late 1980s, and local cost and recurrent expendi- ture financing by external sources will be needed.  -5- Prospects L3. Guinea's long-term development possibilities are substantial based on its agricultural, mineral and hydroelectric potential. However, with 80 percent of the population in the rural sector, and with modest national savings (about 9.4 percent of GDP in 1983) combined witk an acute shortage of foreign exchange, the exploitation of this pocential hinges on the country's ability to provide incentives to agricultural producers and to attract foreign capital for investment in mining, agroindustry, and, eventually, petroleum development. 14. During the 1980s Guinea will continue to face a serious foreign exchange constraint, despite the entry into operation of a diamond mine in 1984. Existing mining operations have few prospects for expansion in the coming years, and the downward trend in agricultural exports will be hard to reverse immediately. At the same time price distortions linked to the over-valued exchange rate discourage the substitution of the large food imports by domestic production, while the debt service ourden remains heavy. 15. At present Guinea is excessively dependent on bauxite mining for its foreign exchange. Diversification of its mineral production is thus a key element in the country's longer-term development strategy. Iron ore mining is one possibility now under active investigation, as are oil exploration and development of other minerals. 16. The Association and the IMF are helping the Government formulate and implement an economic reform program aimed at further encouraging private sector development, notably in agriculture, while at the same time increasing the efficiency of the public sector and improving resource management. Particularly crucial will be a major monetary reform, with accompanying measures to correct price distortions, and thereby reform the structure of agricultural incentives. The authorities also plan to introduce rigorous budgetary measures and the rational programming of public investments. To reverse the previous regime's economic policies, the new authorities plan to open up the economy to the private sector and greatly reduce the scope of the Government's direct involvement in the productive sectors, by a large-scale public enterprise divestiture program. The success of these reforms will depend on the program's ability to attract and encourage private entrepreneurs. To emerge from its burden of external debt, Guinea plans to seek a multilateral debt rescheduling in 1985 and subsequently limit its foreign borrowing at appropriately concessional terms. At the Association's suggestion, the Government has examined these interrelated problems, and has prepared a coordinated economic reform program eligible for donor support. This program will be the basis for an IMF Standby Arrangement in 1985, and the Association will soon appraise a Structural Adjustment Credit and help mobilize balance of payments support from other donors. Following the major Agricultural Sector Review organizFd by the Bank with the support of several other agencies (CIDA, USAID, CCCE, IFAD, UNESCO). its report (GUI-4672, April 15, 1984) also represents a significant step in assisting the Government to  - 6 - reform agricultural sector policies. A long-term strategy and agricultural investment program are now under preparation with the Association's help. 17. However, once the Government embarks on major reforms, Guinea would face a difficult transition period during the late 1980s when in-. creased foreign assistance. on concessional terms, would be needed to ease the balance of payments difficulties and contribute to a gradual realiza- tion of the country's considerable development potential. PART II - BANK GROUP OPERATIONS IN GUINEA 18. The first Bank Group operation in Guinea comprised two loans in FY68 and FY71 for tL2 profitable bauxite mining project at Boke. This project was foliowed by IDA credits in the mid-1970s for pineapple produc- tioa and the rehabilitation of roads. Encouraged by the first results of these projects. the Bank Group began to diversify and expand its lending program, based upon broad priorities agreed with the Government: (i) reha4ilitation and maintenance of basic infrastructure; (ii) improvement of human resources; (iii) mining development; and (iv) development of the rural sector. IDA operations in each of these areas have been approved, with particular emphasis on sectoral planning, institution building and training. The FY79 First Education Project was very satisfactorily imple- mented, and provided a sound basis for the Second Education Project, which is proceeding well. The First Power Project (FY8I) is rehabilitating the Conakry power system. Following the conclusions of the UNDP-financed Water Resources Master Plan, for which the Bank was executing agency, the pro- posed project would help prepare a long-term electric generation and transmission program to exploit Guinea's substantial hydroelectric poten- tial, as well as promote the efficient management of the sector by SNE. A Water Supply project (FY79) provides similar assistance, and was partially the precursor of the Conakry Urban Development project (FY84). which assists the Government in managing urban growth in the capital region. The Second Highway Project was successfully completed in 1984 and Highways III (FY84), which includes the reconstruction of the country's first priority road link, continues with a third phase of maintenance and rehabilitation under a revamped highway organization. Implementation of the renovation works under the Conakry Port Project (FY83) is also on schedule. Public enterprise rehabilitation programs under the Industrial Rehabilitation Promotion Project (FY81) have begun. Recent operations to assist efforts to promote private investment, a first IFC loan and investment for the AREDOR diamond mining company, and the Petroleum Exploration Promotion Project (FY84). have also started well. 19. It is in the rural sector that the Government has experienced the greatest difficulty in harnessing its development potential. Support for smal'l private producers, including marketing and financial incentives, and access to modern technology and applied agricultural research, has been almost nonexistent. To deal with these fundamental problems, the Associa- tion has supported intervention in two sub-sectors with substantial growth potential. The Livestock Development Project (FY81) aimed at strengthening the national livestock planning institutions, improving animal health and productivity, and training livestock sector staff. However the continuation  of enforced government cattle purchasing created significant implementation problems and the Credit was cancelled on September 12, 1983. The new Government has removed these obstacles, and a Livestock Sector Rehabilita- tion Project has just been approved. The Rice Development Project (FY80) stresses national institution-building and introduces pilot low-cost improved rice production methods in an area with high potential. In addition, as part of the intensive dialogue between the Bank Group and the Government. the Agricultural Sector Review (para. 16) provides the focus for new directions for agricultural development and policy formulation. The Governament has accepted the need for improved incentives and the absolute priority of smallholder agriculture. These discussions will be pursued and supported by the lending program, inter alia, in a Second Rice Development Project and a First Agricultural Services Project, which have recently been appraised. Other agricultural projects addressing the sector's institutional and training needs are being prepared- in the context of a long-term program to revitalize smallholder agriculture. 20. Bank Group operations in Guinea now include fifteen IDA Credits totalling US$199.7 million, and two Bank loans totalling US$73.5 million. Guinea's disbursement rate (disbursements in relation to the undisbursed balance) compares very favorablv with that of other countries at similar levels of per capita income and development. Its disbursement profile matches the Regional profile. 21. Current Assistance Strateg. The proposed Bank Group lending program, supported by zn expanded program of economic and sector work, is based on a strategy of encouraging key policy reforms at the national. project and sector levels. These aim to improve economic mechanisms by promoting market forces, and thus would begin the structural adjustment of the Guinean economy. Support to the directly productive sectors would increase the rate of economic growth. Specific targets are: (a) providing. vith other donors. financing for imports needed for the success of the economic reform program (para. 16); (b) giving priority to policy- based projects that increase production; (c) introducing technical assistance directed towards policy reforms, improved economic management and resource allocation; (d) improving absorptive capacity in those social and infrastructure sectors which support the productive sectors, through * rehabilitation, and technical and managerial training; and (e) improving capital flows through the promotion of private investment and increasing the level of cofinancing. During the preparation of the economic reform prugram, the Association will help the Government mobilize the necessary increased financial support from other donors. 22. The Association is planning to expand agricultural operations once the monetary reform has created the needed incentive structure for smallholder agriculture, in the context of a long-term strategy for agri- cultural development, which is under preparation. It is equally important for the Bank to deepen its understanding of the industrial sector through additional sector work and policy discussions. possibly leading to a second industrial rehabilitation operation once the Government has defined its industrial policy and the role of public enterprises (para. 46). The Association is also providing technical advice to Government for possible  - 8 - diversification of mining activities. A mineral development project which has recently been appraised includes promotion of secondary minerals and further work on the proposed Mifergui-Nimba iron ore project. 23. The Bank Group's share of Guinea's external debt (public and private guaranteed) at the end of 1984 stood at about 13 percent (including undisbursed). Its portion of external debt disbursed is expected to be 11 percent by 1987 compared with 8 percent in 1981; its share of debt service on public debt and private debt guaranteed, 6.6 percent in 1980. is expected to decline to 3.5 percent by 1987. PART III - THE ENERGY AND POWER SECTOR The Energy Sector 24. Demand and Supply. Statistical information about the energy sector is poor and incomplete. Total energy consumption is estimated at 1.2 million tons of oil equivalent (toe). Most of Guinea's energy demand is residential (60 percent) or industrial (24 percent). the latter mainly for bauxite mining and processing; the remaining demand is from the transport and commercial sectors. Firewood and charcoal provide about 64 percent of energy use; they are the primary fuel sources for cooking for almost all Guineans. While firewood supplies will, in general, be adequate for the near future, intensive use of firewood Is leading to significant depletion of forestry resources around towns. Additional energy supplies come from petroleum products (34 percent) and hydroelectricity (2 percent). 25. All oil products are imported as there is currently no oil production in the country. Imports in 1983 totaled about 365,000 tons, of which the bulk was fuel oil used by the two major bauxite companies for processing alumina and power generation. The value of oil product imports was US$83 million in 1983, representing about 17 percent of export earnings. A Petroleum Exploration Promotion Project (Credit 1438-GUI) financed by IDA began in 1983. Its aim is to compile geological and geophysical data to demonstrate the country's potential to the oil industry. 26. Guinea has abundant hydroelectric resources. Due to favorable topography and high annual rainfall, potential is estimated at about 26.400 GWh per annum. However, only about 300 GWh have so far been developed. With appropriate upgrading of existing plant and expansion of capacity, more of the country's hydro potential could be utilized to substitute for existing diesel generation and to meet increases in energy demand. 27. Institutions in the Energy Sector. Responsibilities in the sector are fragmented and poorly coordinated. The mining service of the Ministry of Planning and Natural Resources (MPNR) is responsible for exploration for hydrocarbons and other mineral resources. The Ministry of Trade arranges oil product imports except for the mining companies and approves the power tariff structure and levels. The Secretariat of State for Energy (SSE) in the MPNR is in charge of planning and executing the power investment program and is also responsible for overall technical  - 9 - supervision of the power sector. The Societe Nationale d'Electricite (SNE) is the state enterprise in charge of operating the power system. The National Hydrology Service (SNH) in MPNR is responsible for the collection and analysis of the hydrological data on the water resources. 28. Sector Investments. There is no coherent investment strategy for the energy sector. However, the IDA Technical Assistance project will help Government elaborate comprehensive rolling three year public investment programs by mid-1986. Investments in petroleum exploration include the exploration work of Societe Guineenne des Hydrocarbures (SGH) - a joint venture between GOG and Mobil Oil Co., - and the activities financed under the Petroleum Exploration Promotion Project (para. 25). In power, the major investment being implemented is the First Power Project, for which a Credit (1085-GUI) of SDR 22.1 million was approved in 1980. The Federal Republic of Germany (KfW) and France (CCCE) are providing parallel financing which totals US$27 million equivalent (para. 33). Including the proposed and ongoing projects, investment required in the power sector to meet demand through the early 1990s is estimated at about US$225 million at 1984 prices. 29. Energy Pricing. When converted at the official exchange rate, retail petroleum product prices at the US dollar equivalent appear high relative to international prices. However, under a more realistic exchange rate, prices would be low. The structure of oil product prices will be rationalized when the economic reform program, now agreed by the Government on the basis of IMF and IDA staff recommendations containing specific proposals to align petroleum product prices to appropriate levels, goes into effect. There has been no clear pricing policy with respect to electric power. A study, financed by CCCE, will analyze the power tariff structure and the level of LRMC on the basis of the investment program to be determined by the power planning study (para. 51). A World Bank/UNDP Energy Assessment is planned for FY86 to review energy demand and supply, sector institutions, investment plans and pricing. The Power Sector 30. Background. After independence and the nationalization of the power facilities in 1961, SNE was created as a state enterprise charged with operating the Guinean public power system. During the following two decades, lack of foreign exchange, constant government interference, ineffective management, inadequate staff compensation, absence of leader- ship and discipline, paucity of professional capability and haphazard investments, have led SNE to a disastrous condition. Development of the power sector has been further inhibited as the authorities focussed their efforts on the US$3 billion development of the Konkoure hydro-power and aluminum smelter project. In late 1983 following UNDP-financed studies for which it was executing agency, IDA conveyed to the Guinean Government its view that the project was not economicallv viable. However, it was not until the new Government took power in April 1984 that IDA's advice was accepted.  - 10 - 31. Existing System. The country's electric power sector is divided into the public system operated by SNE, with a capacity of 64 MW (40 MW of hydro capacity and 24 MW of diesel) and three isolated captive diesel and steam plants operated by the bauxite mines, totalling 70 MW. The former consists of three separate systems (Conakry, Kinkon, and Tinkisso) and 12 towns scattered throughout the country which are supplied by small diesel units totalling about 10 MW. The existing system and the towns with electricity supply are shown on IBRD Map 18167. 32. The transmission system consists of about 83 km of 110 kV, 83 km of 60 kV and 300 km of 30 kV lines. The primarv distribution system consists of 20 kV and 15 kV in Conakry and 5.6 kV in the rural areas. SNE serves about 30,000 customers nationwide of whom about 55 percent are in the Conakry system. Only 6 percent of the total population is served by the power system, concentrated mostly in the Conakry area where 60 percent of the population has access to electricity from both legal and illegal connections. 33. Under the First Power Project, IDA joined with CCCE and KfW to rehabilitate the existing facilities and provide training and technical assistance to SSE. IDA financing (Credit 1085-GUI) includes the reha- bilitation of the distribution system in Conakry, construction and equip- ment of a training school and houses, technical assistance, training and studies for the establishment of accounting and billing systems. CCCE is financing the renabilitation of Grandes Chutes Hydro Plant and its 60 kV transmission system to Conakry, a study for the optimization of the development of the Samou river, and an analysis of the power tariffs. KfW is financing the rehabilitation of the Donkea Hydro Plant and the 110 kV transmission system to Conakry, the rehabilitation of the Tombo diesel station, the provision of spare parts, and the rehabilitation and extension of public lighting for Conakry. GOG has also signed a contract with Energoprojekt (Yugoslavia) for the supply and erection of a 2 x 2.5 KW hydroelectric plant at the foot of the existing Banea Dam. 34. The rehabilitation of SNE's Conakry system should be completed bv 1987. The installed generating capacity would then amount to 47 MW hydro and 14 MW diesel which would be sufficient to meet the Conakry system demand through the late 1980s. 35. Future Development. SNE's medium and long term strategy aims at taking maximum advantage of the country's hydroelectric energy to meet essential power demand, while maintaining the existing thermal plant as standby capacity. Future generation expansion is being examined by a power planning study carried out by HQI and financed under a PPF advance. The study, which started in September 1984, is expected to be completed by October 1985. Its purpose is to determine the least cost program for the development of generation and transmission facilitv in the country with special emphasis on the Conakry system, the mining load and the Kinkon system. The study draws on the Water Resources Master Plan (WRMP) that inventories Guinea's hydro resources and assesses the potential sites for hydroelectricity, irrigation and water supply. The WRMP was financed by UNDP with the Bank as executing agency. In September 1985, GOG. CCCE,  - 11 - CIDA, KfW and IDA would review the power generation and transmission program resulting from the study and agree on the sequence of projects in the sector. The Government has agreed to study and to implement only the agreed priority projects (Section 3.04 of draft Development Credit Agreement). The proposed project includes financing for detailed engineering of the first generation project in the program. 36. An indicative system development plan over the next 10 years was prepared by IDA staff. It assumes economic recovery and a resulting annual growth rate in electricity demand of 7.5 percent p.a. The IDA staff plan has as a main objective the reduction of generation costs by substituting hydropower for thermal generation in addition to meeting incremental demand. It projects interconnection of the Conakry System with the mining loads and the Kinkon system by early 1990, to further reduce dependence on diesel oil. Additional diesel capacity of four MW will be needed by 1989 to meet the Conakry system load. By the early 1990s, additional capacity of 25 to 40 MW and an average output of 200 GWh would be required to meet the interconnected system load. This will be verified bv the ongoing planning study. 37. Sector Responsibilities. Responsibility for the power sector is divided between the Secretariat of State for Energy (SSE), under MPNR, and SNE, a legacy of the "Concession Systemu. This has not been conducive to the efficient operation and development of the sector. SSE is in charge of sector planning, investment decisions, and arranging the financing and construction of power facilities which are transferred after completion to SNE for operation. SNE has no autonomy as: (i) day to day decisions are made by the Secretary of State for Energv; (ii) tariff structures and levels are approved by the Ministry of Trade; (iii) SNE's accounts are audited by the Ministry of Economy and Finance; (iv) SNE's managers are appointed by presidential decree; and (v) all other personnel are appointed and administered by the Ministry of the Public Service. 38. SNE's operations are organized on simple lines under three directorates - Finance, Commercial and Technical - reporting to a Director General. Under the First Power Project, a project implementation unit reporting to the Director General, was created within SNE. It is expected to evolve into a construction department that will eventually take over responsibility for implementation of all of SNE's investments. Respon- sibilities within SNE are ill-defined. Clear job descriptions, work assignments and delegations of authority are lacking. Staff are in- adequately compensated, lack leadership and discipline. In addition, they spend only a fraction of the official working hours at their jobs. 39. In an attempt to address the above problems, the First Power Project included financing for a technical assistance team and an organizational and institutional study. Under that project, SNE employs 15 expatriate personnel from Hydro Quebec International (HQI) to fill key positions and train Guinean counterparts. During project implementation, it became apparent that additional funds of about US$1 million were needed to maintain the momentum of the rehabilitation effort by the technical assistance team through mid-1985. These funds were included in the  - 12 - Petroleum Exploration Promotion Project (Credit 1438-GUI). An additional US$1.5 million has also became available under the Petroleum Project due to modification of the seismic program following the availability of data from studies financed from a PPF advance. Government has asked that the savings be applied to continuation of the technical assistance to SNE to pay for the period between the exhaustion of the SNE category under the Petroleum Project and the time when activities to be financed under the Proposed Credit begin. The technical assistance program is progressing well and the efforts of the technical assistance team have already led to improved electricity supplies in Conakry. Total system output increased by about 40 percent in 1983 and 29 percent in 1984. In addition. the TA team can be credited for improved accounting which made possible the discovery of the diesel oil losses at Tombo (about seven million liters in 1983), and the underbilling of about 31 GWh of electricity. 40. HQI also carried out studies for the complete overhaul of SNE's billing, stock control and accounting systems. The studies, completed in 1984. are now being implemented. Several SNE staff members have been trained to implement the new systems at Hydro Quebec in Canada and the technical assistance team has been expanded to include a store manager who vill implement the stock control system- 41. The First Power Project's training component is proceeding satisfactorily. The training center is functioning and a training specialist and three instructors from HQI are preparing staff training programs. About 60 SNE staff members have already been trained abroad. In addition, three students are attending the Ecole Superieure Interafricaine d'Electricite (ESIE) in Abidjan. These efforts have to continue, and wi11 be extended in the proposed project to include eight more engineering students at ESIE, three accountants and two computer programmers at an equivalent school. 42. As priority was rightly given to the rehabilitation of SNE's installations, the organizational and institutional study was postponed and began only in October 1984 under a PPF Advance for the proposed project. Phase I of the study will review the organization of the sector and the roles and responsibilities of the different agencies as well as address SNE's internal problems including overstaffing and inadequate compensation. The consultants (Tractionel, Belgium) have already submitted a preliminary report which makes recommendations on the institutional environment and the organizational structure of SNE. The report was discussed by GOG. IDA and the other co-financiers at negotiations. Agreement was reached on the basic principles which the consultants would follov to finalize their recommendations on the institutional framework and SNE's autonomy and its organizational structure. By September 30. 1985. the consultants would submit a final report incorporating these recommendations together with a draft implementation plan. GOG would submit by Februarv 28, 1986, a timetable satisfactory to IDA to implement this plan (Section 3.05 of the draft Development Credit Agreement).  - 13 - 43. During the pre-negotiation discussions, a Recovery Plan prepared by SNE in cooperation with the HQI team and Tractionel, was submitted for IDA's review. The Plan covers all systems and functions and includes target dates which end in 1987 when all the operational areas are expected to have reached an acceptable state of efficiency. The Recovery Plan is complementary to the new institutional structure of SNE but is not dependent on it, as the operational functions and areas exist no matter where they may be placed in the institution. The Government and SNE have agreed to implement the Plan in accordance with an agreed timetable. (Section 3.06 of the draft Development Credit Agreement). 44. SNE's financial and statistical data base is not reliable. It does not provide accurate information on power plant operation and costs, distribution costs. energy sales in total and by consumer category. average prices per kWh sold, age of receivables and the value of inventories. However, the situation should improve substantially when the new accounting and billing systems are introduced in 1985 (para. 40). 45. Accounts and Audit Arrangements. Income statements and balance sheets for 1981 and 1982 were not audited because of the poor quality of accounts. Therefore, the first audit was only performed on the 1983 accounts. The auditors were unable to express an opinion on the accounts as, inter alia, detailed consumer and inventory records could not be reconciled with the balance sheet totals. The new accounting and billing systems should remedy these and other deficiencies. SNE's annual accounts would be submitted to IDA within six months of the end of each fiscal year after verification by auditors acceptable to IDA (Section 4.01(d) of draft Development Credit Agreement). 46. SNE's Past Financial Performance. SNE did not perform well during the period 1981-1983 and did not meet the earnings covenant under the First Power Project. From 1981, SNE's revenues were to cover operating expenses, taxes, maintenance, depreciation (revalued), the excess of debt service over depreciation and produce rates of return of 2 percent for 1983 and 3 percent thereafter, on average revalued net fixed assets in operation. Despite tariff increases in 1981 of about 38 percent and a further 62 percent in early 1983 leading to a price of about USg18/kWh 1/ SNE incurred large operating deficits during 1981-83. 2/ In addition, SNE wrcte off in 1981 and 1982 bad debts of GS 345 million, excluding Government accounts. At the end of 1983. SNE's liquidity was unsatisfactory 1/ The official exchange rate of GS 24 = US$1.00 compares to a parallel market rate of GS 260. The average price per KWh is estimated as the records do not yield accurate information on KWh sales. 2/ The audited accounts for 1983 show a loss of GS 333 million (US$14.5 million).  - 14 - with receivables of GS 344 million (US$14.3 million), equivalent to 10 months' billing. To finance the serious shortage of working capital. SNE had to resort to short term bank borrowing of GS 262 million (US$10.9 million). In addition, bills of GS 737 million (US$30.7 million) had not been paid - mainly for diesel oil. 47. SNE's poor financial situation is primarily due to lack of electricity output, poor cost control and inadequate metering, billing and collection, which has rendered tariff increases ineffective. The main increase in costs has been for diesel fuel as the hydro plants which are being rehabilitated have either failed to generate at expected capacity levels or been out of service. Fuel costs were about 60 percent higher than they should have been because of losses of diesel oil at the Tombo diesel plant. Fuel consumption, which has already been reduced from 450 gm/kWh to 268 gm/kWh, will need to be further reduced in 1985 to reach the manufacturer's rated consumption and to be maintained at that level thereafter (Section 4.08 of the draft Development Credit Agreement). SNE's revenues were also lower than they should have been because increased electricity production in 1983 was not billed accurately. Revision of bills to reflect present consumption and installation of meters in the premises of 70 percent of large commercial and industrial consumers have been completed. 48. A further write-off of SNE's bad debts for non-government customers amounting to about GS 140 million has taken place and Government has settled its outstanding debts to SKE, leaving GS 55 million to be paid. These steps reduced accounts receivable to an estimated 6.5 months billings at the end of 1984. Government and SNE have agreed to submit a plan to reduce SNE's receivables to the equivalent of not more than three months billings by mid-1986. (Section 4.04 of draft Development Credit Agreement). 49. SNE's unpaid bills amounting to about GS 1.5 billion (mainly for oil, accumulated depreciation and bank short term borrowing) due to Government and its agencies would be written off during settlement of debts among state enterprises that GOG intends to carry out as part of the economic recovery package. Government has agreed to such a write-off. (Section 3.03 (a) of draft Development Credit Agreement). 50. Future Finances and Tariffs. Preparation of meaningful financial forecasts for SNE over the project period is impossible because of the uncertainty regarding the impact of the forthcoming major monetary reform, the resultant tariff increases, and the poor quality of financial information. Until such time as satisfactory accounting systems are fully operational, it would be inappropriate to continue with the current requirement to base SNE's earnings on a rate of return covenant related to revalued net fixed assets in operation. The financial objective for SNE over the next three years (1985-88) would be to overcome SNE's serious liquidity problems and strengthen its creditworthiness to enable it to undertake future investments without reliance on financial support from GOG. SNE and GOG have agreed to ensure that SNE's revenues would be  - 15 - sufficient in each future year to cover operating expenses including interest, the greater of depreciation or amortization of debt, working capital requirements including cash, unfunded interest during construction, and contribute an amount to capital investment equal to the local cost of the investment program. (Section 4.05 (a) of the draft Development Credit Agreement). To meet this goal an increase in SNE's tariffs to the higher of GS 6/kWh or US018.0 equivalent, is a condition of effectiveness of the proposed Credit. (Section 6.01 (e) of draft Development Credit Agreement). A series of targets in the Recovery Plan (para. 43) will be used to monitor SNE's financial performance. These were agreed in principle with SNE and GOG at the time of negotiations and will be reviewed every six months during project supervision. The existing data base and condition of the power system may not allow the earnings covenant to be fully met during the next two or three years but will form the target base which Government and IDA will try to achieve. SNE's records and operations are expected to be in a condition by the end of 1987 to allow agreement on a specific earnings covenant for the next power project. 51. Following completion of the ongoing power generation and trans- mission planning study, a tariff study based on long run marginal cost (LRMC) principles will be carried out (para. 29) with an expected comple- tion date of end-1987. Recommendations arising from the study will be discussed by GOG, SNE, CCCE and IDA, and agreements would be implemented by December 31, 1987 (Section 3.07 of draft Development Credit Agreement). 52. SNE's diesel costs are expected to peak in 1985 at about 25 percent of operating costs and thereafter fall to about zero in 1987, when the hydroplants will be fully rehabilitated. Unexpected changes in the hydrolthermal mix could occur in future as a resnlt of extraordinary droughts. Current tariff schedules do not include a fuel adjustment clause to enable SNE to recover additional costs arising from such fluctuations. Consequently, GOG has agreed as a condition of effectiveness to incorporate a fuel adjustment clause in the tariff schedules which would adjust electricity prices quarterly to meet such changes in fuel costs. The approach would be to divide the tariff into two parts - a base tariff and a fuel component. The latter component would consist of the estimated fuel bill for the coming quarter adjusted for over or under estimates in the previous quarter, divided by the estimated kWh to be sold. (Section 4.05 (b) of draft Development Credit Agreement). 53. The retention of an oil price for SNE several times the inter- national level (as at present 3/ ) is not justified. GOG. therefore, agreed that the diesel price charged to SNE would be at a level equal to the CIF price in Conakr-y plus reasonable handling and mark-up charges. These are now estimated at 10 percent. (Section 4.07 of draft Development Credit Agreement). 3/ When converted at the official exchange rate.  - 16 - 54. As SNE needs to purchase the spare parts, equipment and materials needed to operate effectively, GOG agreed that SNE be permitted to purchase annually, foreign exchange equivalent to the amount to operate and maintain its plant and equipment at acceptable power utility standards (Section 3.03 (b) of the draft Development Credit Agreement). The amount, now estimated at USS2 million equivalent, will be reviewed annually and adjusted by GOG and SNE in consultation with the Association. 55. Bank Group Objectives and Rationale for Involvement. IDA's objectives in the sector are to help Guinea to complete rehabilitation of the power system, while building the institutional framework necessary to exploit its abundant hydroelectric resources in the most economic manner. IDA's involvement would help create a power utility and power sector to a standard of efficiency sufficient to operate, maintain and administer the systems already rehabilitated. This is a necessary pre-condition for the expansion of the sector based on hydro power. The resources required to do so will be large and the Association is well placed to take the lead in mustering the financing required from interested donors. 56. IDA involvement in the power sector in Guinea started in 1979 with the First Power Project which aimed at putting SNE on the road to recovery. This has turned out to be a longer and costlier process than expected. The technical assistance team financed under the First Power Project has been at work in Conakry since 1982. The team has had to spend a great deal of time dealing with technical problems and eouipment breakdowns rather than concentrating on the task of rebuilding SNE into a viable public utility. Progress has been made across the board (para. 39), but several tasks remain to be completed. These include the completion of the rehabilitation of SNE's installations, the planning of the future development of the sector and the strengthening of SNE's institutional structure and finances. It is clear that the continued presence of a large technical assistance team will be necessary for several years despite the high cost of such an approach. In cooperation with CCCE, CIDA, KfW and AGCD, IDA's continued involvement in the sector would ensure that all projects undertaken are in line with the power planning study mentioned in para. 35 and are affordable both as regards investment and recurrent costs. By the time of the next major investment toward the end of the 1980s, SNE and the sector would be in acceptable operating condition and capable of successfully undertaking such a major project. PART IV - THE PROJECT 57. A project appraisal mission visited Guinea in November 1983, with follow-up missions in June and December 1984. Negotiations were held in March 1985 with a Guinean Delegation led by the Secretary of State for Energy, Lieutenant J.G. Zoumanigui. There is no Staff Appraisal Report. Annex 3 contains supplementary data.  - 17 - Objectives 58. The purpose of this project is to continue the rehabilitation efforts started under the First Power Project. The project would: (a) strengthen the power sector's organization and management; (b) plan the development of Guinea's most abundant energy resource - hydroelectric power - to reduce dependence on imported oil; (c) improve system efficiency and reliability through cost reduction, training, and provision of technical assistance, vehicles, equipment and spare parts; and (d) provide technical assistance, hydrometric equipment and vehicles to the National Hydrology Service (SNH). Description 59. The project would comprise the following components: a) Consulting Services and Studies vi) the preparation of a power generation and trans- mission planning study to the year 2000 and the investment program required for the first 10 years; 4/ (ii) a study of the organization of the power sector, including the organization and management of SNE, the relationship between SNE and its supervisory ministries, and manpower needs for SNE; 4/ (iii) a study of the rehabilitation and reinforcement of priority subtransmission and distribution systems; (iv) a feasibility study and detailed engineering of the next generation project as defined by the Power Generation and Transmission Planning Study; and (v) a study of the tariff structure. (b) Technical Assistance and Training for SNE Staff (i) extension of the technical assistance contract between SNE and HQI 5/ , and 4/ Both studies above are underway and being financed by a PPF advance dated August 2, 1984. 5/ Financed under Credit 1085-GUI.  - 18 - (ii) extension of the training program as recommended by the preliminary results of the power sector organizational and institutional study. including: - scholarships for eight students (or 40 student-years) at ESIE to prepare future engineers for SNE, and continuation of financing for three students already there; - scholarship for accountants, and computer personnel (20 student-years); - purchase of equipment needed to complete the Training Center; and - 10 staff-years of specialized training for SNE's managers and senior engineers. (c) Technical Assistance and Training for the National Hydrology Service (SNH) Staff Mi technical assistance to SNH from a developed institution to provide advisory services in technical and managerial matters over a three year period; and (ii) six staff-years of scholarships for SNh manage- ment. (d) Spares, Equipment and Haterial i) spare parts (a) immediately required for the generating stations and distribution system, including service vehicles and other transport, and (b) to build up stocks for emergency needs; and (ii) hydrometric instrumentation, vehicles and boats for SNH. (e) Buildings (i) warehouse rehabilitation and equipment; and (ii) construction of a wall and lighting around the Tombo power station. Status of Preparation 60. The power planning study and the power sector organizational and institutional study financed by the PPF advance are underway. Contracts for the two studies were signed in September 1984 and work should be completed by early 1986. Terms of reference for the subtransmission and distribution systems rehabilitation as well as the partial stock list was confirmed with SNE during negotiations. Detailed lists of spares immediately needed for the system have been prepared by SNE and agreed with  - 19 - IDA, CIDA and KfW. A preliminary program for the scholarships has already been prepared. The detailed program is under preparation. A list of equipment, vehicles and instruments for SNH has been prepared and agreed with IDA. Cost Estimate 61. The total cost of the project is estimated at US$20.00 million equivalent, with a foreign exchange component of US$18.35 million (92 percent), and is detailed in the Credit and Project Summary. The project is exempt from local taxes and duties. Cost estimates are based on January 1985 prices with about 5 percent added for physical contingencies. This is reasonable as studies at fixed contract prices have already started under PPF financing and the technical assistance contract will be an extension of the existing one. Price contingencies are based on the following inflation rates: 1986 - 7.5 percent, 1987-1990 - 8 percent. Financing Plan 62. The IDA credit of US$8.00 million equivalent would be onlent to SNE for 20 years, including a five year grace period at 9.29 percent. the Bank's prevailing interest rate. SNE would bear the foreign exchange risk. The execution of the subsidiary loan agreement between GOG and SNE would be a condition of effectiveness of the proposed credit (Section 3.02 of the draft Development Credit Agreement). 63. Financing from France (CCCE) at terms yet to be agreed, is estimated at US$5.20 million equivalent, including contingencies. The project will also be supported by the following grants: US$3.75 million equivalent from Canada (CIDA), US$0.70 million equivalent from the Federal Republic of Germany and US$0.70 million equivalent from Belgium (AGCD). The local cost of the project (US$1.65 million equivalent) would be financed by SNE from internally generated funds. Agreements with CIDA and KfW have already been signed, and CCCE has agreed in principle to finance its share of the project. 64. The proposed IDA would finance the cost of the power planning study, the power sector organizational and institutional study, the study of the rehabilitation of the priority distribution sybtems, training of SNE staff, stocks for SNE, the technical assistance team (with the exception of four experts who will be financed by CIDA) and vehicles SNE's transport needs. CCCE would finance the feasibility and detailed engineering of the next power project and the tariff study. KfW would finance the urgent spare parts for Tombo diesel station. Besides the cost of four experts (three for training and the stock control manager), CIDA would finance the urgent spares related to the distribution/transmission systems, office equipment, and the renovation of Tombo yard and warehouse. The Government has sought AGCD finance for the technical assistance, training and equipment for SNH.  - 20 - Implementation 65. SNE. with the assistance of the technical assistance team, would be responsible for project implementation. Terms of reference for the engineering studies to be financed by CCCE will be reviewed and cleared with IDA. Annex 4 shows the implemntation schedule with completion in June 1990. Procurement 66. The rehabilitation study for the subtransmission and distribution systeas will be awarded according to IDA Consultant Guidelines. About 50 percent of the IDA-financed spare parts for SNE will be procured by ICB. the balance vill be procured from the original manufacturers in order to maintain standardization of equipment. Procurement of spare parts. equipment, material and studies financed by co-lenders will be in accordance with thefr procureament guidelines. Annex 5 shows the amounts and methods of procurement. Disbursement 67. The proposed IDA Credit would be disbursed against 100 percent of the foreign exchange cost of studies. technical assistance and tralning for SNE and stocks. Prior to effectiveness, SNE would establish a Foreign Currency Special Account of US$100.000 to pay for spare parts. IDA would disburse the initial amount and replenish this account upon presentation of supporting documentation from SNE (Sections 2.02 (c) and 6.01 (b) and Schedule 4 of the draft Development Credit Agreement). The estimated disbursements (Annex 6) are derived from the existing disbursement profile for power projects in the West Africe Region. IDA has agreed to administer CIDA disbursements related to the technical assistance under an administra- tion agreement drawn up according to the 1978 Memorandum of Agreement between the Association and CIDA. Disbursement against IDA funds would be fully documented and SNE will handle all disbursement requests. The closing date for the IDA credit would be December 31. 1990. Any funds remaining undisbursed after project completion would be cancelled. Project Benefits and Risks 68. Fragmented responsibilities for the power sector have created a lack of sound long-term power planning and uncertainty about future investment requirements. The proposed project would assist in filling the planning vacuum and would pave the way for essential institutional reforms. Organization and management problems within SNE would also be addressed. Bottlenecks and high loss areas in the distribution syscems will be studied for rehabilitation. Extension of contracts for the technical assistance team in Conakry, and expansion to include badly needed expertise for stock management, would allow continuation of the transfer of technical know-how to Guinean staff and fill positions that cannot be filled immediately by Guinean personnel. Financing of spare parts. equipment and tools will improve the effectiveness of the technical assistance team and the efficiency of SNE's operations. The main project risk is the continuation  - 21 - of Government interference in SNE's planning, operations and compensation policy which could lead to unsatisfactory results from the technical assistance and the training programs. The new Government's commitment to grant autonomy to SNE and Its agreement to implement the Recovery Plan (paras. 42 and 43) w-ould reduce these risks. PART V - LEGAL INSTRUMENTS AND AUTHORITY 69. The draft Development Credit Agreement between the Republic of Guinea and the Association and the Recommendation of the Committee provided for in Article V, Section I (d) of the Articles of Agreement of the Association, are being distributed separately to the Executive Directors. 70. Special conditions of the Project are noted in Section III of Annex 3. Special conditions of effectiveness would be the signing of the subsidiary loan agreement between GOG and SNE (para. 62), the opening of the Special Account (para. 67), and the initial tariff increase (para. 50) incorporating the fuel adjustment clause (para. 52). 71. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 72. I recommend that the Executive Directors approve the proposed Credit. A.W. Clausen President Attachments April 18, 1985 Washington, D.C.  - 22 - Annex 1 T A L I 3Llrl of 5 Cua -SOCV DlV W A -RS OM So= -= 105 I~~ AIe=C 338911 /C I94~~ 137~ Z322842&