Mozambique - Energy Technical Assistance and Rehabilitation Project

Docment of The World Bank FOR OFFICIAL USE ONLY Report No. P-4464-MOZ MEMORANDUM AND tECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 15.6 MILLION TO THE PEOPLE'S REPUBLIC OF MOZAMBIQUE FOR AN ENERGY TECHNICAL ASSISTANCE AND REHABILITATION PROJECT May 6, 1987 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 (April 1987) US$ 1 = 200 Meticais (MT) MT 1 = US$0.005 SDR I = USS1.28 ABBREVIATIONS AND ACRONYMS CARBOMOC National Coal Company DOE Department of Energy EDM Electricity Company of Mozambique ENH National Hydrocarbons Company MIE Ministry of Industry and Energy PETROMOC National Petroleum Supply Company FISCAL YEAR Government and Public Enterprises: Calendar Year  FOR OMCIAL USE ONLY THE PEOPLE'S REPUBLIC OF MOZAMBIQUE ENERGY TECHNICAL ASSISTANCE AND REHABILITATION PROJECT CREDIT AND PROJECT SUMMARY Borrower: The People's Republic of Mozambique Beneficiaries: Electricity Company of Mozambique (EDM); National Petroleum Supply Company (PETROMOC); National Hydrocarbons Company (ENH); Ministry of Industry and Energy (MIE) Amount: SDR 15.6 million (US$20 million equivalent) Terms: Standard Onlending US$5.0 million would be onlent to PETROMOC at Terms: 110% of the IBRD loan rate and US$4.5 million would be onlent to EDH at the IBRD loan rate for the purchase of equipment, spare parts and vehicles for maintenance and rehabilitation. Funds for technical assistance would be provided as follows: (a) US$8.8 million would be passed on to EDM and PETROMOC, subject to an annual administration fee of 1% above the IDA service charge of .75%, and (b) US$1.7 million would be provided on a grant basis to ENH and MIE. EDM and PETROMOC would bear the foreign exchange risk. (US$ million) Financing Plan: Government of Mozambique 0.36 EDM 3.72 PETROMOC 2.68 Government of Norway 5.00 IDA 20.00 TOTAL 31.76 a/ Economic Rate of Return: 27% Staff Appraisal Report: 6647-MOZ, May 1, 1987 a/ Includes US$1.37 million of interest during implementation. 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.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE PEOPLE'S REPUBLIC OF MOZAMBIQUE FOR AN ENERGY TECHNICAL ASSISTANCE AND REHABILITATION PROJECT 1. The following report on a proposed development credit to Mozambique for SDR 15.6 million (US$20 million equivalent) is submitted for approval. The proposed credit would be on standard IDA terms and help finance an Energy Technical Assistance and Rehabilitation Project. Onlending of US$8.7 million to the National Petroleum Supply CDmpany (PETROMOC) would be as follows: US$5.0 million for the purchase of equipment, spare parts, and vehicles at 110X of the Bank loan rate, and US$3.7 million for technical assistance at an annual fee of 1.75%. Onlending of a of US$9.6 million to the Electricity Company of Mozambique (EDM) would be as follows: US$4.5 million for the purchase of equipment, spare parts and vehicles at the Bank loan rate, and US$5.1 million for technical assistance at an annual fee of 1.75%. EDM and PETROMOC would carry the foreign exchange risk. The balance of US$1.7 million would be for technical assistance to the Ministry of Industry and Energy (MIE) and the National Hydrocarbons Company (ENH). A grant of US$5.0 million equivalent is being provided by the Government of Norway as cofinancing for the project. 2. Background. Mozambique has substantial hydropower and coal resources and reasonable hydrocarbons potential. Present annual per capita consumption of energy is about 250 kilograms of oil equivalent, which is low by regional standards. 80% of this consumption is from woodfuels. MIE is responsible for implementing energy policies and for the performance of EDM and PETROMOC. The Department of Energy (DOE) in MIE provides advice and coordination on policy and sector development. The Ministry of Mineral Resources is responsible for the performance of ENH in petroleum and gas exploration and development and the National Coal Company (CARBOMOC) for coal production. The Ministry of Agriculture is involved in woodfuel matters through its Directorate of Forestry. 3. Institutional development of the energy sector organizations has been hindered by the country's economic difficulties since Independence, particularly by shortages of trained staff and foreign exchange., and disruptions to operations by the activities of armed bands. The organizations share common institutional and management problems: (a) inadequate financial data and lack of auditing; (b) minimal planning and budgeting; and (c) little or no technical and management training. EDM and PETROMOC have not produced reliable financial accounts for many years. These problems are explicitly addressed in the proposed project. EDM's and PETROMOC's physical facilities have deteriorated due mainly to shortages of transport and maintenance equipment, materials, spare parts and skilled manpower. Frequent power outages and unreliable petroleum supplies result in lost industrial production and agroindustrial exports. The safety standards of PETROMOC's fuel handling facilities are below acceptable limits. The proposed project also addresses these issues.  - 2 - 4. The Bank's recent energy sector report 1/ has helped the Government to identify a five-year investment program with the following priorities: (a) to increase the reliability of energy supplies; (b) to increase the availability of woodfuels, kerosene and electricity to urban households; (c) to strengthen the institutional capabilities of the energy supply agencies; (d) to prepare sound least-cost investment programs with emphasis on rehabilitation; and (e) to establish priorities among proposed large export-oriented projects based on indigenous energy resources. These priorities are consistent with Government's current comprehensive reform of economic policies under which enterprises are now able to offer competitive wages and incentives to retain and motivate skilled personnel, and to set prices to cover costs. Electricity tariffs and petroleum product prices were increased to compensate fully for the five-fold devaluation of the metical announced on January 30, 1987. Until completion of the financial accounts for EDM and PETROMOC by project-funded consultants, the financial adequacy of these prices remains in question, although price levels are reasonably in line with economic costs. 5. Projec-t 2bjectives. The project is designed to bring about quickly a substantial improvement in the supply and distribution of electricity and petroleum products to the main urban areas, especially Maputo, Beira, Nampula, Nacala and Quelimane, where most of the the country's trade and processing activities are carried out, through rehabilitation of facilities and strengthening of the relevant institutions. A second objective is to support economic recovery beyond the short-cerm by helping the energy agencies to prepare sound long-term development plans. 6. Project Description. The proposed project would (a) rehabilitate EDM's and PETROMOC's physical facilities and provide vehicles and special-purpose maintenance and distribution equipment; (b) provide operational support to EDM and PETROMOC for three years in managing transport fleets and operating power and petroleum handling facilities; and (c) provide technical assistance to EDM, PETROMOC, MIE and ENH to design and implement management and financial systems, for manpower training and to prepare subsector development plans for power, petroleum and household energy. The project would be coordinated by the MIE and executed by EDM, PETROMOC and ENH. These agencies already have experience in managing advisers and consulting organizations. The total estimated project cost is US$30.4 million equivalent, with a foreign exchange component of US$25.0 million (82%). A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Mozambique are given in Schedules C and D, respectively. A map is also attached. The Staff Appraisal Report, No. 6647-MOZ dated May 1, 1987, is also attached. A Project Preparation Facility of US$1.1 million has been approved to finance advance procurement assistance,preparation of financial statements for EDM and PETROMOC and the initial foreign exchange costs of operational support to EDM and PETROMOC. 7. Rationale for IDA Involvement. The Bank's strategy in Mozambique is to support the Government's efforts to improve economic policies, strengthen institutions responsible for the planning and 1/ 'Mozambique: Issues and Options in the Energy Sector', January 1987; Joint UNDP/World Bank Energy Assessment Program.  -3- management of key economic sectors, and to rehabilitate services and activities essential to the recovery and development of the economy. In this context, the project would: (a) support the Government in implementing its energy sector strategy as discussed in the energy sector report, particularly to strengthen operations and management; (b) contribute IDA's experience on rehabilitation, institutional strengthening and sector development; and (c) mobilize and focus donor assistance on immediate rehabilitation and institutional strengthening priorities. t 8. Agreed Actions. The Government has agreed on the following actions: (i) EDM and PETROMOC would fund at least 20% of their investment programs from net income after debt servicing in FY89, and at least 30% from FY90; (ii) the Borrower would maintain retail prices of petroleum products at least equal to the sum of the prevailing levels of import parity prices, inland distribution costs and overheads; (iii) EDM and PETROMOC would not incur debt which would reduce below 1.5 the ratio of net revenues to debt service requirements; (iv) EDM and PETROMOC would implement by December 31, 1987, compensation packages to retain skilled manpower; (v) Government would not undertake energy investments which are outside the agreed five-year energy investment program and which exceed US$3.0 million without prior consultation with IDA, and would exchange views with IDA on the energy sector investment program following project-funded studies; (vi) EDM and PETROMOC would keep a register of vehicles provided under the project; (vii) EDM and PETROMOC would present income statements for FY85 and FY86 and financial plans for FY87 and FY88 as a condition of disbursement on the components for maintenance and rehabilitation of power and petroleum supply facilities and supply of vehicles to EDM and PETROMOC; and (viii) as a condition of credit effectiveness, the Association would require (a) signature of contracts for assistance in preparing financial statements for EDM and PETROMOC; (b) effectiveness of the Norwegian Grant Agreements; and (c) Government to conclude subsidiary loan agreements with EDM and PETROMOC. 9. Justification. Economic benefits from the proposed project are expected from improving energy supplies to key economic consumers by rehabilitating operating facilities and strengthening sector institutions. The estimated economic rate of return is 27%. 10. Risks. The main risk would be delay in project implementation from insufficient management resources in 9DM and PETROMOC. This risk would be diminished by the project's operational and management support components. The project activities would be coacentrated in areas which have been relatively free from the activities of armed bands. 11. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington D.C. Kay 6, 1987  - 4 - Schedule A Project Cost: Foreign Local Total ---(US$ million)- Power System 4.75 1.74 6.49 Maintenance & Rehabilitation Transport Equipment for EDM 1.74 0.10 1.84 Petroleum System 2.35 0.70 3.05 Maintenance & Rehabilitation Transport Equipment for PETROHOC 2.95 0.14 3.09 Technical Assistance for 3.17 0.32 3.49 Systems Operations Technical Assistance for 5.82 1.79 7.61 new management and financial systems and manpower training Technical AssisLance to prepare 1.10 0.08 1.18 subsector development programs Project Preparation Facility 1.10 0 1.10 Base Costs 22.98 4.87 27.85 Physical Contingencies 0.36 0.10 0.46 Price Contingencies 1.66 0.42 2.08 Total Project Costs 25.00 5.39 30.39 Interest During Implementation 0 1.37 1.37 Total Financing Required 25.00 6.76 31.76 Note: The imported goods would be exempt from duties and taxes. Financing Plan: Foreign Local Total --- -(US$ million)- - IDA 20.00 - 20.00 Government of Norway 5.00 - 5.00 EDM - 3.72 3.72 PETROMOC - 2.68 2.68 Government of Mozambique - 0.36 0.36 Total 25.00 6.76 31.76  - 5 - Schedule B Page 1 of 2 Proposed Procurement Schedule (US$ million) Project Comuponent Procurement Method Total ICB LCB Other Not Cost Methods Applicable bl Power System Maintenance 2.33 - 3.08 1.81 7.22 and Rehabilitation, and (1.58) (1.23) (2.81) 4,150 house connections Transport Equipment for EDM 2.01 - - - 2.01 (1.64) (1.64) Petroleum Product Handling 3.28 - - 0.22 3.50 and Distribution System (2.14) (0.19) (2.33) Maintenance and Rehabilitation Transport Equipment for 3.25 - - - 3.25 PETROMOC (2.70) (2.70) Technical Assistance to EDM - 4.51 4.51 and PETROMOC for system (3.64) (3.64) operations Technical Assistance to EDM - - - 8.64 8.64 PETROMOC and ENH for new (5.86) (5.86) management and financial systems and manpower training Technical Assistance to - - - 1.26 1.26 prepare subsector (1.02) (1.02) development programs Total 10.87 - 3.08 16.44 30.39 (8.06) (11.94) (20.00) Note: (a) Figures in parentheses are the respective amounts financed by the IDA Credit. (b) Not applicable procurement methods cover purchases off-the-shelf, negotiated contracts and engagement of consultants. Consultants for technical assistance would be procured in accordance with the Bank's Guidelines for the Use of Consultants (August 1981).  - 6 - Schedule B Page 2 of 2 IDA Credit Allocation Category Amount of the Credit Percent of Allocated Expenditures (US$million) to be financed Power System Maintenance & Rehabilitation 2.81 87% of foreign costs of all subcomponents except distribution materials and equipment Transport Equipment for EDM 1.64 87% of foreign costs Petroleum System Maintenance & Rehabilitation 2.14 87% of foreign costs Transport Equipment for PETROMOC 2.70 87% of foreign costs Technical Assistance for Systems Operations 2.89 87% of foreign costs Technical Assistance for new management and financial 5.51 87% of foreign costs systems and manpower training Technical Assistance to prepare subsector development programs 1.02 87% of foreign costs Project Preparation Facility 1.10 Refinancing a/ Total 20.00 a/ PPF: TA for advance procurement assistance and preparation of financial statements (US$0.35 million); TA for system operations (US$0.75 million). Estimated Disbursements of IDA Credit FY88 FY89 FY90 FY91 FY92 FY93 ------ ---(US$ million) - Annual 3.1 6.9 5.9 3.1 0.8 0.2 Cumulative 3.1 10.0 15.9 19.0 19.8 20.0  - 7 - Schedule C MOZAMBIQUE Energy Technical Assistance and Rehabilitation Project Timetable of Key Project Processing Events (a) Time taken to prepare: 4 months (b) Prepared by: Government, energy agencies and IDA. (c) First IDA Mission March, 1986 (d) Appraisal Mission July, 1986 (e) Negotiations April 13 - 17, 1987 (f) Planned Date of Effectiveness October 31, 1987 (g) List of Relevant PCR's Not applicable. and PPARs.  - 8 - Schedule D STATUS OF BANK GROUP OPERATIONS IN MOZAM4BIQUE A. STATEMENT OF BANK LOANS AND IDA CREDITS AS OF MARCH 31, 1987 Loan/ Fiscal Amount Less Cancellation Credit No. Year Borrower Purpose Bank IDA Undisbursed ------