Madagascar - Energy Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6405-MAG STAFF APPRAISAL REPORT MADAGASCAR ENERGY I PROJECT March 31, 1987 Eastern and Southern Africa Projects Department Energy Division This dument 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 - Malagasy Franc (FMG) US$1.0 = FKG 750 (as of July 1, 1986) WEIGHTS AND MEASURES 1 kilometer (km) 3 0.621 miles 1 square kilometer (km2) - 0.386 square miles 1 kilovolt (kV) 1,000 volts 1 megawatt (MW) - 1,000 kilowatts 1 megavolt ampere (MVA) - 1,000 kilovolt amperes 1 gigawatt hour (GWh) 1 million kilowatt hours 1 ton of oil equivalent (toe) - 10)500,000 kilocalories bbl = barrel MJ - megajoule cm = centimeter Hm3 million cubic meters GW - gigawatt m3 - cubic meter hs = hectare MWh - megawatt hour -ie = kilotonnes of oil equiv. od - oven dry :, kWh - kilowatt, kilowatt hour sv = solid volume LPG 3 liquified petroleum gas t - tonne N = million TCF - trillion cubic feet mcwb = moisture content tpa, tpy - tonnes per annum, per year wet basis twe = tonnes of wood equivalent GLOSSARY OF ABBREVIATIONS BADEA Banque Arabe de Dgveloppement Economique en Afrique BNI Banque Nationale pour l'Industrie CCCE Caisse Centrale de Cooperation Economique CIDA Canadian International Development Agency CIMA Kalagasy Cement Manufacturer DEE Department of Electricity and Water DEF Department of Fishery and Forestry DGP Planning Directorate EEK Electricitg et Eau de Madagascar ESMAP Energy Sector Management Assistance Program FAC Fonds d'Assistance a la Cooperation FANALAMANGA Malagasy Industrial Wood Plantation Authority FAO Food and Agriculture Organization FED Fonds Europeen de Ddveloppement GOM Government of Madagascar ICS Interconnected System serving Antananarivo Region JIRAMA Malagasy Electricity and Water Corporation MIEM Ministry of Industry, Energy and Mines MPAEF Ministry of Animal Production, Fisheries and Forests MPARA Ministry of Agricultural Production and Agrarian Reform OMNIS Military Office for National and Strategic Industries PIU, PMU Project Implementation Unit, Project Management Unit PSIP Public Sector Investment Program RIP Reference Power Sectot Investment Program SEM Soci6tf d'Energie de Madagascar SOLIMA Malagasy Petroleum Refinery Company SOMAGI Government-owned Data Processing Company UNDP United Nations Development Program USAID United States Agency for International Development ZE Major Power Production Zones Outside of ICS ZI Small Isolated Power Systems GOVERNMENT OF MADAGASCAR FISCAL YEAR = CALENDAR YEAR  IVOR OML6 S NY MADAGASCAR ENERGY I PROJECT Credit and Project Summary Borrower: Government of Madagascar Amount: SDR 19.8 million (US$25 million equivalent) Beneficiaries: The Malagasy Electricity and Water Corporation (JIRAMA); the Ministries of Industry, Energy and Mines, of Agricultural Production and Agrarian Reform, and of Animal Production, Fisheries and Forests; public enterprises involved in the boiler program; local private charcoalers; and the Industrial Wood Plantation Authority (FANALAMANGA). Terms: Standard. 1/ Project The project would help the Government strengthen energy Objectives: policy formulation, planning and investment programming, and institutional development. It would assist the Government and JIRAMA in improving the efficiency of resource utilization in the power subsector by strengthening financial management, planning and manpower development. and by rehabilitating existing deteriorated subsector infrastructure, improving financial and operational performance of JIRAMA, and stimulating commercial utilization of low cost hydropower resources. It would help the Government develop least-cost plans to expand the supply of electric power and household energy products and by correcting distortions in their prices. Finally, it aims to encourage increased and more effectively coordinated flow of resources from donors to the power and household energy subsectors. Project The project comprises the implementation of the highest Description: priority projects, comprised mostly of rehabilitation works, included in JIRAMA's investment program for the perit,d 1987-1992, technical assistance for power system planning and investment programming, and assistance in the establishment of modern methods and tools for utility financial management and administration. The project comprises technical assistance for strengthening energy planning and management in MIEM, and for major policy and planning studies on biomass fuels supply and marketing and resource assessment, and household energy demand. The project would support initiatives to improve household cooking efficiency, to develop production of charcoal from pine plantation thinnings and residues; and to test pilot 1/ Onlending terms are 8% Interest rate, repayment periods of 10 to 20 years after grace period of 2 to 5 years. Thi documnt b a estited distdbution and may be used by reipints only in the perfonmce of te officil dutbs Its contonts may not otherwi be diclosed without Wodd Bank authodutlon.  - il - production of rice husk briquettes. Finally, the project includes installation of electrical boilers which would use surplus power in the Interconnected System (ICS). Project Risks: Risks are minimal as the project concentrates on rehabilitating existing generation, transmission and distribution systems. Also, JIRAMA has a sound record for safe engineering practice. Benefits arising from the proposed electric boiler program may be reduced due to delays in implementation or reduced demand. The risk that JIRAMA may be overwhelmed administratively by the volume of required rehabilitation works is to be minimized by the appointment of consultants to assist with the design, prioritization and implementation of the rehabilitatin program. Foreseen improvements In the financial viability of JIRAMA may be jeopardized by delay In tariff adjustment althought this risk is to be minimized by linking the achievement of financial performance criteria to the release of the first and second phases of investment. Madagascar Public Power Stations and Transmission Lines, October 1986, IBRD 18816R  MADAGASCAR ENERGY I PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. THE ENERGY SECTOR IoOOOoOOOOOooooOOOooOeOOOOOOOOeOOooOOOOOooOoo 1 Introcjction 00I00000006009000000000090000000090000000000000000 1 Bank Particepation in the Sector .............................. 2 Reasons for IDA's Involvement in the Energy Sector ............. 4 Energy Resources 4.....0.0.00...........*ooooooooooooooooooo 4 Hydropower ..ooooo.ooooooo.ooo.oooooooooooo.oooo 000000000 4 Petroleum ............................... 4 Coal, Lignite and Peat ...................5........... 5 Biomass 5 FoergDests .d.o...000000*000000*00000000000000000000000000000000 5 Energy Balances and Trends .............0.00.0o.0...0.0..o. 5 Energy Supply oooo. .o .ooo.000 **.**0.000..0*.00** 6 Electric Power ee6oooooo*oooooo*oooooooooo.oo*00000o000o 6 Petroleum and Petroleum Products *7**ooo*#o*** ooooooooo 7 Biomass Fuels B000000000****o*****o**oooooo.eo*oooo 8 II. THE POWER SUBSECTOR *000000000 ooooo00ooo0o0oo0oooOooooo000o*o 8 Organization 0000000000000*00 eee**.e**0*0**00..*4.0oo0o00 8 Sector Fatilities *000000000000-00000000000000000--00000 9 Access to Service 10 Pattern cf Electricity Consumption 10 Power Subsector Planning 11 Power Subsector Objectives 12 Power Subsector Strategy *oo.ooooooo*o......................... 12 Aid Inflow and Coordination in the Sector 12 ITI. THE BORROWER AND THE IMYLEMENTING AGENCIES ......13 JIRAMA 0 00 13 Organization and Management 13 Planning 14 Engineering and Design .....14 Operations and Maintenance 14 Data Processing 15 Billing and Collection 15 Accounting and Audit 15 This report is a result of a mission which visited Madagascar between June 2 and June 19, 1986. The mission leader was Ken Newcombe (Senior Energy Specialist) and included Juergen Franz (Senior Financial Analyst), C. H. A. Killoran (Power Engineer, Consultant), W. Pacheco (Power Engineer, Consultant), and J. R. Mercier (Energy Planner, Consultant).  Insurance and Taxes . ..................................... 15 Personnel and Personnel Management 16 Training 16 Management Information System (MIS) 16 Performance Indicators 17 IV. THE MARKET 17 Electricity Market 17 Historical Market ...... ..oe ........................ 17 Demand Forecast for Electricity in the Main ICS 17 Generation and Capacity Balances in the Interconnected Systeu 18 Demand Forecast for Electricity in the External Zone 19 Demand Forecast for Electricity in the Isolated Zone 19 Household Fuels Market , 19 Cooking Fuel Supply and Demand: Antananarivo #.............. 20 Household Fuels Marketing ....... .20 V. INVESTMENT PROGRAM AND PROJECT 21 Power Subsector Investment Program (PSIP) s.................... 21 The Program ...................u. 22 Works in Progress 22 Future Projects 23.......... * 00 23 The Project 23 Project Objectives 23 Project Preparation 24 Project Description 25 Power Components 25 Energy Components 25 Electric Boilers ...................o. 26 Project Costs ...o........ ** 26 Project Implementation 27 Implementation of Power Components 27 Implementation of Energy Components 28 Implementation of Boiler Program ............................ 29 Consulting Services .ee*. * . 000.0.......... 30 Procurement ................ 30 Advance Contracting and Retroactive Financing ......32 Financing Plan 32 Disbursement 33 Special Account,; 33 Environmental Aspects ....................... 00 34 Project Risks 34 VI. FINANCIAL ANALYSIS .... 3 5 ...........35 Introduction 35 Financial Position and Past Operating xesults of JIRAMA 35 Tariff Structure and Policy ......36 Financial Restructuring of JIRAMA 38 Future Financial Position and Operations of JIRAMA 40 Project Phasing and Financial Covenants 41 VII. ECONOMIC JUSTIFICATION 42 A. Power Subsector Economic Analysis 42 Average Incremental Cost Analysis 42  Return on Power Subsector Investment .......................... 42 Economic Analysis of Volobg Hydropower Plant Rehabilitation ... 43 Electric Boller Prograu ....................................... 43 Economic Analysto of Antananarivo-Anstirabe Transmission Line . 44 Economic Viability of New Household Power Supply Connections .. 44 Economic Viability of Rehabilitation Programs ................. 44 B. Housebold and Industrial Energy Production Pilot Projects ..... 45 Charcoal ....................... 45 Rice Husk Briquettes .... ...................................... 46 VIII. AGREEMENTS TO BE REACHED AND RECONMENDATIONS .................. 46 Agreements ....................... 46 Conditions for Effectiveness .................................. 48 Conditions of Disbursement ............ *00e***O**.............. 48 Recommendation ....O.......OO@C OCOCOC.. 49  LIST OF ANNEXES 1.1 National Energy Balance, 1983 1.2 Energy Sector Information Flow sad Decision Making Process and Administration of Household Energy Planning Program 2.1 Installed Generation Capacity 3.1 Organization and Functions of the PMU, Project Management Organization, and JIRAMA Organization Chart 3.2 Selected Performance Indicators 4.1 Methodology and Assumptions for Load Forecasts 4.2 JIRAMA ICS Sales and Generation, Actual and Projected FYSO-95 4.3 JIRAMA ICS Peak Demand, Actual and Projected FY80-95 4.4 JIRAMA ICS Energy and Capacity Balances FY86-95 4.5 Isolated External Zone Centers Sales Forecast 4.6 Projected Supply-Demand Balance for Household Energy, Antananarivo Faritany 4.7 Description of the Charcoal "Filiare"; Present and Possible Fhiture Situation 5.1 Reference Power Subsector Investment Plan Sumary, 1987-1991 5.2 Project Description 5.3 Project Cost Summary 5.4 Summary of Implementation Schedule 5.5 Electric Boiler Project - General Contract Terms & Conditions 5.6 Financing Plan 5.7 Estimated Scbedule of Disbursements 6.1 JIRAMA Reform Measures 6.2 JIRAMA Income Statements 1983-1992 6.3 JIRAMA Balance Sheets 1983-1992 6.4 JIRAMA Sources and Uses of Funds 1984-1992 6.5 Assumptions Used for Financial Analvsis 6.6 Phase II Investments 7.1 Economic Cost of Electricity and Economic Rate of Return on Power Subsector Investment Program 7.2 %conomic Analysis of VolobG Hydropower Generating Plant 7.3 Economic Analysis of the Antananarivo Region Electric Boiler Program 7.4 Economic Analysis of Antananarivo-Antsirabe Transmission Line 7.5 Comparative Economic and Financial Cost of Rice Rusk Briquettes, Madagascar, 1986 8.1 Documents entered Into the Project File MAP: Madagascar Public Power Stations and Transmission Lines, October 1986, IBRD 18816R  MADAGASCAR ENERGY I PROJECT STAFF APPRAISAL REPORT I. THE ENERGY SECTOR Irtroduction 1.01 Madagascar is the fourth largest island in the world with a land area of 597,000 km2. Its estimated 1986 population Is 10.1 million. Despite a favorable resource endowment, Madagascar's economic performance has been disappointing and its present estimated GDP per capita is only about US$240/capita, 1/ whiech is 252 below that of the early 19708 and still declining. The lialagasy economy remains predominantly agricultural with 81% of the population being rural and agriculture contributing about one third of GDP. Economic recovery is predicated on more efficient use )f resources in the face of severe foreign exchange constraints, rehabilite- tion of infrastructure and productive capacity and resumption and growth in agricultural exports. 1.02 Total gross energy consumption was about 2 million toe, or 214 kgoe per capita in 1983 of which 82X was fuelwood used very largely for household cooking (Annex 1.1), whereas final energy use was 1.65 million toe. Energy demand is forecaet to reach 2.44 million toe by 1995, a growth of 3.3% per annum, though woodfuels used in the household sector will still exceed three-quarters of final energy consumption. 2/ 1.03 Madagascar's main commercial energy resources are hydropower, petroleum and coal. Hydropower is estimated at 7 GW, coal at one billion tonnes and heavy oil at 5-20 billion barrels; however, the economically recoverable quantities are not known as physical and technical accessi- bility is generally difficult. Other forms of petroleum, lignite, and- despite regional shortages-forests and woody biomass are all available in significant quantities though commercial access is presently limited. Uranium and geothermal steam are also known to occur. 1.04 The Ministry of Industry, Energy and Mines (MIEM) has the mandate to formulate energy policy and to undertake energy planning and investment programming, although the (ffice Militaire pour les Industries Nationales et trategiques (OMNIS) has played an important role in this sphere until recently. The other major energy agencies are JIRAMA and SOLIMA, the national power and petroleum supply and refining companies, respectively. Both of these companies report through the Direction de l'Energie et de l'Eau (DEE) of MIEN, to the Minister of Industry, Energy and Mines. Increasingly, other Government agencies are being drawn into energy supply activities, especially for woody biomass fuels. These include the 1/ Preliminary revised Atlas figure. 2/ Madauascar: Issues and Options in the Energy Sector, World Bank (July 1986), Report No. 5700-MAG.  - 2 - Departement des Eaux et ForOts (DEF) of the Ministere de Production des Animaux, Eaux et Forgts (MPAEF), the parastatal timber producer, FANALAMANGA, linked to MPAEF, in respect to woodfuels, especially charcoal, and the MinistAre de Production Agricole et Revolutioin Agraire (MPARA) with respect to agricultural residue fuels. A schamatic representation of the new arrangements for energy administration of the Government and for the energy planning administration itself, is pre3ented in Annex 1.2. These arrangements were agreed with IDA during project preparation and are being implemented. 1.05 Interaction for the purposes of energy policy formulatlon, planning, and investment programming between government agencies, even for those under the umbrella of MIEM, has not been strong. There is no coherent national energy policy, though in certain contexts, such as Government sponsored conferences on the nation's energy resources, national goals and objectives have been enunciated. In the course of IDA's ongoing dialogue with the GOM ill the energy sector, and with the benefit of the recent joint UNDP/World Bank Energy Sector Assessment and preparation for the proposed Credit, the GOM has confirmed the central role and responsibility of MIEM for energy policy and planning. Thus IDA would provide technical assistance and other means of support to MIEM to elevate the status and effectiveness of energy planning and to broaden the horizons of energy strategy formulation to include the household energy subsector: specifically, supply and demand management aspects of energy used for household cooking, lighting and other household end-uses. The size of IDA's proposed support for the energy administration and household energy planning has been adapted to the absorptive capacity of the Government. 1.06 Public sector investment programming is the responsibility of the Direction G6n6rale du Plan (DGP), which has limited skilled staff and resources, and no staff assigned to, or well informed with respect to$ the energy sector. Currently, DGP compiles the energy sector components of the Public Sector Investment Plan (PSIP) directly from the plans and programs of the various agencies active in energy production and supply. However, there is no explicit energy sector investment program prepared as part of the PSIP. Instead, woodfuel production, power supply, petroleum exploration, and petroleum refining and distribution are treated in disaggregated fashion with no attempt to prioritiz% within the sector consistent with least-cost among competing solutions to serve particular energy demands. Thus sound technical, economic and financial analysis and judgment of sector priorities is lacking and there is an ongoing risk of inefficient resource utilization in the sector. Under the proposed credit, IDA would seek to alleviate this problem by strengthening energy planning and investment programming both within MIEM and JIRAMA, as well as encouraging coordination between all other energy-related agencies towards effective energy planning and project implementation. Bank Participation in the Sector 1.07 The Bank Group has provided funds for three energy sector operations and two forestry projects which have subsequently created important energy supply options. The first energy sector project was for the power subsector through assistance with financing the Andekaleka Hydropower Project with a credit of US$43 million (Credit 817-MAG, May  1978). This credit closed on September 15, 1986. The project included the construction of a dam and power plant with two 29 MW generating units, engineering services, technical assistance, and training. The project achieved its objective of exploiting an Important hydropower resource to economically displace thermal power in the main interconnected power supply zone (ICS). In the process JITAMA staff increased their competence in major project design and implementation. The project achieved the establishment of a planning unit, the provision of computer facilities and improved management practices and organization. However, plarning methodologies, investment programming, and the successful adaptation of computer technology for consumer billing and accounts and for planning and engineering design are still needed. Lessons learned from the project include the need for improved demand forecasting techniques and market analysis to reduce the risk of premature investment. Failure to predict more accurately future power demand at the time of designing the Andekaleka project has led to large surpluses of hydroelectricity in the ICS (para. 4.03). Similarly, a stronger and ongoing dialogue is required during project supervision between JIRAMA, the Government and IDA in order to strengthen planning and management capability. Under the seeend energy sector project, the Petroleum Exploration Promotion Credit of 1980 (Credit 1016-MAG), the GOM established the legal and fiscal framework for explora- tion and promotion and assembled the required data. Since 1981 four contracts have been signed with major oil companies and more than US$90 million has been spent on drilling activity. The third energy sector project, the Tsimorora Heavy Oil Exploration Project of 1982 (Credit 1298-MAG) has further defined the Tvimorora resource, and though not proving up recoverable resources, showed possible extension of the reservoir, thereby justifying further seismic analyses lu 1985, and shallow drilling in 1986. In the forestry sector, two operations have contributed to energy sector development by generating large quantities of charcoal feedstock in the form of thinnings and smallwood. These are the first and second Mangoro Forestry projects (Loan 1065-MAG and Credit 525-MAG, 1974- 1981 and Credit 1661-MAG, 1982) which helped the Government to complete the establishment of about 80,00U ha of pine plantations at Haut Mangoro. 1.08 Under the Joint UNDP/World Bank Energy Assessment Program and at the request of the Government of Madagascar, the Bank conducted in 1984 an energy sector assessment of Madagascar. The final report (No. 5700-MAG) of the mission was published in January 1987 after detailed review by the Government, and concludes that the sector issues which roquire the most urgent action are: (i) the increasing shortage and rapidly growing r.: 1 prices of woodfuels for household cooking and the deforestation and environmental deterioration related partly to woodfuel scavenging; (ii) the urgent need for rehabilitation of distribution, transmission and generation systems in the power sector; (iii) the gross under-utilization of hydropower available from the Andekaleka hydroelectric generating station in the Interconnected Zone; (iv) the general weakness of energy policy, planning and investment programming in Government, exacerbated by the lack of a single effective focus for energy planning and poor coordina- tion between agencies active in the ener,v sector; (v) the future form of petroleum products supply and the viability of and options for refinery rehabilitation and operations; (vi) the inadequate definition in physical and economic terms of the major resources with energy potential, including in particular hydropower and woody biomass.  -4- Reasons for IDA's Involvement in the Energy Sector t 1.09 IDA's goals in Madagascar are to assist the Government with the formulation and implementation of policies and programs which will improve the efficiency of the public sector and stimulate private sector production of goods and services. leading to increased resource mobilization, and increased production and exports of agricultural produce and manufactured goods where Madagascar has a comparative advantage. In supporting the energy sector, IDA is seeking the formulation of comprehensive energy policies leading to rational energy prices, import substitution, economic use of indigenous energy resources, energy efficiency improvements and enhancement of the role of the private sector in energy management and development. Consistent with these objectives, IDA sought and reached agreement with the Government on the strengthening of energ sector institutions through the development of a single effective energy planning agency, and the preparation of least cost production and supply plans for major subsectors of the energy economy. Another important objective is the improvement of reliability of supply and efficiency in the power sector through rehabilitation of deteriorated generation, transmission, and distribution facilities, and the financial rehabilitation of sector parastatals (especially JIRAMA), leading to uniformly high technical standards of service and financial autonomy. Energy Resources 1.10 Hydropower. The hydropower resources of Madagascar are substantial but poorly defined and frequently economically inaccessible to potential demand centers. Stream gauging and hydrological analysis has been only intermittent in the major catchment zones. JIRAMA estimates that there are 339 known sites with a firm power potential of 7,055 MW capable of an annual production of about 60,000 GWh. Thirty-three sites with estimated power outputs tabove 50 MW account Eor 6,330 MW, or 90% of the known total. There are 72 sites identified in the 1-5 MW range, and at least 200 sites below 1 MW. Only 105 MW, corresponding to 1.6% of known potential, has been developed. The greatest barrier to efficient development of the hydropower resource is the lack of precise information on the potential to economically displace existing diesel generation with mini or micro-hydropower installations, the lack of a comprehensive least cost development plan, and the poor coordination between potential donor agencies. The proposed project will strengthen hydropower resource assessment and development planning (see para. 5.07(e)). 1.11 Petroleum. Two sedimentary basins, Morondava in the west and Mahajunga in the north, are potential sources of oil and gas. Their total land-area is 170,000 ki2, with a further 80,000 km2 offshore at depths up to 200 m. The deep water area between 200-2,000 m covers a further 50,000 km2, offering prospects for oil and gas in the 'onger term. Most explora- tion has been in in the Morondava basin where evidence of tar sand and heavy oil have been found. Following the 1979 increase in oil prices, the Government, with IDA assistance, was able to attract major oil companies to invest heavily in oil exploration. The four major oil companies now active-Mobil, AGIP, Amoco and Occidental-will have spent more than US$100 million by mid-1988. There are also tar sand and heavy oil deposits in western Madagascar. The Bemolanga tar sands are estimated to contain 5-20  billion barrels of oil equivalent. However, studies financed by IDA indicate that their exploitation is not presently economic. The heavy oil deposits at Tsimorora are also being reviewed with IDA assistance in order to establish their potential foe commercial exploitation, though once again, market conditions do not suggest early production from this resource. 1.12 Coal, Lignite and Peat. The area of greatest interest for coal is the Sakao basin with estimated reserves of 1,000 million tonnes and mineable reserves wltt. moderate ash, medium volatile steam coal estimated at 173 million tonnes, of which 82 million tonnes are recoverable by underground methods, and 23 million tonnes by open pit methods. The principal lignite resources occur in the Anteirabe region of the central highlands. Recent estimates indicate proven reserves of 11 million tonnes and possible reserves of 32 million tonnes. Lignite is not of sufficient quality to justify mining hence there appears to be no foreseeable economic future for the resource. On the other hand, peat occurrences are common and it is used widely for brick making. Peat resources have not been investigated though there is potential for significant discoveries. 1.13 Forests. The contiguous natural forest cover is estimated at 12.3 million ha. Plantations add a further 265,000 ha. On the assumption that only 20X of the natural forest is economically accessible under environmentally sound management practices, the estimated sustained annual yield is about 2 million toe, compared with a gross annual consumption of about 1.7 million toe. Unfortunately, there are regional imbalances which render meaningless the apparent surplus of 0.3 million toe. In fact, demand for woodfuels is concentrated in the central highlands, in the hinterland of Antananarivo, Antsirabe and Fianarantsoa, where there is a sbortfall between accessible sustainable production and regional demand of about 0.6 million toe (1.9 million tonnes of wood) per annum. Production surplus to demand in other regions cannot be economically transported to the central highlands demand centers. 1.14 Other Biomass Resources. Madagascar's main agricultural crop is rice which generates annually cellulosic residues of about 4.6 million tonnes. Some 500,000 tonnes of these residues are rice husks which are largely disposed of as wastes, except in the Lac Aloatra region where about half are used for fueling boilers to provide shaft power for rice milling. The remainder there and in the immediate hinterland of major cities could be briquetted for household fuel production, and used as a substitute for firewood and the low quality charcoal presently marketed. Sugar crop residues are another potentially economic source of industrial and household fuel, or for the production of electricity surplus to sugar mill needs for regional sale in public distribution systems. Bagasse and cane field residues offer long term potential for power and energy production of about 90,000 toe annually. Other crop residues are judged not to be economically accessible in the foreseeable future. Energy Demand 1.15 Energy Balances and Trends. A national energy balance for Madagascar for 1983 is provided in Annex l.1. Table 1.1 provides a summary of this Annex with projections of demand for all fuels through 1995. Total  - 6 - energy consumption is projected to increase by almost 50% over the 12 year period, 1983-1995, from 1.65 million to 2.46 milllon toe, representing an annual growth rate of 3.4%. Consumptlon is expected to Increase faster in industry and transport, by 5.7% and 4.3%, respectively, as these sectors recover from recent slumps and as the infrastructure expands. Electricity and petroleum utilization increases of 6X and 4.52 respectively are forecast in this projection, with boiler electrification being a major factor in the increase in electricity consumption (paras. 4.02-4.05). However, the great bulk of energy use throughout the period is In the form of woodfuels, being 80% of final energy in 1983 and 76% in 1995. Table 1.1: FINAL ENERGY CONSUMPTION BY ENERGY FORM AND SECTOR, 1983 AND 1995 Annual Percentage Growth Consumption of Total Rate Energy Form/Sector 1983 1995 1983 1995 1983-95 - toe thousands - - percent Woodfuels 1323.1 1854.4 80.2 75.5 2.9 Fuelwood (1201.8) (1642.0) (72.8) (66.8) (2.6) Charcoal (121.3) (212.4) (7.4) (8.6) (4.8) Petroleum Products 241.3 411.0 14.6 16.7 4.5 Electricity 78.2 158.3 4.7 6.4 6.1 Coal 7.5 34.0 0.5 1.4 13.4 Total 1650.1 2457.7 100.0 100.0 3.3 Households 1375.1 1935.8 83.3 79.5 2.9 Transport 141.4 233.8 8.6 9.6 4.3 Industry and Others 133.6 2 8.1 8.1 10.9 5.7 Estimated Traded Portion of Fuelwood 43.0 80.5 Source: Bank Estimates Energy Supply 1.16 Electric Power. Electricity supply is discussed in detail in Chapter IV. Electricity supply in Madagascar was 68% from hydropower in 1985, and by 1995 this proportion is expected to increase to 84%. Rehabilitation of the Volob6 hydropower plant serving the Toamasina region, the planned construction of the Ambodiroka hydropower plant to serve the demands of the Mahajunga region, and increased utilization of the Andekaleka hydropower plant in the interconnected zone will be responsible for this significant expansion in the use of hydropower. Interconnection of major power systems in the longer term should stabilize supply and Improve utilization of hydropower capacity, substituting for petroleum- fueled generation.  - 7 -. 1.17 Petroleum and Petroleum Products. Madagascar is entirely dependent on imports for Its petroleum supply, both crude and refined products. Net petroleum Imports were 31% of total merchandise imports in 1983 and absorbed 52% of non-energy export revenues, 3/ up from 13% and 15% respectively in 1978, in spite of a decline in petroleum ilport volumes during this period. In 1983 crude oil cost US$82.7 million and refined products cost US$63 million. Preliminary indications for 1985 imports are US$15 million for crude and US$41 million for refined products: a substantial reduction due both to reductions in the price of refined and crude products and to reductions in absolute volumes imported and stock reductions. Madagascar obtains its crude oil through a Government-to- Government arrangement with the Soviet Union and precise details of this arrangement remain confidential. It is believed that the indicative price was about US$22/bbl in mid 1986, considerably above world market prices, but credit and foreign exchange requirements are softened by virtue of special payment terms and conditions. Refined product needed to supplement refinery production in meeting Madagascar's demand is procured on the open market at CIF prices more than 25% above those available if foreign exchange were not a constraint. At present, SOLIMA, the State-owned petroleum parastatal, is forced to buy late and short, because it does not have a sufficient credit rating to permit it to engage major suppliers in competitive bidding, based on optimal procurement and transport packages. The proposed project includes a study to review the options to minimize the cost of petroleum products, including procurement of crude and products. 1.18 Imported crude is refined at the port of Toamasina, at the Government owned refinery operated by SOLIMA, the company formed by the Government in 1976 to take over petroleum supply, refining, distribution and marketing from local affiliates of a number of major foreign oil companies. The refinery has a capacity of 16,800 bpd (750,000 tpy) and is equipped with a new 350,000 tpy visbreaking unit, a 165,000 tpy gas oil hydro-sulfurization unit and a 20,000 tpy bitumen unit. The refinery is in a deteriorated condition as a result of a long period of operation without adequate spare parts and a subsequent fire in the topping furnace in 1983, after which it was temporarily shut down, and more recently, operated below full capacity. The GOM plans a major program of refinery rehabilitation pending the availability of required foreign exchange financing, in which CCCE has expressed an interest to participate, though no firm arrangements have been made. Although petroleum products are still widely available, port handling, storage, coastal transport and inland distribution systems are in a badly deteriorated condition due to lack of spare parts and suboptimal storage and handling arrangements, leading to large product losses through multiple handling and evaporation. The study of petroleum import options included in the project would also review the future role of the refinery and include preparation of a master plan for petroleum distribution, expansion, and rehabilitation, and the organization and incentive system to effectively distribute petroleum products throughout the country. 3/ Fuel oil surplus to country requirements is re-exported from the Toamasina refinery.  -8- 1.19 Petroleum prices remain above border prices; e-en with recent devaluation, though the relationship between prices and economic costs is changing rapidly due to exchange rate and global petroleum price varia- tions. Government policy is to discriminate in pricing against high-income users in favor of low-income and productive end-uses. However, it is unlikely either that families using kerosene for cooking are low-income, or what heavy discrimination against gasoline is economically productive at the margin. Diesel-engined vehicles are more expensive, and the policy currently leads to the use of kerosene in blends with gasoil and gasoline, resulting potentially in higher engine wear and serious loss of fuel economy. A review would be made by the Direction of Energy and Water, MIEM, as part of proposed petroleum planning studies, of possible alternative pricing policies which might avoid the worst aspects of the present distortion while maintaining tax revenues and achieving economi- cally sound policy objectives. 1.20 Biomass Fuels. Declining physical accessibility of woodfuels of acceptable quality over the past decade is strongly reflected in price trends in the open market. Prices of firewood and charcoal in Antananarivo appear to have increased by 50X and 30%, respectively, in real terms over the 1973-1984 period. Since 1984, the Bank has monitored firewood and charcoal prices at selected retail outlets in Antananarivo and had found that firewood prices have risen 13-15%, and charcoal about 5% per annum, in real terms, during the past two years. However, recent IDA time series analyses, which applied more accurate inflation data, cast doubt that pricet have actually been increasing significantly in real terms. Detailed woodfuels supply-demand projections were made by the Joint UNDP/World Bank Madagascar Energy Assessment. Without a series of possible interventions identified by IDA, sbme of which are supported through this project, the deficit between sustainable supply and demand in the hinterland of Antananarivo will grow from 1.3 million to 2.2 million tonnes of wood equivalent over the next decade. The supply demand imbalance projected will lead to loss of oome 1.5 million ha of natural forest cover by 1995, some 12% of present contiguous forest cover. It is neither a conceivable nor a feasible option to reforest at a rate to avoid potentially serious negative effects of anticipated deforestation, although a combination of improved forest management, community or agroforestry, recovery of fuel quality residues surplus from wood processing, logging and existing industrial wood plantations, as well as growing use of modern fuels and higher cooking efficiency, could greatly ameliorate impending problems. As a component of this project, IDA would support the utilization of thinnings and other residues from the Haut Mangoro pine plantation, commercial trials of rice husk briquetting, improvements to traditional carbonization efficiency, improved household energy planning, and interventions to improve cooking efficiency through the use of improved stoves and the introduction of electric rice cookers, all as private sector initiatives. II* THE POWER SUBSECTOR Organization 2.01 JIRAMA is the sole agency in Madagascar responsible for elec- tricity production and supply, and is also responsible for potable water supply. Until 1973, responsibility for power supply was vested with two  -9- major companies, privately owned Electricit6 et Eau de Madagascar (EEM) and a company in which the Government had a majority share-holding: Soci4t6 d'Energie de Madagascar (SEM), which operated supply mainly in the respective municipalities. These two major companies also operated public water supplies in their service areas. In 1973 the Government took over SEM and EEM, managing the combined entity temporarily under the Soci6t6 d'Interft National pour l'Eau et l'Electricite, and then in 1975, established the autonomous Malagasy Electricity and Water Corporation (JIRAMA), to own and operate all electricity and water supply. Finally, on January 1, 1977, JIRAMA took over the assets and liabilities of the former entities, in addition to the long term debt to Government in respect to the compensation of related foreign interests. JiRAMA was at first responsible to the Ministry of Economy and Commerce, but in the early 1980s became the responsibility of the Ministry of Industry, Energy and Mines. Chapter III contains further details on the management and origin of JIRAMA and its links with Government. Sector Facilities 2.02 The major electric power facilities have been constructed to international standards. However, serious lack of foreign exchange for the procurement of spare parts has led to severe deterioration of physical plar- and increasingly frequent and economically disruptive outages. Sustained power supply in several major towns and cities is now seriously jeopardized. This problem has been further exacerbated by recent cyclones. Cyclone Kamisy caused severe damage to central highlands and west coast facilities, especially in the Mahajunga supply zone, in 1984, and in March 1986 cyclone Honorina caused damage to distribution, transmis- sion and generation facilities. The majority of funding proposed for the power subsector in the proposed project is for rehabilitation of diesel and hydropower generation, and for transmission ane distribution facilities with the objective to improve reliability of supply and to create a sound basis for later power system expansion (para. 5.07). 2.03 Although the public power supply system is managed by JIRAMA, private sector captive supply is significant with 23% of total installed capacity, a sizeable proportion of which is within the sugar industry. Table 2.1 indicates the ownership of power plants. In the region of the capital of Antananarivo, supply is through a large interconnected system presently responsible for over 63% of public electricity sales. The total installed capacity in Madagascar is 267 .AW, if which 105.5 MW is hydropower, about 139 MW is diesel and 22.4 MW is steam turbine driven generators. Supply is divided into three groups as per Table 2.2 (IBRD Map 18816). Table 2.1: GENERATING CAPACITY BY OWNERSHIP IN 1985 Hydro, Thermal and Diesel Total MW % MW % MW % Public Supply 105.5 51.5 99.4 48.5 204.9 76.8 Private Supply 62.1 62.1 23.2 Total Country 105.5 51.5 161.6 60.5 267.0 100.0  - 10 - 2.04 The main electric power generating facilities are listed in Annex 2.1 and summarized in Table 2.2. Table 2.2: GENERATING CAPACITY IN MADAGASCAR, 1985 Hydro Diesel Thermal Total Units MW Units MW Units MW Units MW Interconnected Zone 16 92.4 13 34.5 - - 29 126.9 External Zone 12 13.0 135 63.1 - - 147 76.1 Isolated Zone 2 0.1 21 1.8 - - 23 1.9 Public Sector 30 105.5 169 99.4 199 204.9 Private Sector - - 64 39.5 6 22.4 70 62.1 Total Country 30 105.5 233 138.9 6 22.4 269 267.0 Access to Service 2.05 All urban centers are served by electricity from public supply. The urban population is estimated to be 19% of the total of 10 million (1986). However, less than one-third of the urban population is actually connected to electricity, wbich represents about 6% of the total population. Extension of supply within the ICS and other low cost supply zones is a high priority component under the proposed IDA project. Per capita consumption of electricity from the public supply system was about 33 kWh/year which, given substantial private sector production, is an underestimate of the true national average. Madagascar's consumption is of the same order as that of Tanzania, and above that of the poorer countries of the region, such as Ethiopia and Uganda. However, it is about one-half and one-third of that for Malawi and Kenya, respectively, lndicating that the relative level of electrification is very low by regional standards, despite the availability of low-cost indigenous power resources. Pattern of Electricity Consumption 2.06 Public electricity consumption by major system and consumer category is shown in Table 2.3. In the ICS consumption was about 204 GWh, or about 64% of the total in 1985. Table 2.3: MADAGASCAR: PUBLIC ELECTRICITY CONSUMPTION BY CONSUMER CATEGORY, 1985 ICS External Z. Isolated Z. Total Category GWh % GWh Z GWh Z GWh X Residential 61.1 30.0 20.3 18.0 0.8 41.5 82.2 25.8 Commercial 44.2 21.7 18.1 16.0 0.8 41.5 63.1 19.8 Industrial 98.3 48.3 74.6 66.0 0.3 17.1 173.2 54.4 Total 203.6 100.0 113.0 100.0 1.9 100.0 318.5 100.0  - 11 ~- Power Subsector Planning 2.07 Power system development planning has been carried out by JIRAMA without the assistance of consultants. Any development plans prepared by JIRAMA are presented to the Department of Energy and Water, MIEM, reviewed there and then discussed with the DGP before being incorporated in the Public Sector Investment Program (PSIP). However, the company has not routinely undertaken comprehensive power system planning as it lacks suitably trained and experienced personnel and until recently was not structured to facilitate systematic planning for power supply development and management. As a result there has never been a comprehensive least cost expansion plan as the basis for review annually, or more frequently, as a regular part of management review and budgeting. Similarly, load forecasts have been, for the most part, simple linear projections based on historical performance. The proposed project would include technical assistance and training to strengthen the new Direction of Economic Studies and Planning and the Direction of Electrical Equipment, which is the division responsible for the final feasibility study and implementation management for major power system development. The proposed project would also fund the first national power sector master plan and related investment programming and tariff studies, projecting the needs for system development beyond the year 2000, and laying the foundation for rolling annual review and revision of plans and investment programs by JIRAMA. 2.08 In part as a result of planning weaknesses, and in part through direct Government intervention, there has been both overinvestment in capacity and overestimation of demand, leading to a dramatic oversupply of generation capability in certain regional centers and little otilization of availalle hydropower in the main ICS. This has led, in turn, to lower than expected revenue, resulting in poor financial performance for the utility. Perhaps the most serious problem arises from the large surplus in hydro- power capacity contributed by the Andekaleka Hydropower plant (2x29 MW) in the ICS feeding the Antananarivo region. Load growth in the ICS did not grow as anticipated during the economic evaluation of the Andekaleka project in the late 1970s, largely because the economy has been stagnant to declining in comparison with the moderate growth foreseen at the time. In particular, a large number of planned industries did not materialize. In 1985 only 180 GWh of the 500 GWh average annual availability of this hydro- power plant was utilized. The GOE and JIRAMA are revising commercial policies for electricity connections to promote the use of electricity wherever financially and economically attractive. Such measures would be supported by the proposed project. Furthermore, there is a need for comprehensive power system rehabilitation. However, apart from the absence of a planning framework for system expansion, there is no economically sound methodology being practiced by JIRAMA to establish priorities for rehabilitation in the face of ongoing scarcity of equipment and materials. Modern maintenance scheduling and planning for decision-making on priorities for implementation of the proposed major rehabilitation program are addressed in detail in the proposed project. The initial review phase leading to rationalization of diesel generation facilities would also assist with a revaluation and computerization of the asset base and the establishment of computerized spare parts inventory.  - 12 - 2.09 During appraisal, agreement was reached on reasonable load forecasts, and an indicative or "Reference Power Sector Investment Prograu" (RIP) for the 1986-1992 period, was established in advance of more detailed load forecasting and system expansion planning which would be undertaken as part of the proposed project. Agreements were obtained during negotiations that: (i) JIRAMA would not, until the completion of the project, undertake any major change in the Government's RIP agreed with IDA unless JIRAMA shall have furnished evidence satisfactory to IDA that such major project or program is economically and technically justified and, (li) the RIP, which would cover at least five years, would be reviewed annually by March 31, or as needed, and revised as required. Major changes would be those requiring capital expenditure which would exceed 1X of JIRAMA's gross revalued assets in operation in any fiscal year, or two million dollars, whichever is the lower. Power Subsector Objectives 2.10 The main objectives of the power subsector arising from discus- sions between JIRAMA, the Government and IDA are: (i) to improve the reliability of production and supply of electricity throughout the country in accordance with agreed national economic and social objectives; (ii) to ensure that electricity supply is provided at least cost; (ili) to increase the use of indigenous sources of electricity wherever economically justified; (iv) maximize the utilization of existing low cost sources ci supply from existing production capacity. Power Subsector Strategy 2.11 The following strategy represents the position of the GOM and JIRAMA in attempting to fulfill the main power sector obJectives: (i) to develop indigenous energy resources, such as hydropower and biomass residues, for electricity generation in place of more expensive imported fuels; (ii) to interconnect supply zones to make more efficient use of existing and prospective major hydropower plants and to stabilize and minimize the cost of power supply; (iii) to increase system reliability and reduce power losses through improving operation and maintenance and rehabilitating existing facilities; (iv) to regulate tariffs and take other financial measures necessary to meet financial objectives; (v) to promote the utilization of electricity where economically and financially desirable, through increasing the number of consumers and designing programs of interfuel substitution in industry for electrifying heat and steam production; (vi) to undertake least-cost power system expansion planning and to carry out detailed feasibility studies for economically attractive major power developments. Aid Inflow and Coordination in the Sector 2.12 Bank participation in the sector has been substantial, though limited to one major hydropower project: Andekaleka. To finance this project a substantial cofinancing effort was made leading to a financing package which included the Abu Dhabi Fund, Banque Arabe de D6veloppement Economique en Afriq-