Mozambique - Urban Household Energy Project

Document of The World Bank FOR OFFICIAL USE ONLY C-P Ao 33 - MQE Report No. 7611-MOZ STAFF 4PPRAISAL REPORT MOZAMBIQUE URBAN HOUSEHOLD ENERGY PROJECT MAY 12: 1989 Industry and Energy Operations Southern Africa Department This document has a restrited distibuton and may be used by recipients only In the perfonnawu of their official duties. Its contents may not otherwise be disclosed without World Bank authorzation.  CURRE'.''Y EQUIVALENTS (APRIL 1989) US$ 1 - 700, Heticais (HT) - April 1989 US$ 1 - 580 Heticais (MT) - at time of appraisal MT 1 - US$0.002 US$1 = 2.5 Rand (R) ABBREVIATIONS AND ACRONYMS BADEA Arab Bank for Economic Development in Africa BDM Banco de Mocambique BPD Banco Popular de Desenvolvimento cR Cents Rand (South African) DC Direct current DCA Development Credit Agreement DN Direct Negotiations DOE Department of Energy EDM Electricidade de Mocambique ESCOM Electricity Supply Commission (RSA) ESMAP Energy Sector Management Assistant Program HCB Hidroelectrica de Cabora Bassa ICB International Competitive Bidding IS International Shopping LCB Local Competitive Bidding LPG Liquified petroleum gas MIE Ministry of Industry and Energy MOCACOR Mozambique LPG Distribution Company NORAD Norwegian Aid Agency PETROGAL Portuguese National Oil Cumpany PETROMOC Empresa Nacional de Petroleos de Mocambique PPF IDA's Project Preparation Facility PROLEC Urban Electrification Program R Rand (South African) RSA Republic of South Africa SIDA Swedish International Development Authority UCPI Coordination Unit for Import Programs WEIGHTS AND MEASURES B/D barrels per day GWh gigawatt hour ha hectare kg kilogram kgoe kilograms of oil equivalent km kilometer kV kilovolt kVA kilovolt ampere kW kilowatt kWh kilowatt hour MW megawatt toe tonnes ef oil equivalent v volt FISCAL YEAR Government and Public Enterprises: Calendar Year U.  FOR OMCIAL USE ONLY MOZAMBIQUE Urban Household >nnergy Pro3ect Credit an-1 Project Summary Borrower: The People's Republic of Mozambique Beneficiaries: Electricidade de Mocamb.que (EDM), Empresa Nacional Petroleos de Mocambique E. E. (PETROhOC), Mocacor, Ministry of lndustry and Energy (MIE), Banco de Mocambique (BDM) Amounts IDA Credit SDR 17.1 million (US$22 million equivalent) Terms: Standard, with 40 years maturity Onlending Terms: SDR 1.55 million and SDR 0.55 million will be onlent to PETROMOC and Mocacor at 11OZ of the Bank loan rate (8.4Z), and SDR 3.35 million would be onlent to EDM at the prevailing Bank loan rate (7.65Z). The funds onlent to EDM would be repaid over 20 years with five years' grace period. Funds lent to PETROMOC and Mocacor would be repaid over 10 years with four years grace period. EDM, PETROMOC and Mocacor would carry the foreign exchange risk. The balance of the credit (SDR 11.65 million) would be channelled through BdM for implementation of the electrification component and imports of goods and materials for the electrification and commercial energy programs, and to MIE and other Government Departments for coal, woodfuel and co- ordination components. The credit includes SDR 2.17 million not allocated to specific categories. 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.  Proiect Description: The project consists of: (i) power system reinforcement in Mozambique's cities together with connection of 40,000 houses, provision of coal stoves to about 50,000 households, reinforcement of kerosene and LPG distribution facilities, improvements in woodfuel supply and operations, provision of stoves, lamps, pots and pans, drums and cans etc; (ii) technical assistance and consultancy support to reinforce the operations of EDM. PETROMOC and Mocacor, to support the project coordination and implementation, and for the woodfuels and coal programs. The project would be coordinated by the MIE with support from a number of Mozambican institutions. The project would be executed by EDM, PETROMOC, Mocacor and a number of small Mozambique enterprises. The project will be complemented through commodity aid finance of fuels. Proiect Tustification and Riskss Economic benefits from the proposed project will accrue primarily to participants from the lower and middle income groups whose household fuel costs will be reduced by about one-third. Moreover, the shortfall in the present supplies of household fuels will be significantly reduced. Additional benefits anclude a reduction in deforestation and environmental degradation around the main urban areas caused by present fuel gathering activities in a security constrained environment and a substantial improvement in air quality in areas switching to alternate fuels. The substitute commercial fuels to be used are those which will be available at low cost in Mozambique in the longer term. Since households are at present paying high prices for traditional fuels the lower costs of commercial substitutes should be affordable. In the case of electricity, connection costs will be spread over about ten years through credit arrangements. Project benifits also include institutional strengthening and rehabilitation of energy facilities. The overall economic rate of return is estimated at 50Z. The major risks are that Government will be unable to maintai. the high level of coordination needed to put the various elements of the project in place at the same time. Technical assistance will be provided under the project to reduce these risks, and Government has agreed to maintain the present level of coordination. When the security situation improves urban consumers are expected to continue using commercial fuels for reasons of both lower cost and convenience. 71  - iii - Estimated Proiert Cost: Foreign Local Total US$ million EDM Component Power system reinforcement 12.0 2.0 14.0 Vehicles and equipment 0.2 - 0.2 Technical assistance 2.0 0.3 2.3 PETROMOC Component Rehabilitation, vehicles, equipment 1.2 0.1 1.3 Technical assistance 0.6 0.1 0.7 Mocacor Component Rehabilitation, vehicles, equipment 0.45 0.1 0.55 Technical assistance 0.15 - 0.15 DOE Component Coal program 0.9 1.0 1.9 Woodfuels program 2.7 0.5 3.2 Coordination and t.a. 0.9 0.1 1.0 Industrial studies/cable rehabilitation 1.3 0.1 1.4 BdM Component Electrification program (Prolec) 7.1 2.2 9.3 Commercial energy program 3.1 0.4 3.5 Base Costs 32.6 6.9 39.5 Physical contingencies 3.3 0.7 4.0 Price contingencies 4.8 1.0 5.8 Total, excluding interest 40.7 8.6 49.3 Interest during implementation 0.5 1.0 1.5 Total Project Costs 41.2 9.6 50.8 Fuel imports 30.0 0.0 30.0 Total Financing Required 71.2 9.6 80.8 Proposed Financing Plan IDA 22 - 22 Government of Denmark 3 - 3 Badea 10 - 10 Nordic Development Fund 5.7 - 5.7 Mozambican Companies 0.5 8.4 8.9 Government of Mozambique - 1.2 1.2 Total Project Finance 41.2 9.6 50.8 Parallel Finance: Commodity Aid Funds (SIDA, Norad) and IDA Rehabilitation II Credit 30.0 - 3.0 Total Financing 71.2 9.6 80.8  - iv - Disbui.sement of IDA Credit FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 US $ millions Annual 3.8 2.2 4.9 4.0 3.5 2.3 1.2 0.1 Cumulative 3.8 6.0 10.9 14.9 18.4 20.7 21.9 22.0 Economic Rate of Return: 502 Map: IBRD 21316 February 1989  MOZAMBIQUE URBAN HOUSEHOLD ENERGY PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS I. THE ENERGY SECTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction and Economic Context ... . . . . . . . . . . . . . 1 Present Situation .... . . . . . . . . . . . . . . . . . . . . 2 Energy Sector Issues .... . . . . . . . . . . . . . . . . . . . 2 Energy Pricing .... . . . . . . . . . . . . . . . . . . . . . . 3 Sector Priorities and Strategy ... . . . . . . . . . . . . . . . 4 Energy Resources . . . . . . . . . . . . . . . . . . . . . . . . . 5 Energy Supply and Consumption ...... . . .. . . .. . . . . 6 Bank's Role in the Energy Sector . . . . . . . . . . . . . . . . . 8 Experience with Past Lending ... . . . . . . . . . . . . . . . . 9 II. HOUSEHOLD ENERGY .... . . . . . . . . . . . . . . . . . . . . ... 9 Background .... . . . . . . . . . . . ...g.... . . . . . . 9 Cost of Household Fuels .... . . . . . . . ..... . . . . . 10 Fuelwood and Charcoal .... . . . . . . . . ..... . . . . . 12 Coal .... . . . . . . . . . . . . . ....... . . . . . . . 14 Electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Liquified Petroleum Gas .................. . . 5' Kerosene. . .... . . 17 III. THE BORROWER, THE SECTOR AND THE EXECUTING AGENCT . . . . . . . . . . 19 The Borrower and the Executing Age-c_,s . . . . . . . . . . . . . 19 Sectoral Arrangements . . . . . . . . . . . . . . . . . . . . 19 Department of Energy . . . . . . . . . . . . . . . . . . . . . . . 20 The Electricity Subsector ... . . . . . . . . . . . I . . . . . 20 The Petroleum Subsector ... . . . . . . . . . . . . . . . . . . 21 Accounts and Auditing . . . . . . . . . . . . . . 2 . . . . . . . 22 Insurance .... . . . . . . . . . . . . . . . . . I . . . . . . 23 IV. THE PROJECT .... . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Project Preparation . . . . . . . . . . . . . . . . . . . . . . . 23 Project Objectives . . . . . . . . . . . . . . . . . . . . . . . . 24 Project Options and Design ... . . . . . . . . . . . . . . . . . 24 Project Description .... . . . . . . . . . . . . . . . . . . . 26 Project Implementation . . . . . . . . . . . . . . . . . . . . . . 27 Project Cost Estimate . . . . . . . . . . . . . . . . . . . . . . 29 Financing Plan .... . . . . . . . . . . . . . . . . . . . . . . 31 Procurement .......................... . 32 Disbursements .... . . . . . . . . . . . . . . . . . . . . . . 34 Reporting Requirements .... I . . . . . . . . . . . . . . . . . 35 Environment and Safety .... . . . . . . . . . . . . . . . . . . 35 Project Risks . . . . . . . . . . . . . . . . . . . . . . . . . . 36  V. FINANCIAL ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Electricidade de Mocambique (EDM) . . . . . . . . . . . . . . . . 37 Background . . . . . . . . . . . . . . . . . . . . . . . . . 37 EDI's Present Financial Position . . . . . . . . . . . . . . . 38 Power Tariffs . . .. . . . . . . . . . . . . .40 Empresa Nacional de Petroleos de Mocambique (PETROMOC) . . 43 Existing Agreements . . . . . . . . . . . . . . . . . . . . . 43 PETROMOC'S Financial Position . . . . . . . . . . . . . . . . 43 Mocacor's Financial Position . . . . . . . . . . . . . . . . . . . 46 Petroleum Product Pricing . . . . . . . . . . . . . . . . . . . . 48 VI. PROJECT JUSTIFICAfION . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Financ al Comparison . . . . . . . . . . . . . . . . . . . . . . . 49 Economic Comparison .... . . . . . . . . ..... . . . . . . 50 VII. AGREEMENTS REACHED AND RECOMMENDATIONS ... . . . . . . . . . . . . . . 51 ANNEXES 1.01 Production, Imports and Exports of Electricity 1.02 Consumption of Energy Petroleum Products 1.03 Energy Balance 2.01 Comparative Cost of Fuels 4.01 Project Description and Cost 4.02 Technical Assistance and Studies 4.03 Household Electrification Program 4.04 Woodfuels Program 4.05 Disbursement Schedule 4.06 Procurement Schedule 4.07 Project Monitoring Guidelines 4.08 Project Schedule 4.09 Project Coordination 5.01 Petroleum Product Pricing Structure 5.02 Notes and Assumptions on Financial Projections 5.03 PETROMOC Financial Projections 5.04 Mocacor Financial Projections 6.01 Economic Benefits 7.01 Selected documents and data available in the Project File Chart: Electrification Scheme Map: IBRD No. 21316  MOZAMBIQUE URBAN HOUSEHOLD ENERGY PROJECT STAFF APPRAISAL REPORT L. THE ENERGY SECTOR Introduction and Economic Context 1.01 During the first half of the 1980s, Mozambique experienced a marked and sustained decline in output and an aggravation of economic distortions and financial imbalances resulting from a combination of adverse exogenous factors, internal disruptions caused by widespread armed attacks and failures in economic p"licies. In the first six years of the decade, overall production fell by nearly 30 percent, exports declined by nearly 75 percent and imports were compressed by nearly one-third. In response to the growing internal and external imbalances, and the limited impact of initial corrective policy measures undertaken to address them, the Government, in 1987, launched a far-reaching Economic Rehabilitation Program (ERP) intended to deal comprehensively with the structural problems and severe distortions in the economy. By the end of the first year, the ERP, which contains, inter alia, measures to increase reliance on market signals, improve economic incentives and strer.gthen demand management through appropriate fiscal monetary, exchange rate and external borrowing policies, had begun to reverse the economic decline of previous years. Now in its second year, the main objectives of the ERP have remained fundamentally unchanged -- namely: (a) to reverse the decline in production and restore a minimum level of consumption and income for the population; (b) to teduce substantially domestic financial imbalances and strengthen external accounts and reserves; (c) to enhance efficiency and establish conditions for a return to higher rates of economic growth; (') to reintegrate official and parallel markets; and (e) to restore orderly financial relationships with trading partners and creditors. The Government is maintaining the momentum of policy reform, and consolidating the encouraging results that have already been obtained. 1.02 While there can be little doubt as to the appropriateness of the ERP's objectives (and the policy measures required to achieve them) for Mozambique's goal of moving towards sustained economic growth ir the medium- to-longer-term, it should also be borne in mind that some adjustment measures have considerable short-term costs for vulnerable population segments -- costs which must be at least partially mitigated if the supporting social consensus for the ERP is to be maintained. The two major items of the family budget, food and fuel, have risen strongly in price as controls have been relaxed, and their cost is causing obvious hardship in the urban areas. Government has decided to address these challenges as a matter of urgency, and has asked for IDA support both in nutriti3n and in household energy. The project proposed in this report aims to assist the Government in meeting these challenges in urban household energy. The costs of fuelwood and charcoal in the market-place are double the economic cost of commercial fuels, and the scope for reducing energy costs for the householder through a commercial energy program is significant. Accordingly the Government has assigned priority status to the proposed project as a means of reducing the cost of cooking fuel for a large segment of the urban population.  - 2 - 1.03 IDA is assisting Mozambique to rehabilitate its main energy facilities through the Energy Technical Assistance and Rehabilitation Credit, which is also financing extensive technical assistance and a number of studies, including preparation of a household energy strategy, now expected to be completed by March 31, 1990. While the full details of this strategy will not be finalized until 1990, the Government has decided to make an early start in introducing and implementing priority measures that have already been identified. When the strategy has been finalized, th project will be reviewed by Government and IDA (September 30, 1990) with a view to making any necessary adjustment. Present Situatiou 1.04 Recent trends in the energy sector of Mozambique reflect the prevailing conditions throughout the economy, particularly dieruption to economic activity by armed bands, acute scarcity of foreign exchange and trained manpower, and shortcomings in management and operation capability and in financial performance. The continuous decline in economic activity between 1981 and 1984, as indicated in estimates of GDP, was both cause and effect of a 402 drop iti the consumption of commercial energy (petroleum products, electricity and coal) between those years. GDP and commercial energy use have recovered to their 1984 level. Mozambique's principal source of electric power, the Cahora Bassa hydro, has been unable to supply Maputo since 1981, forcing Mozambique to resort to imports. In turn this has weakened the financial position of EDM (the power supplier). The general financial weakness of EDM, and related problems in other parts of the sector, is one of the major energy issues. Energy for household use has been in short supply through the 1980's, in part through reduced biomass availability, in part through the consequences of armed attacks, and ir. part because of foreign exchange shortages. This shortage and the high price of the energy that is available are the principal energy problems facing the Mozambican people. Energy Sector Issues 1.05 Disruption to Energy Supply. Acts of sabotage by armed bands have severeiy disrupted energy production and supply, especially for electricity transmission since 1981 and for coal transportation since 1983. Consequently, the two major facilities for producing ener,y ir. Mozambique, the Cahora Bassa hydroelectLic power station and the coal mines at Moatize, are running at nominal capacity at present. The direct annual cost to Mozambique of this disruption is about US$25 million in terms of foregone earnings from exported energy and additional costs of imported energy. The activities of armed bands restrict the better management of woodlands and limit the woodfuel options. In late 1988 Mozambique, Portugal and South Africa reached agreement on steps to resume transmission of power from Cahora Bassa by 1990. Electricidade de Mocambique (EDM) has rerouted part of one of its transmission lines in central Mozambique to make it more defensible and to permit more reliable supply to Beira from the hydro station and Cahora Bassa.  - 3 - 1.06 Backlog of Maintenance and Rel.abilitation. Lack of foreign exchange has contributed to a decline in operational efficiency of power and petroleum facilities by causing shortages of spare parts, materials and equipment required for system operation, maintenance and rehabilitation. Th" power distribution systems have only been kept in operation thrcugh donor support for technical assistance particularly from Sweden and Portugal and for imported goods from Denmark, Norway, Sweden and Holland. The petroleum product handling and distribution facilities need to be rehabilitated as a matter of urgency. The transport fleets of EDM, PETROMOC and BP (Mocambique) Ltd need to be strengthened to enable fuels to reach the provincial cities reliably. In the main urban areas there are frequent power outages and unreliable distribution of petroleum products, whilst many areas of the country do not receive any petroleum supplies. One of the results is loss of agroindustrial production and interruption of other productive activities. The backlog of maintenance and rehabilitation will be reduced under IDA's Energy Technical Assistance and Rehabilitation Project. Further support is planned through the proposed project. 1.07 Institutional Weaknesses. The energy sector organizations were created after the general collapse of institutions that occurred in the mid 1970s following the Portuguese exodus. They have suffered from the economic difficulties that followed Independence, and thus have had to operate with shortages of skilled manpower and deteriorating physical facilities. Scarce management resources are fully occupied in handling routine matters, often on the basis of crisis management, and they have little opportunity to tackle fundamental issues. Remuneration packages have been insufficient to motivate and retain skilled personnel. Consequently, the organizations have encountered major obstacles to developing and maturing since their inception. Anty lasting solution to break the vicious circle of manpower and financial constraints, weak administration and poor economic performance will require mutually reinforcing improvements in all areas. Sustained improvement in economic performance also requires the resumption of peaceful conditions in the countryside. Energy Pricinj 1.08 Prior to the reform program Government emphasis was on price stability at the expense of enterprise viability. Financial performance of energy enterprises, resource mobilization and market signals suffered accordingly. Current policy is to ensure the financial viability of the enterprises, avoid Government subsidies and cover long run marginal costs. 1.09 Electricity prices were not changed between the mid 1960s and January 1986 when they were raised by an average of 120Z. Prices increased subsequwntly in January and July 1987, and were increased again in October 1988 and April 1989. EDM has been receiving payments from both Government and foreign donors to offset the costs relating to the armed attacks, and is also suffering from a high level of arrears in payments for electricity. These issues will be addressed under the project (see Chapter V). Petroleum product prices were not changed between 1979 and the increase of about six- fold that was announced on January 30, 1987. Petroleum product prices were furthe.: increased in July 1987, October 1988 and April 1989, and are now  - 4 - generally in line with international prices. These recent price increases maintain the reasonable financial position of PETROMOC and Mocacor (the LPG distribution company., except for a bad debt problem with a limited number of PETROMOC's large customers (see Chapter V). Coal prices are based on import cost plus distrtbution costs, with the result that local production, whose output is severely disrupted, operates at a loss. The prices of woodfuels are market determined and appear to be affected by transport constraints and lack of alternative fuels. Sector Priorities and Strategy 1.10 The recently completed report on the energy sector in Mozambique 1/ identified the following priorities: (i) to increase the reliability of meeting essential demands for energy, particularly petroleum fuels to key economic consumers; (ii) to strengthen the institutional performance of the main energy supply agencies; (iii) to increase the availability of household energy to urban areas; particularly woodfuels, and also kerosene, LPG and electricity; (iv) to prepare sound investment programs to meet Mozambican energy needs, including exploitation of indigenous energy resources (hydroelectricity, forests, coal and natural gas) where economically justified; and (v) to establish priorities for preparation work among large export-oriented projects based on indigenous energy resources. Government agrees with these priorities which accord with Government's main objective of improving operational efficiency in the short and medium term for the energy sector, and a parallel priority objective of making energy available and affordable. 1.11 The first priority in energy supply has been to re-establish the supply and transmission of power from the Cahora Bassa hydro station so as to generate export earnings and avoid the need for Mozambique to import power from South Africa. Agreement has been reached between South Africa, Portugal and Mozambique for repairs to the high tension transmission lines that had been damaged by armed bands, and for minor rehabilitation at the hydro station. The new operational arrangements will provide for formal security arrangements for the transmission line, and the bulk power tariff includes an element to pay for this. The agreement provides for South Africa to invest about US$20 million on rerairing the transmission line within Mozambique. The part of the line passing through South Africa has not been attacked. Transmission from the C.hora Bassa system to southern Mozambique and South Africa is planned to restart in 1990. 1.12 The second priority of Government in energy supply is to address the household energy shortages and prices with a view to making energy more readily available in the urban areas and tc reducing the overall fuel cost for a large ntaber of households. The options for achieving this include electricity, petroleum, coal, charcoal and fuelwood, and are discussed more ftilly in Chapter II. 'Mozambique: Issues and Options in the Energy Sector", January 1987. Joint UNDP/World Bank Assessment Program  1.13 Other priorities include the development of Mozambique's energy potential, primarily through foreign entrepreneurs and private capital. In resource development the Government launched a promotion to attract coal investment, but firm results from the promotion are fundamentally dependent on improved security. A number of international oil companies are already exploring in Mozambique and are satisfied with the incentive package. Oil discoveries have been small and gas discoveries cannot be exploited until security improves. This work forms part of Government's strategy to place Mozambique inT a position to exploit regional and international market opportunities once the security situation improves and markets can be assured at viable pricAs. 2/ Foreign investment is also being sought in projects to make use of the energy resources already discovered. Some of these projects involve massive investments relative to the size of the economy. The combined investment for the larger projects exceeds US$2 billion in 1988 prices. The economic viability of these projects will need to be carefully assessed, and risk capital provided primarily by the foreign private investors. 1.14 The energy investment program undertaken in recent years has been modest and in line with that recommended in the Energy Assessment Report, except that an additional hydro station is being developed (through grant finance) to reinforce the supplies to Maputo and reduce the dependence of the capital on a single transmission line. The Energy Technical Assistance and Rehabilitation project included a review mechanism for IDA to comment on new investments not included in the agreed program to 1991 where these investments exceed US$3 million. It is proposed under the Urban Household Energy project to modify this to review of any new single energy investment project expected to exceed US$10 million. Enerrgy Resources 1.15 Mozambique is well endowed with a variety of primary energy resources. A noticeable feature is the concentration of these resources along the Zambezi Valley which is far (about 1,100 km) from the main consumption center around Maputo. (i) Hydroelectric power potential has been identified at over 100 sites on the numerous rivers in Mozambique, with a combined average energy output of about 75,000 GWhlyear for which an indicative total for installed capacity is about 14,000 MW. About 152 of this potential has been developed at Cahora Bassa (2,075 MW, 14,000 GWh/year of available energy). 21 The major energy developments being considered for the longer term are Cahora Eassa Stage 2 (US$512 million), Moatize Coal (USS979 million for Phases 1 and 2 (to 6 million tonnes/year and including associated infrastructure), Pande Gas Field (US$20 million), an ammonia plant (US$280 million) and an aluminum plant (US$360 million).  - 6 - (ii) Coal deposits exist extensively throughout central-western Mozambique with estimates of total geological reserves exceeding 3 billion tonnes of run-of-mine coal, of which proven reserves amount to about 850 million tonnes. The only coalfield presently being mined is located at Moatize in the Zambezi Valley with proven reserves of about 87 million tonnes. Expansion in coal production capacity to an annual level of 6 million tonnes of saleable coal might be feasible,following resolution of the security situation, and with this in mind Government is seeking to attract private entrepreneurs. (iii) Oil and Gas exploration has been carried out extensively for decades in Mozambique's large sedimentary basin, but the hyd,ocarbon potential of Mozambique is still re:atively unknown. An onshore commercial gas discovery at the Pande Gas Field, located 30 km inland and about 550 km north of Maputo, was made in 1961. Estimates of recoverable reserves are broad, lying in the range of 0.4 to 1.3 trillion cubic feet. There are indications of other substantial gas deposits. Government has n';en carrying out intensive promotion activities for petroleum exploration, and in recent years has signed exploration and production contracts with Exxon, Shell, Amoco and British Petroleum. ENH (the national oil exploration company) is exploring for gas with Russian assistance. (iv) Forestry Reserves in Mozambique comprise 0.6 million ha of forests with high productive potential, 4 million ha with medium productive potential, 15 million ha with low productive potential and about 37 million ha of land with a minimal forestry potential. From rough estimates, the natural annual increase in volume of the standing biomass balances the total national demand for forest products. However, there are major imbalances at the regional level between demand and sustainable yield. There are critical shortfalls in woodfuel resources around the main urban areas, particularly in Maputo, Beira and Nampula, which can only be addressed through long-term programs for increasing the supply of woodfuels, improving energy utilization efficiency and developing supplies of other forms of household energy. Energy SUPPly and Consumption 1.16 In an average year of the early 1980's, the gross energy available to Mozambique from all energy forms was about 3 million tonnes of oil equivalent (toe) or roughly 250 kgoe per capita, of which about 80Z was from woodfuels. Mozambique's per capita energy consumption was at the lower end of the average for Eastern Africa.31 Petroleum products accounted for about 3/ For comparison, per capita energy consumption in neighboring countries were about 760 kgoe for Zimbabwe, 560 kgoe for Malawi, 470 kgoe for Tanzania, 350 kgoe for Uganda, and 270 kgoe for Ethiopia.  802 of non-woodfuel energy, primary electricity for about 152 and coal for 5Z to 10Z. In the early 1980s, the distribution of consumption of these forms of energy was 27Z in industry, 27Z in transportation, 31Z in households and public institutions, and 15? in agriculture and other sectors. An energy balance for is given in Annex 1.03. 1.17 Energy Trade. Energy's role in the country's foreign trade has declined. Power exports from the Cahora Bassa hydroelectric complex were reduced in 1981 and halted in 1984 due to sabotage of transmission lines at a cost to Mozambique in foregone foreign exchange earnings of about US$15 million annually. National coal production is at a fraction of its level in the late 1970's due to the severance of transport links from the coal mines, and the country is losing revenues from coal exports of about US$10 million annually. The total volume and value of imported petroleum has declined substantially since 1981. The annual deficit on the trade of petroleum and products fell from an average of USA150 million in the period 1980-82 to about US$70 million in 1983 and has abilized at about US$60 million since then. The net cost of petroleum consumption (deficit) averaged about 1OZ of total imports in the period. 1.18 Electricity Supply and Consumption. The supply of power in Hozambique excluding exports from Cahora Bassa has fluctuated around 600 GWh over the last 10 years with a low of about 550 GWh in 1985 and 1986, equivalent to a per capita consumption of 40 kWh/year, and recovery to about 630 GWh in 1987 and 1988. The lack of availability in Southern Mozambique of power from Cahora Bassa has resulted in major imports from South Africa. EDM estimates that it serves about 75,000 households nationally, in which case only about 2.5Z of the total population and 17? of the urban population have access to electricity. 1.19 Petroleum Products Supply and Consumption of petroleum energy products fell by about 30? from 1978 to 1987, from 384,000 tonnes to 270,000 tonnes. Consumption in 1988 recovered to 300,000 tons. The structure of supply, however, changed markedly in the early 1980s. Up to 1980, Mozambique refined sizeable quantities of imported crude oil, exported about one-third (mostly gasoline and heavy fuels), and imported gas oil (diesel) because of a mismatch between refinery yield and the pattern of demand for products. As a result of the refinery closure product imports rose substantially, from an average of about 100,000 tonnes/year in 1978-1980 to about 300,000 tonnes in recent years. Notwithstanding this increase, there were acute shortages of kerosene, LPG and gasoline from 1985 to 1987. Price increases have reduced gasoline demand and physical rationing ceased in 1988. To improve urban household energy supplies, Government has made concerted efforts in 1988 to make LPG and kerosene more available. 1.20 Coal Supply and Consumption. Mozambique's sole domestic supply of coal is from the Moatize underground coal mines near Tete which have been active since the 1940s. Production peaked in 1975 at 575,000 tonnes run of mine and then declined to 3,000 tonnes in 1986, with recovery to 25,000 tons  - 8 - in 1987 and 1988. During the 1980s, hal.f of the production consisted of coking coal. Exports have accounted for about a quarter of total production of which pri,.or to 1982 one-fifth was transported overland by rail and road to Malawi, and the rest via the port of Beira. There have been no sea-going exports through Beira since 1982, and major rehabilitation work is required to enable the railway line from the mine to carry substantial traffic, and security will need to be enhanced. Exports by road to Malawi have continued, although at a reduced scale. Since 1983, most coal consumbd'in l4ozambique has been imported by rall from South Africa at low costs by world price standards for use in power generation (Maputo), railway traction and cement production, and small quantities for test marketing of coal stoves for households. 1.21 Woodfuel supply, both as fuel wood and as charcoal, has been severely constrained by deforestation and by transport shortgges. There is no reliable quantified information that can give an accurate picture of supply and consumption, the best information coming from partial surveys (Beijer 1987, ETC 1987, Behrens 1988). Based on these surveys it is clear that there are woodfuel shortages in both urban and rural areas. Wide ranging assistance in fuelwood and charcoaling will be provided under the Energy Technical Assistance and Rehabilitation Project. A firm is being selected for a study on charcoal production technology, with a view to identifying relevant technology in other countries and adapting the more efficient charcoaling technology to Mozambique's needs. A woodfuels transport specialist will examine ways of reducing the cost of transport and increasing transport capacity. Other experts will review ways of increasing the wood supply, looking at various options such as woodlots, smallholder planting, plantations, better management of natural woodlands etc. An aerophotographic survey will be completed in 1989. These studies will feed into the household energy strategy. Bank's Role in the Energy Sector 1.22 The priority for the Bank in the energy sector is to help maintain the momentum of policy and institutional reform by assisting energy agencies to develop appropriate strategies and for them to be able to improve the reliability of energy supplies. The Energy Technical Assistance and Rehabilitation project is supporting wide ranging technical assistance and rehabilitation designed to improve the efficiency and reliability of energy supplies in EDM (electricity) and PETROMOC (the major petroleum products), and is supporting a number of studies to assist in strategy formulation. This support needs to be taken further with a stronger and more immediate focus on the area where energy shortfalls are causing the greatest hardship, namely urban household energy. The main thrust of the proposed project would be to increase urban household energy supplies through introducing commercial energy to the main cities, focussing on energy sources indigenous to Mozambique and providing fuel choice to consumers in line with the policy expected from the urban household energy strategy. Wide ranging institutional strengthening will be necessary for suppliers of fuels and appliances, as well as in financing mechanisms. The project would support the Bank's overall country assistance strategy through helping to soften the impact of the structural adjustment program on the low and middle income  segments of the population. Chapter II explains the household energy options and Chapter IV details the project. ExDerience with Past LendinR 1.23 The project would be the Bank's second operation in the energy sector qnd the eighth of any type in Mozambique. Implementation of the Energy Technical Assistance and Rehabilitation Project is progressing satisfactorily, although behind the original schedule. The main components of the project were: (i) financing of priority facilities rehabilitation needs of EDM and PETROMOC and connection of some 4,000 additional households to the electric power system; (ii) provision of special advisors to assist in operating power and petroleum facilities; and (iii) technical assistance for financial strengthening, and upgrading of accounting, budgeting and planning systems at EDM and PETROMOC. Preparation of financial statements for EDM and PETROMOC was completed in September/October 1988 reflecting a much greater task than originally envisaged. A review of pricing implications for EDM will commence in summer 1989 once the accounts have been refined further. Procurement for the project was delayed pending satisfaction of the conditions of disbursement; it is now proceeding actively. A number of consultancy contracts have been signed but it is too early for results to be available. The proposed project would re-enforce major economic and financial covenants in the previous project. Implementation of the first and second rehabilitation credits has also progres3ed well with no significant problems. BADEA, the Nordic Development Fund and Denmark would collaborate in this project together with commodity aid support for petroleum fuels from Norway and Sweden. IL. HOUSEHOLD ENERGY Background 2.01 Household energy needs are not being met and there are severe and growing shortages, particularly of wood. In Maputo the shortfall in supply is tex.tatively estimated at 10 to 30Z and similar shortfalls are being experierced in other urban areas. Possible solutions based on a greatly enhanced woodfuels program are impractical both because of the frequency of armed attacks and the unsuitable environment. The Government's objective in urban household energy is to encourage the use of the cheaper indigenous commercial fuels, and at the same time to improve the efficiency in supply and use of traditional fuels, with a view to satisfying urban household energy needs and eventually reducing urban demand for fuelwood and charcoal to a level that can be sustained naturally. Improved utilization of woodfuels in rural areas is also an jbjective. The strategy for achieving the objectives includes a rapid increase in electrification of urban areas, testing and test-marketing of coal stoves, and improving the efficiency of the use of traditional fuels. For the short and medium term it will be necessary to supplement these measures with other commercial fuels,  - 10 - particularly kerosene, and make use of the existing facilities for supply and use of LPG in Maputo. 2.02 The priorities established by Government follow from a number of internal studies on the cost of alternative fuels, the cost of appliances and appliance efficiencies, and studies on the foreign exchange content of each option. Subject to any special problems and costs due to !oration, the most cost-effective fuels for cooking in the context of Mozambique are coal and electricity, coal because of access to low cost imported coal and potential access to good quality domestic coal, and electricity because of the vast low cost hydro resources already developed. Further details of the cost of each fuel are given in Annex 2.01. Both coal and electricity face important constraints. Coal is a new fuel for Mozambique's households, there is limited experience of coal for cooking, and the number of appliances is limited by manufacturing and assembly capability currently at 300 per month. This rate will increase as coal usage develops towards achieving its full potential. Electricity faces parallel constraints, appliances are in short supply and are expensive, (the current retail price of electric stoves - more than US$100 - is at least three times the level in the United States), the power distribution system needs reinforcement, and EDM will need staff reinforcement to manage larger numbers of new customers than achieved historically. 2.03 The Government's aim is to provide the maximum possible freedom of choice in fuels. There will be no restrictions on who uses kerosene or the traditional fuels. A special effort will be made to ensure that kerosene is available throughout the urban areas. There will be constraints, electricity connections will be have to be prioritized so as to focus on areas requiring little capital expenditure, LPG will be restricted to existing registered consumers, and the overall coal program will be limited by availability of stoves and wider environmental and other factors. Apart from these constraints, the major determinants of fuel choice are likely to be familiarity, acceptability and affordability. Cost of Household Fuels 2.04 The Energy Assessment identified electricity and coal as the lowest (economic) cost fuels and their costs are known with reasonable certainty. Electricity supplies will initially come from South Africa (based on the ESCOM bulk supply tariff) or, when available, in priority, from Cahora Bassa, for which a renovation and supply agreement was signed early in 1988. Coal supplies will come from South Africa (at local prices), Swaziland (at international prices) or from domestic coal mines and stocks. The South African price of electricity is currently low, although much higher than the price of power from Cahora Bassa. South African coal prices are also currently low, about 25Z below the level expected for Mozambique when its mines can resume normal production. However, the advantage of the local coal is its high local currency content and its improved competitiveness in Central Mozambique where rail lines (once reactivated) should enable it to be cost-competitive. There is no reliable data on the economic cost of wood and charcoal. The last estimates - prepared by Beijer in 1985 - showed that  - 11 - the economic cost of both fuelvood and charcoal were about 5O0 of retail price and that retail prices were effectively double that of kerosene. Table 2.1 Economic Cost of Fuels UnIt Cost Equivalent A pilance Effective Annual per t.o.e. !ffii-ty cosr _stper X o.e household Power - from Cohora Basso 1. cR/kWh 3 70 aS slOS i 8 - from ESCOM 8.2 cR/kWh 8323 65 S498 340 (cost at Maputo city Gatt) Coal - from South Africo 63 R/ton I go 20 *182 31S (cost at Maputo) - local coal 48 USD/ton 3 76 20 $380 330 (cost at Beira) LPG - ex-distributor 8400/ton 3376 45 1836 *67 Kerosene - ex-distributor 3235/ton 1238 2S *932 $76 Source: Ministry of Industry and Energy Mission estimates Notes 1. Annual cost based on use for cooking. 2. Cost of power distribution/connection about US$40 p.a. extra. 3. Costs based on Octobe: 1988 data. 2.05 Delivery costs of coal to households are estimated to average 4mt/kg ($10/toe) and will have little impact oni comparative costs. By contrast, the costs of delivering power to households will be an important cost item, sufficient to bring the economic cost of power close to the cost of other modern fuels, and the proposed project aims to focus power connections where these costs can be miinimized. Financial costs of new power supplies will be slightly higher than petroleum fuels when allowance is made for connection costs. 2.06 Government has recently (October 1988) adjusted the retail prices for LPG and kerosene to bring them approximately into line with cost and to provide an incentive to distributors. It has also established a price for coal to cover import cost and contribute towards the cost of coal stoves. Electricity tariffs have also been reviewed (see Chapter V) with a view to covering long term costs, and making a start in bringing domestic and general tariffs closer into line. 2.07 The retail prices of wood and charcoal were decontrolled early in the adjustment program. Their level reflects the shortage of all fuels and the lack of sufficient appliances for use of cormercial fuels.  - 12 - Table 2.2 Flnancial Cost of Fuels Unit Cost Equlv5lsnt Apliance Effective Annual per .o.s. efciency eoit per cost Power 20.9 mt/kWh 0433 6S 3m 864 (price at the household)* Coal 20 mt/kg 86f 20 8280 122 (delivered to the balrro) LPG - ex-distributor 210 ut/kg 8834 46 1742 869 Kerosene - ex-distributor 110 mt/liter 3238 25 3932 175 Wood - *x-distributor 22 mt/kg 397-125 8 81210-1560 890-125 Charcoal - ox-distributor 107 mt/kg 8270-346 12 12236-2886 8180-280 Source: Ministry of Industry and Energy ESMAP studies Notes 1. Annual cost based on use for cooking. 2. Cost of power distributlon/connection about US$40 pa. extra 3. Costs based on October 1988 prices. *excluding connection costs 2.08 Most households are multi-fuel users. Outside of the high-rise area in Maputo it is common for households to use both fuelwood and charcoal, and frequently these households also have LPG and kerosene stoves. At the time of appraisal the average monthly fuel bill for the Haputo shanty towns was 13,000 to 14,000 meticais, the most important fuels being wood and charcoal. In Quelimane, which is more likely to be typical of other provincial cities, most households do not own any kind of stove, and wood plays a much more dominant role in energy use. The average monthly fuel bill for the Quelimane shanty town was 5,000 to 7,500 meticais, reflecting slightly smaller families, less use of energy in total and particularly less use of the highest price fuel, charcoal. 2.09 The main determinant of fuel choice was shown by the Behrens survey to be availability of fuel, and to counter the recurrent difficulties householders have a variety of appliances to take advantage of whatever fuel is available. A second major constraint has been the availability of appliances. The high incidence of wood and charcoal use is explained by the extreme shortage of kerosene and LPG in recent years and the nominal electricity connection program. Fuelwood and Charcoal 2.10 Overall Situation. Woodfuels provide about 80X of the gross supply of energy in Mozambique, and similarly close to 80I of household energy. Both urban and rural households are facing serious energy shortages. Shortages of LPG and kerosene and disruptions to electricity supplies (especially outside of Haputo) have forced households to use more woodfuels, at the same time the continuing rapid growth in population and numbers of families is adding to the problem. More than half the rural households are in areas of fuelvood  - 13 - scarcity and people must devote increasing amounts of time and effort to the collection of firewood. One of the Government's measures to ameliorate the urban situation has been to free the trade in firewood and charcoal (entirely private sector) from official controls, which has resulted in increased supplies to urban areas. 2.11 The actions of armed bands have d.disrupted wood cutting and gathering, as well as charcoaling. The attacks also make trucking a more dangerous and risky activity, limiting the number of trucks used for transport of wood. 2.12 Urban Fuelwood Supply. Areas around major cities have been deforested, especially around Maputo, Beira and Nampula, as well as around smaller urban centers. There is no practical way in which this can be remedied. Most of the cities are along the coast, which restricts the area available for growing wood. The situation around Maputo, a city now of 1 to 1.2 million people, is particularly difficult as the natural savannah has low forestry potential and (apart from two plantations) trees for fuelwood are scarce within a 50 km radius. A recent study by the Beijer Institute showed that within 120 km only 52Z of Maputo's current need could be supplied from natural forests. Attempts to develop plantations close to Maputo have encountered a number of problems, in part because if soil conditions, and for the short to medium term the Government's objective is to maintain the existing plantations with only minor expansion. Beira receives its fuelwood from a forest located at a distance of 25-3C km. Security has been a particular issue in the rural areas around Beira, beyond the Beira corridor. Wood supplies for Quelimane, studied by ESMAP, are obtained from a local swamp. It is reported that the situation around Nampula is similar to that around Maputo. The long term sustainable level of supply to M.puto is estimated by the Government to be about 200,000 tonnes per year. 2.13 'Jrban Fuelwood Demand and Costs. Based on cooking patterns and fuel efficiency, quantities needed in Maputo for fuelwood and charcoal are about 400,000 tonnes/year, although supply is believed to be only 60-802 of this. More reliable figures are not available. In practice this shortfall is represented by reduced consumption in response to price, with consequential adverse dietary changes. About 70? of the total supply is consumed as fuelwood and 302 as charcoal. The ESMAP household energy survey in mid-1988, showed that fuelwood prices have not kept pace with either devaluations or inflation, but prices continue to be high at 22 meticais per kg and charcoal prices 107 meticais per kg. Government plantations are not breaking even at these prices, and officials do not expect prices to fall even when the armed attacks cease, because supplies are becoming increasingly scarce in the vicinity of the major cities and the road network is in very poor condition. 2.14 Health Issues. In the cold season the extensive use of %\elwood in Mapiro's shanty towns produces smoke and smog similar to those in Europe in the 1950's. Studies by Beijer in mid-1988 showed that atmospheric pollution from woodburning was approximately three times the WHO (World Health Organization) standards. The impact of the coal program will be measured against this benchmark.  - 14 - Coal 2.15 Overall Situation. Coal is not currently an important household fuel in Mozambique. The major industries consumed more than 9OZ of production for the domestic market, and apart from the current test program in Maputo there is almost no information on its use in households in Mozambi-ue. Evidently households in the areas with readily accessible coal supplies, such as those around Moatize, traditionally use coal for cooking. 2.16 Coal Supply. Proven domestic reserves of coal are considerable, with recoverable reserves, even at peak production rateui included in earlier expansion plans, for more than 100 years. Transport is the major problem, through the worn-out state of the railway and sabotage. Moatize coal is of good quality and no significant user problems are expected. Ample supplies are available for local consumption, particularly in Tete, and there are large stocks at Beira. Mozambique has facilities for coal imports by rail but not for large scale imports by sea, with the result that the only sources of supply on competitive terms for the Maputo area are likely to be Swaziland, Zimbabwe and South Africa. 2.17 Coal costs and prices. Moatize coal is medium cost by international standards. Based on 1/2 million tonnes/year, at the pithead the overall cost is about $20/tonne, including allowance for the :osts of rehabilitating the mine (1980 estimates). Transport costs by rail to Beira, together with port handling costs, are high, bringing total costs ex-Beira (after rehabilitation) to about $48/tonne. Large-scale exports are unlikely. However, for domestic use the high local currency element makes Moatize coal a potentially attractive fuel, especially where rail connections are good. 2.18 Coal 3upplied from South Africa has increased in price over recent years from 25 to 30 rand per tonne delivered Maputo in 1985 ($11 per tonne) to 53 rand per tonne in 1988 ($23/tonne). The border price set by South Africa is the same as for domestic sales and as such it is substantially below the opportunity cost of coal on the international market. Rail costs, 15 rand per tonne included above, can be paid in meticais. 2.19 Government with the assistance of Carboval and Carbolard (two Mozambican companies) and Sweden's Beijer Institute, in 1988 commenced a coal testing program to establish the acceptability of coal and coal stoves in urban households. The program included tests on the suitability and durability of coal stoves, their cost, the appropriateness of the price of coal, the facilities with which the stoves are used, and their popularity with householders. At the end of the testing period in February 1989 the program was yielding a very positive response from the 800 participating households. It is expected that the completion report will support continuance of the program. 2.20 During the pilot stage for coal stoves, coal for household use is being charged above cost at 20 meticais per Kg ($35/tonne) to allow for distributors' costs and a contribution from the coal price to pay for the coal stove.  - 15 - 2.21 Subject to the completion report confirming the interim results, the major constraints on expanding the coal-use program are the speed at which coal stoves can be assembled (presently only :5 stoves per day) and the atmospheric constraints (next paragraph). If the program is extended, additional merchants and stove assembly teams will be brought in, and the program will be extended to Tete.auid Beira. 2.22 Health and Safety Coal is not generally regarded as an environmentally benign fuel, but it is expected to improve air quality in Maputo. Coal produces dust, soot, sulfur and nitrogen oxide gases during combustion. A principal focus of the coal testing program has been the safety in use of the coal stoves. They have been designed with a tall steel chimney to induce draft, give good consumption and draw the harmful fumes out of the house so that they can disperse. Tests on use of the stoves have not indicated any potential health problems. The Swedish consultants (Beijer) assisting with the coal testing program have advised that based on general climatic data, 50,000 households in Maputo could become regular coal users without disturbing environmental standards. At the same time they have assisted DOE to establish regular monitoring of atmospheric conditions to measure the impact of the coal program, so that the overall environmental impact can be kept under control. Electricity 2.23 Overall Situation. Electricity is an important part of the overall Mozambican commercial energy balance but is only a minor part of household energy. Supplies are reasonably reliable in Maputo but, because of attacks, blackouts and brownouts are common in other areas. EDM is taking steps to improve the reliability of supplies, both through rerouting of transmission lines and installation of generators at secure sites. Total concurrent peak demand for Mozambique is about 90 MW, compared with 200 MW entitlement from Cahora Bassa and a current availability from other sources of about 280 MW. Overall generation and transmission capacity is sufficient for foreseeable needs. 2.24 Cost of Electricity. (a) Generation. Mozambique's cost of bulk electricity supply from Cahora Bassa is low by international standards, with a bulk supply cost of 0.5 US c/kWh (as renegotiated in 1988). Cahora Bassa has the capacity for all of Mozambique's needs subject to the security issue. In addition EDM has available 67 MW of low cost hydro. Electricity from the South African grid - currently supplied to Maputo - is at ESCOM's standard bulk tariff and until recently was at very low cost; however a 502 increase in 1987 brought the price to 6.2 rand cents/kWh (2.7 US cents), still a competitive price. Generation from the Maputo thermal plant, nominally 50MW coal generation capacity, costs 1.5 US cents/kWh for fuel and about 0.65 US cents/kWh for other variable costs. 2.25 (b) Distribution. Connection costs for household electrieity supplies must be contained to make the electricity supply affordable. The ESMAP household energy survey revealed cost of internal wiring ranging to $100 per household and detailed cost estimates suggest $150 per household.  - 16 - The ESMAP distribution survey (Swedpower, Sweden) showed expected low-voltage distribution costs at about $200 per household for the Maputo shantytowns. Taken together with meter costs, overall costs for additional household consumers are about $400 to $450 per household for the low voltage system, and appear to be low enough to justify a household electrification program. Cost estimates will be prepared for other cities during 1989 as part of ongoing consultancy work, and priorities will be reviewed to take account of this work. 1 2.26 Electricity supplies to households. Growth in electricity connections since 1970 have failed to keep pace with household formation, with only 60,000 new connections between 1970 and 1980 compared with 1 million additional households over the same period. Of the 356,000 urban households in 1980, only 83,000 (232) had a formal electricity connection (there is some unauthorized supply from house to house but on a small scale). Electricity had reached 50X of the houses defined as structurally suitable for supplies, (according to inherited Portuguese standards, those made of concrete and brick, or of wood with corrugated zinc). Of 2.4 million rural households only 1Z had an electricity connection (24X of houses defined as structurally suitable). Consultants are reviewing these structural standards with a view to further relaxation; and EPM proposes to publicize its requirements in this respect so that householders in non-eligible houses can make appropriate modifications. Urban household formation has continued to grow through the 1980's because of rural families leaving the insecure areas for the comparative safety of the cities, as well as natural population growth. By contrast, the rate of connection to the electricity system has fallen to one-sixth of the rate of the 1970's. The proposed project reduces the role of EDM in new connections and relies more heavily on participation of several Mozambican companies. Together with technical assistance it should 'De possible to increase the rate of new household connections to reach 9,000 a year within 5 years, focused mainly on Maputo, Beira and Nampula. The ESMAP sponsored energy survey of urban households in Maputo and Quelimane, designed to identify and quantify the extent of potential power connections, has shown a large latent demand that is restrained by lack of local distribution lines, the long lead time for EDM to make the link-ups, high connection costs, lack of wire and fittings at reasonable prices, and the high retail price of appliances. Measures to deal with these issues are outlined in Chapter 4. 2.27 Electricity Pricing for Households. The overall financial framework for EDM was agreed with Government for the first Energy Technical Assistance and Rehabilitation project. This provided for the preparation and audit of accounts, and for a review of the financial structure (expected to commence in 1989). Power tariffs are able to cover operating costs but, on the accounting assumptions tentatively used by consultants, will need significant increases to make EDM financially viable. For a typical small-scale user with lighting and cooking (only) by electricity (e.g. 120 kWh/month) the monthly charge at the time of appraisal was about 2,300 meticais (US$4), substantially lesz than for most other fuels. The April 1989 tariff increase raised this to the equivalent of US$5.  - 17 - Liguified Petroleum Gas 2.28 Overall situation. LPG has been available in nominal quantities during the 1980's falling from 13,000 tonnes in 1980 to a low of 3,000 tonnes during mid-decade. Supplies are currently at 7,000 tonnes annually. The principal reasonF for this decline are the closure of the Hatola (Maputo) refinery with the consequent need to import all supplies by rail from South Africa, and the lack -of spare parts for LPG fuelled appliances. The Government has recently arranged for an increase in supplies with a view to measuring the size of the market. 33,000 LPG customers are currently registered to receive supplies. It is believed that all have access to electricity or kerosene as an alternative fuel. 90Z of LPG customers are located in and around Maputo. 2.29 Costs and Prices. LPG as a fuel is low cost but its handling is costly at all stages. It is currently imported in pressurized rail wagons from South Afrlca. A new unloading arm and pipe (to be financed by SIDA - $1,200,000) will enable supplies to be brought alternatively by pressurized LPG barge. Both transportation methods yield about the same cost ($260/tonne). Local bottling and distribution ($60) requires special filling equipment and heavy steel containers for the gas, and LPG handling and retailing costs reflect the need to transport the containers. Total cost, including distributors margin is $400/tonne. This cost is competitive with kerosene provided that distribution costs within Mozambique are minimized, and this can be achieved if the LPG use is restricted to Maputo. LPG appliances in Maputo are sophisticated and expensive, and unless lower cost appliances can be identified LPG use should be focussed on making the best use of the present bottling facilities and storage and the present stock of steel containers (bottles) and appliances. Mocacor intends to review some of the simpler LPG appliances used in other countries to see if suitable ones can be identified for Mozambique, so as to expand the market within Maputo. Because of the weight of a full LPG bottle (about 20 kg), Mocacor is investigating the physical and financial viability of a home delivery service. 2.30 Safety. There have been no accidents reported in the handling and use of LPG, and the bottling arrangements via Mocacor minimize the risks. Government is using the price mechanism to minimize the one high-risk feature, the transport of LPG bottles by sea from Maputo to Beira, as the costs involved with improved safety are uneconomic in relation to the volumes. Kerosene 2.31 Overall situation. Frca the closure of the refinery (1984) until early 1988, Mozambique had available only nominal quantities of kerosene. Annual consumption, which averaged about 45 million liters in the early eighties, fell. to 4 million liters from 1984 to 1987. Government has increased availability by 502, meeting the needs in Maputo city center, but the distribution system needs to be re-established to make the kerosene available to a wider area. The major use of the kerosene seems to be for lighting in houses not connected to the power supply, and a small amount is  - 18 - used as a cooking fuel. Since the refinery closure supplies havj been made available from the degradation of jet kerosene, so that fuel no longer suitable for jet turbines was sold for household use. Some problems were experienced with this, and kerosene imports recommenced in 1988. 60Z of kerosene customers are located in and around Maputo. 2.32 Distribution System. In the early eighties kerosene was distributed in bulk to about 8,000 retailers and cooperatives in Maputo. each.supplying about 25 tamilies. Many of the retailers sold the kerosene in cens of 1 to 20 liters, which in practice were not returned. This led to a high usage of cans and a high cost. The recent reintroduction of kerosene has been to 12 of the gasoline service stations (i.e. about 752 of the service stations in the Maputo area) where in each case the low gasoline demand has permitted the conversion of one pump to kerosene. Progress in bringing kerosene to the less-wealthy urban areas has been slow. One of the local manufacturers of cans and drums has restarted manufacture of large (210 liter) drums for the merchants, and PETROMOC is cooperating by leasing hand pumps to enable retailers to fill customers' cans. These pumps are expensive (about $75 each, excluding tax and duties) and PETROMOC is investigating simpler filling systems. 2.33 Costs and prices. Kerosene has no special handling problems either in bulk or retail, and no special safety problems in transport and distribution. Although one of the more expensive petroleum products ex- refinery (about $160/tonne), the ease and low cost of handling makes it possible to retail without subsidy at 19 US cents/liter ($235/tonie). Costs of kerosene stoves ($15) and lamps ($l-$15) are similarly below comparable LPG costs, although the appliances are not as durable. This ease of handling, low capital and operation cost of distribution and 'low, cost of appliances makes kerosene a suitable interim fuel while longer term fuels are being introduced. 2.34 Safety. A number of countries have experienced safet) problems with kerosene. In the United States freestanding kerosene space heaters have proven unstable and when knocked over have quickly ignited clothing and furnishings. Kerosene space heaters are not used in Mozambique, but there have recently been similar tragic accidents with low price 'wick' kerosene lamps because of the ease with which they can be knocked over. These lamps were a special import under a foreign aid program and are no longer imported. Similar problems have arisen with home-made lamps. The Government's solution is to encourage the import of safer lamps at affordable prices. Both the higher priced kerosene lamps and the kerosene stoves in use in Mozambique are designed for stability and have not caused accidents.  - 19 - Ill. THE BORROWER, THE SECTOR AND THE EXECUTING AGENCIES The Borrower and th: Executing Agencies 3.01 The Government of the People's Republic of Mozambique would be the Borrower or the 17.1 million SDR IDA Credit (US$ 22 million). The proceeds of the credit would be onlent in SDR: to EDM SDR 3.35 million (US$ 4.3 million), PETROMOC SDR 1.55 million (US$ 2.0 million) and Mocacor SDR 9.55 million (US$ 0.7 million) as executing agencies for energy supply. Signed subsidiary loan agreements will be conditions of effectiveness of the IDA credit. The SDR 11.65 million (US$ 15 million) balance will be for the project coordination and the wood, charcoal and coal components of the project, and for the implementation unit and various other Mozambican companies for the purchases of equipment, parts and services required for this project, and an amount to be allocated subsequently as the project progresses. Sectoral Arrangements 3.02 The supply of commercial energy products (petroleum products, electricity, coal and gas) is primarily the responsibility of public sector agencies. Coal and kerosene are also sold to consumers by private sector traders and the supply of woodfuels is carried out by private producers and traders. The Ministry of Industry and Energy (MIE) has overall responsibility f..r implementing energy policies in Mozambique, and it is responsible for the two main operating enterprises in the electricity and petroleum supply sub- sectors, namely Electricidade de Mocambique (EDM) and the national petroleum supply company (PETROMOC). MIE through PETROMOC is also responsible for Mocacor, a PETROGAL/PETROMOC joint venture responsible for LPG. The Department of Energy (DOE) in MIE is responsible for advice and coordination on policy and overall sector development. The Ministry of Mineral Resources (MMR) is responsible for petroleum, gas and coal exploration, development and production through the operating enterprises, the National Hydrocarbons Company (ENH) for petroleum and gas, and the National Coal Company (CARBOMOC) for coal production. The Ministry of Agxiculture is involved in woodfuel matters through the Directorate of National Forestry and Wildlife. 3.03 Government organizations responsible for impj.ementing national economic policies affect the energy sector. The Ministry of Industry and Energy is itself responsible for major manufacturing companies, including Celmoque (manufacturer of copper cable), one of the key industrial enterprises supporting electrification. The Secretariat for Light Industry is responsible for promoting industrial development of the medium industries (e.g. appliance manufacturers) and for IDIL, the institute for the development of light industry. The Banco de Mocambique controls foreign exchange and domestic credit, the Ministry of Finance is responsible for budgetary allocations, taxation and pricing policies, and the Ministry of Planning has formal responsibility for inter-sectoral priorities and resource requirements. The Ministry of Labor has an important bearing on the energy sector through its responsibility for labor legislation, as do the Council of Ministers and National Wages and Prices Commission who fix or regulate the  - 20 - prices of important goods and services, including those foz electricity, coal and petroleum products. Department of Energy 3.04 The Ministry of Industry and Energy (MIE) has overall responsibility for the energy sector, and for the major companies in the industrial sector. A Department or Energy was set up by MIE in 1985 to provide technical support and to act as a catalyst for policy initiatives in the energy sector. The Department is responsible for the coordination and monitoring of the energy sector, collecting data, initiating cross-sectoral activities, advising on tariffs and pricing, and for energy policy. It has particular responsibility for initiating research, conservation and other activity, and for hands on guidance of energy operations for areas outside the scope of the main energy institutions. The Department will provide overall coordination and supervision of implementation of the project. Further detail is in Annex 4.09. The Electricity Subsector 3.05 The principal entities in the electricity subsector are EDM (see next paragraph), ENIEL (responsible for construction of public works), ELECTROMOC (with responsibility for construction of other works) and Interelectra (import and export, warehousing), in the public sector, and HCB as supplier of hydroelectricity from Cahora Bassa. Several industrial companies generate power for their own usz. The appliance and installation activities are in the private or intervened sectors 4/ but competition is limited because of the small number of companies involved in the manufacture of electric wire, pots and pans, appliances and plugs, sockets etc. Numerous small-scale enterprises (approved by EDM) install electric wiring. Appliances are sold through retail stores and not by EDM. 3.06 Electricidade de Mocambique (EDM), which reports to the MIE, was created in 1977 and given the exclusive responsibility in the country for the public supply of electricity including generation, transmission and distribution of power. During the next few years EDM took over the operations of numerous regional and municipal undertakings that supplied both electricity and water, and subsequently relinquished most of the water supply operations. Over the years EDM has experienced difficulties in integrating its operations due to shortages of skilled manpower, to the wide dispersion of load centers and facilities, and to lack of standardization among inherited generating plant, distribution voltages, accounting systems and tariffs. EDM had to face these issues in an era of shortage of cash, social rather than business objectives, and dependency on expatriate help through various aid agencies (strong support from Sweden, Norway and Netherlands). EDM's many problems have been greatly exacerbated by the frequent sabotage of transmission lines, and shortage of fuel for generators. 4/ Companies whose owners left at the time of independence. The state intervened to provide management pending clarification of their legal status.  - 21 - 3.07 EDM employs about 3,800 staff of which about 1,000 are semi-skilled workers (mainly electricians and mechanics) and 120 are skilled workers and staff in engineering, professional, managerial and technical grades. The total complement of skilled workers is low for the scale of EDM's operations whereas the numbers of unskilled workers seem high. There are currently about 80 expatriates mainly from Portugal, with some from Sweden and other countries. Recent improvements in benefits have slowed the emigration of skilled staff, but there remains a major problem of uncompetitive salaries (being addressed under the Energy Technical Assistance and Rehabilitation Credit). It will take many years to train sufficient numbers of local personnel and EDM will be dependent on expatriates for some time. Training in this situation is inevitably a slow process, given the low average educational standard of school leavers over the last decade and the consequent need for extended general training. Training and technical assistance are being provided on a large scale through the Energy Technical Assistance and Rehabilitation Project and with extensive support from the donor community. Further t-chnical assistance will be provided to EDM to assist in expansion of the distribution system to facilitate implementation of the urban household energy project. The Petroleum Subsector 3.08 The principal entities in the petroleum sub-sector are PETROMOC, Mocacor (see below for both), ENH (responsible for exploration for oil and gas) in the public sector, BP, Caltex and Mobil as private and semi-private sector companies in petroleum distribution, and Amoco, BP, Exxon and Shell as private sector companies in petroleum exploration. The manufacture and marketing of appliances, drums and cans is in the private or intervened sectors, with limited local competition in the manufacture of appliances and drums and cans. Appliances and cans are sold through the retail network, both stores and cooperatives, and kerosene is sold through a network of merchants and cooperatives as well as through service stations. 3.09 Empresa Nacional de Petroleos de Mocambique (PETROMOC) which reports to MIE, was created in 197'. PETROMOC is responsible for supervising the country's petroleum sector, including necessary planning, and for all petroleum imports. It collects Government taxes on all petroleum products. In carrying out its import role PETROMOC has to coordinate with and seek the approval of MIE, the Ministry of Finance and the Banco de Mocambique. PETROMOC is responsible for the Matola refinery, closed since 1984. Pending consultancy studies and a final decision on the refinery (expected in 1989), PETROMOC is retaining the maintenance workforce, process operators, other key skilled technicians and selected staff since fully-trained technicians and operatives are scarce in Mozambique. PETROMOC has been hiring out their underemployed skilled workers to other industrial plants since the refinery was shut down. PETROMOC is also responsible for the supply and distribution of petroleum products (about 802), together with BP (about 20%). BP has the major role in distributing lube oils. Caltex and Mobil operate limited bunkering facilities. PETROMOC and BP sell motor gasoline and kerosene via privately-owned service stations and other outlets. Industrial supplies are delivered direct to customers.  - 22 - 3.10 PETROMOC'.t total workforce of 1,000 includes 360 at the refinery, the balance being used for product imports and marketing. Staffing levels are reasonable in comparison with the international companies operating in Mozambique. PETROMOC has the ability to offer flexible employee benefits and has been able to retain skilled staff. However, there has been a sharp deterioration recently in relative salaries, with problems comparable to EDM. PETROMOC's training and technical assistance problems are similar to those of other enterprises such as EDM. It is making a great effort to improve the general level of education of its workers, several of whom are studying at night at primary and secondary levels of education. Instruction is provided by PETROMOC's own staff. Technical assistance is being provided on a large scale with the cooperation of multilateral and bilateral donors, especially under the IDA supported Energy Technical Assistance and Rehabilitation Project. Additional technical assistance for PETROMOC is envisaged for the urban household energy project to support better scheduling of distribution activities, improving storage and control of quality of products. 3.11 Mocacor is jointly owned by PETROMOC (24Z) and PETROGAL (762), the Portuguese national oil company. Although LPG is imported by PETROMOC. Mocacor is responsible for its operational storage, bottling, distribution and sale. Mocacor distributes direct to major customers, and transports LPG by truck to 20 distribution points, and to some of the cooperatives. The pricing system provides some incentive for collection from the depot, and several local suppliers do this. It has a workforce of 180, down one third from the level of the early 1980's and broadly sufficient for the level of sales envisaged under the project. The overall operation is reasonably efficient, given the age and condition of the facilities and shortage of spares, trucks etc., and is conducted with a view to safe operation of the Matola depot. Mocacor needs to strengthen its te_nnical assistance arrangement with PETROGAL, for general operational advice. While the needs are not large, a small amount of training is included under the project. Accounts and Auditing 3.12 Accounts for the parastatal organizations have not been satisfactorily prepared and until recently were not subject to external auditing, except in relation to taxation. The decrees that established the organizations stipulate that annual accounts should be submitted tc the parent ministry. EDM has submitted outline income and expenditure statements as part of the annual budget exercise, but the standard has fallen well short of the level of international accounting standards in terms of both the degree of detail and comprehensiveness. With consultancy assistance (Price Waterhouse, Lisbon) comprehensive draft accounts for 1986 were produced in October 1988. PETROMOC's first financial accounts since 1979 were produced in September 1988, and related to 1986 (assistance was provided by Sismet, Lisbon). In both cases this assistance was financed under the Energy Technical Assistance and Rehabilitation Credit. Mocacor has prepared satisfactory accounts for each year in line with local standards. 3.13 The quality of raw accounting data in EDM and PETROMOC needs substantial improvements. These companies lack sufficient trained personnel, equipment and suitable systems. Mocacor's problems relate mainly to its lack  - 23 - equipment and suitable systems. Mocacor's problems relate mainly to its lack of suitable office equipment. EDM, PETROMOC and Mocacor need adequate financial reports to improve planning and control of the operations, provide the basis for deternrining sound pricing policies and for financial control during future developmpnt programs. Technical assistance is being and will continue to be provided under the Energy Technical Assistance and Rehabilitation Project to design and implement financial, accounting and planning systems for EDM and PETROMOC, with a view to both companies being able to prepare accounts unaided within two to four years, (PETROMOC and EDM respectively) and to having acccunts suitable for international audit by 1990 and 1992. With effect from 1990 (PETROMOC and Mocacor) and 1992 (EDM) the energy supply companies will be required under the project to produce accounts of a standard suitable for international audit and to submit audit reports to IDA within nine months of the end of the fiscal year. This is in addition to the standard practice in Mozambique, which is to have the tax assessment audited by the Ministry of Finance. All special accounts and statements of expenditure will be independently audited each year within nine months after the end of the fiscal year concerned. Insurance 3.14 Insurance in Mozambique is normally taken out in local currency. However, the severe shortage of foreign currency seriously limits the value of insurance payments when made in meticais. Government has agreed to design and review with IDA by 31 December 1991 ways of enabling assets to be insured on a basis providing for asset replacement (i.e. so that sufficient foreign exchange is available), and in agreement with IDA to set a timetable for this to be implemented. IV. THE PROJECT Project Preparation 4.01 The priority need to address the household energy issues was identified by the UNDP/ESMAP Energy Assessment Report and the longer-range studies were initiated through the Energy Technical Assistance and Rehabilitation Project. Because of the impact on the general population of the various structural adjustment measures impl.mented during 1987 and 1988, the Government decided to advance the introduction of measures to increase the availability of household energy and reduce the cost of household fuels to the urban population, and to designate the project as a priority project. The household energy survey of parts of Maputo and Quelimane was undertaken by Behrens for ESMAP from June to August 1988, and the power distribution survey for the same areas was undertaken at that time by Swedpower (Sweden) for EDM under ESMAP's supervision. Overall coordination was carried out by DOE. Investments for repairs and rehabilitation of the energy supply and distribution systems were identified by EDM, PETROMOC and Mocacor during project preparation. Investment requirements for rehabilitation and improvement of cable, appliance manufacture etc. were identified in part  - 24 - through an A. D. Little (US) consultancy study and further refined by the respective companies and their advisors. A project preparation facility of US$750,000 is being used to finance the advance rehabilitation of distribution facilities and provision of parts for the repair of bottles and stoves ($185,000), supply of appliances ($200,000), initial costs of technical assistance and studies ($210,000) and equipment and various facilities for project coordination ($155,000). The Second Rehabilitation Credit (Cr.1841-Moz) will finance rehabilitation of kerosene distribution facilities, purchase of pumps for filling of cans, and kerosene lamps ($540,000). It will also finance $960,000 of kerosene. In relation to urban household energy, the Energy Technical Assistance and Rehabilitation Credit will finance connection of 4,150 householders to the power systems in Maputo, Beira, Nampula and Nacala, in addition to rehabilitation of power and petroleum distribution facilities and technical assistance, and surveys and testing for the traditional fuels. Proiect Obiectives 4.02 The project would reinforce the Government's efforts in structural adjustment by improving the availability both of fuel and appliances, and by reducing the impact of adjustment on the middle and low income segments of the urban population. The main project objective is to bring low-cost commercial fuels to a large number of householders in urban areas of Mozambique, in an efficient and cost-effective manner. The designated measures include the acceleration of electricity connections in urban areas, improved supply of a range of fuels and appliances, improved end-use fuel efficiency in households, establishment of small-scale crediL facilities for connections, fittings and appliances, and provision of choice in fuel use. A second major objective is to strengthen the agencies and energy supply companies, managerially, operationally and financially. Measures to achieve this include extensive technical assistance and reform of pricing and financial policies. 4.03 On a broader view, the project objectives are to slow down deforestation around urban areas, to improve air quality, to alleviate poverty through lowering the cost of fuel, to provide for testing of improved energy efficiency and management measures, to develop the use of indigenous natural resources, to encourage development of local institutions and provide opportunities for local industries, and to reduce demands on the limited transport capacity. DOE will work with the energy supply companies to agree on the performance standards to be achieved by the end of the rehabilitation program, and will prepare proposals for discussion and agreement with IDA by September 30, 1994. Project Options and Design 4.04 Woodfuel options are limited by the general unsuitability of the soil and climate (in the south), limited availability of transport, rapid urbanization and the impact of armed attacks. A woodfuels strategy has not yet been prepared. The project aims to achieve the maximum that can be physically and economically achieved in the short term: (1) establish a biomass energy unit to develop policies and promote efficiency improvements  - 25 - (2) stove research and pilot development ar.d (3) plantation maintenance with minor expansion. This is the basis of the plans in Annex 4.04. 4.05 Power system expansion is constrained by the physical capability of EDM to make new connections, the limited local capability for installing house wiring, and the ability of Mozambique to manage and supervise a major electrification program. A new connection rate rising to about 9,000 houses a year has been chosen as the maximum achievable. It will be twice the maximum rate of connection achieved by EDM in the past, and will require collaboration of a number of institutions. Government is reluctant to choose a more modest rate as the increase in the number of new urban houses is still several times the proposed electrification rate. To ensure minimum cost and maximum benefits, EDM will need to identify areas of low cost (both generation and distribution) so that the new customers make a positive contribution to EDM's financial position. These areas will also need to be areas of average or above average wood costs to provide the incentive to substitute with electricity. EDM will establish target cost levels for various cities with a view to ensuring the benefits of the connection program. 4.06 Subject to confirmation from the formal evaluation of the test program, the coal program will be developed at the maximum rate possible in Maputo, Beira and Tete. These cities are currently the only urban areas with access to low cost coal, and the range of cities will be widened as the transport situation improves. The overall target numbers have been based on atmospheric studies and will be modified as further data is collected. 4.07 Handling cost, for LPG are high and on economic grounds its use should currently be restricted to Maputo. To ensure the economic benefits, total sales should be kept within the capacity limits for storage and bottling. As petroleum fuels are expensive and require large amounts of foreign exchange, Government priority is to encourage LPG and kerosene as part of a short term solution to the household energy problem, but to discourage long term expansion of LPG and kerosene, and (between these two fuels) to discourage LPG particularly as appliances currently used in Mozambique are expensive and long-lasting, whereas it will be less difficult for customers to dispose of shorter life, lower cost kerosene appliances in order to adopt coal or electricity. The targets for LPG are based on the needs of existing registered customers; those for kerosene are based on a limited market survey. 4.08 The precise targets, the balance between the fuels and the priority placed on individual urban centers and the progress on achieving project objectives would be reviewed annually between the Government and IDA, taking account of the experience to date. The first review would be held at the time the household energy strategy is discussed, i.e. by September 30, 1990.  - 26 - Project Description 4.09 The main features of the proposed project, summarized from the description given in Annex 4.01, are as follows: (a) power distribution system rehabilitation reinforcement and extension primarily in Maputo, Beira, Nampula and Nacala, and also in other cities such as Quelimane, Chokwe, Xai-Xai, Chimoio and Tete; (b) reinforcement of kerosene and LPG storage and distribution facilities, particularly in Maputo, Xai-Xai, Inhambane, Manica, Mocuba and Lichinga; (c) improve efficiency of woodfuel utilization through development of improved charcoaling methods, improved wood stoves and charcoal stoves, maintenance of plantations, forest inventory etc. (woodfuels program); (d) provision of coal stoves to about 50,000 households in Maputo, Beira and Tete and other areas with access to coal, (subject to formal evaluation of the coal testing program confirming the initial results); (e) connection of 40,000 urban houses to the system through provision of transportation equipment, tools, materials for house wiring contractors, together with sufficient service cable and fittings for the proposed electricity connections (PROLEC); (f) provision of about 50,000 electric stoves, 60,000 kerosene stoves, aluminum pots and pans, and sufficient kerosene cans for householders and drums for merchants, 80,000 kerosene lamps, 200,000 electric light bulbs (of which 40Z are to be high efficiency bulbs) and a number of electric fans and solar panels for public buildings as part of an experimental energy efficiency program, provision of spare parts for electric stoves, kerosene stoves and LPG stoves, and of capacitors and medium and low voltage equipment for industrialists. Rehabilitation through cofinanciers of cable manufacturing and related industrial studies. (g) institutional support for project cuordination and implementation, establishment o.Z biomass energy unit in Ministry of Agriculture, technical assistance to the EDM, PETROMOC and Mocacor etc. (details in Annexes 4.02, 4.03 and 4.04) (h) policy measures to facilitate financial soundness of energy suppliers, and to provide incentives, encourage affordability, ensure safety, and enhance fuel and appliance availability and freedom of choice.  - 27 - Over the five to six years the project will require import of 47,000 tons of coal, 75,000 tons of kerosene and 40,000 tons of LPG. Project Implementation 4.10 Based on progress to date, the proposed implementation period for the project would be from the effective date (late 1989) to the June 30, 1996 completion date. MIE would be responsible for coordinating the project and has designated a project coordinator from DOE who is acceptable to the Association. The project coordinator is supported by an economist and a technical assistant and the necessary systems would be designed throLgh consultants. Continuation of this support will be provided for under the project (see Annex 4.09). MIE, EDM and PETROMOC, the principal entities in the household energy program, are gaining experience of procurement under IDA guidelines and the Coordination Unit for Import Programs (UCPI) in the Ministry of Commerce, which is supervising procurement under the Second Rehabilitation Credit, would provide guidance to all entities. The proposed project includes provision for reinforcement of UCPI. The DOE has been responsible for the initial conceptualization of the project, for defining the main elements and for ensuring the commitment and understanding of each entity and company involved. It will continue to take a leading role in implementing the project in the light of experience through establishing a formal household energy strategy, designing the next stage of the coal program, ensuring a focus on priorities as detailed cost estimates are prepared for power connections in provincial cities, and through monitoring and reporting on progress in each sub-sector. 4.11 PETROMOC has overall responsibility for activities in the petroleum sector, and would ensure that the petroleum-related components are carried out. PETROMOC and Mocacor would be responsible for the energy supply systems and supply arrangements for kerosene and LPG respectively. They would use specialist contractors for complex rehabilitation work, and would appoint counterpart staff to work with the major contractors. Own staff would be used for more routine rehabilitation work. Retail sales of kerosene will also be undertaken by foreign-owned and local private enterprise and cooperatives. Distribution margins have recently been increased and provide sufficient incentive for distributors to increase sales of kerosene both in Maputo and in other urban areas. PETROMOC as the supervising agency for the petroleum industry would encourage the distribution through leasing arrangements where required, e.g. through leasing of delivery vehicles to BP, and through leasing of pumps to distributors. Local retailers would market the kerosene appliances, and Mocacor would offer spare parts and repair facilities for LPG appliances. No special credit facilities are anticipated as recent reductions in import duties will make the appliances more affordable. The affordability would be carefully monitored to see if a layaway scheme is necessary. 4.12 EDM has overall responsibility for the electricity component and for overall coordination, supplying electricity, and reinforcing the electricity transmission and distribution system. It would use specialist contractors for the complex rehabilitation work and for expansion of the transmission and distribution systems, assigning counterpart staff to work with the contractors. Own staff would be used for more routine work. EDM would be  - 28 - responsible for prioritizing areas for new electricity connections and determining cost parameters, as well as for verifying the safety of the house wiring systems and connecting houses to the system. It is expected that EDM would act as collection agent, billing householders the monthly installments to pay for the house wiring, etc. Under the supervision of a local engineering company, the physical work of internal house wiring, installation of appliances, etc., would be undertaken by electrical contractors, of which 40 local companies have been identified. These contractors are expected to provide the labor force, and arrangements will be made for local contractors to have access to foreign exchange to buy necessary vehicles and tools. 4.13 BPD (Banco Popular de Desenvolvimento) would have special responsibility for the local financing arrangements. It would assess the creditworthiness of householders and make term loans to pay for the electrification package, generally in line with their normal credit policies. BPD would establish a model loan agreement for the household electrification program (PROLEC), to be finalized and approved by IDA as a condition of disbursement of related Credit funds. As mentioned above, BPD would make payments direct to the electrical contractors in line with work done and to Interelectra in line with the supply to households of services and equipment and materials. BPD as banker to many of the local companies that may be involved in the project will, if required, make local currency loans in line with its standard policies to enable the companies to finance their operations and finance the purchase of foreign exchange. BPD has ample liquidity. Moreover, most companies participating in this project have sufficient meticais available without additional funding. 4.14 In view of the size of the program a number of companies would be involved and arrangements for the household electrification program (detailed in Annex 4.03), has been set out in the Electrification agreement entered into between the participants. The aim of the scheme is to use to the extent possible existing companies and build on the skills that already exist in those companies. All companies and entities involved need some technical assistance and logistical support in order to achieve these enhanced responsibilities. The 'PROLEC' component will be managed by a supervisory implementation unit to be established and maintained in the Department of Energy (see Annex 4.03). The staffing and availability of the principal members of this unit have been confirmed. Interelectra, a national company under the Ministry of Commerce, will be responsible for purchasing all equipment and materials required for the household electrification, and for supplying them as needed to the installation contractors. Interelectra will also have the responsibility for ensuring the quality of locally supplied goods. Local supply will be encouraged through incorporation of local preference in bidding documents in line with IDA procurement guidelines. Interelectra will monitor prices, quality and supply performance. Technical assistance will be provided under the project to support local institutions in their efforts to encourage improvement in quality and local content. 4.15 Carbomoc, a national company under the Ministry of Mineral Resources, has overall responsibility for coal. It is responsible for production ot domestic coal and also the import of coal for power and other uses. It will ensure the supply of household coal needed for the program. A subsidiary,  - 29 - Carboval, and a private company, Carbolard, are undertaking the supply of household coal to the bairros (the suburban communities) and the supply and installation of coal stoves. The coal stoves and fuels ere being retailed through newly established 'energy' stores in the bairros. As all coal supplies are channeled through these companies it has proved possible to charge a price for coal that includes an element to cover over time the cost of the stoves, and it is intended to continue this practice. The net effective cost of coal to householders, on this basis, is less than half the fuel cost for the next cheapest fuel option, and householders have no incentive to switch to another fuel. However, alternative charging options will be considered as part of the household energy strategy. 4.16 The woodfuels component would be the responsibility of the Ministry of Agriculture, through the National Forestry and Wildlife Department. 'hey would arrange for continued maintenance and rehabilitation of the woodfuel plantations, and for preparing an up to date forestry inventory through the aerophotographic survey (Energy Technical Assistance and Rehabilitation project), satellite imagery and mapping. A biomass energy unit for traditional fuels has been established within the forestry department and will be maintained at least under completion of the woodfuels component, (see Annex 4.04). The principal local staff for this unit have already been appointed. The biomass energy unit will be responsible for overall long term planning for supply of traditional energy for collection of data and for testing and developing stoves with improved fuel efficiency. Proiect Cost Estimate 4.17 The project cost, excluding fuels is US$49 million, of which US$41 million is in foreign exchange. In addition, allowing for necessary contingencies, the project would require approximately US$29 million in petroleum fuels and US$1 million for coal, at a total of US$30 million of essential related costs. The total financing requirement also includes interest during the implementation period, estimated to be about US$0.5 million in foreign exchange and US$1.0 million in local ct'rrency. A breakdown of the estimated cost by broad category is given in T'able 4.1 and by project component in Annex 4.01.  - 30 - Table 4.1 Proiect Costt Foreign Local Total US$ million EDM Component Power system reinforcement 12.0 2.0 14.0 Vehicles and equipment 0.2 - 0.2 Technical assistance 2.0 0.3 2.3 PETROMOC Component Rehabilitation, vehicles, equipment 1.2 0.1 1.3 Technical assistance 0.6 0.1 0.7 Mocacor Component Rehabilitation, vehicles, equipment 0.45 0.1 0.55 Technical assistance 0.15 - 0.15 DOE Component Coal progrf.m 0.9 1.0 1.9 Woodfuels program 2.7 0.5 3.2 Coordination and t.a. 0.9 0.1 1.0 Industrial studies/cable rehabilitation 1.3 0.1 1.4 BdM Component Electrification program (Prolec) 7.1 2.2 9.3 Commercial energy program 3.1 0.4 3.5 Base Costs 32.6 6.9 39.5 Physical contingencies 3.3 0.7 4.0 Price contingencies 4.8 1.0 5.8 Total, excluding interest 40.7 8.6 49.3 Interest during implementation 0.5 1.0 1.5 Total Project Costs 41.2 9.6 50.8 Fuel imports 30.0 0.0 30.0 Total Financing Required 71.2 9.6 80.8 4.18 The local costs of about US$8.6 million exclude import duties and taxes. Import duties amounting to US$1.6 million equivalent would be payable on imports, based on rates introduced early in 1989. The project base costs are estimated in end 1988 price terms. Physical contingencies have been provided at an average of 1OZ of base costs. Price contingencies for foreigr. costs in US $ terms have been calculated from the following projected international rates of inflation, 1989 - 3Z, 1990 and after - 4z. Price contingencies for local costs in US$ terms are based on the same rates, implying devaluation of the metical to maintain its international purchasing parity. The project cost estimates for stoves, lamps, cable, fittings and drums are based on recent quotations from various manufacturers and suppliers. Power system cost estimates are based on consultant's studies (Swedpower, 1988). Technical assistance costs are based on recent experience in Mozambique and are expected to average US$6,000-8,000 per man-month based on 650 man months and are inclusive of overheads, subsistence, travel etc.  - 31 - Financing Plan 4.19 Foreign costs would be provided by IDA (US$ 22 million), Nordic Development Fund (NDF) (SDR 4.4 million, equivalent to US$ 5.7 million), BADEA (US$ 10 million) and Danida (US$ 3-5 million). Apart from some minor local costs related to consultancy, all local costs would be financed by the Mozambican state enterprises an. companies, BPD and Government, as appropriate. The IDA contribution represents 452 of total financing and 542 of foreign exchange finance. Danida funds would be parallel (tied) finance and would be focussed on the target towns of Chimoio, Quelimane and Tete. Eighty-six per cent of NDF funds would be used in parallel (tied to Nordic source procurement, particularly consultancy). A.DF will also finance cable factory rehabilitation and industrial studies on an untied basis, and NDF hss tentatively requested IDA to administer this. BADEA funds would be focussed on power distribution and equipment for the electrification program for Maputo and Beira and would be subject to standard procurement rules for Arab Funds. Fuels would be financed from commodity aid funds (e.g., SIDA, Norad, IDA's rehabilitation credits) and sufficient funds are available for the first two years. There is not expected to be difficulty in obtaining commodity aid funds for later years. The proposed financing plan is in Table 4.2. Signature of the Nordic Development Fund credit and BADEA loan agreements are conditions of disbursement for EDM's hardware and the PROLEC hardware components respectively. TABLE 4.2 PROPOSED FINAICING PLAN US $ million Foreign Local Total IDA 22 - 22 Danida 3 - 3 BADEA 10 - 10 Nordic Development Fund (NDF) 5.7 - 5.7 Mozambican Companies 0.5 8.4 8.9 Government of Mozambique 1.2 1.2 Total Project Finance 41.2 9.6 50.8 Parallel Finance: Commodity Aid Funds tSIDA, Norad) and IDA Rehabilitation II Credit 30.0 - 30.0 Total Financing 71.2 9.6 80.8 4.20 Onlending in SDR of US$ 2 million (SDR 1.55 million) of the IDA Credit to PETROMOC and US$ 700,000 million (SDR 0.55 million) to Mocaror would be at 110? of the prevailing Bank loan rate (8.4Z), and similarly of US$ 4.4 million (SDR 3.35 million) to EDM for at the prevailing Bank loan rate (7.65Z). The above loan to EDM would have a repayment period of 20 years including five years' grace, and to PETROMOC and Mocacor would be ten years including four years' grace. The energy agencies would bear the foreign exchange risk. The credit allocation includes US$ 2.8 million (SDR 2.17 million) not allocated to specific categories, part of which is expected to be allocated as needed to the energy companies for the project. The  - 32 - conclusion of subsidiary loan agreements with EDM, PETROMOC and Mocacor would be conditions of Credit effectiveness. The funds for supplies of stoves, lamps, equipment, spares, etc. (about USS 6 million) would be available for purchase at the Banco de Mocambique for the purposes of this project by Interelectra and others. Companies purchasing foreign exchange with local funds do not carry foreign exchange risk. 4.21 Under tLa Energy Technical Assistance and Rehabilitation Credit special interest rates were agreed for onlending for technical assistance for the energy companies. The financial position of PETROMOC and Mocacor are now sufficiently satisfactory and no special onlending arrangements for this are required. IDA is not planning to finance EDM's technical assistance. Procurement 4.22 For the IDA-financed portion of the project, about half of the procurement would be by International Competitive Bidding (ICB) in accordance with the Bank Group's procurement guidelines. For those items where local suppliers have suitable products (e.g. stoves) domestic preference will apply in accordance with Bank Group rules. Domestic preference will also apply for works in connection with power distribution, in accordance with Bank Group rules. The exceptions to ICB would be (a) those items where local repair and service facilities are essential (b) small contracts where requirements cannot be known with accuracy and which br.e needed at intervals through the project period, (c) small contracts for rehabilitation and overhaul of original equipment, (d) smaller civil works contracts and (e) consultancy and technical assistance. In the same way, Mozambican companies purchasing foreign exchange from BDM will be required to use ICB (and other procedures acceptable to IDA) under the supervision of UCPI. 4.23 Rehabilitation of the LPG bottling plant would be procured through direct negotiation with the original manufacturer. Rehabilitation of LPG compressors is also expected to be through direct contracting, although Mocacor is trying to identify additional suppliers with compatible equipment. Together these would total about US$ 200,000. Because of the small number involved, their specialized nature, the urgency of acquisition and the adequate representation of eligible sources, vehicles will be procured by local competitive bidding procedures satisfactory to the IDA. Moreover all new vehicles will be purchased with a set of spares. LCB procedures would also apply to some contracts for power distribution works (up to US$250,000 for any one contract and USS 1 million in total), to small scale civil works (estimated at US$ 50,000) and computers. The LCB procedures have been reviewed and found acceptable. The total amount to be purchased through LCB procedures would be limited to US$ 4 million in total. International shopping procedures (subject to a minimum of three bids) would apply to small packages that cannot be packaged in a form suitable for ICB, subject to a maximum of US$ 250,000 for any one bid and USS 3 million in total. Technical assistance would be obtained in accordance with the Bank Group's consultancy guidelines. DOE, EDM and PETROMOC already have experience of the Bank's procurement procedures. Mocacor would also be expected to undertake its own procurement using technical advice from UCPI. Other procurement would be coordinated and supervised by UCPI on behalf of the Government, and UCPI would give general support. All -.ontracts of value greater than US$250,000 which would be financed by the credit would be subject to prior approval by the Association. The procurement schedule is given in Table 4.3.  - 33 - Table 4.3 Prosed Procurmat Scheule WI eillIon IDA Financina Financed Local ICB LCB IS ON CON by Othero Component Total EDM Component Power ayt me reinforement 389. 1.0 0.05 0.06 0.0 (t) 2.0 (D) 2.6 VehIcle /EquIpmsnt a.2 Technical assistance 2.5 (N) 0.4 20.65 PETROMOC Compnent Stiorag/dIitrbution rehab. 0. 0.1 Vehicles 0.5 EquTpeent/materialos 0. Technical ossistance 0.0 0.1 2.5 ocacor Comr,onent PTini Rehnb 0.06 Perts/Vehicles 0.45 0.1 Office Equipment 0.06 Technical assistance 0.16 0.8 DOE Comronent Vehicle , Equlpment, Supplies 0.3 1.1 0.96 0.1 0.2 Materials 1.0 1.2 Technical Assistance, Studie- 2.0 0.6 Civil works 0.06 9.2 Cable rehab/indue studies 1.7 (N) 0.1 8dM Component Prolc, stoves, sockets, fittings 3.06 2. 0 (8) 1.0 (D) 0.5 Contractors tools and vehicle* 0.6 0.26 2.1 Supervisory units 0.6 i.66 0.8 Commercial energy component 2.3 1.6 (N) 0.6 16.16 10.8 4.0 3.0 0.2 4.6 1s.7 6.6 49.S Note 1. Total ICB is USS 11.6 million, Including US$ 1.2 million ICS from Nordic Development Fund untied financing for cable factory rehabilitation. ICB portion under IDA finance amounts to USS1O.3 million 2. Other methods cover procurement by BADEA (8) rules (USSIO million), Danida (D) rules (USS3 million), ti;dNDF (N) funding (USS4 million) and counterpart investment by local entities (USS8.6 million). NDF funding also Includes studies (untied -USS O. Smillion) and the ICB portion (US8 1.2 million) noted above. 3. Total of IDA financing above is USS 22 million.  - 34 - Disbursements 4.24 The estimated disbursement period for the ID. Credit is six years (Annex 4.05). The IDA Credit would be used to finance: (i) 100 percent of foreign expenditures and 70Z of local expenditures for equipment, materials, supplies, spare parts and vehicles under the EDM, PETROMOC, Mocacor and DOE components, the (PROLEC) Household Electrification and Commercial Energy programs; and (ii) 100 percent of expenditures for consultants' services and training. IDA financing would be for those items not targeted by cofinanciers, i.e. primarily for (i) power system reinforcement (USS 5.3 million); (ii) stoves, lamps, fittings, meter boxes and circuit breakers and local contractors equipment (US$ 6.2 million); (iii) the traditional energy program (USS 3.3 million); (iv) rehabilitation/ reinforcement of the kerosene and LPG systems (USS 2 million); (v) the coal program (US$ 1.2 million); and (vi) project implementation capacity through consultancy services, vehicles etc. (USS 4 million). The above amounts include a tentative allocation of funds not allocated in the Credit Agreement. To facilitate project implementation, four separate, US dollar- denominated Special Accounts would be opened in a commercial bank for Government and each major implementing agency (BDM - USS 1.6 million; EDM - USS 0.8 million; Mocacor - US$ 0.2 million and PETROMOC - USS 0.4 million). The accourts would be operated and maintained on terms and conditions acceptable to IDA. The authorized allocations for each Special Account represent anticipated maximum eligible expenditures for a period of about four months. The Special Accrnunts would be replenished upon receipt of properly documented withdrawal applications prepared by the relevant implementing agency on a regular monthly basis promptly after receipt and reconciliation of bank statements from the commercial bank. All expenditures would be fully documented except for expenditures for equipment, materials and rehabilitation contracts of less than US$100,000 equivalent, which would be reimbursed on the basis of certified statements of expenditure. Supporting documentatioa would be available for inspection by supervision missions. There would be no retroactive financing and no advance contracting. 4.25 Disbursements for the hardware components and technical assistance are scheduled essentially in accordance with the overall standard profile for the Bank Groups' energy projects in Africa. The project is scheduled to be completed by June 30, 1996 and the corresponding completion of disbursements (the Closing Date) is scheduled for December 31, 1996. There would be conditions of disbursement as follows: (a) for hardware components for EDM, submission to Government of EDM's: proposal for resolving its financial problems; (b) for the same components, implementation by EDM of a further tariff increase in 1989; (c) for the same components, signature of the Nordic Development Fund Credit Agreement; (d) for the electric stoves, plugs and sockets, bulbs, fittings etc., component, approval of a satisfactory model loan agreement between BPD and beneficiaries; (e) for same items, signature of the loan agreement with BADEA; and (f) for the hardware components for EDM, PETROMOC and Mocacor, submission of their respective plans for recovering the arrears of accounts receivable together with a satisfactory timetable for their implementation.  - 35 - Reporting Requirements 4.26 The records and reports necessary to monitor progress of the project and for preparation of the Project Completion Report were agreed during negotiations. A list of the monitoring guidelines for project implementation is given in Annex 4.07. DOE would ensure maintenance of appropriate records and report quarterly on the status of the project components. DOE would also coordinate the preparation by the implementing entities of a project completion report within nine months of the credit closing date. This report will show the extent to which the physical components of the project were achieved and their cost. It will also show the environmental consequences in terms of both air pollution and deforestation alleviation, and the fuel availability and prices at the end of the program. The financial performance of the energy supply companies will be based on their published accounts. Environment and Safety 4.27 One of the primary aims of the project is to reduce the impact on the environment of supplying household energy requirements. The current rate of woodfuel use around Maputo is about double the sustainable rate from the natural forests, and the problems around Beira, Nampula, Nacala and other cities appear to be similar. The longer term aim of the project together with follow up projects is to reduce woodfuel use to approximately the level that can be met on a continuous basis from local supplies. 4.28 The project would help imprcve air quality in urban areas. Of the two principal fuels being promoted under the project, electricity is environmentally benign and its supply is principally from existing hydro facilities. The health issues connected with coal use have been thoroughly tested and appear to have been resolved during the stove development program, and the overall atmospheric impact would be carefully monitored by the Government. Moreover, initial results from the monitoring program suggest that coal rroduces less atmospheric pollution than fuelwood. 4.29 All woodfuels and other carbon-based fuels have some impact on the atmosphere. The change from woodfuels to coal, petroleum products and electricity in the scale envisaged for the project should have limited but positive 1 al impact, with the strong benefits from electricity. 4.30 The safety risks from kerosene lamps was discussed in Chapter II, and the availability of low cost safe kerosene lamps under the project should minimize the safety problems. There are no other special safety risks in use of the various fuels. In relation to fuel supply, the greatest risks attach to the storage and bottling of LPG; Mocacor has sound, well-tested safety procedures and has a good safety record. The most risky part of Mocacor's operations, delivery of LPG by sea to Beira, is expected to reduce markedly as a result of new pricing policies.  - 36 - Project Risks 4.31 Most of the project components are for the urban areas and are not at risk from armed attacks. However, the major physical risk for the project is the uneasy security problem in the countryside, which will continue to be an obstacle in the use of the larger, more energy-efficient charcoaling techniques. In addition, vehicles purchased under the project may be at risk from attacks by armed bands when used for transporting oil to the provincial cities. Improvements in security would also permit greater reliability of Cahora Bassa for low cost hydro supplies, and of local coal. 4.32 There are five major fuels under the project (power, coal, kerosene, LPG and woodfuel), each of which is substantially independent of the others. Delays on one would not impact on the others, except in relation to the overall objective of strengthening fuel availability and reducing environmental impact. Within each of these components, the project needs close integration of energy supplies, availability of appliances etc. at reasonable prices and the introduction of effective systems for credit. Many of the institutions involved are in need of reinforcement. Manpower available for this coordination has been limited. Government has provided additional rescurces for this and would be required to maintain this level of coordination throughout the project. Technical assistance and logistical support would be provided to the entities coordinating and supervising various aspects of the project. V. FINANCIAL ANALYSIS Introduction 5.01 Because of skill shortages, a large number of companies in Mozambique have had difficulty in preparing annual accounts to an adequate standard, and the audit of accounts is often limited to the taxation requirements. In May 1967 the Bank's internal audit department investigated the extent of the problem. Government is taking a number of steps to achieve the objectives outlined in the report, including establishment of a joint venture audit company with one of the major international audit firms to be operational in 1990. 5.02 In 1987 EDM and PETROMOC were in a similar position to many companies in Mozambique in that they had not prepared adequate annual accounts for some years, reflecting the lack of priority given to their financial performance. With IDA support, both companies have engaged experienced international consultants to assist them in preparing accounts for 1985 and 1986, to a standard sufficient to demonstrate their financial positions and indicate their main financial problems. At the same time the consultants prepared estimates for 1987 and 1988. 5.03 With the inception of the Economic Recovery Program (ERP), Government policy has changed. Prices are now mainly uncontrolled or 'guided', with only a few (such as power tariffs and petroleum products) determined by  - 37 - Government. For most companies the Government subsidies have ceased and firm arrangements have been made for paying off the bank loans. Under the new system debts are clearly the responsibility of the companies and should be serviced on time. While the same principles of non-subsidization and full financial responsibility for debt service will also apply to public utilities such as EDM and state enterprises such as PETROMOC, for the present EDM's tariffs and PETROMOC's prices (also Mocacor's prices) remain subject to Government control. 5.04 Mozambican industry is able to operate reasonably satisfactorily, if not efficiently, as a result of the influx of foreign aid over the last three years. The major external constraint - foreign exchange - is a soluble problem for priority investments. As with any administered foreign exchange system, there remain some problems where interrelated companies producing for different stages of a single end product are not all getting the necessary access to the foreign exchange, and care has been taken to ensure that all enterprises necessary for the success of the project would have access to foreign exchange. Government has also opened a limited foreign exchange window under the second rehabilitation credit, and is expected to broaden this under the proposed third rehabilitation credit. 5.05 The standard policy of Government is for the benefit of aid to be .retained within Government with companies purchasing the foreign exchange in meticais. Although some companies have difficulty in raising these counterpart funds, the companies associated with the household energy program do not expect this to be a problem. Electricidade de Mocambicue (EDM) (a) Background 5.06 During the early to mid 1980s, EDM suffered from the weak financial discipline endemic in the public sector. It's tariffs had not been adjusted since the mid 60s, and its net operating cash requirements were covered by loans from the Bank of Mozambique and by various subsidies. It's accounting records were incomplete, decentralized in a number of former operating companies, unreliable, and substantially out of date. Arrears of accounts receivable were known to be sizable, but the extent of the arrears was unclear and documentary evidence was lacking in some cases. EDM's financial position was exacerbated by the impact of the armed attacks, not just the visible costs of destroyed power lines, but more importantly in the high costs of keeping the system going in the face of frequent sabotage. Additional costs include imports of electricity from South Africa to replace Cahora Bassa, local generation using petroleum fuels in lieu of the use of hydro, the need to provide and operate extensive standby facilities, and declining sales in place of the strong growth originally anticipated. 5.07 The Energy Technical Assistance and Rehabilitation project, prepared in parallel with the introduction of the ERP, established the framework for the financial recovery of EDM. The most important task was to overhaul and improve the financial records to a point where they would give reliable financial information for management and Government. An international  - 38 - accounting firm (Price Waterhouse, Lisbon) was engaged by EDM to prepare accounts from 1984, 1985 and 1986 and estimate accounts for 1987 and 1988. This was to be followed by an overhaul and simplification of EDM's accounting systems, training of EDM's staff, and more detailed tasks relating to EDM's asset revaluation, inventories etc. A full audit was to be undertaken once the accounts were of a suitable quality (then expected for 1989). EDM implemented tariff increases in 1986 and 1987 prior to the finalization of the Credit. Under the Energy Technical Assistance and Rehabilitation Project, the Bank agreed with Government and EDM on the basic financial structure to be achieved for EDM. This structure included: (i) establishment of EDM's patrimony i.e. the listing and valuation of inherited assets and initial equity; (ii) EDM to be responsible for servicing its own debt; (iii) EDM to fund not less than 20Z of its investment program in FY89 and 30Z from FY90; and (iv) EDM to avoid taking on debt if this would impair its ability to cover debt service from net revenues 1.5 times. The agreements also provided for review by IDA of financial statements and prompt submission of annual audit reports, and six monthly review of EDM's tariffs. (b) EDM's Present Financial Position 5.08 Substantial progress has been made in meeting a number of these requirements, but the task is much larger than originally envisaged and has taken longer (e.g. accounts completed October 1988). Some key decisions have to be taken and further work is necessary before the accounts are suitable for audit. EDM's financial situation has been helped by tariff increases in October 1988 and April 1989. In early 1989, Government formally decided that all electricity assets for the public supply system will be owned by EDM (which meant the transfer of substantial assets, and some or all of the related debt to EDM from Gove.nment and other entitities). These assets will require about two years to list and value and formal valuation is expected by 31st December 1990. Mozambican law requires assets to be revalued each year, and this will be implemented for FY91. IDA will review progress on this by September 30 each year. The accounts to 1988 have been based on 'best estimates' for the above, but until fundamental decisions are made on initial equity and debt to be transferred they must be regarded as somewhat tentative. 5.09 A further problem highlighted by the draft accounts is the size of accounts receivable, totalling about US$5 million (3 months' billings) early in 1989. The lack of emphasis on financial performance prior to the ERP resulted in arrears to EDM of accounts receivable rising rapidly. The major debts are the Ministry of Defence, APIE (the Government department dealing with public buildings), Ministry of Health (includes hospitals etc.), Maputo water company, provincial education authorities, Vidreira (a glass company), PETROvIOC, UDAH (ports) and CFM (Mozambican railways). Small scale debts represent only 14Z of the total. Most of these major establishments have financial problems, but they also appear to lack the motivation to pay. EDM is selectively cutting off power at non-strategic locations, but in practical terms is not currently in a position where it can withhold supplies. Stronger Government support in this connection has been promised so that EDM can act fully as a productive, financially viable company. Government has confirmed its responsibility for Government departmental debts. As part of the  - 39 - solution the Government has decided in principle to make direct transfers to EDM for debt arrears of parastatals and Government Departments that are not able to meet their obligations at present. Ministry of Finance has asked EDM to meet with all important debtors to seek negotiated solutions, and then to make formal proposals to the Ministry. EDM also proposes to use its statutory powers to charge interest on overdue accounts. The issues have been discussed in some depth and a detailed action plan and timetable for recovering the arrears will be a condition of disbursement for EDM's hardware components, with provision for review thereafter of the action plan by September 30 each year. EDM's submission to Government of formal proposals to enable it to achieve and maintain a sound financial position, also discussed extensively during negotiations and covering asset valuation, debt a.:d equity structure, tariff increases and recovery of accounts receivable, would be a condition of disbursement for EDM's hardware components under the project. 5.10 The provisional accounts for 1987 and 1988 submitted by consultants are set out below. These are based on conservative assumptions for patrimony, debt and interest payable. Final decisions on these will be part of the restructuring expected later in 1989, and until decisions are reached on these tne 'actuals' must be treated with caution. Moreover, at this stage it is not meaningful to present financial projections for EDM for subsequent years. Nor is it possible to know precisely whether EDM is in compliance with its financial covenants. millions of meticais 19g7 1988 Revenues 9,050 12,200 Purchased electricity 3,150 5,400 Fuel and materials 4,400 5,800 Operating costs 800 1,100 Interest 2,150 4,150 Depreciation 1,000 2,200 Provision for bad debts 450 300 Total Costs 11,950 18,950 Net Income -2,900 -6,750 It can be seen from the above that operating revenues approximately equal operating costs, but do not meet capitei charges. The cost borne by EDM as a result of the armed attacks (about 6,000 million meticais in 1988) is about equal to the deficit shown atove. In the past the Government has reimbursed EDM for these additional costs. Some donor grants have also been provided for this purpose.  - 40 - 5.11 Under the project EDM's financial recovery program will be continued and reinforced through the implementation of a 3-year action program. Once EDM's financial records are to an acceptable quality and the financial covenants included in the Energy Technical Assistance and Rehabilitation are explicitly achieved on its total operations, EDM will have achieved a satisfactory financial position. 5.12 As mentioned above, during 1989 EDM will submit to Government and IDA formal proposals to enable it to achieve and maintain a sound financial position. As a first step EDM will (as a condition of disbursement) implement a tariff increase in the second half of 1989. The agreed proposals for financial recovery would be fully implemented p:omptly to a timetable to be agreed with the Association, and should be fully implemented by 1992. Government will initiate action on paying off the arrears of accounts receivable during 1989. Studies will start shortly that will enable EDM's assets to be properly valued with a view to Government being able to establish the patrimony and equity of EDM by the end of 1990. Annual revaluation of assets will then be introduced. The steps taken to improve EDM's accounting capability are to be continued, with a view to EDM being able to prepare its financial accounts unaided, and for EDM to have accounts suitable for audit to international standards for FY92 and submitted to IDA within 9 months of the end of the fiscal year. These steps are a major movement towards restoring the financial thealth of EDM. Close monitoring will be required and IDA will continue its six monthly review of power tariffs, and will review the position more fully once the accounts have reached an acceptable standard (September 30, 1993). In the light of the above it was agreed to continue the present debt service covenant and cash generation covenant 'as is'. However, for a limited period until the patrimony has been fully clarified (FY91), these covenants (debt service and cash generation for EDM) should be interpreted on a basis that includes as income the subsidies and grants and other payments to compensate EDM for additional costs as result of the security situation, and excludes the major investments being transferred to EDM. (c) Power Tariffs 5.13 EDM's present tariff structure reflects in part the structure of the economic cost of meeting demand, by incorporating a maximum demand charge as well as an energy charge, defining the main tariff categories according to the voltage level at which a consumer is supplied, and including a charge for reactive energy. However, the tariffs differ from the cost of meeting demand on EDM's systems in a number of respects, notably the absence of differences in the level of charges between the interconnected systems supplied from low- cost sources and the isolated systems, 5/ the historical difference in energy charge between the general category and domestic category, and the absence of time of day tariffs for larger users. The October 1988 and April 1989 tariff increases marginally narrowed the differential between the 5/ Power produced from isolated generating plant accounted for 102 of total power supplied to EDM's systems in 1987 (Annex 1.01) and 1988.  - 41 - general and domestic categories. At the same time the Government decided in principle on introduction of time of day tariffs for major industry in 1989. TABLE 5.2 EDM'S Tariffs (as of April 1989) Domestic General Medium and High Voltage Supply Voltage 2301380 V 220/380 V 500V and over Energy Charge 19.3 46.0 24.6 (Mt/kWh) (15.5) (40.0) (20.5) Demand Charge 1050/a to 18,100/a 3,700/b (Mt/month) (650) (to 10,500) (2,400) la the demand charge of the tariff is graded according to the rating of the load limiter, and the demand charge varies with the rating. Figures quoted are based on 2.2 kVA (domestic) and 19.8 kVA (general). /b these supplies are generally measured through a maximum demand meter. Figures quoted per kVA. Note: figures between brackets express October 1588 tariffs. The new tariff was introduced in April, 1989. 5.14 A comparison between EDM's tariffs with ESCOM's current (1987) bulk tariff and HCB's tariff for Mozambique's entitlement to power from Cahora Bassa (following the recent negotiations) shows substantial differences as shown in Table 5.3. EDM's tariffs for all categories of consumers cover the long run marginal cost when supplies come from Cahora Bassa. When the dominant supply is from ESCOM the tariffs on average cover the long run ! marginal supply cost; however, the energy charge is substantially above and demand charge somewhat below that of the long run marginal cost.  - 42 - TABLE 5.3 Comparison of EDM's Tariff with Bulk Supply Tariffs EDM ESCOM HCB (domestic) (high voltage) Energy Charge 19.3 24.6 6.7 (Mt/kWh) ) 3.59 ) Demand Charge 477 3700 4180 (Mt/kW/month) ESCOM Tariffs: Energy Charge 3.066 cRand/kWh = 0.03066 Rand/kWh Demand Charge 14.67 Rand/kW/month HCB Tariff (bulk supply to RSA); 1.26 cRand/kWh (no separate demand charge) In addition RSA pays a reliability premium of 0.59 cRand/kWh. EDM does not pay the reliability premium. Exchange Rate: 1 Rand = 285 Mt (April 1989) 5.15 Most of the supply to the Southern (Maputo) Pagion - the main consumption center (602 of national consumption) - is presently supplied under ESCOM's bulk tariff, and this will be substituted by power under HCB's tariff when the DC lines to RSA from Cahora Bassa become operational (planned for 1990). Thus, EDM's tariffs need to recognize both of these dominant sources of supply. There is a need to increase the demand charge to recognize ESCOM's tariffs. Moreover, for EDM's Central and Central-Northern Regions, and the Southern Region once a firm supply is resumed from Cahora Bassa to RSA, the appropriate tariff structure would have a much lower relative charge for energy than in EDM's tariff. While the restoration of power from Cahora Bassa is in sight, it would be unwise to adjust tariffs to reflect this until the ability of the security system to defend the line is proven and EDM's financial position is more secure. In the meantime, EDM's demand charge should move towards the tariff structure for ESCOM, and thus be increased significantly. EDM's cost of self-generated coal/hydro and purchased power is also low and much below its energy charge of between 19.3 and 46 MT/kWh on the integrated system. 5.16 EDM cross-subsidizes customers on the high cost isolated systems, and within the integrated areas cross-subsidizes household use at the expense of commercial and small industrial users. This latter kind of cross-subsidy is probably appropriate for low-volume, low-income residential consumers but not for those making extensive use of electricity.  - 43 - 5.17 Under the Energy Technical Assistance and Rehabilitation Credit EDM will engage consultants to study EDM's tariff levels and structure, billing system, and tariff adjustment mechanism, in addition to various aspects of its financial systems. This contract will be awarded not later than March 31, 1990. The results will be reviewed with IDA and agreed conclusions will be implemented according to a timetable to be agreed at that time. Empresa Nacional de Petroleos de Mocambipue (PETROMOC) (a) Existing Agreements relating to PETROMOC 5.18 Under Cr.1806-MOZ IDA has agreed financial covenants for the basic financial structure of PETROMOC with Government and PETROMOC, which parallel the agreements for EDM. These include (i) establishment of PETROMOC'S patrimony (i.e. the listing and valuation of inherited assets and establishing its initial equity); (ii) PETROMOC to be responsible for servicing its own debt; (iii) PETROMOC to fund not less than 202 of its investment program in FY89 and 302 from FY90; (iv) PETROMOC would avoid taking on debt if this would impair its ability to cover debt service from net revenues 1.5 times. The agreements also provided for review by IDA of the financial statements, prompt submission of annual audit reports, and six monthly review of PETROMOC's prikes. (b) PETROMOC'S Financial Position 5.19 PETROMOC produced no comprehensive financial accounts between 1979 and 1984. Retail petroleum prices were unchanged during the same period, at price levels determined end 1979, immediately after the 1979 oil price shock. Despite the relative stability of internatioral oil prices over most of this period, PETROMOC's net worth at the end of 1984 was a negative 3.9 billion meticais (at the then exchange rate, about US$100 million). Its financial position has improved steadily since then and PETROMOC achieved a positive net worth during 1987. PETROMOC has generated a post tax profit in every year since 1984. Apart from the refinery (now closed), PETROMOC has few fixed assets. Consequently, the updating of its accountancy practices to reflect its patrimony, current cost depreciation and for payment of interest are likely to have relatively small impact on its net income. 5.20 Despite this current generally healthy position, PETROMOC's financial situation needs attention. It is especially vulnerable to changes in costs that are not immediately reflected in prices. Apart from specific ad valorem taxes, the margin between import cost and the ex-storage price is retained by PETROMOC. In some cases (such as for gasoline) this margin is very large, but the volumes are small; in other cases (such as gas oil) the margin at times is large and at other times is more modest, coupled with relatively large volumes; and yet in other cases (such as for kerosene) both the margin and volumes are small. The shift in margins with each devaluation, and to some extent with each shipment due to changes in international prices, has an important impact on PETROMOC's profitability. Moreover the tax regime has changed three times in recent years, in that the former special tax on gasoline has been abolished, as has the payment to the Government reflecting the difference between anticipated and actual import costs, and the 100? tax  - 44 - on the value of stock increases as a result of devaluation has been shifted to year end collection instead of instantaneous. 5.21 The dominant factor for PETROMOC's financial viability is the speed by which its prices are adjusted to recognize changes in the meticais cost of imports. For example, although the metical was devalued in July 1988 the consequent increases in petroleum product prices were delayed until October 1988, and in the case of LPG were inadequate to cover cost increases. Government has decided to implement a system of regular revisions of petroleum product prices that will anticipate future inflation and devaluations and compensate as necessary for price increases since the last adjustment. It was agreed during negotiations that the price structure will be revised and maintained so as to enable PETROMOC and others to meet their financial covenants, and to ensure that there are no subsidies on petroleum products. 5.22 PETROMOC's accounts receivable position continues to be too high, and Government has not been giving sufficient support, in particular Government has not been prepared for PETROMOC to withhold supplies from non-paying customers. Total debtors in early 1989 totalled about US$10 million, approx- imately equivalent to PETROMOC's net worth. However, almost all sales of petroleum products are now made against cash payment or payment in advance, and these outstanding debts represent a hard core of unwilling or insolvent 'customers'. The principal debtors are EDM, Maputo passenger transport, Navique (a shipping company), CFM (railways) and Vidreira (glass company). As in the case of EDM's accounts receivable, solutiot&s will be possible through the Ministry of Finance and its budget contributions to certain enterprises, and the same solution is planned. Moreover, with proper support for withholding supplies (aow promised), these companies could be persuaded to resolve these arrears. PETROMOC will negotiate repayment schedules with its major non-Governmental customers. As a condition of disbursement PETROMOC will prepare a detailed action plan and timetable acceptable to the Association, and progress on implementation will be reviewed annually by September 30 each year. 5.23 Government has clarified the patrimony of PETROMOC in line with understandings reached during negotiation of the Energy Technical Assistance and Rehabilitation Credit. The process is simpler for PETROMOC than EDM as the initial patrimony is based on that of its constituent entitities, particularly Scnarep, Sonap and Sonap Maritima, and there is little difficulty in identifying and valuing the assets. Formal establishment of PETROMOC's patrimony, with detailed valuation of assets, is expecteu by January 1, 1991. PETROMOC will revalue its assets annually from that time in accordance with Mozambican law. IDA will review progress on this by September 30 each year. 5.24 The above steps will permit PETROMOC to become a more financially sound entity, although further measures may be needed as the accounting standards improve and the problems are more clearly identified. PETROMOC expects that for FY90 its accounts will be of a standard where they could be subject to international audit, followivng which (September 30, 1991) PETROMOC will undertake a special review with IDA of its financial position and needs,  - 45 - as an enhancement to the six monthly assessment of prices provided for under the Energy Technical Assistance and Rehabilitation Credit. Continuation of the six monthly review was reconfirmed for the Credit. The accounts when audited to international standards will be submitted to IDA within 9 months of the end of the fiscal year. 5.25 Subject to satisfactory progress on the above, the overall financial position of PETROMOC is expected to be sound. The forecast of revenues and costs is summarized below, and set out more fully in Annex 5.04. Critical factors in these forecasts are the prompt adjustment of prices in line with cost changes, maintenance of margins in line with present practice, and substantial progress in the payment of the arrears of accounts receivable. PETROMOC is expected to be able to meet without difficulty the local currency portion of its investment program. Table 5.3 Table of Accounts PETROMOC Forecast of Income (millions of meticais) 1987 1988 1989 1990 1995 Revenues 28,200 43,900 48,400 50,300 61,400 Cost of Products 14.800 30,700 32,900 34,200 41,600 Operating Costs 3,400 4,600 5,700 6,400 10,000 Interest - - 100 100 200 Depreciation 100 200 1,100 1,400 1,000 Total 18,300 35,500 39,800 42,100 52,800 Profits Before Tax 9,900 8,400 8,600 8,200 8,600 Stock Revaluation Tax 3,200 1,300 2,300 1,100 600 Income Tax 3,350 3,550 3,150 3,550 4,000 Net Income 3,350 3,550 3,150 3,550 4,000 Cash generation divided by debt service N.R. N.R. 54 63 31 Cash generation as Z over over over over of new fixed assets 1002 1ooz 62Z 1OOZ 1002 5.26 In the light of the above, the financial covenants agreed for the Energy Technical Assistance and Rehabilitation Credit are seen to be achievable and were confirmed as relevant to PETROMOC's needs. Accordingly the DCA reconfirms that PETROMOC would be required to fund not less than 20Z of its investment program from internal sources by FY89 and 30Z by FY90, and that PETROMOC would avoid taking on new debt if this would impair its ability  - 46 - to cover debt service from net revenue 1.5 times. Government has given assurances that it would ensure that bulk and retail margins are set at a level that permits PETROMOC to meet its financial covenants. Mocacor's Financial Position 5.27 Mocacor's sales of LPG dropped rapidly through the 1980's and by 1984 were only one-quarter the level of four year's earlier. Mocacor's response to declining sales was to reduce staff by 33Z. In relation to sales. staff levels remain high. Because of the difficulty in recruiting skilled employees, and also because of the increasing need for repairs and cannibalization of existing assets, Mocacor judged it unwise to cut back further on staffing. 5.28 The financial performance reflects this decline of throughput, and profits of 27 million meticais in 1980 changed to a loss of 20 million meticais in 1984. Since then there has been a widening of Mocacor's distribution and retailing margins, some increase (44Z) in sales and stronger management, with the result that 1987 profits reached 13 million meticais (at the lower 1987 exchange rate). 5.29 Mocacor is a small, well-run company, with a reasonable financial position. It's net worth became positive in 1987, and it has operated at a profit since that time. Mocacor's retail margins are based on the use of old, fully depreciated assets. Subject to the continuation of these retail margins, its prime financial need is to minimize its capital expenditures, and to maintain sales volume. 5.30 The financial problems currently faced by Mocacor are relatively small. Most of its sales are for cash, and of the four credit account customers, none are seriously in arrears. However, until recently Mocacor did have one customer regularly failing to pay and Mocacor felt that it had no choice but to maintain supplies, and therefore Mocacor is included alongside EDM and PETROMOC in Government now giving explicit support for withholding supplies should its parastatal customers fail to pay. As a condition of disbursement Mocacor will prepare a plan on how it expects to manage its accounts receivable, with a timetable acceptable to the Association, and IDA will review progress on plan implementation by September 30 each year. 5.31 Mocacor's fixed assets are valued in the accounts at historic cost, and because of devaluations bear little relation to value. Accordingly, at negotiations Mocacor agreed to implement net later than January 1991 the recent (12/88) Government decree requiring regular annual asset revaluations in published accounts. IDA will review progress on this by September 30 each year. 5.32 Mocacor's accounts are not currently audited except in respect of its tax liabilities. Mocacor has agreed during negotiations that (a) its accounts will bse brought to international standard by FY90 and that it will then (September 30, 1991) undertake a special review with IDA of its financial position and needs, and in addition (b) that Mocacor's prices will be reviewed with IDA at six monthly intervals, and (c) that the audited  - 47 - accounts will be submitted to IDA within nine months of the end of the respective year. 5.33 Subject to Government promptly permitting price adjustments and maintaining margins at their present levels, Mocacor's financial position is expected to continue satisfactorily: Table 5.4 Table of Accounts MOCACOR Forecast of Income (millions of meticais) 1987 1988 1989 1990 1995 Revenues 263 740 1480 1800 2380 Cost of LPG 170 500 1040 1270 1650 Operating Costs 70 170 220 260 400 Interest 0 0 20 40 40 Depreciation 10 10 20 40 40 Total Costs 250 680 1300 1610 2160 Profit Before Tax 13 60 180 190 220 Income Tax 8 30 90 95 110 Net Income 5 30 90 95 110 Cash generation divided by debt service NR NR 11 6 2 Cash generation as 2 of new over over over over over fixed assets 1002 100% 1002 35Z 1002 Further details are in Annex 5.05. Cash generation from operations will be sufficient for Mocacor to meet the local currency cost of its investment program. 5.34 In the light of the above, essentially the same financial covenants as agreed for PETRO'MOC are achievable by Mocacor and are appropriate to its circumstances. Accordingly Mocacor agrees to fund not less than 30% of its investment program from internal sources by FY89, and to avoid taking on new debt if this would impair its ability to cover debt service from net revenue 1.5 times. Government has agreed to ensure that retail margins for LPG are set at a level such that Mocacor is capable of meeting its financial covenants.  - 48 - Petroleum Product Pricinf 5.35 Petroleum product prices have been adjusted four times over the last two years, to recognize the changes in exchange rates and for other reasons. Government agreed during negotiations for the Energy Technical Assistance and Rehabilitation Credit that it would maintair. p-oduct prices at least as high as prevailing import parity levels plus internal costs and overheads, and to review prices semi-annually with the Association. With effect from April 1989 all petroleum fuels are priced at above international parity. Overall there is no subsidy for petroleum. TABLE 5.5 Petroleum Product Prices (October 1988) Local Ex-storageE uivalent/ International Price tonne prices cif Maputo Premium Gasoline 286 MT/liter $483 $188 Regular Gasoline 242 MT/liter $408 $188 Jet Kerosene 127 MT/liter $21'4 $178 Illuminating Kerosene 107 MT/liter $181 $170 Gas Oil 118 MT/liter $200 $177 Fuel Oil 64 MT/kg $108 $105 LPG 146 MT/kg $247 $292 Aviation Gasoline 306 MT/liter $516 $328 Asphalt 143 MT/kg $242 $218 A fuller comparison including April 1989 prices is set out in Annex 5.01. The April 1989 price increase removed the subsidy on LPG. 5.36 As part of the project preparation, Government has reviewed specifically the distrl.aution and retail margins applicable for kerosene and LPG, and has increased them to a level that will encourage distributors and retailers to give some priority to the distribution of these products. VI. PROJECT JUSTIFICATION Introduction 6.01 The project is intended to alleviate the shortages and high cost of energy being experienced by urban households, and eventually (after possible follow up projects) provide a basis for lower cost fuels meeting about 50Z of the energy needs of the urban population. It would thus address issues affecting more than 25Z of the household budget, would support the economic adjustment program and assist in maintaining the social harmony needed for the continuation of the economic reform program.  - 49 - 6.02 A long term household energy strategy will be established in 1990 when various preparatory studies are complete. The interim strategy to be supported by the project, expected to be compatible with the long term strategy, is the promotion of low cost indigenous coxmercial fuels in urban areas to an extent which, when taken together with improvements in traditional energy, would enable urban household energy needs to be met more effectively and at lower cost. Hence the project would promote the use of coal and electricity, which appear to be the lowest cost indigenous fuels, would support energy efficiency improvements in wood and charcoal, and would expand the interim use of kerosene and LPG as a means of meeting energy requirements. 6.03 Subsidiary benefits from the project include improvements in urban air quality, improvements in the quality of life for .arge numbers (directly affecting about 200,000 households) reduced pressure on wood and charcoal supplies (possibly resulting in lower prices), reduced demand for trucking and hence allowing tvrcks to be used for other priority needs, improvements in the competitiveness of a number of local manufacturers, and higher employment. Financial Comparison 6.04 For the project to achieve its intended objectives, the fuels to be supplied must be affordable by the target households. Affordability is m.ost reliably established by comparing the cost of the fuels to be supplied under the project with those they are intended to replace. In the case of coal, kerosene and LPG, financial benefit and affordability should not be an issue, because the cost to the consumer of these fuels is substantially less than that of the wood and charcoal for which they will substitute (see Chapter II) Kerosene and LPG are also preferred fuels for many applications. When available under the project, these cheaper, more convenient fuels are likely to be consumed in preference to wood and charcoal in at least equivalent quantities. 6.05 While electricity is much cheaper as a fuel than wood or charcoal, the financial advantage of electricity to new household consumers is less dramatic because the householders must bear the capital cost of house connection, wiring and electrical equipment 6/ purchase. The total cost of these items is estimated to be up to US$250 per household. Term loans at a subsidized rate of interest would be provided to qualified households wishing to invest in an electricity connection, wiring and appliance purchase. In total (i.e. including fuel costs and loan payments) electricity is estimated to cost about US$94 per household per year during the years of loan repayment, compared to 'JS$96-125 for wood and US$180-230 for charcoal (paragraph 2.07) 6/ Cooker, pans, lightbulbs etc  - 50 - Table 6.1 Comparative Cost of Electricity, Wood and Charcoal Per Household Per Year (US$) Initial Fuel Cost of Fuel Capital Charges Total Cost Electricity 54 40 94 Wood 96-125 -- 96-125 Charcoal 180-230 -- 180-230 Source: Table 2.1 and World Bank estimates. Basis: Loans based on 10 years and 10? interest. 6.06 In addition to being a premium fuel, electricity is estimated to cost 50 to 60X less than charcoal for the average family. With this price advantage, it will clearly be preferred to charcoal and readily substituted for this fuel for most purposes. Wood is estimated to cost more than electricity even when capital costs are taken into account and once the householder's electrification loan is fully repaid the financial advantages will be substantial. The convenience of electricity (no collection, storage, instant availability etc), its versatility (in cooking, lighting, heating, refrigeration) and its efficiency, status and environmental benefits are all expected to induce households to switch from wood. Lifeline tariffs, to be considered as part of the power tariff study, should maintain these advantages for low volume consumers. Economic Comparison 6.07 In the absence of any reasonably accurate figure for the economic cost of the fuelwood and charcoal, to be substituted by the project, the most accurate means of evaluating the project's economic benefits is ability and willingness to pay for the existing quantities consumed of those fuels. It is Government policy not to give subsidies for energy, and this applies to electricity connections and appliances as well as fuel supply. In relation to power tariffs, residential consumers appear to be covering costs based on Cahora Bassa supplies, but not be contributing to overheads. Tariff adjustments required to remove the cross-subsidies would bring residential power prices close to the equivalent prices for LPG and kerosene, and are not likely to affect demand. The superior qualities of electricity would continue to make it the fuel of choice in most cases. The Behrens survey confirmed the willingness of new consumers to pay the cost of connection. Therefore full economic pricing is not expected to change household preferences between fuels or reduce the quantities of energy consumed. 14ore likely, the project should reduce the average cost of household energy and thus permit consumption to increase.  - 51 - 6.08 The economic evaluation compares the economic cost of the commercial fuels required for the program with the actual financial cost of the fuelvood that would be displaced. It does not take account of possible additional benefits of lower woodfuel prices and increased household energy consumption that may result. Nor does it take account of the much higher value of charcoal displacement. The budgeted fuel requirements set out in Chapter 4 are for 75,000 tons of kerosene, 40,000 tons of LPG and 47,000 tons of coal. In addition EDM will purchase 160,000 MWh of electricity from Cahora Bassa or (if supplies are not available) from RSA, bringing the total cost over 5 years for the commercial fuels to US$24.5 million, excluding contingencies. Based on the fuel efficiencies quoted in Chapter 2, 1.9 million tons of fuelwood provide an equivalent amount of useful energy, which at current market prices would cost US$71.7 million. Hence the costs of providing fuel to affected households would fall by US$47.2 million over the five years. The total project cost, excluding inflation is US$44 million, and hence in aggregate the project cost is fully recovered in less than five years. The payback period for discount rates of 10 to 301 falls in the 4 to 5 year range, and based on a 10 year project life the internal rate of return is about 50Z. The rate of return quoted is a composite of that for LPG (over 100Z), coal (502), kerosene (50Z) and electricity (142). The rates of return for LPG, coal and kerosene are relatively insensitive to lower fuelwood prices. For electricity a price reduction for fuelwood of 102 would reduce the economic rate of return on that component to 12-1/22. For this calculation, the replacement consumption is valued at original fuelwood prices and additional consumption at the lower prices. The benefits of lower fuelwood prices to continuing consumers of wood cannot readily be quantified but, as these customers in aggregate consume greater quantities of energy, this would more than offset the marginal impact on benefits of those changing to commercial energy. The average economic value of energy supplied by the project would need to fall by about 352 for the benefits to equal costs, based on a 102 discount rate and a 10 year project life. Further details and the fuel by fuel calculations are in Annex 6.01. VII. AGREEMENTS REACHED AND RECOMMENDATIONS 7.01 As a condition of Credit effectiveness, the Association would require the following action, namely signature of the subsidiary loan agreements with EDM, Mocacor and PETROMOC, (paragraph 3.01). 7.02 As conditions of disbursement, the Association would require the following actions: (a) Submission to IDA of a satisfactory financial restructuring plan for resolving EDM's financial situation prior to disbursement of funds for EDM's hardware components (paragraphs 5.09 and 5.12); (b) Implementation by EDM of a satisfactory tariff increase in the second iialf of 1989 prior to disbursement of funds for EDM's hardware components (paragraph 5.12);  - 52 - (c) Signature of the credit agreement with Nordic Development Fund. prior to disbursement of funds for EDM's hardware components (paragraph 4.19); (d) As a condition of disbursement on the electrical fittings etc. that the model loan agreement between BPD and beneficiaries has been approved by the Association (paragraph 4.13); (e) As a condition of disbursement on the same items, that the BADEA financing agreement has been duly signed (paragraph 4.19); (f) As conditions of disbursement on the hardware components of EDM, PETROMOC and Mocacor respectively, that satisfactory action plans for recovering arrears of accounts receivable have been submitted to IDA together with a satisfactory timetable (paragraphs 5.09, 5.22, 5.30). 7.03 During negotiations the following were agreed: (a) Maintenance of BEU and DOE's Project Coordination staff and the Supervisory Unit (paragraph 4.10, 4.32, Annexes 4.03, 4.04 and 4.09); (b) Complete by December 31, 1991 and review by March 31, 1992, studies for design and implementation of strategies for improving fuelwood and charcoal production and commercialization systems, and for identification, design and development of improved charcoaling methods and improved charcoal and wood stoves, including agreed timetable for implementation of agreed conclusions (see Annexes 4.02 and 4.04); (c) review jointly with the Association the results of the study to design a household energy strategy, by September 30, 1990 and agreement on appropriate action plan (paragraph 1.03); (d) annually review (by September 30 each year) jointly with the Association the experience to date on project implementation and progress in achieving project objectives with a view to modifying as necessary the targets, the balance between the fuels and the priority placed on individual urban centers, the first review being held by September 30, 1990 (paragraph 4.08); (e) consult with the Association on all new single energy investment projects expected to exceed US$10 million to be carried out in the public energy sector (paragraph 1.14); (f) review with the Association by September 30, 1994 proposals for the establishment of performance standards for EDM, PETROMOC and Mocacor (paragraph 4.03);  - 53 - (g) preparation by December 31, 1991 of system to authorize EDM, PETROMOC and Mocacor to purchase insurance to provide for replacement of their respective assets, and implementation of such insurance by agreement with IDA, in accordance with an agreed timetable (paragraph 3.14); (h) reporting arrangements comparable to those under Energy Technical Assistance and Rehabilitation Credit (Cr.1806); maintenance of appropriate records (paragraph 4.26); (i) review of performance of EDM, PETROMOC and Iocacor on the implementation of action plans for recovery of arrears of accounts receivable by September 30 each year, and prompt implementation of EDM's financial restructuring plan (paragraph 5.09, 5.12, 5.22, 5.30); (j) establishment of patrimony of PETROMOC and EDM by December 31, 1990 (paragraph 5.08, 5.23), implementation of revaluation of assets of PETROMOC, Mocacor and EDM with effect from 1 January 1991, and review progress on this revaluation by September 30 each year (paragraphs 5.08, 5.23, 5.31) (k) independent audit of accounts to international standard by FY90 for PETROMOC and Mocacor and by FY92 for EDM. Submission to IDA within nine months of end of fiscal year (paragraphs 3.13, 5.12, 5.24, 5.32) and independent audit of accounts of other companies benefitting from project funds in accordance with local requirements, and submission to IDA within nine months of end o,f year (paragraph 3.13); (1) comprehensive review with the Association of financial needs of energy companies when the-r accounts are sufficiently reliable for this, i.e. by September 30, 1991 for PETROMOC and Mocacor and September 30, 1993 for EDM (paragraphs 5.12, 5.24, 5.32) (m) confirmation of financial covenants for EVM and PETROMOC and establishment of comparable financial covenants for Mocacor (paragraphs 5.12, 5.26, 5.34); continuation of semi-annual review of tariffs of EDM, (paragraphs 5.12); (n) semi-annual review with IDA of petroleum product prices to ensure they are maintained at least as high as prevailing import parity prices plus internal distribution costs (5.21); and the system for adjusting, and the structure of petroleum product prices ensuring that they are sufficient to enable PETROMOC and Mocacor to achieve their financial viability (paragraphs 5.21, 5.24, 5.26, 5.32, 5.34); (o) By March 31, 1990, EDM will have awarded the contract for financial and accounting systems, that includes a study on EDM's tariffs (paragraph 5.17).  - 54 - ANX 1.01 HOZAUBIQUE URBAN HOUSEHOLD ENERGY PROJECT PRODUCTION. IMPORTS AND EXPORTS OF ELECTRICITY IN 1980-87 a/ (GUh) 1980 1981 1982 1983 1984 1985 1986 1987 Production from Cahora Bassa: 10,809 3,035 2,540 5,643 109 285 71 56 - Delivered to RSA (Appolo) bI 9,594 2,601 2,152 4.835 0 160 - Transmission losses c/ 952 305 293 649 0 24 3 2 - Taken by EDM d/ 263 50 25 37 51 51 38 24 Production from EDM's Stations: - Maputo Power Station 63 95 83 97 87 123 80 88 - Central hydroelectric stations 158 157 131 128 135 88 78 111 - Isolated generating plant 83 80 89 85 67 54 59 70 304 332 303 310 289 265 217 269 Imported Power by EDMi - from RSA (to Maputo) e/ 26 234 293 290 280 228 304 330 - from Malawi 2 2 2 1 2 1 1 0 - from private generators -- 1 3 2 1 -- 0 1 Total Supply to EDM's Systems 595 619 626 640 623 545 560 624 Exported Power by EDM (Zimbabwe) -- -- -- 3 -- -- -- -- Distribution of Supply to EDM's Systems in Mozambique - Southern Region 349 368 391 405 377 352 385 418 - Central Region f/ 158 160 133 126 135 89 78 112 - Central-Northern (Tete) Region 76 79 88 93 98 92 83 80 - Isolated Load Centers 12 12 14 13 13 12 14 14 a/ Excluding production and consumption by owners of private generating facilities for their own use. b/ Cahora Bassa Exports to RSA started in 1976-1226 GWh delivered; 1977-4241 GWh delivered, 1978-7170 GWh delivered, 1979-10,352 GWh delivered. Delivered quantities are net after deducting reexports of HCB power to EDM through ESCOM's system. c/ Cahora Bassa transmission losses are generally estimated at 9Z of sent out energy based on line power ratings. Actual losses were apparently different from these estimates in some years. d/ EDM entitlement taken mostly for Maputo through ESCOM system, and a small proportion directly from Cahora Bassa to Tete and to the Central-North line from 1983. e/ Imports paid at ESCOM bulk tariff by EDM. f/ 1980 consumption by main load centers (GWh/year): Beira/Dondo/Buzi/Mafimbisse-102; Chimoio- 30; other centers-13 after system losses (about 9? of sent out energy). Source: EDM.  MOZA.BIqUE URBAN HOUSEOLD EERGY PROJECT COSUPiTICN OF EDOROY PETRCLEUM PRCCtTS, 1979-1987 (tonfm) 1980 1961 1982 1983 1984 19t6 196 1987 A. Internal Market LPG 13,394 11,091 10,291 7,706 8,215 4,6s3 3,870 6,470 Aviation GasolIns 1,113 1,273 1,037 843 778 237 1,070 2,250 Motor Gas olnes 37,955 34,265 37,481 40,009 82,966 31,766 81,570 28,410 JP-14kerosenes 07,483 71,062 74,228 65,847 52,616 44,128 43,390 54,690 Gas 0 l/01. e Oil 240,627 242,486 229,959 202,969 177,692 l19,515 219,700 156,750 Fuel Oil 51.088 49.312 48.44 36.625 24.947 22.591 14.400 22.810 Sub-Total 411,530 409,429 401,894 862,996 292,211 303,320 314,000 270,380 B. Bunkers Aviation Gasoline 31 264 854 25 240 190 n.s. 460 JP-1 7,781 4,610 4,591 4,726 3,748 4,410 8,200 4,090 Gas Oil 21,783 15,6e6 17,876 10,476 1,717 o) 00 1,900 1,890 Diesel Oil 6,683 5,233 4,893 3,578 1,018 ) Fuel Oil 70.126 46.e69 4s.7s6 13.455 4,979 8.600 280 ss0 Sub-Total 108,25z 72,318 78,500 32,260 11,702 6,700 10,380 0,470 C. Total (A+B) 617,791 481,747 474,894 385,266 803,913 312,020 224,3a0 276,650 Source: PETROkOC Note: Non-energy product* excluded from above  - 56 - ANNEX 1.03 MOZAMBIQUE URBAN HOUSEHOLD ENERGY PROJECT National Eneray Balance (tons oil equivalent) 1988 Primary Energy Secondary Energy Total Coal Hydro Electricity Petroleum Fuels Crude Energy Production 14.8 13.9 28.7 Imports 57.9 28.7 342.8 429.4 Exports (9.1) (9.1) Steck adjustments 1.7 (11.8) (10.1) Available Energy 65.3 13.9 28.7 331.0 438.9 Conversions/losses (46.8) (13.9) 19.3 (17.6) (59.0) Exports/bunkers (0.1) (10.0) (10.1) Domestic Consumption 18.5 - 47.9 303.4 369.8  - 57 - Annex 2.01 Pagel of 2 MOZAMBIQUE UREBAN HOUSEHOLD ENERGY PROJECT Comparative Cost of Fuels (October 1988 prices) Electric stoves: US cost is about $20 - $25 and typical retail price $40. Project is based on import of materials etc. at $25 and total cost about $40. Electric light bulbs: Based on $0.60 for conventional incandescent bulbs and $2 for high efficiency long life bulbs. House wiring: Detailed cost estimate as follows: Total Cost Forex Cost Cable $ 50 Meter 20 $20 Panels/fuses 30 20 $100 $40 Labor 40 Margin 10 $150 (Comparable data from Botswana and South Africa also $150). EDM reinforcement: Swedpower estimated $200 per house based on 10OZ connection in new areas. Project costs and economics based on $250. Electricity supply: 1.3 cents Rand per kWh from Cahorra Bassa and an average of 6.2 cents Rand per kWh from ESCOM. Electricity consumption: about 120 kWh/month for cooking and small amount of lighting. Electric stove efficiency: 65Z in conditions of minimum maintenance. Could be improved to 80Z for 'good' appliances. Coal stoves: Total cost of $30 to 40 per stove of which $20 for imported components. Coal: 53 Rand per tonne delivered Maputo for South African coal. Of this 15 Rand for rail costs is payable in local currency. Coal delivery: About 200 meticais per bag for delivery to stockist. Coal consumption: About one 55kg bag per month. Coal Stove efficiency: In practice 20 to 232.  - 58 - Annex 2.01 Page 2 of 2 LPG stoves: New stoves not available in Mozambique. The type in use is expected to be twice the cost of kerosene stoves. Alternatives as in Cape Verde appear to be close to price of kerosene stoves. LPG lights: Not used in Mozambique. LPG cylinders: About $35 each for 11 kg cylinder. Smaller cvlinders (as in Cape Verde) are not used in Mozambique. LPG handling costs: Petromoc 10 meticais/kg, Mocacor 26 meticaislkg for cylinder repair, filling and i.sndling, and 18 meticaislkg for retailing. Transport allowance 8 meticais/kg max. LPG Stove efficiency: In practice about 45Z. Better maintenance and improved availability oi spares could bring this closer to 702 on newer appliances. Kerosene stoves: Current prices in Maputo are $14 to 15. Import cost for materials estimated at $8 to 10. Kerosene Lamps:Wick lamps cost $1 to 2 and pressurized lamps about $15. Local manufacture is unlikely to be competitive. Kerosene cans: Imported materials at $1 to 2 per can. A high wastage rate is expected as cans have other potential uses. Kerosene delivery costs: Bulk handling costs 5 meticais/liter, bulk distribution costs 11 meticais/liter, retail margin 13 meticais/liter. Kerosene stove efficiency: About 25Z for existing models with little maintenance. Could improve to about 45? for new appliances with maintenance. Wood: Normal practice is to use three stones and wood stoves are unusual. Charcoal: Stoves are often made from used cans, and are essentially, a 'free good.' Fuelwood and charcoal efficiency: Typically 8? f.-r wood and 12Z for charcoal. The project will try to identify ways to improve this.  - 59 - Annex 4.01 Page l of 5 MOZAHBIQUR LURBN HOUSEHOLD ENERGY PROJECT ProJect Description and Cost 1. Power Distribution System Reinforcement The project will provide for reinforcement of the power distribution system in the provincial capitals and cities, ie the three principal cities of Maputo, Beira, Nampula, and also Nacala, Quelimane, Chokwe, Xai-Xai, Chimoio and Tete. Swedpower (Sweden) are assisting EDM to identify the areas that can be electrified at reasonable cost, and are also assisting in redefining the physical attributes of houses fit for electrification. MIE would designate some of the urban areas as prime candidates for the coal program, and the EDM would prioritize remaining areas in accordance with criteria to be agreed with IDA, and prepare city by city programs. The total number of non-electrified urban houses is estimated at 275,000 (1980 data) of which from 30 to 702 may be suitable for electrification. In addition, about 90,000 rural households await electrification. The six year program includes 40,000 urban households in the project. Reinforcement of the distribution system is estimated at US $250 each for the majority of households, (foreign exchange cost), based on Swedpower's detailed estimates of the cost of electrifying areas in blocks in Maputo's suburbs. Infill areas could cost more or less, depending on the numbers to be electrified at any one time. Infill schemes are included in this project for those cases where costs are similar to unserved areas. Transmission system reinforcement and substations will be financed from the Energy Technical Assistance and Rehabilitation credit or bilateral assistance as appropriate. Total cost of power system reinforcement is estimated at US$14 million including US$2 million local currency. 2. Reinforcement of Kerosene and LPG Distribution Facilities Some reinforcement of petroleum distribution facilities is included in the Energy Technical Assistance and Rehabilitation project. In addition, bilateral assistance is expected to finance the Beira loading/unloading jetty, LPG transit and storage facilities at Beira, and the Maputo LPG marine unloading pipeline. The Urban Household Energy project includes rehabilitation, equipment and vehicles for the kerosene and LPG receiving, storage and distribution systems not included elsewhere. In relation to kerosene supply, this would include rehabilitation of storage tanks, accessories and equipment primarily at Xai-Xai, Inhambane, Manica, Mocuba and Lichinga (US $300,000), rehabilitation and replacement of 20 pumps, air compressors and pressure gauges (US $300,000), provision of 500 handpumps for kerosene (US $35,000), and spares (US $15,300), trucks and four wheel drive vehicles for bulk and emergency kerosene deliveries, including consumer services (US $350,000), and materials (US $200,000). The provision for trucks includes provision for BP.  - 60 - Annex 4.01 Page 2 of 5 For the LPG system, the project includes rehabilitation of facilities for weighing and bottling of LPG in Maputo (US $120,000), cylinder repair, valves and regulators, spares for consumer appliances (US $150,000), one 12 ton truck and four medium delivery trucks (US $150,000), office equipment, vehicle rehabilitation and miscellaneous materials (US $50,000). Petroleum fuels to be provided in parallel in association with the project are 75,000 tons of kerosene (US $14.3 million) and 40,000 tons of LPG (US $8.4 million). 3. Institutional Strengthening The project includes very substantial operational logistical support, technical assistance and consultancy (including audit) for EDM (US$ 2,000,000), PETROMOC (US $600,000), Forestry Department (US$ 1,000,000 including initial expatriate staffing of Blomass Household Energy Unit - see para. 5), Mocacor (US$ 150,000), industrial studies (NDF) (US$ 300,000), BPD (US$ 250,000) and for the program coordination and implementation units (US$ 2.25 million). Further detail is contained in Annex 4.02. 4. Coal Stove Program Subject to the formal review of the test program, the project will finance imported materials for about 50,000 coal stoves. The principal import items are the steel for the chimney and cooking plate (US $650,000) and refractory bricks (US $150,000). Cement will be supplied from local sources. Total cost per stove is estimated to be US $30 to 40. The project will also include US $120,000 for coal delivery vehicles (two heavy trucks and four 5 ton trucks), and in parallel US $1,000,000 for 47,000 tons of imported coal. 5. Traditional Energy Program The project would provide for rehabilitation of woodfuel plantations .:nerated by the Ministry of Agriculture at Maputo, Beira and Nampula through provision of equipment and vehicles to enable the plantations to be maintained (US$1,400,000). The major components are for equipment purchase and rehabilitation, equipment for mechanics' shops, plantation protection and for extension services. Small scale expansion will be undertaken at the three sites. It is expected that a separate project will be developed for enhancing woodfuel supplies from these areas. The project would also provide for satellite imagery and mapping (US $200,000) complementary to the aerial photography program under the Energy Technical Assistance and Rehabilitation project, with a view to preparing up to date maps of wood resources for the development of a forestry management plan. Studies under the project (see technical assistance component) would endeavor to identify simple improved wood and charcoal stoves relevant to the Mozambican resources. The project includes US $100,000 for a pilot program of stove manufacture and dissemination. The project also includes funds for the establishment of a biomass energy unit for biomass fuels.  - 61 - Annex 4.01 Page 3 of 5 6. Provision of Household Equipment, Fittings. Cable, Etc. In relation to PROLEC, the electrification program, the project includes the supply of 40,000 electric stoves (US$ 1.0 million), US$ 250,000 for sockets, plugs and switches, supply of 120,000 aluminum pans (financed from other sources), 200,000 light bulbs, (40? of the bulbs are expected to be high efficiency long life bulbs), and US$ 3.0 million for circuit breakers, meters, meter boxes, panels and fuses required for the electrification program. Interlectra will undertake procurement of all items for the household electrification program. The PROLEC part of the project will also include tools and vehicles for local contractors and part of the institutional strengthening in Para. 3 above. Rehabilitation of cable manufacture (US $650,000) for house wiring and distribution systems (it is expected that bilateral programs will continue to finance the imported material), and operational start-up (US$ 250,000) will be financed by the Nordic Development Fund. The commercial energy part of the project would include the supply of 60,000 kerosene stoves (US$ 0.5 million), kerosene cans and drums (financed from other sources), 80,000 kerosene lamps (US$ 300,000), 10,000 electric stoves for resale and provision for a pilot energy efficiency program of electric fans and solar panels, capacitors and low voltage equipment for industrialists. Local manufacturers will compete with international suppliers. Companies expected to participate actively are Comec and Climatecnica (kerosene stoves), Van Leer and Metal Box (kerosene cans and drums), Comec and Hafer (electric stoves), Celmoque (cable) Mocambique Distribuidora (sockets and plugs), and Alumoc (pots and pans). Government is seeking additional companies capable of participating in these supplies 7. Contingencies Physical contingencies are provided at an avprage of 10Z. Price contingencies on the basis outlined in Chapter IV average 15?. These are additional to the above sums.  - 62 - Annez 4.01 Page 4 of 5 Estimated Project Cost Foreign Local Total USS million EDM Component Power system reinforcement 12.0 2.0 14.0 Vehicles and Equipment 0.2 0.2 Technical assistance 2.0 0.3 2.3 PETROMOC Component Rehabilitation 0.5 0.1 0.6 Vehicles 0.4 0.4 Equip1ent/materials 0.3 0.3 Technical assistance 0.6 0.1 0.7 Mocacor Component Rehabilitation, equipment and parts 0.3 0.1 0.4 Vehicles 0.15 0.15 DOE Technical assistance 0.15 0.15 DOE Component DOE: Technicri. assistance 0.4 0.1 0.5 Logistics 0.1 0.1 UCPI: Technical assistance 0.3 0.3 Logistics 0.1 0.1 Industrial studies 0.4 0.1 0.5 Rehabilitation of cable facilities 0.9 0.9 Coal program: Vehicles 0.1 0.1 Materials 0.8 1.0 1.8 Woodfuels program: Consultancy 0.9 0.4 1.3 Vehicles 0.9 0.9 Equipmentisupplies 0.75 0.1 0.85 Training 0.1 0.1 Civil works 0.05 0.05 BDM/Supplies Component: (a) Prolec Component: Electric Stoves 1.0 0.3 1.3 Spare parts 0.1 0.1 Plugs and sockets 0.25 0.1 0.35 Electric lamps 0.5 0.5 Electric fittings 3.0 3.0 Aluminum pots Contractors tools 0.2 0.2 Contractors vehicles 0.5 0.5 Contractors works 1.7 1.7 Interelectra: Technical assistance 0.3 0.3 Logistics 0.1 0.1  - 63 - Annex 4.01 Page 5 of 5 Implementation Unit: Technical assistance 0.85 0.1 0.95 Logistics 0.1 0.1 BPD: Vehicles and Equipment 0.2 0.2 (b) Commercial Energy Componentss Electric stoves 0.25 0.1 0.35 Kerosene stoves 0.5 0.3 0.8 Spare parts 0.1 0.1 Kerosene lamps 0.3 0.3 Kerosene cans and drums Electric fans 0.3 0.3 Solar panels 0.2 0.2 Mv/Lv Equipment 1.2 1.2 Capacitors 0.25 0.25 Total capital cost 32.6 6.9 39.5 Physical contingency 3.3 0.7 4.0 Price contingency 4.8 1.0 5.8 Total capital cost 40.7 8.6 49.3 Purchase of coal 1.0 1.0 Purchase of LPG and kerosene 23.0 23.0 Physical contingency 2.4 2.4 Price contingency 3.6 . 3.6 Total cost 70.7 8.6 79.3  - 64 - Annex 4.02 Page 1 of 14 MOZAMBIQUE URBAN HOUSEHOLD ENERGY PROJECT TECHNICAL ASSISTANCE AND STUDIES TECHNICAL ASSISTANCE REQUIREMENTS Operational Assistance BENEFI- CIARIES TITLE Posi- Place of Man. Estimated Job tions Work Months Cost Description (within Annex 4.02) EDM senior distribution engineer (coordinator's assistant) 1 Maputo 38 288,000 annex 1 area distribution engineer i Maputo as 262,000 annex 2 area distribution engineer 1 Quelimane 36 252,000 annex 2 area distribution engineer 1 N mpula 36 262.000 annex 2 144 1,044,000 Biomass Energy Unit (Ministry of Agriculture) senior energy planner 1 Marrecuene (Maputo) 60 420,000 annex 3 wooodfuel specialist 1 Marracuene (Maputo) 86 180 000 annex 4 86 600,0W PETROMOC distribution engineer 1 Maputo 24 180,000 annex 6 sales engineer 1 Maputo 12 84,000 annex 6 sales engineer 1 Beira 18 128,000 annex 6 sales engineer 1 Nampula 18 1280000 annex 6 72 516,000 external audit assistance 100,000 Program Coordination DOE/MIE energy planner 1 Maputo 20 160,000 annex 7 economist 1 Maputo 20 160.000 annex 8 46 320,000 Celmoque start-up 250,000  - 65 - Annex 4.02 Page 2 of 14 IEaHacAL ASS1STMU 1511 NRE S Consultancy Services A Studies SENEFICIARIES SCOPE OF WRK ESTIdATED COST TERS OF REFEREDCE E0M */ distribution studios 960,000 annex 9 b/ .t.ff training 100-400 000 three courses for distribution 950-1,250,000 technicians (standard EDM coursex) Biomass Energy Unit (Forest Deportment) o/ *stellto lmagery 260,000 annex 10 b/ improved wood stoves 100,000 ann-x 11 c/ general studee 100.000 yet to be defined 450,000 IMPLEMENTATION UNIT AND PROJECT COORDINATION DOE/MIE engagement of managing, consulting firm Including external audit 860,000 terms of reference, as defined in *HouseholdElectrif icatlonProgramE INTER ELECTRA engagement of managing, 850,000 thre year contract terms of consulting firm reference - annex 12 | UCPI engagement of managing, 860,000 extension of current assistance consulting firm to UCPI for which financing is sponsored by IDA, EEC. Mocacor operational technical assistance 50,000 to be defined external audit 100,000 DOE Industrial studies 8o0,000 draft prepared  - 66 - Annex 4.02 Page5 of 14 Annex 1 EDM Title: Senior Distribution Engineer (Assistant Coordinator) Number of positions: 1 (Maputo) Duration of assignment: 36 man.month Reporting to: Co-ordinating Senior Distribution Engineer Duties: support and coordinate the work of the household electrification program. prepare tender documents for projects to be made by contractors. assist the Co-ordinating Senior distribution engineer. any other duties relevant to the position.  - 67 - Annex 4.02 Page 4 of 14 Annex 2 EDM Title: Area Distribution Engineer Number of Positions: 3 (Maputo, Quelimane, Nampula) Duration of assignment: 36 man.month each. Reporting to: Area Manager Duties: advise EDM's area manager on all distribution system daily procedures and practices. plan and propose reinforcements in existing distribution system according to EDM's standards for distribution. plan and propose electrification projects for approval by EDM's management. to be responsible for construction of reinforcements and extensions of the distribution system. implement operating and maintenance procedures according to EDM's standards for distribution. renew and update system's documentation. recommend staff for participation in courses at EDM's training center and provide on the job training of EDM's staff.  - 68 - Annex 4.02 Page 5 of 14 Annex 3 BDU (unidade de energia de biamassa) Ministry of Agriculture (UD mF) Title: Senior Energy Planner Number of Positions: 1 (Marracuene - Maputo) Duration of assignment: 60 man.month Reporting to: BEU's director Duties: The consultant will actively support the director of BEU on all tasks relevant to the unit; the consultant will specificglly: design, plan and implement annual programs of action, on the basis of the functions assigned to the BEU. design, implement and maintain biomass data banks, specially focussed on the monitoring of woodfuel and charcoal consumption and production. design and implement studies and surveys required for biomass energy planning. coordinate the assessment, analysis and utilization of available data, prepare proposals for policy making, and identify development strategies. further to the on the job training of principal local staff, the consultant will identify adequate mechanisms and propose policy guidelines focussed on training and manpower development.  - 69 - Annes 4.02 Page 6 of 14 Annex 4 BEV (unidade de energia de bi4wassa) Ministry of Agriculture (UDFFB) Title: Woodfuel Specialist Number of Positions: 1 (Marracuene - Maputo) Duration of assigrnent: 36 man.month Reporting to: BEU's director Duties: the consultant will work in close cooperation of local staif, and will generally provide technical assistance to voodfuel/charcoal marketing and producing units; further to the direct technical support to existing plantations, the consultant will specifically: evaluate the productability of existing plantations and natural forest basins influencing the main urban areas; the evaluation will be based on available data, and if necessary expedite mechanisms to complement information. design and implement mechanisms for improving natural forest management, focussing on woodfuel and charcoal production and marketing. evaluate, plan and implement guidelines for improving technical adjustments for the production of biomass energy and for increasing the efficiency of its use. further to the on the job training of principal local staff, the consultant will identify adequate mechanisms and propose policy guidelines focussed on training and manpower development.  - 70 - Annex 4.02 Page 7 of 14 Annex S PETROMOC Title: Distribution Engineer Number of Positions: 1 (tMaputo) Reporting to: Sales Manager Duration of Assignment: 24 man.month Duties to work in close cooperation with PETROMOC'S sales manager, assisting him specifically on: design market strategies preparing systems for cost control and distribution costs monitoring quality control legal advice on retail and distribution mechanisms pricing systems  - 71 - Annex 4.02 Page 8 of 14 Annex 6 PETROHOC Title: Sales Engineer Number of Positions: 3 (Maputo. Beira, Nampula) Duration of Assignment: 18 man.month each Reporting to: Sales Manager Duties: to work in close cooperation with PETROMOC'S sales manager, specifically on: assistance to retail network supervision of quality and performance of retailers market surveys preparation of costing systems establishment of least cost domestic supply strategies business promotion  - 72 - Annex 4.02 Page 9 of 14 Annex 7 DOE I MIE Title: Energy Planner Number of Positions: 1 (Haputo) Duration of Assignments 20 man.month Reporting to: Head of Department of Energy (HIE) Duties: the selected candidate will work in close cooperation with DOE' staff, in matters related with energy planning at national level; he (she) will be specifically involved on: organizational aspects relevant for comprehensive planning preparation of simple forecasting models, data banks, and data routine flows. preparation and monitoring of studies on: fuel savings and energy conservation, fuel switching in industrial sectors; energy consumption in the transportation sector. recommendation on legislation (and fiscal proposals) for promoting energy conservation, energy efficiency. analysis of projected investments, feasibility studies, and assessment of energy policy impacts. household energy planning  - 73 - Annex 4.02 Page 10 of 14 Annex 8 DOE I HIE Title: Energy Economist Number of Positions: 1 (Haputo) Duration of assignment: 20 man.month Reporting to: Head of Department of Energy (MIE) Duties: the selected candidate will work in close cooperation with DOE' staff; he (she) will specifically be involved on: pricing policy (power and oil sector) preparation of investment plans monitoring of economic and financial performance of energy agencies recommendations on fiscal policy relevant for the energy sector analysis of investment projects and feasibility studies  - 74 - Annex 4.02 Page II of 14 Annex 9 ELECTRICIDADE DE MOCAMBIQUE Terms oi Reference for Planning of low voltage networks for the Household Energy Project. Background The World Bank household energy project includes a program for electrification of 40,000 new households. The geographical distribution is scheduled as Maputo 15,000 Beira 7,500 Nampula/Nacala 7,500 Quelimane 2,500 Tete 2,500 Chimoio 2,500 Xai-Xai 2,500 The implementation of the electrification program is scheduled to start 1989. For Maputo area SwedPower is contracted for the preparation of a Masterplan for 11 kV and higher voltages. This work will also include planning of some low voltage networks in sample areas. Based on this result and a review of possibil4.ties for local manufacturing a revised EDM distribution standard will be prepared. The areas in Maputo, for which a low voltage plan is to be made, will cover 2,000 (to be confirmed) new customers. Scope of work - Prepare a LV plan for the cities of Beira, Nampula, Nacala, Quelimane, Tete, Chimoio and Xai-Xai and complementary plan for Maputo. Plans should includes - on site collection of plans for urbanization. - identify areas suitable for electrification to extend the number of consumers according to plan. The selection should be based on the urban planning, estimated costs for electrification and sound engineering experience. - for the selected.areas make a complete survey to identify existing consumers and houses which can be offered a oonnection. The personnel doing the survey can be provided by EDM but supervision, instruction and evaluation should be the responsibility of the bidder.  - 75 - Annex 4.02 Page 12 of 14 - for the selected areas prepare an optimal plan for the distribution network. For all towns excluding Maputo and Beira the necessary reinforcement of med 'm voltage networks shall be included. The criteria for the plans shall be as given in the Maputo Masterplan Project. The standards shall follow EDM distribution standard. The plan shall be complete enough to make the implementation either by requesting bids from a contractor or by EDM personnel after purchasing the specified material. The preparation of tender documents is not included. The preparation of documentation such as maps and diagrams shall be part of the work. - provide training to EDM personnel who participate in the -ork. The training shall mainly be on the job training. If computerized planning systems are utilized the EDM staff shall be trained to a level so that they can use this type of system under the consultart's supervision. The conditions for continued use of this system by EDM shall be stated. - present a cost estimate for the implementation of the electrification project. The cost estimate should be presented in two ways. One alternative is if EDM is contracting it as a turn-key project, the second alternative is if EDM is purchasing the material and tools and the work is undertaken by EDM staff. Time schedule The work can start when EDM's revised distribution standard is ready. This is today scheduled for August 1989. The work should be conducted so that the result is available beginning of 1990.  - 76 - Annex 4.t12 Page 13 of 14 Annex 12 INTER ELECTRA Consultancy Services The consulting firm to be engaged will assist Inter Electra on the design and implementation of the required systems as to enable Inter Electra to meet their contractual obligations within the Household Electrification Program. Although the Terms of Reference (HEP) make limited reference to the general scope of activities of Inter Electra, the consultant will integrate the said tasks and services within the company's global activity. Therefore, the consultant will evaluate the curretr. organizational, accounting, invoicing and billing systems in order to assess thdir adequacy vis a vis the foreseen requirements; special emphasis should be ailocated to stock control and management; on the basis of such assessment, the consultant will recommend the level of changes and improvements required; the conbultant will be heavily involved on the implementation of the recommended systems, and will specifically assist Inter Electra, on a resident basis during at least the first six months of implementation. it is anticipated that a strong training input will be required; three/four micro-computers may be required, together with application software. The services will require an input of some 40 man.months. The estimated cost of the s;rvices will amount to US$350,000, including provisions for travel and accommodation of expatriates.  - 77 - Annex 4.02 Pagel4 of 14 Annex 13 UCPI Consultancy Services UCPI will be engaged by the Project Coordination as the institution that will ,onitor all the procurement aspects of the project, with the exception of hardware for EDM and Petromec. Although "PI maintain a high level of efficiency carrying on similar tasks for major programs in Mozambique, it is anticipated that UCPI will need to allocate extra resources for monitoring the Household Energy Program. UCPI with IDA and DOe will decide whether a new contract or an extension of existing consultancy contracts will be the most appropriate method. The terms of reference will coincide with those prevailing for the current contract (PAI.TEX). The services will require an input of some 40 man.months. The estimated cost of the services will amount to US$350,000, including provisions for travel and accommodation of expatriates.  - 78 - Annex 4.03 Page 1 of 4 MOZAMBIQUE URBAN HOUSEHOLD EVERGY PROJECT Household Electrification Program (Prolec) 1. This annex describes the operational methodology of the household electrification program, the responsibilities and tasks assigned to each agency, and the coordinating and monitoring mechanisms to be adopted. 2. It should be noted that the operational approach stresses the necessity for strengthening the existing institutions rathe-- than the creation of new agencies. The overall strategy calls for the creation of an alequate business environment for promoting small-medium electric contractors, most of such contractors are already active in the local market; however, past market uncertainties, the lack of consistent credit facilities, and an overall shortage of electric material for house wiring impeded the necessary transition from "one-man company" (charging speculative prices) towards the small-medium contractor companies; measures for resolving most of the business constraints are considered within the project. 3. The Household Electrification Program will create steady short- medium term market opportunities, and provisions will be allocated for financing the basic equipment needed by the local contractors (tools, measuring equipment and vehicles); simple mechanisms for sunporting the fulfillment of legal requirements for obtaining official recognition will be established together with access to local banking-credit facilities; training and assistance for basic but effective managerial requirements shall also be considered. 4. Based on an urban scrutiny promoted by EDM, about 40,000 households 'traditionally consuming woodfuel/charcoal) were identified as suitable and viable for electrification in the next 5/6 years; the number of houses to be electrified in each city, the timing for implementation, the standard requirements and the sequential investment criteria will be defined by EDM not later than July 1989. 5. The overall operation for household electrification will rely on two main credit agreements to be supported by BPD: (a) a line of credit will be activated to permit the purchase of equipment and vehicles by qualified household wiring contractors (although final arrangements are yet under negotiations, it is likely that the following conditions will prevail: amortization period not longer than five years, with interes. rates of 9Z per annum); (b) a second line of credit intended to support the customer's willingness for household electrification will also be available; qualified householders will benefit from soft credit cond.tions (amortization period under discussion, and interest rates not more than lOZ per annum); borrowers will apply for such credit conditions for benefiting from a package consisting of household wiring and connection to the power grid, electric stove (where appropriate), two/three aluminum pots, 56 efficient bulb lamps, for a total estimate value of US$250; though the final arrangements are yet under negotiations it is likely that EDH shall be involved in the credit operation, at least as collector of the due installments; specific legal arrangements between BPD, the borrower and EDM will come into force.  Annex 4.03 -79- Page 2 of 4 6. The implementation of the Household Electrification Program will chiefly require the participation of the following agencies, EDM, Interelectra, Implementation Unit and the Household Wiring Contractors. The next paragraphs will describe the terms of reference for each agency, as well as their relationship. EDM Terms of Reference 7. To identify a sequential program for household electrification based on least cost criteria (maximum connection cost will be agreed upon); a number of suitable households have to be identified for each city as well as the anticipated annual rate of connections; priority areas have to be established considering economic criteria and resource availability. 8. To design detailed technical projects for all identified areas - emphasis has to be placed on standardization, cost-effectiveness and safety; to define minimum qualification requirements for household electrification; to project load forecasts as to enable the design of network reinforcements and economically justifiable expansions of power network. 9. To establish detailed schedules for investment implementation; to procure equipment and materials to permit implementation of the program on time. 10. To promote the implementation of the program. INERELECTRA Terms of Reference 11. The agency will be responsible for the following main tasks:. (a) Procurement of local electric materials, most probably wiring, cables (Celmoque); electric fittings (Moz Distribuidora); wooden and concrete poles (Moflor, EDM); and accessories. (b) International procurement for imported materials and equipment; (c) Storage and timely distribution of materials and equipment to contractors. Interelectra will use its own facilities and, where appropriate, the agency will activate its wide network of local representatives; (d) Management and control of stocks to be procured under the program, in order to ensure cost-effectiveness and timely deliveries. 12. Although Interelectra will have primary responsibility for ensuring the time schedule of the Urban Electrification Program (40,000 households during 1989-93), the agency will benefit from additional provisions for supplying the traditional urban market, hence promoting individual efforts for electrification of extra households as well as the maintenance of existing installations.  - 80 - Annex 4.03 Page 3 of 4 13. The agency will make use of its existing facilities and resources in Maputo, Beira and Nampula; to improve its capability and institutional strengthening Interelectra will receive tecianical assistance, specifically focussed ons (i) procurement methods; (ii) standardization of household electric materials and equipment; (iii) control and management of stocks; (iv) establishment of adequate routines and procedures in accordance with its contractual duties under the program; (v) invoicing and collection routines; (vi) in-house accounting and financial systems. Further to the referred technical assistance, Interelectra will also receive provisions for purchasing some basic equipment for improving management efficiency (vehic.les, micro-computers, office equipment, etc.) 14. Interelectra's role will be embodied by contractual arrangements; its direct involvement will be chiefly with the Implementation Unit and house wiring contractors; the Implementation Unit will give Interelectra instructions on: (i) schedule of requirements for the program (on an annual basis) so that the procurement, storage and distribution mechanisms might be designed and ignited; (ii) deliveries of materials and equipment to qualified contractors; and (iii) invoicing and collecting. 15. Interelectra will decide whether local credit support will be necessary for its operations; the agency will be entitled to receive a fee for its services, which will be passed on to customers; the fee will be designed to accommodate optimal procurement costs, technical assistance and operational costs, and a reasonable margin for profits. SUPERVISORY (IMPLEMENTATION) UNI" Terms of Reference 16. The Unit, to be maintained until completion of the electrification component, will have the following main tasks and responsibilities: (a) Based on the investment schedules to be defined by EDM, the unit will identify the lots of households to be electrified, promote the contacts with householders for identifying their willingness to participate in the program, and will also establish formal contacts between householders and BPD for institutiornslizing the individual credit agreements (for this purpose householders will endorse full responsibility to the Unit); (b) For each lot of qualified households, the Unit will prepare and evaluate bidding documents to be tendered by contractors, under criteria to be agreed with the Project Coordinator as set out in the bid documents; bids will be call for tenders on a labor-plus basis, as the procurement and supply of necessary equipment will be done by Interelectra. Standard contracts will be prepared, negotiated alLd signed with successful bidders by the Unit on behalf of householders;  - 81 - Annex 4.03 Page 4 of 4 (c) The Unit will supervise and monitor the work to be performed by successful bidders under the contractual agreements, and will prepare the necessary progress reports to be presented to the Projec'. Coordinator; reports will emphasize the schedule requirements and cost monitoring; (d) Based on the progress of work, the Unit will instruct Interelectra on the supply of material and equipment and will certify invoicing procedures to be established by Interelectra; BPD will pay direct to Interelectra the corresponding amounts for equipment and materials, as well as the perceived fee for its services. Invoice will be established on a monthly basis; (e) Similarly, based on progress of work, the Unit will certify invoicing procedures to be established by wiring contractors, who will be paid directly by BPD. (f) Together with EDM (the ultimate authority), the Unit will inspect the completed work and will issue the correspondent certificates; such certificates will permit contractors to release the Performance bonds foreseen in the bidding procedures, and will legally constitute the termination of the contract. (g) The Unit will advise contractors on legal matters pertaining to the creation of companies, as well as banking arrangements; promotion of training activities on basic managerial matters will also be considered; the Unit will make standard household wirintg projects available to contractors. 17. The Project Coordinator will recruit consultants for managing and executing the above referred duties, and for providing overall coordination assistance in relation to IDA's credit. The consultants team (hereinafter called the UNIT) will act under MIE's responsibility and will report to the Project Coordinator; all the legal responsibilities and other official duties will be undertaken by MIE, except those pertaining to the execution of the contract. The UNIT will make use of EDM and MIE's premises, and regional representatives will be appointed at least for Maputo, Beira and Nampula. 18. For its services the Unit will be entitled to receive a fee; such fee will be paid directly by BPD, under arrangements to be escablished; the fee and related taxes will be considered as a cost for the householder.  - 82 - Annex 4.04 Page 1 of 14 TRADITIONAL ENERGY PROGRAM BIOMASS ENERGY UNIT AT THE NATIONAL FORESTRY AND WILDLIFE DIRECTORATE (NWFD) 1. Context Forest-based biomass fuels represent the single most important source of energy to the household sector in Mozambique. The household sector is the largest energy consuming sector in the country. While rural households account for close to 85? of all biomass energy consumed, the situation of the urban and peri-urban households is far more critical due to their severely restricted access to forest- based fuels. Energy planning is done at national, regional and, sectorial levels, with exception of the household in its biomass energy dimension, which has rarely been look at. The production and application of fuelwood and charcoal are inevitably linked to the exploitation of forest resources, and should therefore be linked to their management and planning. The already overloaded situation of the existing Ministry of Industry and Energy (MIE), and its lack of experience on forestry matters prevents it from undertaking the necessary planning and supervision of the household/biomass sub-sector. The NFWD has the necessary forestry expertise, which is the critical component, but lacks the household energy planning expertise and the human and financial resources to assume that responsibility. 2. Obiective Government has established and will maintain a "Biomass Energy Unit -(BEU)" for biomass energy at the NFWD, for an initial period of five years, to undertake in collaburation with MIE, the necessary research, planning, and projectlprogram development activities related to the utilization of biomass energy in the urban household sector, and to promote the conservation, protection and further development of energy oriented forest plantations in the country. 3. BEU's Principal Objectives BEU would have two principal objectives: (a) to consolidate the institutional structures related to biomass energy in order to enable its planning and development within the context of the existing energy development policy of the government; and, (b) to identify, promote, support, and guide energy oriented reforestation projects and projects which make a rational energy oriented use of existing natural forests, particularly those which seek to attend urban househol'd energy needs.  - 83 - Annex 4.04 Page 2 of 14 4. BEU's Principal Duties In order to fulfill its proposed objectives, the BEU would have to undertake the following principal duties: (a) identify, promote and undertake applied biomass energy research in the country, geared toward the creation of a solid infoz.mation base for planning and policy making purposes; (b) create and maintain a biomass energy resources and forestry data bank; (C) monitor the market evolution of fuelvood and charcoal in the principal consumption centers in the country; (d) identify and/or develop and promote methods and technologies for the improved production, distribution and final household use of fuelvood and charcoal in the country; (e) monitor the evolution of forest and agriculture- based energy resources in the country, and provide that information to all other relevant government energy planning agencies; (f) elaborate and promote biomass energy resources use and conservation policies on a national basis, but with emphasis on the principal urban centers of the country. (g) provide technical assistance to existing energy oriented reforestation projects on fuelwood and charcoal production and commercialization matters; and, (h) identify and promote projects and opportunities for the rational and sustainable energy oriented exploitation of existing natural forests in the country. 5. BEU's Work Progran. The BEU should work in close relation with the "National Reforestation Program", which is the institutional structure currently responsible for the existing fuelwood production projects in the country. In that context, and having the necessary human and material resources, the BEU will be responsible for carrying out the following work program during its initial five years of operation:  - 84 - Annex 4.04 Page 3 of 14 (a) in the short term i) guarantee the continuity of the existing energy oriented reforestation projects in and around Haputo, Beira, and Nampula; ii) identify and/or develop improved appropriate technologies for the production of charcoal and for the final use of fuelvood and charcoal; iii) promote and participate in the updating of the country national forestry inventory, providing special emphasis to the determination of the biomass energy potential of the existing forest stocks; and, iv) develop studies and surveys for the collection of data on the production and consumption of biomass energy in the country, assigning priority to the principal consumption center of the country; and, v) develop a national forest resources data bank, proving priority to the collection of urban and peri-urban forestry data. (b) in the medium-to-long team i) disseminate through its own means and through existing and programed rural and forestry extension projects, the identified improved biomass energy production and end-use technologies; and, ii) identify and elaborate medium and long term sector development project and activities which ensure the continuation in time of the work (data collection, research, planning, etc.) done by the BEU in its initial phases. 6. Human Resources For the creation and operation of the BEU a total of four (4) professional, two (2) technical, and three (3) administrative staff will be required. Given the prevailing financial and human resource constraints of the country, the senior elements of the proposed staff will have to be recruited internationally. In that context, the staff structure would be divided in senior expatriate staff to be recruited with external funding and intermediate, technical and administrative staff to be recruited and/or made available on a full-time capacity for the BEU by the NFWD:  - 85 - Annex 4.04 Page 4 of 14 (a) Expatriate staff (external funding) Two (2) senior level staff will be required for the following positions: i) Biomass Energy Planning Specialist, Team Leader; and, ii) Biomass Energy Production Specialist. (b) National staff (NFMD funding) i) two (2) forestry engineers ii) two (2) forestry technicians iii) three (3) secretarialladministrative level staff 7. Material and Financial Resources For the creation and operation of the BEU during its initial 5-year phase, a number of material and financial resources will be required. The NFWD will be responsible for providing the necessary office space at its office complex. All other major resources are to be externally financed. Table A.1 presents a detail of all external financing costs including the necessary expatriate staff.  - 86 - Annex 4.04 Page 5 of 14 TABLE A.1: External Funding Requirements for the Initial 5-Year Phase of the BEU Approximate cost Resources (US $) Staff: (2) Expatriate staff 560,000 Material Resources: (2) four wheel vehicles 32,000 (1) light vehicle 13,000 (2) 250 cc trail motorcycles 6,000 (1) complete IBM/AT-compatible personal computer with printer, plotter, and ups accessory 10,000 (1) IBM compatible portable computer 4,000 forestry GIS hardware and software 80,000 (2) typewriter machines 4,000 (1) photocopy machine 5,000 office furniture 10,000 photo-interpretation equipment 5,000 cartographic equipment and materials 3,000 office supplies 58,000 Total Approximate Funding Requirements US $790,000  - 87 - Annex 4.04 Page 6 of 14 PROPOSAL FOR SUPPORTING EXISTING FUELWOOD REFORESTATION PROJECTS IN MAPUTO, BEIRA, AND MAMPULA 1. Context Seventy five percent of the country's urban population is concentrated in the cities of Maputo, Beira, and Nampula. Estimates indicate that at least 65 Z of that population utilizes fuelwood and/or charcoal as their principal cooking fuels. In view of the fuelvood/charcoal scarcity in those urban areas, and the pressing need to increase local supplies, the Government, with FAO financial support, initiated the three following energy plantation projects: FO-2: Energy plantation in Maputo, (1977) FO-4: Energy plantation in Beira, (1981) FO-5- Energy plantation in Nampula, (1981) Under very difticult conditions, these projects have managed to reforest a total of 7,900 hectares (Table B.1). At the same time, considering an average increment of 10 m3/halyear, and a minimum price of 8,000 MT per m3 of standing wood, these projects have resulted in the creation of an estimated value of 2,200 million MT (Government figures). The principal problems that these projects have faced have been the lack of sufficient funds and spare parts to maintain the project equipment (vehicles, forestry tools, etc.), attacks of armed bands, and forest fires. Current external financing for these projects is expected to end during 1989, with which the continuation of operations and the safeguard of the existing reforested stock the will be seriously compromised. While these projects have not been able to meet expected target, expecting so under the prevailing conditions would be unrealistic. Beyond the existing reforested stock, much experience and forest management know-how has been acquired. This asset will most likely be lost if external financing is allowed to run out. 2. Proposal It is proposed to allocate close to US $ 1.4 million from the UHEP funds over a 5-year period, to provide the National Forestry and Wildlife Directorate (NFWD) with the necessary minimum operating resources to rehabilitate the energy plantation projects in Maputo, Beira, and Nampula. 3. Principal Objectives The principal objectives to be achieved through the proposed funding would be:  - 88 - Annex 4.04 Page 7 of 14 (a) rehabilitation of the existing equipment at the three plantation projects, enabling the achievement of annual planting and production targets: (b) acquisition of new equipment/machinery to replace existing units that have fallen beyond repair. (c) desJgn and implementation of a forest fire warning and response system; (d) design and implementation of an improved fuelwood and charcoal production and commercialization system within the three different energy plantation projects; (e) staff training; and (f) design and implement forestry extension programs in the projects' areas of influence. 4. Required Material and Financial Resources Total requirement of external funds is US $ 1,400,000. Table B.2 presents an estimation of the required external funding per required item, and Table B.3 presents a list of the required equipment and machinery. All national staff and variable operating expenses will be covered by national funds from the government's budget. 5. Principal Expected Results Over and above ensuring the survival and rehabilitation of the existing energy plantations, the allocation of the proposed funds according to the schedule presented in Table B.2 should enable the achievement of the following principal specific results: (a) the implementation of 1,200 ha/year of plantations, among the three projects totalling 6,000 ha for the proposed 5-year period; (b) the implementation of a forest fire alert and response system; and, (c) the implementation of an improved fuelwood and charcoal production and commercialization system in the three projects.  - 89 - Annex 4.04 Page 8 of 14 TABLE B.1 MOZAMBIQUE: EXISTING ENERGY PLANTATIONS Plantation FO-2 FO-4 FO-5 Year Maputo Beira Nampula Total 78/79 150 150 79/80 264 - 264 80181 642 80 35 757 81/82 520 56 85 651 82/83 357 370 83 810 83/84 403 500 249 1,152 84/85 263 872 52 1,187 85/86 363 386 117 866 86/87 324 443 164 931 87/88 410 524 180 1,114 Total 3,696 3,231 965 7,892  TWOl 6.2 COST ESTIMATES FOR TE EIILBTATIGN OF Wt O, KEIRA AND NAWULAS ENIEW PULATATIONS (*) * ('000 MZS) F0-2/ Mapuato F0-4/ BP ra F0-5/ Nampula I t S Total I 2 3 4 5 tot I 2 3 4 5 tot 1 2 3 4 5 tatp * Equlpment 1Iequlpment repalr 60 25 25 - - 110 40 20 30 - - 90 35 I0 5 - - 30 23D 2 Equlpment purchase ZS 85 35 10 10 375 130 45 30 30 10 2o - - - s5 15 30 610 3 Mechanic shops 10 10 10 10 20 60D 0 10 30 1515 60 5 5 5 '5 5 25 145 equlpment Plantation Protectlo 3D 10 10 5 5 60 30 1010 5 5 O 5 5 5 5 5 25 145 Field Materials 10 5 5 5 5 30 5 5 5 5 5 25 5 2.5 2.5 2.5 2.5 3s 70 Staff Tralning 10 10 s S S 35 5 10 5 5 5 3D 2.5 2.5 2.5 2.5 2.5 12.5 77.5 Forestry Extenslon 25 5 5 5 5 45 25 2.5 2.5 2.5 2.5 35 2.5 I 1 1 1 6.5 86.5 Consulting 36 ............. .1W.. 150 9S 4D D 715 as bO.S eI 42.5 14S SC5 35 as a 31 146 1400 * Equipmet rcpcs rchw ofptw parts.tor h1i ropsir on existing equlpmsat; euipemt porchase: purehbeat ne oqIgimnt to replce eIpment ds_gpd. beyoni sIr nd to execute prec_;d opew rtions (led prephrctlon, pl"isag, harvesting, etc); Ad, _ejiasc amp's "ulpemat purchas of equlpmnt and tools nece"y to rehabilitate mechanic shops. I.'  - 91 - Annex 4.04 Page 10 of 14 TABLE B.3 LIST OF EQUIPMENT THAT NEEDS TO BE REPAIRED OR REPLACED (PURCHASED) FOR THE REHABILITATON OF MAPUTO, BEIRA AND NAMPULA'S ENERGY PLANTATION PROJECTS MAPUTO PROJECT (FO-2) Repair Purchase 1 Komatsu D60 A machine 5 tractors 4 cisterns 7 cargo trailers 2 power pumps 3 cisterns 1 Wolkwagen nick-up truck 1 10-tons truck 2 Toyota Land-Cruiser vehicles 3 250-cc motorcycles 3 tractors 2 4x4 WD vehicles 5 chain-saw machines 1 fire equipped tractor 1 small fire truck 4 CB radio units BEIRA PROJECT (FO-4) Repair Purchase I caterpilar levelling truck 3 tractor 2 Ford tractors 1 10-tons truck 2 Toyota La-d-Cruiser vehicles 5 250-cc motorcycles 1 Scania H2 truck (;0 tons 2 4x4 WD vehicles 2 Cargo trailers 10 Cargo trailers 5 Chain-saw machines 2 Cargo trailers 5 125-Honda XL motc.;ycles 3 Cistern trailers 1 Small fire truck 1 Fire equipped tractor 4 CB radio units NAMPULA PROJECT (FO-5) Repair Purchase 2 125-Honda XL motorcycles 2 250-cc motorcycles 3 Toyota Land-Cruiser vehicles 1 light fire truck 1 Scania truck (10 tons) 4 CB radio units  - 92 - Annex 4.04 Page ll of 14 PROPOSAL FOR THE FUNDING OF A FOREST COVER AND BIOMASS INVENTORY REMOTE SENSING AND MAPPING STUDY 1. Context The only existing national level data base on Mozambique's fore-c cover dates back to an aerial coverage done between 1950 and 1960. In 1980 a FAO project (Forest Resource Evaluation Project - FAO MOZ/761007) acquired a partial set of LANDSAT imagery for the country and elaborated maps for the principal forest areas. Given the importance of actualizing and complementing the existing forest cover information, the Government has identified the necessity to undertake a nation-wide remote sensing inventory and mapping study. The information that would result of such an exercise is of critical importance to base management, planning and policy decisions concerning the urban areas forest stocks. 2. Proposal It is proposed to allocate cloMe to US $ 200,000 from the UHEP funds to provide the National Forestry and Wildlife Directorate (NFWD), with the necessary funding to execute a nation-wide forest cover and biomass inventory remote sensing and mapping study. 3. Principal Objectives and Results Under the terms of this proposal, the principal objectives and results of the remote sensing and mapping study would be the following: (a) to acquire and interpret an estimated 48 satellite images, to produce the base data on the forest cover and biomass inventory for the country, giving priority to the forest areas in and around the principal urban centers; (b) to undertake field verification work in priority and critical areas; and, tc) preparation of an estimated 102 maps (1250,000) containing the forest cover and biomass inventory information.  - 93 - Annex 4.04 Page 12 of 14 4. Requ A.aterial and Financial Resources Table C.l presents a summary of the material and financial resources required to implement che proposed study. TABLE C.l REQUIRED RESOURCES FOR THE IMPLEMENTATION OF A FOREST COVER AND BIOMASS INVENTORY REMOTE SENSING AND MAPPING STUDY Approximate Resources cost (US $) purchase of LANDSAT imagery (48 x US $ 1,000) 48,000 Consulting costs (fees, travel, etc.) 45,000 Study transport needs (airplanes & helicopter rental, ground transportation) 30,000 Materials and supplies for map production 55,000 Local staff (cartographers, field surveyors, etc. ) 10,000 Other 12,000 Total US $ 200,000  - 94 - Annex 4.04 Page 13 of 14 PROPOSAL FOR THE IMPLEMENTATION OF AN IMPROVED FUELVOOD AUND CHARCOAL STOVE STUDY FOR MAPUTO, BEIRA, AND bAMPULA 1. Context Fuelwood and charcoal constitute the principal household cooking fuels in Maputo, Beira, and Nampula. Fuelvood and charcoal supply is, however, severely limited in the urban and peri-urban markets. In that context efforts must be done in order to identify and promote technologies which can increase the final end-use efficiency of fuelwood and charcoal. 2. Proposal It is proposed to allocate US $ 60,000 from the UHEP funds to provide the National Forestry and Wildlife Directorate (NFWD), through the "Biomass Energy Unit" now under creation, with the necessary funding to implement an improved fuelwood and charcoal study in Maputo, Beira and Nampula. 3. Principal Objectives and Results Under the terms of this proposal, the principal objectives and results of the improved fuelwood and charcoal stove study would be the following: (a) To undertake limited applied consumer surveys in order to determine relevant cooking requirements, characteristics, equipment, and habits; (b) to design and field test improved fuelvood and charcoal stove models in Maputo, Beira and Nampula; and, (c) to identify the mechanisms (production facilities, financial conditions, material, commercialization, etc.) necessary to implement a national improved fuelwood and charcoal production program. The results of the study would be submitted to IDA by December 31, 1991, and IDA would exchange views with the Government by March 31, 1992, and agree a timetable for implementation of agreed recommendations.  - 95 - Annex 4.04 Page 14 of 14 4. Required Material and Financial Resources Table D.1 presents a summary of the material and financial resources required to implement the proposed study. TABLE D.1 REQUIRED RESOURCES FOR THE IMPLEMENTATION OF AN IMPROVED FUELWOOD AND CHARCOAL STOVE PROGRAM Approximate Resources cost (US S)* Stove technologist (3 man/month: fees, travel, expenses, etc.) 37,000 Consumer survey costs (design & implementation) 5,000 Stoves and working materials 15,000 Contingencies 3,000 Total US $ 60,000 - A provisional sum of US$100,000 is required for a pilot production program.  - 96 - Annex 4.05 MOZAMBIQUE URBAN HOUSEHOLD ENERGY PROJECT Disbursement Schedule (US$ millions) IDA Fiscal Year and Quarter: Disbursement: Cumulative: FY9.0 December 31, 1989 3.7 3.7 March 31. 1990 0.0 3.7 June 30, 1990 0.1 3.8 FY91 September 30, 1990 0.2 4.0 December 31, 1990 0.2 4.2 March 31, 1991 0.8 5.0 Jun, 30, 1991 1.0 6.0 FY92 September 30, 1991 1.3 7.3 December 31, 1991 1.3 8.6 March 31, 1992 1.3 9.9 June 30, 1992 1.0 10.9 FY93 September 30, 1992 1.0 11.9 December 31, 1992 1.0 12.9 March 31, 1993 1.0 13.9 June 30, 1993 1.0 14.9 FY94 September 30, 1993 0.9 15.8 December 31, 1993 0.9 16.7 March 31, 1994 0.9 17.6 June 30, 1994 0.8 18.4 FY95 September 30, 1994 0.6 19.0 December 31, 1994 0.6 19.6 March 31, 1995 ).6 20.2 June 30, 1995 0.5 20.7 FY96 September 30, 1995 0.4 21.1 December 31, 1995 0.4 21.5 March 31, 1996 0.3 21.8 June 30, 1996 0.1 21.9 FY97 September 30, 1996 0.0 21.9 December 31, 1996 0.1 22.0  - 97 - Annex 4.06 Page 1 of 2 MOZAMBIQUE URBAN HOUSEHOLD ENERGt PROJECT Procurement Schedule USS MilIlong IDA Share Other ICB Other Financlers Local Totel EDM Component Power System Roenforcement 8.99 1.0 (LCB) 8.0 (8) 2.5 2.0 (0) Vehicles and Equipment 0.2 (LCB) 0.05 (DN) 0.05 (IS) Technical AssIstance 2.6 (N) 0.4 20.65 PETROMOC Component Storage/Distributlon Rehab 0.7 0.1 Vehicles 0.6 (LCB) Equipment/Materlnis 0.3 (IS) Technical Assistance 0.8 (CON) 0.1 2.6 Mocacor Component Rehabilitation of Plant, etc. 0.05 (DN) Parts 0.26 (IS) 0.1 New Equipment (office) 0.05 (LCB) Vehicles 0.2 'IS) Technical Assistance 0.15 tCON) 0.6 DOE Component DOE: TA 0.46 (CON) 0.1 Logistics 0.1 (LCB) UCPI: TA 0.35 (CON) Logistics 0.1 (LCB) Industrial Studies 0.6 (N) 0.1 Cab!e Rehabilitation 1.2 (N) Coal Program: Vehicles 0.2 (LCB) Materials 1.0 (IS) 1.2 Woodfuels Program: Consultancy 1.1 (CON) 0.4 Vehicles 0.3 0.7 (LCB) 0.1 (ON) Equip/Supplies 0.96 (IS) 0.2 Training 0.1 (CON) Civil Works 0.06(LCB) 9.2  - 98 - Annex 4.06 Page 2 of 2 MOZAMBIQUE URBAN HOUSEHOLD ENERGY PROJECT Procurement Schedule USS Millions IDA Share Other ICe Other Financiers Lo,-l Total BDM/Supp les Component Prolec Component: Electric Stoves 1.3 0.4 Spare Parts 0.1 Plugs and Sockets 0.8 Electric Lamps 0.6 Electric Fittings 0.76 2.0(B) *1.0(D) 0.1 Aluminum Pots Contractnrs Tools 0.26 (IS) Contractors Vehicles 0.6 (LCB) Contractors Works 2.1 Interelectra: TA OXG (CON) 0.1 Logistics 0.1 (LCB) Implementation Unit: TA 1.05 (CON) 0.1 Logistics 0.1 (LCB) BPD: Vehicles/Equipment 0.3 (LCB) 0.1 11.85 Commercial Energy Component: Electric Stoves 0.3 0.1 Kerosene Stoves 0.6 0.4 Spare Parts 0.1 Kerosene Lamps .4 Kerosene Cans & Drums Eloctric Fans 0.8 Solar Panels 0.3 Mv/Lv Equipment 1.6 (N) Capacitors 0.3 4.3 TOTALS: Capital Cost 10.3 11.7 18.7 8.6 49.3 Coal 1.3 LPG and Kerosene 28.7 30.0 TOTALS: All Costs 10.3 11.7 18.7 88.e 79.3  - 99 - Annex 4.07 Page 1 of 3 MOZAMBIQUE URBAN HOUSEBOULD ENERGY PROJECT Project Monitoring Guidelines 1. DOE will coordinate the monitoring of project implementation by EDM, PETROMOC and MOCACOR, and will report quarterly to IDA on progress. 2. Records will be maintained on the following 1/ By EDM: (a) sources of power in terms of hydro and thermal production and imports (in GWh); (b) electricity consumption (in GWh) by power system, isolated towns, consumer categories and sectors and exports; (c) maximum demand (in MW) in interconnected systems: (d) fuel oil and coal consumption in power plants; (e) number of power outages, their duration and causes; (f) number of staff, classified by education standard and function in the sector; (g) average tariff level (meticais/kWh) classified in total and by consumer category; (h) rate of return on average revalued net fixed assets in operation; (i) self generated funds contributions to construction costs; (j) operating ratios; (k) revenues outstanding in terms of number of days of billings; (1) debt/equity ratios; (m) revisions to cost estimates of each project component and related financing; (n) records of all new vehicles supplied under the project showing location, mileage, major maintenance, availability and average fuel consumption; (o) analyses of accounts receivable; (p) implementation of me!aures to retain staf4; (q) results of household energy surveys; (r) consumption and costs in areas covered by project; (s) costs of power generation by source; (t) numbers of consumers and new connections; (u) collection performance for household energy program 2/; (v) procurement performance; and (w) performance in award of consultancy and technical assistance contracts. 11 2(a) to (n) for EDM and (overleaf) (a) to (f) for PETROMOC are as required by the Energy Technical Assistance and Rehabilitation project. 2/ Subject to confirmation of EDM role  - 100 - Annex 4.07 Page 2 of 3 By PETROMOC: (a) quantities of petroleum products sold in Mozambique, handled in transtt to neighboring countries and exported, by type of prodtuct (in tonnes); (b) consumption of petroleum products in Mo:aml'que by consumer category (in tonnes); (c) number of staff, classified by education standard sard function in the sector; (d) petrole4m product retail prices in Mozambique (in meticaislliter); (e) revenues outstanding in terms of number of days of sales; (f) records of all new vehicles supplied of each project component under the project showing location, mileage, major maintenance, availability and average fuel consumption; (g) analyses of accounts receivable; (h) implementation of measures to retain staff; (i) consumption in areas covered by project; (j) petroleum product costs, including distribution costs; (k) procurement performance; (1) performance in award of consultancy and technical assistance contracts; (m) market share by product; and (n) analyses of use made of petroleum products (to the extent possible). By MOCACOR (a) quantities of LPG sold in Maputo and elsewhere in Mozambique; (b) consumption by consumer category; (c) number of staff, classified by education standard and function; (d) retail prices; (e) analysis of accounts receivable; (f) detailed records of vehicles; (g) analysis of numbers of consumers by distribution method; (h) consumption outside of Maputo and related cost of transport and handling; (i) procurement performance; and (j) performance in award of consultancy and technical assistance contracts.  - 101 - Annex 4.07 Page 3 of 3 By DOE (a) physical performance in relation to project of local enterprises; (b) supply and consumption of various sources of energy; (c) unit costs of appliances, connections, supply, etc. and consumption levels; (d) vehicle records related to project (excluding as above); (e) records of logistical equipment for project (excluding as above); (f) procurement performance; (g) performance in award of consultancy and technical assistance contracts; (h) statistical and cost data on household coal supply; and (i) statistical and cost data on woodfuels program.  Annex 4.08 Pg. 1 of 1 - 102 - MOZAMBIQUE URBAN HOUSEHOLD ENERGY PROJECT PROJECT SCHEDULE Number of households to be connected for electricity Location Total 1990 1991 1992 1993 1994 1995 Maputo 15,000 1,500 2,000 2,500 3,000 3,000 3,000 Beira 7,500 500 750 1,000 1,750 1,750 1,750 Nampula/Nacala 7,500 500 750 1,000 1,750 1,750 1,750 Quellmane 2,500 200 300 400 400 400 800 Tete 2,500 200 300 400 400 400 800 Chimoio 2,500 450 500 500 350 350 350 Xai-Xai 2,50C 300 400 450 500 500 350 Number of households to be supplied with coal Location Total 1990 1991 1992 1993 1994 1995 Maputo 30,000 2,000 3,000 5,000 5,000 7,000 8,000 Tete 2,400 100 300 500 500 500 500 Beira 10,100 100 500 1,000 2,000 3,000 3,500 Other 5,100 100 500 1,000 1,000 1,000 1,500  - 103 - Annex 4.09 MOZAKBIQUE URBDN HOUSEHOLD ENEIGY PROJECT Project Coordination (a) The Department of Energy (DOE) of the Ministry of Industry and Energy (MIE) shall be responsible for the overail coordination and supervision of Project implementation. (b) A Project Coordinator with qualifications and managerial experience, acceptable to the Association, shall be appointed within the DOE. (c) The Project Coordinator rhall be responsible, inter alia, for the following: (i) coordination of all Project activities within MIE and with EDM, PETROMOC, MOCACOR, Banco de Mocaml'ique, Ministry of Agriculture. Ministry of Mineral Resources and other government agencies. official entities and the Association; (ii) ensuring appropriate compilation and maintenance of Project documentation and files; (iii) preparation and furnishing to the Association every three months of Project evaluation and physical progress reports of the various Project components; (iv) ensuring that disbursements of the Credit funds, employment of consultants, and procurement procedures follow the Association's Guidelines; (v) monitoring and supervising the status of commitments and disbursements of Credit funds allocated to each implementing agency; (vi) monitoring and supervising the status and findings of studies to be carried out under the Project; (vii) monitoring selection, employment and performance of consultants' services funded under the Credit; (viii) preparing on the basis of Project implementation experience, proposals to strengthen Project design and/or implementation procedures to better achieve the objectives of the Project. (d) In discharging these responsibilities, the Project Coordinator shall be assisted by; (1) technical staff (two Assistants); and (ii) support staff (e) Government will maintain the Project Co-ordination staff during the execution of the project  - 104 - ANNEX 5.01 HO2ANBIQUE URBAN HOUEHOLD ENERGY PROJECT PLTROLEUM PRODUCT PRICING STRUCTURE US $ tonne (October 1988) Premium Regular Gas Jet FL Gasoline Gasoline Oil Kerosene Fuel LPG Oi. Import Price 188 i88 177 170 178 292 105 Ex-storage price 483 408 200 181 214 247 108 Retail price 564 477 233 235 233 292 118 (April 1989) Retail price 670 560 250 300 320 490 180  - 105 - Annex 5.02 Page l of 3 KOWIBIQUE URBAN HOUSEHOLD ENERGY PROJECT NOTES AND ASSUMPTIONS ON FINANCIAL STATEMENTS I. General 1. The fiscal year for each enterprise runs from January 1 to December 31. 2. Exchange rate meticais to the dollar has been assumed to be: 1988 522 1989 685 1990 769 1991 807 1992 848 1993 890 1994 934 1995 981 The rand/dollar exchange rate has been taken to be 2.5 throughout. 3. Inflation rates were assumed as below: International Local 1988 1.03 1.50 1989 1.04 1.30 1990 1.04 1.20 1991 1.04 1.10 1992 1.04 1.10 1993 1.04 1.10 1994 1.04 1.10 II. PETROMOC 1. Basis of financial forecasts is Sismet report on 1985 to 1988 dated October 1988. 2. Cost of oil products is subject to international inflation rate and forecast meticais/dollar exchange rate. Prices are assumed to be adjusted in proportion to cost adjustments, and at the same time.  - 106 - Annex 5.02 Page 2 of 3 3. Volume of petroleum product sales to be unchanged except for addition of fuels provided under the Urban Household Energy Project. 4. Materials are subject to international inflation rate. Employee costs and other local costs are subject to local inflation rate. 5. Costs insensitive to volume except for direct cost of petroleum product imports. 6. Depreciation and amortization at existing rates, i.e. buildings 42 annually equ4pment 102 annually vehicles 252 annually technical assistance202 annually Supplementary depreciation to reflect currency revaluation to be provided on tangible assets purchased with loan funds. 7. Provisions for physical stock losses (42) and for doubtful debts (4Z). 8. Interest at 8%2 on new loans for hardware, at 2.752 for technical assistance. 9. Contribution to legal reserve at 5Z of pre-tax profits. 10. Sales tax at 12 on petroleum products. Stock revaluation tax 1OOZ on revaluation adjustment. Industrial contribution i.e. (company income tax) 502 of net profit. 11. Capital expenditure program as forecast for Energy Technical Assistance and Rehabilitation Credit plus as shown in Annex 4.01. 12. Accounts receivable: Pending Government declaration of its action program for reducing arrears of accounts receivable, it is assumed that the program will, as a minimum, prevent any increase in accounts receivable in meticais. No bad debts to be written off.  - 107 - Annex 5.02 Page 3 of 3 III. HOCACOR 1. Cost of LPG to be based on international inflation rate and forecast meticais/dollar exchange rate. Prices would be adjusted in proportion to cost adjustments, and at the same time. 2. Sales volume as follows: 1988 7.2 (thousand tonnes) 1989 7.6 1990 on8.3 This reflects LPG provided under Urban Housheold Energy Project. 3. LPG, merchandise and materials subject to foreign inflation rates. Other costs subject to local inflation rates. 4. All costs treated as fixed except for LPG purchases. 5. Depreciation and amortization at existing rates, i.e. buildings 42 annually equipment 102 annually vehicles 252 annually technical assistance202 annually Supplementary depreciation to reflect currency revaluation to be provided on tangible assets purchased with loan funds. 6. Provisions for physical stock losses at 102 inventory. No write down of non-fuel inventory. 7. Interest at 8