Haiti - Fifth Power Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6888-HA STAFF APPRAISAL REPORT HAITI ELECTRICITh D 'HAITI FIFTH POWER PROJECT MAY 4, 1989 Infrastructure and Energy Operations Division Country Department III Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by reipients only In the performance of their official dutes. Its contents may not otherwise be disclosed without World Bank autorzation.  CURRENCY EQUIVALENTS Currency Unit - Gourde (G) US$ 1.00 G$ 5.00 G$ 1.00 US$ 0.20 WEIGHT AND MEASURE t (metric ton) 1,000 kgs (2.205 pounds) k cal (kilo calorie) 3,968 Btu (British thermal units) 1 barrel - 42 US gallons = 159 liters 1 kilovolt (kV) - 1,000 volts (V) 1 kilowatt (kW) 1,000 watts (W) 1 megawatt HrW) = 1,000 kilowatts (kW) 1 kilowatt-hour (kWh) 1,000 watt-hours (Wh) 1 gigawatt-hour (GWh) 1,000,000 kilowatt-hours (kWh) 1 megavolt-ampere (MVA) 8 1OO0,000 volt-ampere (VA) i kilometer (km) 0,6214 mile (mi) 1 hertz (Hz) 1 cycle per second ABBREVIATIONS AND ACRONYMS BMRE =Bureau of Mines and Energy Resources CCCE -Caisse Centrale de Cooperation Economique (France) CIDA =Canadian International Development Agency (Canada) DECON =Deutsche Energie-Contult (Germany) EdH =Electricite d'Haiti IDB =Inter-American Development Bank KfW =Kreditanstalt fur Wiederaufbau (Federal Republic of Germany) MARNDR =Ministry of Agriculture, Natural Resources and Rural Development PTC -Petroleum Technical Committee UNDP -United Nations Development Programme FISCAL YEAR October 1 - September 30  FOR OMCIAL USE ONLY HAITI FIFTH POWER PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Pare No. I. CREDIT AND PROJECT SUMMARY .......... ...... ......... ..... 1 II. THE ENERGY AND POWER SECTORS..... .... ...... ....... A. The Energy Sector.............................................14 Energy Resources and Supply. . .o....... ..... ...... ... o 4 Energy Sector Organization ........ .................. ..... .4 B. The Power Sector .......... ........ ....................5 Organization ......... ... .. . ............ .5 M anagement ionalPerfomanc................................ 5 Staffing Past inancil Perorn....... .6 ... Accounting a nd Audit the.....or.........................O EdH Operational Performance.*******ooo-o.. o7 Power Demand and Supply ......0. . ..900 ...8 Electricity Pricing ........... 9 EdH's Past Financial Performance.#.**..... e**.9 IDA Participation in the .....or 10 IDA Objectives, Strategy and Rational for Involvement..... 11 I T I . T h 'E P R O J E C T . . . . . . . . . . . . . . Background and Objectives .............................. .12 Power Market ............. to...........12 Project Description...*##*#*,.* .....*......... 13 Training Program ..o*.................... ......... 15 Project Execution ....................... 1 5 Project Cost and Financing ............................. 15 Procurement .......... *#**... ........ ........... l17 Dlisbursements**.#.***.....#... ... t .... -**..* ..-..17 Finaneial Prospects ............... . ..... t ... .... < . . ..18 Economic Justification ........ . ..... .... . ,20 Environmental Aspects ... ....... ..... . ... 21 Risks ...... ** .... ........ .. .21 Performance and Financial Indicators ....... . ..... 21 IV. SUMMARY OF AGREEMENTS REACHED AND RECOMHENDATION .............22 A. Agreements Reached ... ............. .............22 B. Recommendation ....t...... ........oo ... 24 This report is based on the findings of an appraisal mission which visited Port-au-Prince, Haiti in June 1987. The mission comprised Messrs. A. Araujo, Power Engineer, and R. Klockner, Financial Analyst. The Mission was assisted by Mr. F. Musso (training consultant). The report was updated by Mr. C. F. Mena, Engineering Consultant, after a visit to Haiti in January, 1989. Hr. C. Moreno-Pineda updated the financial projection. 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.  TABLE OF CONTENTS (CONT.) ANNEXES Paite No. ANNEX 1s EdH Organization Chart .................................. . 25 ANNEX 2: Program for Institutional Development......................26 ANNEX 3: EdH's Institutional Aspects ........................... ANNEX 4s Non-Technical Loss Reduction Program.......................30 ANNEX 5s Existing Power GeneratingFacilities.......................33 ANNEX 6s Electricity Tariffs as of October 1986.....................34 ANNEX 7t Supplementary Financial Information ........................35 ANNEX 8: Power Market ............................................... 38 Attachment 1. Actual and Forecast Sales ................... 41 Attachment 2. Capacity Balance.......... ................. . 42 Attachment 3. Energy Generation in Port-au-Prince ......... 43 ANNEX 9s Ongoing and Future Projects................................44 ANNEX 1Os Project Implementation Schedule............................45 ANNEX llt Project Description and Costs .............................46 Attachment 1. Estimated Project ,osts.....................50 ANNEX 12: Estimated Credit Disbursement Schedule......................51 Attachment 1. Estimated Disbursement Categories....99.9.. .52 ANNEX 13: Training Component......................................... .53 Attachment 1. Summary of Estimated Training Costs .........56 Attachment 2. Consulting Services for Training and Manpower Development. Terms of Reference .... 57 ANNEX 14: Actual and Forecast Performance and Financial Indicators ... 59 ANNEX l5s Internal Rate ofReturn...............9999999949999*.......60 ANNEX 16: Project Files ...99....... 61 MAP (IBRD 21461)  HAITI FIFTH POWER PROJECT STAFF APPPRMISAL REPORT I. CREDIT AND PROJECT SUMiARY Country: Republic of Haiti Beneficiary: Electricite d'Haiti (EdH) Amount: SDR 18.6 million (US$24.0 m..llion equivalent). Terms: Standard IDA, 40 years maturity. Relendina Terms The credit would be onlent by the Government to EdH for 20 years, including five years of grace, at 7.01 interest rate. Interest during construction would be capitalized. EdH would bear the foreign exchange risk of Gourdes to the U. S. dollar and the Government the risk of SDR to U. S. dollar. Description: The project comprises: (a) installation of two 20-MW gas turbine generating units in Port-au-Prince; (b) construction of a single-circuit, 42 km-long subtransmission line of 23 kV from the Peligre hydro plant to Hinche; (c) procurement of equipment and tools for maintenance of distribution systems and a loss- reduction program; (d) preparation of feasibility studies for future medium-speed diesel units; (e) a preinvestment study to assess the economic merits of a frequency conversion (from 50 Hz to 60 Hz) of the Ciment d'Haiti plant, to serve this plant from EdI's main grid; (f) preparation and implementation of a program to reduce non-technical losses; (g) carrying out a program for EdH's institutional development, including the implementation of a training program. Benefits: The proposed project would: (a) contribute to restoring economic growth in Haiti, as it will provide the reliable electricity service needed for the expansion of industrial production and commercial activities; (b) improve the efficiency of the power sector; and (c) strengthen EdH's management.  -2 Risks: The project is not complex technically nor a major financial burden on EdH. The main project risk is that potential socio-political instability may hamper EdH's efforts to reduce electricity theft and sustain stable management, and thus prevent EdH from achieving the expected financial and institutional performance. The above risks, however, are considered manageable and acceptable given the important potential benefirs of the project, the interest shown by the Government in stabilizing EdH's management, and EdH's record of generallv satisfactory management. No negative environmental impacts are expected from the project. Estimated Prolect Costst Local Foreign Total ------US$ million-------- Gas Turbines 2.4 15.4 17.8 Peligre-Hinche Subtransmission Line 0.2 0.9 1.1 Distribution Equipment and Tools - 1.5 1.5 Consultant Services 0.3 0.9 1.2 Training 0.1 0.5 0.6 Base Cost a/ 2.9 19.6 22.1 Physical Contingencies 0.2 1.1 1.3 Price Contingencie3 0.5 3.7 4.2 Total Project Cost b/ 3.6 24.0 27.6 Financial Charges c/ 2.5 - 2.5 Total Financing Requirements 6.1 24.0 30.1 a/ In December 1988 prices. Excludes taxes and duties (EdH is exempt). b/ Minor differences are due to rounding. c/ At relending terms. Financing Plan Local Foreign Total ----US$ million-------- IDA - 24.0 24.0 EdH 3.6 - 3.6 Government 2.5 - 2.5 Total 6.1 24.0 30.1  - 3 - US$ million Estimated Disbursements: IDA FY 1990 1991 1992 1993 1994 1995 1996 Annual 0.8 2.6 4.4 4.8 4.2 3.6 3.6 Cumulative 0.8 3.4 7.8 12.6 16.8 20.4 24.0 Rate of Return: 16% on EdH's investment program.  -4- II. THE ENERGY AND POWER SECTORS A. The Enerxy Sector Energv Resources and. Supply 2.1 Haiti has limited energy resources, Wood, the primary source of fuel for domestic use, accounted for 74% of total energy supply in 1988. Haiti has no identified petroleum deposits. Imported petroleum products represented 182 of the country's total energy consumption in 1988, and are the main source of commercial energy. Another 5% of Haiti's erergy was derived from bagasse, while hydropower supplied the remaining 3% of Haiti's energy needs. Deforestation has led to serious soil erosion problems which threaten the development of hydropower resources. The problem is officially recognized, but progress in controlling grazing or in afforestation is t1.adequate. Potential new hydro capacity is estimated at only about 120 MW. About 85% of this amount is located on the Artibonite river, downstream of the Pe'.igre dam, and on one of its upstream tributaries, the Guayamouc river. Haiti also has about 750 thousand tons of proven lignite reserves in the Central Plateau region, near Maissade. This lignite is best suited for industrial use.1 2.2 The United Nations Development Programme (UNDP) and World Bank joint energy assessment report of 1982, updated in 1985, concluded that the most critical issues in Haiti's energy sector are: (a) the depletion of forest resources, with ensuing soil erosion and reduction of agricultural productivity; and (b) the increasing burden of costly oil imports. To address these issues, the report recommends: (a) development of indigenous energy resources to the extent possible; and (b) management of demand and stimulation of higher efficiency in energy use. The Government, with IDA financing, has undertaken an integrated study of Ha!t-i's severe environmental deterioration. The study will propose policy changes and investments to reduce soil erosion and reverse deforestation. Completion of the study's final draft is scheduled for mid 1989. IDA's review will follow and the appropriate recommendations of the study could begin to be carried out early in 1990. In 1987, the Government also created the Petroleum Technical Committee (PTC) under the Ministry of Commerce to procure the rountry's oil supply. PTC is being supported by consultants funded unOjr a USAID project. Erneriv Sector Organization 2.3 Three ministries share responsibility for energy. The Ministry of Agriculture, Natural Resources and Rural Development (HARNDR) deals with forestry. The Ministry of Public Works, Transport and Communications handles commercial energy, including electricity, through Electricite d'Haiti (EdH), and non-conventional energy sources and energy efficiency through the Bureau of Mines and Energy Resorrces (BMRE). The Ministry of Commerce and Industry is responsible for the Petroleum Technical Committee (PTC). 1/ Haiti-Issues and Options in the Energy Sector UNDP/World Bank joint Energy Assessment-June 1982, updated in August 1985  -5- B. The Power Sector Organization 2.4 EdH, an autonomous government agency created in 1971, is the sole body responsible for electric power generation, transmission and retail distribution in the country. EdH's Board of Directors is appropriately made up of the Minister of Public Works, Transport and Communications (Chairman), the Minister of Economy and Finance, the Minister of Commerce and Industry, the Minister of Planning and External Cooperation, the Governor of the Central Banks and EdH's General Manager. Policy directives are set by the Minister of Public Works, Transport and Communications; the Board approves major investment plans, borrowings and policies, as well as electricity tariffs. This approval process has worked well. 2.5 EdH's current organizational structure (Annex 1), which is based on a 1981 study by consultants financed under the Second Power Project, worked satisfactorily until '98.,. However, improvements are now required because: (a) the activities of the Technical and Commercial Directorate need to be redefined to permit better coordination; and (b) the Administrative Directorate faces structural problems. Management 2.6 EdH's management performance, commercial activities, and energy losses have deteriorated during the last two years, despite improvements achieved in the company's administration, maintenance and distribution expansion under the Fourth Power Project. The difficulty in coordinating the functions of the Technical and Commercial departments plus inadequate control of the consumer-related activities are undermining EdH's efficiency. A redistribution of responsibilities between the Technical and Commercial Departments is therefors necessary in order to transfer to the Commercial Department all customer-related activities and responsibilities. The action plan (Annex 2) addresses this problem. 2.7 The management problems in the Administrative Department are the result of a shortage of qualified staff and inadequate coordination among the various departments. The creation of EdH's labor union makes it more difficult for the Administrative Director to manage his activities. To resolve these problems, the Administrative Department will be split into a Financial Department and an Administrative Department. In September 1988, the Administrative Manager was promoted to General Manager. This is expected to be a short-term assignment since he is already above retirement age. The position of Deputy General Manager was recently created to assist the present General Manager. This position is expected to be filled soon by one of the present department heads, who most likely would succeed the General Manager once his caretaker's duties are completed. Through this arrangement and the creation of a Financial Department by May 1989, the performance of EdH's uanagement is expected to significantly improve. To ensure continued sound managerial performance EdH confirmed that it will continue filling its key managerial positions with persons whose qualifications and experience are satisfactory to IDA.  - 6 - 2.8 Therefore, in order to consolidate its institutional development initiated under the Fourth Power Project, EdH has agreed to continue implementing the Plan of Action for Institutional Development agreed with IDA in 1987 (Annex 2). This plan is geared oto (a) strengthening EdH's management; (b) improving comaercial activities; and (c) correcting some administrative and financial weaknesses that still exist. EdH has also agreed to submit to IDA by September 30 of each year, starting in 1989, a progress report on the status of this plan; and to engage, by December 1989, consultants satisfactory to IDA to work with EdH's staff in the implementation of the plan of action. A detailed assessment of EdH's institutional aspects is presented in Annex 3. Staffin2 2.9 By December 1938, EdH had about 1,667 employees, which is too many. Only 62 had university degrees. EdH's ratio of number of customers per employee decreased steadily from 67 in FY84 to 62 in FY88. EdH and the Government agree that this can and should be improved. Given the characteristics of the EdH system, a long-term target of about 100 customers per employee appears reasonable. Therefore EdH, taking into account the planned expansion of its system and the training program for its staff, has agreed to limit increases in its number of staff and improve productivity levels to meet the following targets for the ratio of number of customers per employee: 64 in FY89, 72 in FY90, 78 in FY91, 83 in FY92, 88 in FY93, 92 in FY94, 97 in FY95 and 100 in FY96 and thereafter. EdH also agreed to prepare annually by August 15, starting in 1989, a detailed plan of action for recruitment of staff for the following fiscal year. Such plans, which will include a temporary restriction on hiring of staff to professionals and technicians, will be implemented taking into account IDA's comments. Submission to IDA of the action plan for FY90 will be a condition of effectiveness of the proposed credit. 2.10 Salaries are competit- ye by local standards, but skilled professionals often leave the country attracted by higher salaries in developed countries. The main constraint to sector development is the shortage of skilled, experienced personnel, particularly in management, administration, finance and maintenance. Therefore, EdH's use of foreign consultants needs to continue until skilled professional staff are trained and have acquired enough experience to take over their assignments. The project will assist EdH to resolve these problems by providing: (a) consulting services to help EdH implement the Plan of Action (Annex 2); and (b) a comprehensive training program for EdH's staff. Accounting and Audit 2.11 EdH's accounts are kept in accordance with generally accepted accounting principles, but improvements in accounting and internal auditing procedures are needed. An accounts-payable procedure should be established and the inventory-control management needs to be improved. EdH does not prepare long-term financial plans. Annual budgeting procedures are inadequate and controls need to be strengthened. Monthly financial statements are issued too late (four months after closing) to be useful as a management tool. Consultants financed under the Fourth Power Project, assisted EdH to analyze its inventory, payroll, management information  - 7 - system, internal auditing procedures and project accounting. The Plan of Action for institutional development (Annex 2) incorporates their recommendations, plus those of EdH's external auditors. 2.12 EdH has had satisfactory arrangements for external audits since 1976. Annual audits of EdH accounts will be required under the proposed project. Purther, EdH has agreed tos (a) continue engaging independent auditors satisfactory to IDA: and (b) submit the audit report on EdH's accounts to IT)A not later than five months after the end of each fiscal yea . EdH ODerational Performance 2.13 Operation and maintenance constraints have been addtessed under credits 1281-HA and 1527-HA. These have financed distribution system renovation to reduce technical losses and rehabilitation of diesel generating plants to reduce the cost of operation and mainte;ance. EdH's consultants recently assessed the effects of the distribution systems renovation and determined that technical losses had been significantly redt,ed in the distribution network to a satisfactory level of 6%. However, non-technical losses and operation and maintenance costs are still excessively high. It is estimated that, as a result of clandestine non- metered users, low-reading meters, corrupt meter readers and accounting collusion, total losses reached in 1988 a level of about 40% in the Port- au-Prince area, and about 25% in the isolated provincial systems. The main causes for such high proportion of non-technical losses are: first, the high level of electricity tariffs (average tariff in 1988 was 0.157 US$/kWh), which makes electricity a highly valuable commodity disproportionately expensive to a large segment of users, and second, the local attitude that 'voler l'Etat ce n'est pas voler, 2 which is exacerbated under civil unrest. The high level of tariffs is due in part to the high operation and maintenance cost of the diesel plants which in the last two years reached levels substantially higher than in similar plants in other developing countries. However, the rehabilitation of EdH's plants has recently been completed under Credit 1527-HA and by year-end 1989 operation and maintenance costs should drop to satisfactory levels. To monitor whether such satisfactory levels are sustained, EdH has agreed to prepare and send to IDA quarterly reports within 30 days after the end of each quarter, starting in January 1990. Su^.h reports to contain a comprehensive assessment of its operating, maintenance and fuel costs, and measures applied in preventive and continuous maintenance, as well as in monitoring sound and economical operation. Substitution with hydro of thermal generation, which now represents 48S of the total in the Port-au- Prince system, would further reduce expensive thermal generation. Raising of the existing Peligre dam by about 5 meters could double this plant's generation. With financing from the Caisse Centrale de Cooperation Economique (CCCE) of France the consulting firm of Coyne et Bellier (France) will begin in April 1989 a comprehensive study to assess the merits of increasing the height of this dam. 21 To steal from the State is not stealing.  - 8 - 2.14 The obje tive of reducing electricity theft to acceptable levels and sustain such levels is a difficult one to achieve. Nevertheless, in February 1988, EdH began a program to neutralize these thefts based on an in-house diagnosis of the situation. As a result, a well-organized team has been instituted in EdH to solve the problem and the following measures are currently being enforceds a) inspection and calibration of meters; b) detection of billing anomalies; c) disconnection of clandestine connections; d) expediting connection requests to prevent illegal connections motivated by service delays; and e) tightening control of materi 's and equipmernt for customer connections. In addition, this team is handling a public relations program to educate the publilc, with special attention to low-income consumers, on the serious consequences to all concerned of electricity thefts. The results of these efforts have produced a reduction in non-technical losses of about 6% during the second semester of 1988. On this basis, EdH expects to reduce its total losses to about 30% in FY89. EdH has agreed to meet the following targets for the technical plus non-technical losses which it intends to achieve in Port-au- Princes 252 in FY90, 20% in FY91, 182 in FY92, and 16% in FY93 and thereafter; and in the provinces, 20% of gross generation in FY89, 18% ir FY90, and 15% in FY91 and thereafter. Further, EdH has agreed to prepare by December 31, 1989, with the assistance of consultants, a plan to strengthen its on-going loss reduction program. EdH will exchange views with IDA on the recommendations of the consultants and carry out the loss- reduction program in accordance with a schedule satisfactory to IDA. The Government has agreed to support EdH in the loss-reduction program by taking all necessary measures to enforce EdH's actions against electricity theft. Power Demand and Suvply 2.15 In 1988 electricity service continued to be unevenly distributed, with only about 10% of the population connected to the power grid. About 45% of the population in Port-au-Prince has electric service, compared to only 3% in the rest of the country. Total sales in 1988 amounted to 318 GWh of which industry accounted for about 45%, residential customers for about 38%, public sector institutions for 12M, and commercial establishments for 5%. Port-au-Prince, with 85% of sales, dominates the market. 2.16 Electricity consumption in Haiti has increased at rates very close to the rate of increase in the number of connections. Active users in Port-au-Prince increased by 4.0% p.a. between FY82 and FY88 while total sales of electricity increased by 4.3% p.a. Sales growth was greater in the provinces, as a result of investments in distribution and the conversion of unaccounted-for consumption into saies. 2.17 EdH's total installed capacity is 186 MW, but real capacity is only 130 MW. The reduction of capacity is the result of limited output from old and poorly maintained diesel units, siltation in the reservoirs and reduced river flows to the hydroelectric power plants during t' t dry season (Annex 5). EdH has an effective generating capacity of 103 MW (148 MW, nameplate) to meet Port-au-Prince's demand of 74 MW. Despite apparently large reserves, EdH has had difficulty meeting dry season demand in recent years. rainfall and the effects of siltation have reduced the production of the 47 MW Peligre hydroelectric station to 21.6 MW. The four thermal plants that serve the Port-au-Prince area (Janvier, Delmas, Varreux  -9- and Carrefour, totalling 101.3 MW) are either old and unreliable or poorly maintained. Extensive rehabilitation work was carried out under the Fourth Power Project, including complete overhauling of the Delmas' four units as well as maintenance and improvements of the Varreux and Carrefour plants. After this rehabilitation, the effective diesel plant capacity in the Port au Prince area will be about 111 MW. Electricity ?ricinx 2.18 With the assistance of consultants, EdH implemented in 1976 and updated in 1982 a satisfactory tariff structure (Annex 6). The structure is based on marginal costing, but is modified to allow social pricing for low-income families. The average tariff for FY 1988 was 0.157 US$/kWh, which is very high for the region.3 However, this tariff level is in line with long-run marginal cost. The tariff structure also reflects the cost of supplying electricity to customers at different consumption levels. The tariff includes a fuel surcharge which is adjusted quarterly and is incorporated into the basic tariff at the end of each fiscal year. 2.19 The social component of the rates (Annex 6) is reflected in a fixed charge of US$3.50 for low-income residential users with consumption of less than 30 kWh/month. Because some 32% of EdH's customers consume less than 30 KWh/month, there is a large element of cross-subsidization from the higher-income segments of the population. Such cross- subsidization is being maintained. EdH's Past Financial Performance 2.20 EdH's financial performance has been on balance unsatisfactory in the recent past. Extremely low rainfall in 1985 forced EdH to derive most of its electricity from the higher-cost thermal plants. As a result, EdH incurred high operating costs and achieved a low rate of return of 3% in that year, compared with one of 5-6% in the early 1980's. With the normalization of rainfall, EdH managed to achieve a rate of return of 52 in 1986. In this year, however, the break-down of civil discipline consequent on the change of government started undermining EdH's ability to generate revenues. Consumers of all classes resorted in large numbers to making illegal connections or bypassing their meters to reduce readings. Energy losses escalated rapidly, reaching an average of 352 of total production in 1987 compared to 30% in 1986. Mainly as a consequence of these losses, EdH's rate of return on revalued fixed assets was only 1.5% in 1987. Aggravating the shortfall in billings, EdH found it more difficult to collect its billings from regular customers who relaxed their payment standards in tune with political uncertainties and the generalization of theft of electricity. A-counts receivable from private customers increased from 60 days equivalent as an average in 1986 to 75 days in 1987. In late 1987 the Government provided some relief to EdH by cutting in half, in the context of its commitments to IDA, the arrears of public entities with EdH. EdH, however, was short of cash at the end of 1987 and had to delay payments to suppliers. As a result, EdH's internal contribution to investment out of own revenues decreased from 352 in 1986 to a mere 3% in 1987. This performance, although not yet critical, was poor for EdH's own past standards. 31 As compared to US$0.069/kWh in the Dominican Republic, US$0.120 in Jamaica, US$0.029 in Bolivia, US$0.03 in Chile, and US$0.04 in Colombia.  - 10 - 2.21 Mainly because of continued high electricity losses, EdH's financial performance remained weak in 1988. Amidst political unrest, increasing civil undiscipline made total losses, mostly non-technical, increase to about 40% as an average that year. In that political climate EdH, despite initial agreements with IDA, failed to increase tariffs by 8%. As tariffs were already perceived as very high, increases would have, more likely than not under the prevailing circumstances, further aggravated the theft of electricity and arrears. EdH thus achieved a rate of return of only 2% in 1988. Mainly because it reduced its investments to about half of previous annual levels, EdH managed to contribute about 30% of the cost of those investments out of its own revenues. The change in government of September 1988 (end of EdH's fiscal year), with accompanying unrest among military ranks and government laborers and clerical personal, set the stage for continued financial problems for EdH in FY89. 2.22 But by January 1989, the Government started coming to grips with the public sector and EdH in particular with the -estoration of discipline among public employees and consumers of public services. A clear stand in refusing to comply with demands of EdH's labor union on matters which are management's privilege, rapidly restored calm and even committed the union in collaborating with management in combatting the theft of electricity. With strong Government support and police assistance to protect EdH's crews from aggression, EdH started a massive campaign of disconnecting services to illegal consumers and customers who bypass their meters or are in arrears. Continuation of this campaign with the energy with which it has started should rapidly reduce power losses to pre-1986 levels and eventually to standards of more efficient power utilities. It should moreover reduce outstanding receivables from the private sector to no more than 60 days of billings, which is acceptable. 2.23 The reduction of energy losses is essential for the recovery of EdH's financial health and future consolidation as a sound power utility. Resort to substantial tariff increases is not a viable course of action in the short nor in the long run, as tariffs in Haiti are not only perceived as high but indeed are very high for international and Latin American standards (electricity tariffs in Haiti are about three and two times higher, respectively, than the averages in the United States and Latin America). Potential increases in operational efficiency and optimization of investments, albeit substantial, will take time. By concentrating now on the recovery of energy losses, EdH is rightly laying the financial basis for successfully carrying out the project and its investment program during the project execution period. IDA Participation in the Sector 2.24 Since 1976, IDA has supported the development of the power sector in Haiti through four credits totalling about US$80 million. In 1976, IDA made its first credit (645-HA, US$16 million) to partial'+ finance the first stage of a two-stage development program for 1976-1981, covering the installation of diesel generating units at Varreau station and distribution network expansion. The Project Performance Audit Report (PPAR No. 3265) was distributed to the Executive Directors on December 30, 1980. The second credit (895-HA, US$16.5 million) helped finance expansion of diesel generating capacity and renovation of the distribution network in Port-au-  - 11 - Prince. The Project Completion Report for this project was distributed on June 5, 1986; no PPAR has been issued. The third and fourth credits (1281-HA, SDR 23.1 million and 1527-HA, SDR 26.0 million) have helped finance expansion of thermal generation, completion of the renovation of the Port-au-Prince distribution network, construction of EdH's headquarters and other miscellaneous works. The first, second and third projects were completed with delays of 18 and 20 months. The original components of the Fourth Power project were completed in December 1988, without significant delays. With a remaining balance resulting from appreciation of the SDR vs. US$, additional project components are beir; executed and should be completed by June 30, 1989, the credit's original closing date. 2.25 Tne development of Haiti's power sector has allowed the growth of a manufacturing sector that has become the most stable economic activity in Haiti. It has employed a substantial part of the labor force migrating from the countryside to the capital. Although EdH has become one of Haiti's most efficient public enterprises, IDA's technical, managerial, and financial assistance will remain necessary until EdH reaches an adequate level of performance. Threa problems were only partially solved by these past projects: high energy losses, Government arrears to EdH, and EdH's managerial and institutional shortcomings. The preparation of the proposed project took into aucount the lessons learned in the previous operations: the reduction of technical and non-technical losses are being handled separately; the settlement of arrears is in force; and the managerial and institutional reforms are being carried out through a specific program. IDA Ob1ectives, Strategy and Rationale for Involvement 2.26 Key elements of IDA's strategy for Haiti include supporting improvements in infrastructure necessary for the reactivation of the productive sectors and the strengthening of institutions important to the development process. IDA's objective in the energy sector of Haiti is to foster energy conservation, the reduction in the lorng-run cost of electricity, and improvement of EdH's institutional and financial performance and, in the longer-run, to assist Haiti in develtping its indigenous energy resources. IDA's involvement in the power sector is crucial to rationalize highly capital-intensive investments. To achieve these objectives, IDA is supporting the Government and EdH to: (a) supply least-cost electricity at adequate reliability levels; (b) continue organizational reforms to enhance institutional and financial efficiency and cost savings; and (c) ensure timely preparation of and adherence to sound least-cost power expansion planning.  - 12 - III. THE PROJECT Backgtround and Obiectives 3.1 The proposed project is part of EdH's expa.nsion program for 1989- 1997. It aims to provide the additional generation capacity required to meet the needs of the Port-au-Prince area by 1992. It would support Haiti's economic development strategy by providing the reliable supply of power necessary for economic growth and, in particular, for industrial and commercial activities. The project was identified by an IDA mission in September 1986, was prepared by EdH's technical and planning departments with the assistance of consultants, was appraised in June 1987 and negotiated In November 1987. The project was updated in March 1989, following the visit of an IDA mission to EdH in 1989. The project was renegotiated in April 1989. 3.2 The main project objectives are: (a) to expand the generating facilities in the city of Port-au- Prince, in accordance with a least-cost expansion program; (b) to supply electricity to the cities of Hinche and Thomonde; (c) to improve EdH's efficiency through the execution of: (i) a program to reduce non-technical losses; (ii) institutional imprevements; and (iii) training programs to strengthen EdH's managerial and technical capacity; Power Market 3.3 Power sales in the Port-au-Prince area grew by 16.41 p.a. between 1972, when the Peligre hydroelectric plant was completed, and 1980. The growth rate declined to 4.0% p.a. in 1980-1988 because of an increase in theft of electricity, EdH's limited installed generating capacity and, in 1983, supply restrictions caused by drought. 3.4 EdH, with the help of consultants, has prepared acceptable forecasts of future energy sales (Annex 8). Because of the low coverage rate, the load growth depends largely on the ability of the power company to increase its generation capacity and the number of customers and, therefore, does not show a strong correlation to economic growth of the country. EdH forecasts that, commensurate with the growth of its capacity, sales will increase by 8.01 p.a. for the Port-au-Prince area and by 8.21 p.a. country-wide in 1988-95.  - 13 - 3.5 Energy losses in Port-au-Prince are very high. The load forecast is based on the assumption that the loss-reduction program will decrease overall losses to 16% of net generation by 1993 and thereafter. The forecast power requirements of the Port-au-Prince area would then be as follows: 1988 1989 1990 1991 1992 1993 1994 1995 Sales (GWh) 271 286 309 334 360 400 442 473 Generation (GWh) 449 381 386 407 429 473 526 563 Peak (MW) 70.0 70.2 71.1 74.9 79.0 86.3 95.4 102.1 3.6 In accordance with recommendations of the 1982 UNDP/World Bank energy assessment, as updated in 1985, EdH completed in 1987-88 the feasibility studies of the St. Christopher coal-fired steam plant (financed by IDB), and of the Artibonite 4C hydroelectric plant (financed by Credit 1527-HA). Acceding to Government's and EdH's requests, IDA financed in 1988 under Credit 1527-HA the preparation of EdH's long-term least-cost generation expansion plan. The plan, prepared by the Deutsche Energie- Consult (DECON) consulting engineers (Federal Republic of Germany), is sumuarized below. Concurrently with DECON's study, a consultant's study financed by IDB and completed in January 1989 using the Wien Automatic System Planning Package (WASP) program has reached conclusions quite similar to those of DECON. Plant and TvPe Capacity (MW) Year of Operation .;as Turbine Units #1, #2 2x20 1992 Medium Speed Diesel Units #1, #2, #3 3xlO 1994 Units #4, #5, #6 3xlO 1997 Coal-fired Steam Units #1, #2, #3 3x20 2000 Units #4, #5 3x20 2004 Unit #6 1x20 2009 3.7 The proposed program would be the least-cost solution when constant oil prices or annual increases of up to 52 are assumed (which is acceptable). With help of its consultants DECON, EdH has also defined a satisfactory investment program for the rest of the country (Annex 9). Proiect Description 3.8 The proje.t would consist of: (a) acquisition and installation of two gas turbines of about 20 MW each; (b) construction of a single-circuit, 42 km sub-transmission line at 23 kV from Peligre hydro power plant to the city of Hinche;  - 14 - (c) procurement of equipment and tools for maintenance of distribution systems and the loss-reduction program; (d) preparation oft (i) a feasibility study for future medium-speed diesel generating units; (ii) a detailed feasibility study for frequency conversion from 50 Hz to 60 Hz at the Ciment d'Haiti plant; and (i4i) a program to reduce non-technical losses; (e) carrying out a program for institutional development of EdH, including, inter alia: a review of its by-laws; a revision of its organization, accounting and inventory control systems; and (f) development of a three-year training program for managers and higher-level staff, aimed at (i) strengthening the management capability at EdH, mainly in the financial, administrative and technical areas, including scholarships abroad; and (ii) improving EdH's training capabilities, including the acquisition and utilization of teaching materials and equipment. 3.9 The installation of the gas turbines in Port-au-Prince will provide additional capacity urgently required to supply the energy demand in Port-au-Prince starting in 1992. Preparation of tender documents for the gas turbine plant is being financwd under Credit 1527-HA. 3.10 Construction of the proposed 23 kV sub-transmission line from the Peligre hydroelectric plant to the city of Hinche is the least-cost solution to supplying electricity to the city of Hinche. The solution was recommended in a study prepared by consultants. 3 11 Proper distribution network maintenance is essential to control losses and maintain system efficiency. The project will finance the acquisition of the necessary equipment, tools and safety devices to permit EdH's maintenance crews to work efficiently and achieve this goal. 3.12 The cement plant Ciment d'Haiti, a company of mixed public and private ownership, has an installed capacity of 2 x 3.2 MW in diesel units at a frequency of 50 Hz, and has ordered 2 x 5 MW units to meet growing demand and provide an adequate reserve margin. Given that th, frequency of EdH's system is 60 Hz and in order to permit the interconnecti)n of the cement plant to the EdH system in the future, the new units are designed to permit an easy conversion from 50 Hz to 60 Hz. The interconnection would be through a single-circuit transmission line about 20 km long, insulated at 115 kV but initially operated at 69 kV, which would be the first section of the proposed Varreaux-Gonaives line (135 km), scheduled for operation in 1997 (see Map). A preinvestment study including cost estimates for the frequency conversion are required and will be prepared under the project. Detailed designs and cost estimates for the Varreux to Gonaives transmission line are being prepared under IDB financing.  _ 15 - Trainint Program 3.13 EdH's training unit and the Center for Vocational Training were created under previous projects to provide in-house and overseas training to EdH's staff. In the last six years, 637 empleyees have received technical training in the center, and 89 were trained abroad. IDA will continue to support EdH's training efforts by financing under the project a comprehensive three-year training program (Annex 13) for about 260 management, technical, administrative, financial and accounting staff at all levels. The program would include: (a) a management development program; (b) specialized training in Haiti and abroad; (c) training of instructors and procurement of teaching materials and equipment for EdH's training centerl and (d) services of consultants and short-term experts to provide local and overseas training. EdH has agreed to: (i) update annually by March 31 its detailed program of training activities for the following fiscal year, taking into account IDA's comments; and ii) engage no later than December 31, 1989, training consultants under terms of reference satisfactory to IDA. Project Execution 3.14 EdH will be the beneficiary and executing agency for the project. EdH's Planning Director will be the project coordinator and the head of a Project Unit responsible for implementing the project. EdH has confirmed that managerial positions will continue to be filled by competent and experienced persons with qualifications satisfactory to IDA, a condition with which EdH has complied under previous Credit agreements. 3.15 EdH will require about 32 man-months of consulting services to carry out detailed engineering, procurement snd supervision of the gas turbine installation, construction of the Peligre-Hinche subtransmission line, feasibility study for medium-speed diesel units, and the feasibility study of the frequency conversion of the cement piant. Management consultants (20 man-months) will continue to assist EdH with the implementation of the plan of action to improve EdH's finances and administration. Consulting services will also be necessary to prepare and supervise the Loss-Reduction Program (24 man-months). 3.16 The proposed project is scheduled to begin in July 1989 and conclude by June 1995 (Annex 10). During execution, EdH will continue to promote lenders' meetings to coordinate the various projects in the sector financed by IDA, Inter-American Development Bank (IDB), Canadian International Development Agency (CIDA), Kreditanstalt fur Wiederaufbau (KfW) (Federal Republic of Germany), and CCCE (France). Proiect Cost and Financing 3.17 The total cost of the project, excluding interest during construction, is estimated at US$27.6 million, of which US$24.0 million vould be foreign cost (Annex 11). The cost estimate does not include taxes and duties (EdH is exempt). Costs are in December 1988 prices and are based on experience in similar projects in the country. Physical contingencies are 6% for gas turbines and 10% for transm_ssion lines and  - 16 - spare parts, and 52 for distribution equipment. Price contingencies were calculated by applying the following annual escalation rates to base costs and physical contingenciess 1989: 5.62, 1990t4.31, 1991: 3.0b, 1992: 3.31, 1993:4.0%, 1994-1996: 5%. These rates reflect expected local and international inflation. The impact of differential local inflation, if any, will be negligible. 3.18 The cost estimate for the project is summarized belows Local Forein Total (US$ million) Gas Turbines a/ 2.4 15.4 17.8 Peligre-Hinche Subtransmission Line 0.2 0.9 1.1 Distribution Equipment and Tools -- 1.5 1.5 Consultant Se-vices 0.3 0.9 1.2 Training 0.1 0.5 0.6 Base Cost bI 2.9 19.2 22.1 Physical Contingencies 0.2 1.1 1.3 Price Contingencies 0.5 3.7 4.2 Total Project Cost 3.6 24.0 27.6 aI Include two units of about 20 MW each with step-up substation and spare parts for 3 years of operation. bi In December 1988 prices. Excludes taxes and duties. 3.19 The financing scheme for rhe project would be as followst (a) the proposed Credit would finance the project foreign currency costs, estimated at about US$24.0 million; (b) EdH would finance the local currency costs, estimated at about US$3.6 million equivalent. 3.20 The proposed IDA credit of SDR 18.6 (US$24.0 million equivalent), would be made to the Government of Haiti on standard IDA terms. The proceeds of the Credit would be onlent to EdH for a term of 20 years including a 5-year grace period at 7.01 interest rate. A subsidiary credit agreement, acceptable to IDA, would be signed as a condition of effectiveness for the proposed Credit. Interest during construction, estimated at US$2.5 million, would be capitalized and added to the subsidiary loan. The Government will assume the exchange risk of the SDR to the US$, and EdH will assume the exchange risk of the Gourde to the US$.  - 17 - Procurement 3.21 The following table summarizes procurement arrangementss Procurement Method ICB a/ Other Total --------(US$ million)--------- Proiect Component (a) Gas turbine equipment and installation 22.4 22.4 (19.4) _ (19.4) (b) Materials, equiument and civil works for the sub- transmission line 1.3 1.3 (1.1) - (1.1) (c) Distribution equipment and tools 1.9 - 1.9 (1.9) _ (1.9) (d) Engineering and management consultants 1.4 1.4 (1.0) (1.0) (d) Training 0.6 0.6 - (0.6) (0.6) Total 25.6 2.0 27.6 (22.3) (1.7) (24.0) ------------------------------------- a/ ICB - International Competitive Bidding Figures in parenthesis are the amounts to be financed by IDA. 3.22 Gas turbine equipment and installation, subtransmission line equipment, materials and civil works, and equipment and tools for distribution crews would be procured by ICB following IDA guidelines for procurement. Consultants would be engaged in accordance with IDA guidelines for the use of consultants. 3.23 Procurement documents for all bidding packages estimated to cost US$50,000 equivalent or more (about 95% of the estimated total value of contracts) would be subject to IDA's prior review. To expedite procurement, EdH and IDA reached preliminary agreement during project preparation on three bid packages which would be procured by ICB: (a) gas turbine equipment and installation, including step-up substation and spare parts; (b) equipment, materials and civil works for the Peligre-Hinche subtransmission line; (c) distribution equipment and tools. Disbursements 3.24 The proceeds of the IDA credit are expected to be disbursed over 6 years. The disbursement schedule reflect the standard profile for all IDA credits to Haiti. Proceeds from the credit would be disbursed for:  - 18 - (a) 1002 of foreign currency expenditures for goods; (b) 1002 of foreign currency expenditures for works; (c) 1002 of foreign currency expenditures for consulting services; and (d) 1002 of total expenditures for EdH's training program, including fellowships. 3.25 All disbursements will be made against full documentation. The closing date would be December 31, 1995, six months after estimated completion of the project. A detailed estimated disbursement schedule for the proposed IDA credit is shown in Annex 12. Retroactive financing for expenses incurred after March 30, 1989, for up to US$150,000 is proposed for payment of engineering services that EdH will have to engage fo,: project design. Financial Prospects 3.26 Mainly through actions taken for curtailing electricity losses (paras. 2.14 and 3.30), EdH is expected to improve its financial performance significantly in FY89. Energy losses are expected to decrease from 40X to about 302 during that year. As a result of this, the rate of return on revalued fixed assets is estimated at 3.52, compared with 22 prevailing in the recent past. These results are far from satisfactory, but constitute a good beginning for achieving EdH's medium-term ob4ective of becoming again able to contribute over 302 of the financial requirements of its investment program, out of its intarnal cash generation. 3.27 The terms of the onlending agreement between the Government and EdH should be consistent with both EdH's long-term financial objective and current financial limitations. EdH should thus repay the Government in 20 years including five years of grace. The subsidiary loan agreement should carry a market-based rate of interest of 7%, but allow for financing of interest during the grace period. The Government should assume the Dollar- -DR exchange risk to avoid imposing on EdH a difficult-to-manage variability of returns. EdH should assume the Gourde-Dollar exchange risk. These arrangements would impose on EdH substantial financial discipline, but allow time to adjust during a period of five years, in which EdH will be both carrying out substantial investments and rebuilding revenue- generating capacity. Before thie end of project execution, on account of the loa. subsidiary to the IDA credit, EdH would be making additional debt- service payments of some US$3 million per year, or about 302 of current total debt payments. 3.28 During the project execution peri ., in addition to covering operating costs, increases in working capital and debt service, EdH will have to carry out total investments of about $300 million, including $28 million under the present project. Government transfers specifically assigned for low-income neignborhoods will finance about 42 (US$12 million) of the total cost of those investments; contributions from developers and upper-income customers will finance another 3 % (US$11 million) approximately. Government sub-loans out of foreign loans and transfers, for an estimated total of US$163 million, would finance about 522 of the cost of the total investment program. EdH will cover the remaining US$130 million of total investments (402) out of its internal cash generation.  - 19 - 3.29 To cover the requirements of its investment and financing plan, EdH will have to achieve progressively higher rates of return on revalued fixed assets during the project execution period. In support of EdH's overall investment and financing plan, assurances were obtained during negotiations that EdH will achieve a rate of return on revalued fixed assets of 3.5X in FY89, 4.52 in FY90, 5.02 In FY91, 5.52 in FY92, 6.0S in FY93, 7.0S in FY94, and 8.0% in FY95 and thereafter. These rates are about the maximum EdH could realistically achievel that of the later years of project execution is fully consistent with EdHl's long-range expansior. requirements. Thle experience with a rate-of-return covenant with EdH is positive, as EdH has a highly reliable system for revaluing fixed assets and computing the rate of return. 3.30 To achieve the above rates of return SdH, in addition to implementing minor tariff increases, will have to improve its commercial and operational efficiency substantially through the project period. In support of this, assurances were obtained during negotiations that EdH will maintain its total energy losses in Port-au-Prince at no more than 25X in FY90, 202 in FY91, 182 in FY92 and 162 in FY93 and thereafter, and in the provinces at no more than 182 in FY90 and 152 In PY91 and thereafter. Likewise, in support of upgrading EdH's operating efficiency, particularly in the area of use of human resources, assurances were also obtained during negotiations that EdH will maintain ratios of customers per staff of no less than 64 in FY89, 72 in FY90, 78 in FY91, 83 in FY92, 88 in FY93, 92 in FY94, 97 in FY95 and 100 in FY96 and thereafter. 3.31 The difficulty of raising tariffs, inter-alia, substantially constrains EdH's ability to carry out additional investments and incur additional debt. Thus, to help ensure that EdH's financial plan will adhere to main priorities, assurances were obtained during negotiations that EdH will seek IDA's consent to: (i) carry out any investment costing over 12 of the value of EdH's revalued fixed assetst and (ii) contract debt other than the project if after contracting the new debt its service coverage ratio were to fall below 1.5. 3.32 Accounts receivable are expected to be in average at less than sixty days of billing, because: (1) balances of receivables from the private sector would be at no more than 60 days of billings, partly as a result of measures required to'comply with above-mentioned loss targets; and (il) receivables from public entities are expected to be in average at 30 days given that, in order to prevent excessive arrears, the Government and EdH have agreed thats (a) the Goverrment commits itself and its agencies to pay their current electricity bills within 30 days of billing; (b) Government will submit to IDA, prior to effectiveness, a satisfactory action plan specifying all measures necessary to ensure that such bills are paid, including satisfactory monitoring arrangements; (c) Government will grant EdH authority to suspend electricity service to agencies in arrears; and (d) the onlending agreement between the Government and EdH will provide that the Government will deduct from EdH's interest payable, the arrears of its agencies to EdH of over three months old; 3.33 In order to allow for proper monitoring by IDA of EdH's financial condition, investment program and operational performance targets, assurances were obtained during negotiations that EdH will: (i) furnish to IDA each year before June 30, for its review and comment, an investment plan, financial projections and monitoring indicators similar to those under the format of Annex 14, for the current and the following five years;  - 20 - and (Ui) propose measures, including adjustments to tariffs and other charges, if needed to comply with the above financial covenants. Assurances were also obtained during negotiations from the GoverWnent that it will support EdH in taking the measures needed to meet its institutional and financial commitments under the project. 3.34 Based on compliance with its financial commitments to IDA, EdH, as portrayed in the financial projections, should be in a solid financial position and satisfactorily finance its total investment program during the project execution period. The average contribution to annual investments, which will about double the present ones, will be 40%. By the end of project execution that contribution would be equivalent to over 1.5 times revalued depreciation, which is compa:.able to high international standards of financial performance for power utilities and somewhat better than EdH's best historical performance. Economic Justification 3.35 The proposed project includes investments necessary to supply electricity to the Port-au-Prince area in 1989-1995, and to supply electricity to the city of Hinche. Since it is difficult to allocate benefits to each component of the EdH expansion program, an economic evaluation of the individual components of the proposed project was not done. Instead, the internal rate of return for 'UH's overall investment program for the period 1989-1995 was computed as the discount rate equalizing the present value of the stream of costs and benefits associated with it. The cost stream, in 1988 constant prices, comprises the capital cost of the development program for generation, transmission and distribution and the associated incremental operation and maintenance and fuel costs. Revenues derived from incremental sales were used as a proxy for benefits. The benefits stream represents revenues generated by the investment program using average tariffs, also in constant prices, and assuming that these benefits are attributed to the program at 101 of the increase of sales in 1989, 20% in 1990, 401 in 1991, 601 in 1992, 80X in 1993 and 100X from 1994 on. Shadow pricing was not used. Other benefits to society and the economy of the country, such as those derived from Improvement of quality of service to customers and availability of energy to industry and commerce, were not evaluated. On these assumptions, the internal rate of return for the program is about 16% (Annex 15). 3.36 Standard sensitivity analyses were carried out to evaluate the Impact on the base case rate of return as a result of variations on the key parameters. The result of these analyses were: Scenario Rate of Return (1) 1. Base Case 16 2. Investments 102 higher 14 3. Benefits 102 lower 13 4. Benefits 101 higher 17 5. Investments 102 higher and Benefits 10% lower 12 6. Fuel Cost 202 higher 14  - 21 - Environmental Aspects 3.37 Haiti faces an environmental problem with very serious economic effectst deforestation. Since the resulting soil eros.Jon threatens the long-term productive capacity of land, control of erosion is one of the country's most critical needs. This problem affects the power sector because erosion-induced siltation is reducing the useful volume of the Peligre hydroelectric plant's reservoir. The Government has undertaken an integrated study, under the IDA-financed Technical Assistance Project (Credit 1786-HA of May 20, 1987), with a view to proposing policy changes and investments to reduce soil erosion and reverse deforestation. 3.38 The project would be executed with due regard to protection of the environment. Specifications for equipment and design of installations would limit gas emissions and noise to acceptable levels. No environmental problems are expected to result from the project. Risks 3.39 The project is not complex technically nor a major financial burden on EdH. The main project risk is that potential socio-political instability may hamper EdH's efforts to reduce electricity theft and sustain stable management, and thus prevent EdH from achieving the expected financial and institutional performance. The above risks, however, are considered manageable and acceptable given the important potential benefits of the project and EdH's record of generally satisfactory management. No negative environment4l Impacts are expected from the project. Performance and Financial Indicators 3.40 Project execution will be monitored against target dates shown in the implementation schedule in Annex 10. EdH's operational, financial and managerial performance will be monitored against the annual indicators shown in Annex 14.  - 22 - IV. SUMNARY OF AGREEMENTS REAC"r4D AND RECOMMENDATION A. Agreements Reached 4.1 During negotiations assurances were obtained from: EdH that it will: (a) implement a program for institutional development including inter alia t (i) a review of its by-laws, a revision o 'ts organizational structure, and improvements of its information, accounting and inventory control systems; submitting to IDA, by September 31 of each year, starting in 1989, a progress report on the plan of action; and engaging consultants to work directly with EdH's staff to implement the program (para. 2.8 and Annex 2); (b) prepare annually by August 15, starting in 1989, a detailed plan of action for recruitment of staff for the following fiscal year. Such plans, which will include a temporary restriction on hiring of staff to professionals and technicians, and will be implemented taking into account IDA's comments; increase productivity to maintain ratios of number of customers per staff not lower than 64 in FY89, 72 in FY90, 78 in FY91, 83 in FY92, 88 in FY93, 92 in FY94, 97 in FY95 and 100 in FY96 and thereafter (paras. 2.9 and 3.30); (c) unless the Bank shall otherwise agree, reach targets for its total losses in Port-au-Prince of not more than 25X in FY90, 20% in FY91, 181 in FY92 and 161 in FY93 and thereafter, and in the Provinces to 181 in FY90 and 15% in FY91 and thereafter (para. 2.14); (d) prepare by December 31, 1989, with the assistance of consultants, a plan to strengthen its on-going lose reduction program. EdH will exchange views with IDA on the recommendations of the consultants and carry out the loss- reduction program in accordance with a schedule satisfactory to IDA. (paras. 2.14 and 3.30); (e) carry out the three-year training program agreed with IDA, and update such program annually by March 31, starting in 1990; and engage no later than December 31, 1989 the training consultants under terms of reference satisfactory to IDA (paras. 2.8 and 3.13);  - 23 - (f) maintain its electricity rates at a level sufficient to earn a rate of return on average revalued net fixed assets in operation of not less than 3.5% in FY89, 4.5% in FY90, 5.0% in FY91, 5.5% in FY92, 6% in FY93, 72 in FY 94 and 8% in FY95 and thereafter (para. 3.29); (g) undertake no investment prior to the completion of the Project which would exceed the equivalent of 1% of the current net value of EdH's fixed assets in operation, unless it has furnished IDA with satisfactory evidence that such investments are technically and economically justified and that EdH would have adequate financial resources to carry out the investments (para. 3.31); and (h) prepare and send to IDA starting in January 1990 quarterly reports with a comprehensive assessment of its operating, maintenance and fuel costs, and measures applied in preventive and continuous maintenance, as well as in monitoring sound and economical operation (para. 2.13); the Government that it will: (a) enable EdH to carry out the plan of action for institutional development (para. 2.8 and Annex 2); (b) take all necessary measures to support EdH's actions to eliminate electricity theft (paras. 2.14 and 3.30); (c) tak, all measures necessary to ensure that all its agencies and offices and autonomous public agencies pay their electricity bills within 30 days of billing; the onlending agreement between Government and EdH will provide that the Government will deduct from EdH's interest payable, the arrears of government agencies to EdH of over three months old; allow EdH to suspend service to agencies in arrears (para. 3.32); and (d) allow EdH to set tariffs at levels &afficient to earn a rate of return on average revalued net fixed assets in operation of not less than 3.5% in FY89, 4.5% in PY90, 5% in FY91, 5.5% in FY92, 6% in FY93, 72 in FY94 and 8% in FY95 and thereafter (para. 3.29); 4.2 The following main provisions of the Project Agreement for Credit 1527-HA would be maintainedt (a) EdH will at all times fill its key managerial positions with persons whose qualifications and experience are satisfactory to IDA (para. 2.7); (b) EdH will contract independent auditors acceptable to IDA to audit EdHts annual financial st.!tements and statements of expenditures;  - 24 - (c) EdH will review, before December 31 and June 30 in each of its fiscal years, whether it would meet the covenanted rate of return in respect of such fiscal year and the next following Fiscal year, and would furnish to IDA the results of such review; (d) EdH will revalue its assets every year; and (e) EdH will seek IDA's consent before incurring any new debt if its debt service coverage were thereby to fall below 1.5. 4.3 Before declaring the credit effective, the following conditions shall have been met: (a) an action plan specifying all administrative and monitoring arrangements required to ensure that electricity bills of government entities are paid within 30 days of billing shall have been presented to the IDA (para. 2.32); (b) a satisfactory subsidiary loan agreement between the Government and EdH shall have been signed (para. 3.20); and (c) EdH's plan of action for recruitment of staff for FY90 shall have been submitted to IDA (para. 2.9); B. Recommendation 4.4 With the above agreements the proposed project would be suitable for an IDA credit of SDR 18.6 million (US$24.0 million equivalent).  -25- i~~~~~~~~~~~~~~~~~~~~~~ I H :] I > IjHJEn I  HAITI ANNEX 2 ELECTRICITE D' HAITI (EDH) Page 1 of 2 FIFTH POWER PROJECT PROGRAM FOR DNSTITUTIONAL DEVELOPMENT POLICY AREA Objectives Description of terks Rbilit Cg D p(Pn n bapit1Sp - - - - -- -- - - - - ---- --- - ------ ractte)1 Required einngCmteton A.- SECTOR POLICY 1.- By-laws To pdate b-laws to split the current To reviye by-laws specially the General AdnTserat ve Directorate In two. c=.poit on of Board of DrOector and appointment OT divisional Directors No Jul 89 2.-Investment policiee To ensure that major Investment To pro ent a eas cQat progrm Planning decisione are economically sound and satesdactQryto IDA fir eneratSon finenc a ly viable and a sociated tr namission for 1988 Hydro, 6hermal and low s diel p1 ante Yes Mar 89 3.- Tariff To ensure that EdH s tariff structure To update EdH's toriff study Planning 1i in line with marginal cost. yes Jun 89 Jul 89 B. - INTTTONAL 1.- Manag aet *nd T ensure proper links between To transfor distribution activities Cenoral Efficiency ed tr;bution and comercial from Technicol Directorate to activities Comercial Directorate No may 89 Dec 89 To Improve EdH's Management To split Administrative Direction in General aw dreflons, one Administrative and ono Financo No _Avg 89 To Improve financial administration To re-organizo the Comptroller Finance activities Department Yes Jun 89 Sop 89 r To achieve efficiency in operating, a) Establish a toak force to propose Planning and maintenance and administratlve areas a program to reduco maintnance, Technical operating and adfinistr vle expens G in accordance with agreed targoet. No Jun 89 SaP 89 b) implement such a program Technical No Oct 89 Sep 9S Management Information To enn i Tg pr epre monthly technical and Planning and Sy"ten EdH Els informotion system in financ a report required for Finance accordbnce w th the re_ommendation manage ent purpose Yes Jul 89 Jul 96 of consultants. To amesare officiency by indicators To erepro yearly operational Planning and system or planning purpose performance report Technical No Sep 89 DOc 89 To develop o computerized syetem Finance To t tize the budgeting and to preparo the annual budget financial procedures procedure Yes Oct 89 mar so To achieve lntegration betwoen To update Financial Project. annually P anning and Assisted by ploan ng and budgeting procedures. Financo IDA staff Jul so Aug 90 Personnel To Improve Manogement of a) To prepare filee and statitices Adminlitrative Hmawn resources o* te personnel Yes Feb 89 Jun 89 b) To prepare ev4luation, bonefIto Administrative and compensation systems Yes Jul 89 Sop 89 Inventory Management tTo achieve efficiency In To implement an effectvo managea nt Administrative linventory manaegeant and control system for the inventory Yes I-Dee 89  FIFTH POWER PROJECT ANNEX 2 PR FOR DNSTUTUlIONAL DEVELOPHENT Page 2 of 2 POLICY AREA cte. Dscrtptoon ot o ting feT (ngCoc tc _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _______ _ _ R qu_re Accqunting ond To control and TroraIng the To impl set 0 _t cost w4cketing system P anning and Auditing xocution and f n.ncingof the FTnanco s N 89 Oe 89 inesmet Pr"