Haiti - Fifth Power Project

Docwmnt of The World Bank FOR OFCIAL USE ONLY eCq Z0-53 - 0 RepotNo. P-4657-.HA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 18.6 MILLION TO THE REPUBLIC OF HAITI FOR A FIFTH POWER PROJECT MAY 4, 1989 J This document has a restricted distrbution and may be used by recipients only In the performance of their offical duties. Its contents may not otherwise be disclosed without World Baok a_trizadon.  CURRENCY EQUIVALENTS Currency Unit - Gourde (G) US$ 1.00 - G$ 5.00 G$ 1.00 = US$ 0.20 WEIGHT AND MEASURE 1 megawatt (MW) 1,000 kilowatts (kW) 1 kilowatt-hour (kWh) = 1,000 watt-hours (Wh) 1 kilometer (km) = 0,6214 mile (mi) 1 kilovolt (kV) - 1,000 volts (V) 1 hertz (Ha) - 1 cycle per second ABBREVIATIONS AND ACRONYMS EdH - Electricite d'Haiti IDA International Development Association FISCAL YEAR October 1 - September 30  MOR OFIMCIAL USE ONLY HAITI FIFTH POWE PROJECT CREDIT AND PJECT SUMARY Borrowers Republic of Haiti. Beneficiary: Electricite d'Hadtl (EdH). Amount: SDR 18.6 million (US$ 24.0 million equivalent). Tnem:s Standard IDA, with 40 yers maturity. Onlendine Terms: The Republic of Haiti would onlend US$24 million equivalent of credit funds to EdH, to be repaid in 20 years, with five years of grace, a; an annual interest rate of 72. TLhe Government will bear the SDR/US$ exchange risk, and SdH the Gourde/US$ exchange risk. FinancsM Plan: EdH US$ 3.6 million IDA US$ 24.0 million Government US$ 2.5 million TOTAL US$ 30.1 million Economic Rate of Return: 191 with tariff revenues as a proxy for benefits. Staff Appraisal ReAorts No. 6888-HA MAP: (IBRD 21461) This document has a restited dstribution and may be wed by rcipints on in therpfomance of their oMcbdtdutits contents may nototrwns be dbdod wihout Wodd Snk authorkstion.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF HAITI FOR A FIFTH POWER PROJECT 1. The following memorandum and recommendation on a proposed development credit to the Republic of Haiti for SDR 18.6 million (US$ 24 million equivalent) is submitted for approval. The proposed credit would be on standard IDA terms with 40 years maturity and help finance a fifth power project for Haiti. 2. Background. Haiti has limited energy resources. Fuelvood accounted for 74Z of total energy supply in 1988. Deforestation has led to serious soil erosion, which has resulted in siltation of existing reservoirs and threatens future hydropower development. No petroleum deposits have been identified. Imported petroleum products represented 18S of the country's total energy consumption in 1988, and are the main source of commercial energy. Another 52 of energy was derived from bagasse. Hydropower supplied 32 of Haiti's energy needs. Hydropower potential that can be economically developed is limited to about 120 MW, but will involve high investment costs which make thermal and diesel capacity more attractive. Only about 102 of Haiti's population of 6.2 million has electricity service. About half of the people in the capital city of Port-au- Prince and about 32 in the rest of the country are connected to Electricite d'Haiti's (EdH) systems. Power sector development has been constrained by shortages of foreign-exchange financing, limited qualified staff and the country's social and political instability. The structure of electricity tariffs is satisfactory and in line with long-run marginal costs, but average tariffs are now very high (about 0.16 US$IkWh), as a result of high operational costs and electricity theft. 3. EdH, an autonomous government agency created in 1971, is the sole body responsible for electric power generation, transmission and distribution in the country. The Board of Directors, chaired by the Minister of Public Works, Transport and Communications, approves major investment plans, borrowings and policies, as well as electricity tariffs. Under good management, EdH has improved electricity service and reduced its technical losses, mainly through programs undertaken under the Fourth Power Project (Credit 1527-HA). These included rehabilitation of generating plants and distribution systems and a better control of operations in the provinces. However, as a result of political events in late 1988 and subsequent social disturbances, EdH experienced a setback in key areas: a) highly qualified top managers had to leave the company under pressure from EdH's labor union; b) electricity theft climbed to high levels, causing total losses to increase from 302 to 40X and the rate of return on revalued fixed assets to decrease from around 42 to 22; and c) financial airangements for investments in urgently required generating capacity expansion suffered considerable delays. As a consequence of the latter, some rationing is anticipated for 1990 and 1991. 4. However, the Government and EdH have taken quick, sound measures with encouraging results. Early in 1989 the Government restored institutional stability, appointing as general manager the then financial manager. In addition, EdH and the Government filled other middle-management positions with qualified EdH staff. In the financial area EdH initiated, with government  - 2 - support, a massive campaign against electricity theft and customers in arrears, including disconnection of fraudulent connections with police assistance to protect EdH'o crews. As of April 1989, EdH's new management is performing satisfactorily and EdH shows discernible progress In reducing consumers' arrears and electricity theft. 5. Rationale for IDA Involv_ment. Key elements of IDA's strategy for Haiti include supporting $provements in Infrastructure necesssry for the reactivation of the productive eectors and the strengthening of institutions important to the development process. Since 1976, IDA has supported the development of the power sector in Haiti through four credits amounting to US$ 80 million. However, although these projects were generally successful, throe issues were only partially solved: high energy losses, government arrears to EdH, and EdH's managerial and institutional weaknesses. The preparation of the proposed project took into account the lessons learneds the non-technical losses are being dealt with separately from technical losses; the arrears settlement agreement began its Implementation prior to negotiations; and the managerial and institutional issues are dealt with through a detailed action plan. 6. Prolect Obiectives. The aim of the project is to provide power investments which are urgently needed to ensure a reliable supply of power necessary for economic growth, and in particular, for industrial and commercial activities. The additional capacity to be provided will avoid the rationing of power that would otherwise become severe by 1992. Further, by interconnecting the cities of Hinche and Thomonde to the main grid* it would substitute for expensive local diesel generation and thus lower operating costs. The project would also reduce non-technical losses, and Improve dEH's managerial financial and technical capacity. 7. Prolect Description. The proposed project comprisess (a) installation of two 20-MW gas turbine generating units in Port-au-Princel (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 the 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 Ha to 60 Hz) of the Ciment d'Haiti plant, to serve this plant from EdH's main grid; (f) strengthening of an on-going program to reduce non-technical losses; (g) carrying out a program for EdH's institutional development, including the implementation of a training program. The total cost of the project, to be executed over six years, is estimated at US$27.6 million, of which the foreign-exchange component of US$ 24.0 million (872), would be financed by IDA. A breakdown of costs and the financing plan for the project are shown in Schedule A. Amounts and method of procurement and disbursements, as well as a disbursement schedule appear in Schedule B. A timetable of key project processing events and the status of IDA operations in Haiti are given in Schedules C and D, respectively. A map and the Staff Appraisal Report No. 6888-HA dated May 4, 1989, are also attached. 8. Agreed Actions. Government has agreed to (a) enable EdH to carry out a program for institutional Improvement; (b) take all necessary measures to support EdI's actions to eliminate electricity theft; (c) take all measures necessary to ensure that all government agencies pay their electricity bills within 30 days of billing and allow dEH to suspend service to agencies in arrears; and (d) allow EdH to set tariffs at levels sufficient to earn a rate of return on average revalued net fixed assets in operation as agreed with IDA and EdH (para. 9).  -3- 9. EdH has agreed tot (a) implement a Plan of Action for its institutional development which will strengthen EdH's management (by transferring customer- related activities from the technical to the commercial directorate, and by splitting the administrative directorate into separate financial and administrative directorates), and to improve EdH's accounting and auditing procedures and information systems; (b) hire new specialized staff only according to a program to be submitted to IDA by December 1989, and improve its efficiency so as to reach agreed annual targets of the number of customers per employee ranging from 64 in FY89 to 100 in FY96; (c) implement a program to reduce non- technical losses to gradually reduce its total losses in Port-au-Prince to 16S by FY93, and in the provinces to 15% by FY91, and to employ consultants by December 1989 to strengthen and supervise the loss-reduction program; (d) maintain its electricity tariffs at a level sufficient to earn rates of return on a'yrage revalued net fixed assets in operation ranging from 3.52 in FY89 to 8X in FY95 and thereafter; and (e) seek IDA's consent prior to undertaking major investments. The main provisions under Credit 1527-HA will be maintained, including that EdH will continue to fill its key managerial positions with persons whose qualifications and experience are satisfactory to IDA. 10. Special conditions of effectiveness will bes (a) an action plan shall have been preseated to IDA specifying all administrative and monitoring arrangements required to ensure that Government entities' electricity bills are paid within 30 days of billing; (b) a satisfactory subsidiary loan agreement between Government and EdH shall have been signed; and (c) EdH's plan of action for recruitment of staff for FY90 shall have been submittec to IDA. 11. Benefits. The project will 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. The rate of return of the project is at least 162, which is satisfactory. This rate of return is understated because electricity sales have been used as the only measure of project benefits. 12. 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 dEI'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, the interest shown by the Government in stabilizing EdH's management and EdH's record of satisfactory management even during political crises. No negative environmental impacts are expected from the project. 13. Recommendation. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington, D.C. May 4, 1989  SCHEDULE A MIT FIFTH PYwER PIOJECT ESTIMATED COSTS AND FINANCING PLAN USS ml lion) Component Local Foreign Total Gas turbines (2x20W) 2.4 15.4 17.8 Peligre-Hinehe transmission 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 Coatfl 2.9 19.6 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 Financial ChargesbI 2.5 - 2.5 Total Financing Requirements 6.1 24.0 30. a/ In December 988 prices. Excludes taxes sad duties (EdH is exempt.) b/ At relending term.  SCHEDI_ B page 1 of 2 WZ zrnm PawnR nu=EC US dillo Pturmmat Mthod IMi Or Total Prolect Comonent Gas turbines equipmet sad istallation 22.4 , 22.4 (19,4)b1 - ~~~(19.4) Materials, equipment end civil vork. for the subtranuission lin 1.3 . 1.3 (1.1) - (1.1) Distribution equipment and tools 1.9 . 1.9 (1.9) ' (1.9) Engineering and mnagemnt consultnts 1.4 1.4 (1.0) (1.0) Training 0.6 0.6 TOTAL 25.6 2.0 27.6!_ (22.3) (1.7) (24.0) a/ ICB - International competitive biddin. b/ pigures in parenthesis are mounts to be fi