Morocco - Second Rural Electrification Project (Loan 3262-MOR)

Document of The World Bank FOR OFFICIAL USE ONLY Report No.: 17551 IMPLEMENTATION COMPLETION REPORT MOROCCO SECOND RURAL ELECTRIFICATION PROJECT (Loan 3262-MOR) March 31, 1998 Infrastructure Development Group Middle East and North Africa Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Moroccan Dirham (DH) 1990: US$1.00 = DH 8.25 1991: US$1.00 = DH 8.76 1992: US$1.00 = DH 8.58 1993: US$1.00 DH 9.35 1994: US$1.00 DH 9.21 1995: US$1.00 = DH 8.52 1996: US$1.00 = DH 8.75 1997 US$1.00 DH 9.57 FISCAL YEAR: January I to December 31 WEIGHTS AND MEASURES kVA = kilovolt-ampere kW = kilowatt kWh = kilowatt hour GWh (gigawatt hour) = 1,000,000 kWh kV (kilovolt) 1,000 Volt MVA = 1,000 kVA MW (megawatt) 1,000 kW ABBREVIATIONS AND ACRONYMS COSPER Comite de Suivi du Prog,ramme d'Electrification Rurale EIB European Investment Bank FEC Fonds d' Equipement Communal HV High Voltage ICR Implementation Completion Report LRMC Long-Run Marginal Cost LV Low Voltage MEM Minist&re de I' Energie et des Mines MV Medium Voltage OCP Office Cherifien des Phosphates ONCF Office National de Chemin de Fer ONE Office National de I' Electricite PNER-I Programme National d' Electrification Rurale- Premiere Phase PNER-II Programme National d' Electrification Rurale- Deuxieme Phase PERG Programme d' Electrification Rurale Globale PERL Public Enterprise Rationalization Loan VAT1 Value Added Tax Vice President: Kerrnal Dervis Director MNCMG: Christian Delvoie Director MNSID: Jean-Claude Villiard Task Manager: Jorge A. Larrieu Consultant-Author: Alvaro J. Covarrubias  FOR OFFICIAL USE ONLY TABLE OF CONTENTS Page Preface Evaluation Summary i PART I: IMPLEMENTATION ASSESSMENT A. Statement and Evaluation of Objectives I B. Achievement of Objectives 3 C. Major Factors Affecting the Project 10 D. Bank Performance 12 E. Borrower Performance 14 F. Assessment of Program Outcome and Sustainability 15 G. Future Project Operation 16 H. Key Lessons Learned 16 PART II: STATISTICAL TABLES 1. Summary of Assessment 18 2. Related Bank Loans 19 3. Project Timetable 19 4. Loan Disbursement: Accumulated, Appraisal Estimate and Actual 19 5. Key Indicators for Project Implementation 20 6. Key Indicators for Project Operation 21 7. Studies Included in the Project 22 8. 8A Project Costs; 8B Project Financing; 8C ONE Financial Statements 23 9. Economic Costs and Benefits 27 10. Status of Legal Covenants 28 11. Compliance with Operational Manual Statements 31 12. Bank Resources: Staff Input 31 13. Bank Resources: Staff Missions 32 APPENDICES A. ICR Mission Aide-Memoire 33 B. Borrower's Contribution and Comments on the ICR 38 Maps IBRD 22099 IBRD 22100 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.-  I  IMPLEMENTATION COMPLETION REPORT MOROCCO SECOND RURAL ELECTRIFICATION PROJECT (Loan 3262-MOR) PREFACE This is the Implementation Completion Report (ICR) for the Second Rural Electrification Project in Morocco for which Loan 3262-MOR in the amount of US$114 million was approved on August 4, 1990 and signed June 14, 1991. The project was restructured, the loan amended on November 12, 1992 and made effective on February 2, 1993. A total of US$ 77.5 million was canceled from the loan upon request from the Borrower during 1996 and 1997, and the balance fully disbursed. The loan was closed on June 30, 1997, as originally envisaged, and the last disbursement occurred on October 31, 1997. The ICR was prepared by Alvaro J. Covarrubias, Consultant, under the supervision of Jorge A. Larrieu, Principal Power Engineer. The ICR was reviewed by the Country Operations Department (MNCMG) and by the Infrastructure Development Group (MNSID). The preparation of the ICR began in November 1997 followed by a mission carried out by Mr. Covarrubias in early December 1997 (Appendix A: ICR Mission Aide-Memoire). ONE, on behalf of the Government, provided the Borrower's project completion report in January 1998 (Appendix B: Borrower's Contribution to the ICR). The ICR is based on the Staff Appraisal Report, the loan and project agreements, supervision reports, correspondence between the Bank and the Borrower (the Government), the financing intermediary (FEC) and the executing agency (ONE), intemal Bank memoranda, and interviews with Bank staff and Borrower, FEC and ONE officials and staff involved in project preparation, appraisal and implementation. Vice President: Kermal Dervis Director MNCMG: Christian Delvoie Director MNSID: Jean-Claude Villiard Task Manager: Jorge A. Larrieu Consultant-Author: Alvaro J. Covarrubias   IMPLEMENTATION COMPLETION REPORT MOROCCO SECOND RURAL ELECTRIFICATION PROJECT (Loan 3262-MOR) EVALUATION SUMMARY Project Objectives 1. The main objectives of the project were to: (a) expand electricity supply to the rural areas; (b) improve the reliability and quality of service of the existing rural distribution network; (c) strengthen the administrative, planning and financial capabilities in the power sector; (d) implement institutional reforms aimed at delineating and streamlining the responsibility for planning, implementing, operating and managing the rural distribution system; and (e) encourage further reforms in the electricity tariff structure. The project was also expected to contribute to the Government's policy of improving the efficiency of energy consumption (para. 3). 2. The physical objectives included construction of about 5,850 km of medium- and low- voltage lines; installation of about 72OMVA in distribution transformers; construction of about 170,000 consumer connections in about 462 villages in 34 provinces; and the supply of vehicles and specialized equipment for operating and maintaining the distribution network in the newly electrified villages. The institutional objectives included a technical assistance component to carry out studies on stock management, integrated distribution works management, train staff on the engineering, design, and marketing of distribution networks, and implement an electricity tariffs policy (including computer hardware and software required to implement the recommendations of the studies and the training). In addition, a set of covenants in the loan and project agreements established specific actions to be taken by the Government and ONE to adjust electricity tariffs, reduce arrears, reorganize ONE, and implement the recommendations of the studies to improve the operational performance of ONE and the power sector. The project was to increase the electrification index of the rural population in concentrated areas from 25 percent in 1990 to 45 percent at project completion in 1997, and to assist ONE in improving its planning, accounting, and financial performance (paras. 4-7). 3. The project's objectives were relevant to Morocco's power sector. They were congruent with those pursued by the Government and with Bank policies for the power sector prevailing at that time. The objectives were clearly stated in the Staff Appraisal Report. The project was to support phase II of the Rural Electrification Program (PNER II). It was defined as a logical continuation of the Village Electrification Project (Loan 1695-MOR) (paras. 8-9).  Implementation Experience and Results 4. Physical objectives were partially achieved. The number of new rural communities connected to electric service by ONE has been very close to the appraisal estimate, but the number of new customers connected has been substantially less than the goal set by the SAR. Compare, for example, the 423 new rural centers and 76,500 new rural customers connected by the project to the appraisal estimate of 462 centers and 170,000 connections, respectively. Even, if the on-going works are completed in 1999, the number of new rural connections achieved will be about half of the appraisal estimate. Whereas the project was designed to increase rural electrification coverage from 25 percent in 1990 to 45 percent by 1997, it only achieved about 28.5 percent, i.e. an improvement of only 3.5 percent (paras. 10-11 and Table 1.1). 5. The partial physical achievement of the project to date, and the on-going works expected to be completed by the end of 1999, can be explained by the long delay in loan effectiveness caused by the non-compliance of the GOM with the agreements established in the project as originally structured and by the weak implementation arrangements (executing unit). Despite the financing restructuring of 1992, the project did not progress. The results began to improve only after the project was restructured in 1994/95 by reducing its scope, making new financing arrangements, and creating the Directorate of Rural Electrification in ONE in June 1995 (paras. 30-33). 6. The technical operations of ONE have somewhat improved: electricity production has increased steadily to 11,703 GWh in 1996 at an average growth of 4.8 percent per year since 1990, including electricity imports from Algeria and purchase from local suppliers during the drought of 1992-1995, especially in 1993 when the hydroelectric plants delivered only one third of their average generation and about half the estimate for a dry year. Installed capacity expanded to 3,654 MW in 1997 (average growth of 9.4 percent per year since 1990). Major capacity additions to the system occurred with the comnmissioning of the Jorf Lasfar thermal power plant in 1995-96 and the Al Ouaha hydroelectric plant in 1997. The power system networks were also significantly extended during the period 1990-1996; and the average efficiency of thermal power plants reached 3442 kCal/kWh in 1996 -- a 7.9 percent improvement from their efficiency in 1990, due mainly to the good efficiency of the Jorf Lasfar coal-fired thermal power plant (paras. 13-16 and Tables 1.2 and 1.3). 7. Institutional objectives were partially achieved. The project accomplished some improvements in the financial and managerial autonomy of (ONE, particularly toward the end of project implementation. Until 1993 cash generation made it possible for ONE to self-finance less than 19 percent of its annual investment program (in 1992 it was not able to self-finance any portion of this program). Since 1994 cash generation has financed 30 percent or more (49 percent in 1997) of ONE's investment program because of less investment, less fuel consumption, more hydroelectric generation, and more revenues from a boost in sales and tariffs. Accounts receivable and arrears have become a chronic problem for ONE. Accounts receivable were very large until 1992 (in the range 9.2-9.5 months) and declined steadily to 4.7 months in 1996, and to an estimated 3.0 months of billing in 1997, yet have remained far from good practice of 45 to 60 days. The arrears of the Regie of Casablanca (the main culprit) have begun to  iii diminish following its privatization in August 1997: the concessionaire is paying in a timely manner both the monthly electricity bills and the arrears (a total of 1,300 million DH) which were rescheduled over the next 3 years. Since the economic importance for the country mitigates against disconnecting the railways (ONCF) the water utility (ONEP) from electric service their arrears were rescheduled in 1996 for ONCF (24 months) and ONEP (36 months) which are now paying in a timely manner the monthly electricity bills and the rescheduled arrears. A coupon system (vignettes) launched by the Government in 1992-93 for the payment of utility bills by the Administration and local governments was insufficient until 1995 but worked well in 1996 and 1997, although 100 million DH of old arrears to ONE have not decreased. Regarding ONE's debt service coverage, it was adequate until 1992 and below 1.5 in 1993 and 1994, but ONE did not default on this covenant. From 1995 to 1997 ONE's debt service coverage exceeded 1.5 (paras. 17-23 and Table 1.4). 8. Electricity tariffs. The level and structure of the tariffs prevailing until 1994 were not appropriate to recover cost based on economic principles. They were insufficient to meet the self- financing ratio and debt service coverage in every year. Until 1992, tariffs had yielded an average revenue of DH 0.72/kWh (about 8.5 UScents per kWh) and had subsidized consumption of up to 500 kWh per month (industrial and commercial consumers bearing the difference), and were uniform to the end consumer countrywide. A small tariff increase in 1993 yielded an average revenue of 0.76 DH/kW]h in 1993 and 0.80 DH/kWh in 1994 and 1995 (about 8.7 UScents per kWh). As a result of pressure exerted by the Bank (including threatening suspension of disbursements and cancellation of a proposed Power Sector Loan), the tariffs were increased and restructured effective January 1996. This adjustment eliminated some of the problems: the average tariff was increased by 6 percent and the block of domestic subsidized consumption was set at 100 kWh per month, which nonetheless is still too high. This increase yielded an average revenue of 0.86 DH/kWh (about 10 UScents per kWh) in 1996 and 1997. As a way to move the tariffs closer to its economic structure, the tariffs for industry connected at medium voltage were decreased by 6 percent in October 1997. An additional reduction of 14 percent to the industry would be applied over the next 5 years. It is worth notice that the electricity price in Morocco is high compared to the electricity prices prevailing in countries of the MENA region (para 24 and Table 1.5). 9. Financial management. In April 1996, foreign consultants issued a report on assets insurance. The recommendations on ONE remaining self insured were implemented during 1997 following internal consultation. Local and foreign consultants reviewed the stock control management and recommended changing over to a more efficient system, particularly in the procurement of equipment and spare parts for the operational units. The recommendations were implemented and a satisfactory system of stock control and management is now in place. External auditing of accounts is done routinely (para. 25). 10. Draft contract program for 1993-1995. This draft contract had specified the measures to be taken by the Government and the complementary actions to be taken by ONE to improve the financial situation of the latter (tariffs, contribution to ONE's investment program and pay off of arrears, and complementary actions to be carried out by ONE) The draft contract program was never signed. Regardless, its objectives were partially achieved: in 1994 and 1996, the electricity tariffs were increased and measures were taken to reduce the arrears (para. 26).  iv 11. Project cost and financing. The project is expected to be completed at a cost of US$118.6 million, or 46.1 percent below the appraisal estimate of US$220.0 million. This can be explained by less than estimated physical achievements, and lower costs of equipment, construction works, and custom duties and taxes. The Bank's contribution to project financing was US$36.5 million, i.e., only 30.8 percent of the actual project financing requirement, much less than the 51.8 percent estimated at project appraisal. The reason for such a significant decrease in Bank's participation in project financing was the decrease in project scope decided in 1994, which led to cancellation of 66.2 percent of the Bank loan. It is estimated that ONE financed US$12.0 million (10.1 percent), local communities (municipalities) US$59.1 million (49.8 percent) and the Government US$11.0 million (9.3 percent), mainly in custom duties, taxes and interest during construction (paras. 28-29 and Part II, Tables 8A, 8B and 8C). 12. The project's economic performance was reevaluated using the method described in the SAR, i.e., by calculating the internal rate of return of the stream of net benefits resulting from the physical components implemented. The cost stream comprises the capital costs of the project, net of taxes and custom duties; the cost of power delivered to the rural electrification networks; and the distribution, operating and maintenance costs. The benefit stream includes the revenue from electricity sales and the estimated consumers' surplus for households (which will use electricity instead of butane, kerosene, candles and batteries) and for small low-voltage and medium-voltage industrial customers (which will use electricity from the network instead of producing it with small diesel generating units). The recalculated internal economic rate of return is 15.3 percent, which compares well with the 17.8 percent estimated in the SAR for the total project (para. 30 and Part II, Table 9). Summary of Findings, Future Operations and Key Lessons Learned 13. The main factors affecting the project were the initially inadequate project financing and institutional arrangements which did not ensure availability of local funds from the GOM. Two attempts were made to correct the financing and institutional arrangements, the first in 1992 and the second in 1994/95. Additional factors were the GOM's tepid initial commitment to implement measures which would have enhanced the sector financial situation and given autonomy to ONE, and the 1992-1995 drought that affected ONE's operational performance negatively by reducing its hydroelectric generation (paras. 31-32). 14. The loan was restructured in 1992 by introducing FEC (Fonds d' Equipement Communal) as financing intermediary between the rural communities and the Govermnent (including on- lending part of the Bank loan to FEC). The loan became effective in February 1993. Unfortunately, this arrangement led to very slow starting of the project because of the heavy bureaucracy created by the many on-lending agreements armong ONE, FEC and hundreds of local small communities. Additionally, the sub-loans became very expensive for the small communities because the addition of intermediary spreads to the interest of the Bank loan raised the interest rate on the sub-loans to 13.5 percent. As a result, the project implementation became stalled until 1994. The issue was resolved and the project gained momentum in 1994/95 when a  v new country-wide rural electrification program, the PERG, was defined, the scope of the PNER II reduced, FEC was reorganized (as financial intermediary it was left only in charge of the sub- loans it had already made to local communities), and ONE created the Directorate of Rural Electrification to complete the PNER II under the framework of the PERG. The sources of financing for the PERG are now a surcharge to urban consumers of 0.02 DH/kWh sold by ONE and flowing directly into ONE's accounts; a transfer of one third of the VAT allocated to the local communities to an ONE's account in the Treasury; plarning, engineering, procurement and supervising services provided in kind by ONE; connection charges to rural consumers; the Bank loan for the PNER II; and soft term credits for the PERG. Cost recovery is achieved by rural domestic consumers paying a monthly connection charge of 40 DH (about US$4.2) over 7 years plus the tariff on electricity consumed (paras. 32-34). 15. The Government was somewhat committed to implementing the physical part of the project but not so much to implementing the measures needed to improve power sector performance. A draft contract program between ONE and the Government, intended to improve the sector's and ONE's performance, was never signed (paras. 26 and 35). 16. Procurement of goods and services was done in accordance with Bank guidelines, but bidding and contract awards were delayed because the project restructuring postponed loan effectiveness by more than 2 years. Also, the institutional and project financing arrangements finalized only in 1994/95 introduced additional procurement delays. Procurement involved 46 calls for bids for the supply of equipment and construction services and 6 contracts for consultant services. Several of the contracts awarded in 1996 and 1997 were turn-key type as a way to expedite project implementation. The contractors have performed satisfactorily in the supply of goods and construction services (para. 36 and 37, and Part II, Table 5). 17. Loan disbursement was very slow compared to the appraisal estimate because of the 30 months delay in making the loan effective: disbursement reached a cumulative level of less than 9 percent of the appraisal estimate 4 years after loan approval. A total of 131 withdrawal applications were submitted to the Bank and US$36.5 million disbursed from the loan, of which the Government on-lent US$31.05 to FEC and US$5.45 million to ONE. The balance of US$75.5 million was canceled in 1996/97 upon request of the Government. The special accounts for ONE and FEC defined in the Loan Agreement were not opened in the Treasury because no simple procedure was found to reconcile the internal procedures of ONE and FEC with the demands of the Treasury. At last, ONE and FEC were authorized by the Treasury to commit payment to suppliers through letters of credit arranged through the Bank (paras. 38 and 39, and Part J, Table 4). 18. A training component was included as part of the technical assistance component of the project but not described in the SAR. Later, neither the Bank nor ONE ever defined a training program for the staff to be involved in the project. Under bilateral agreements, most of them grants, donor countries (France, Canada, and Italy) have made available training programs for Morocco. Thus, the training component included in the project was taken out of the Bank's control (para. 27).  vi Bank Performance 19. Bank performance was mixed in project identification, preparation and appraisal. The Bank staff identified and prepared the project as a follow-up to the first Village Electrification Project the project design was similar to the first project except for different project financing arrangements. On the positive side, the Bank staff devoted important effort to project preparation which is reflected in a SAR of good quality. The SAR defined sound project objectives, clear physical scope of the project based on field surveys made by the COSPER with the assistance of consultants, specific criteria for eligibility of communities to be electrified, and included an excellent project economic analysis and extensive discussion of the power sector issues. On the other hand, the Bank failed to assess the full implications of the financing arrangements envisaged for the project which hinged in the GOM's commitment to making funds available for project implementation. It suffices to recall that the Village Electrification Project completed in 1988 (100 percent financed by GOM contributions and advance payment of connections by the consumers) was significantly delayed by the GOM not making available to ONE in full and timely the funds required by the project implementation. In the loan approved by the Bank in 1991 the GOM and the local communities were expected to finance 50 percent of the project cost each (including the Bank loan). The local communities were to receive contributions equal to one third of the VAT to be allocated by the communities to development projects including rural electrification. The loan was so signed but its effectiveness became protracted because the financing arrangements contemplated in the appraisal were undermined by, again, the low level of commitment of the GOM to making funds available for project implementation. Project identification and preparation can be considered as satisfactory, but appraisal can be considered as deficient, mainly in account of the unsatisfactory assessment of the GOM's willingness to comply with the financial plan designed for the project and of the weak implementation arrangements - executing unit (para. 41). 20. Bank performance in supervision was also mixed. The Bank carried out extensive supervision of the project from July 1990 to December 1996, comprising 8 supervision missions of which 3 missions were carried out between loan approval and effectiveness. Since the project financing arrangements as appraised did not work, they were revised during project supervision. In late 1992 the Bank agreed to amend the loan by introducing FEC as financial internediary, and declared the loan effective in 1993. But that change was not satisfactory either and the financing and institutional arrangements were changed again in 1994/95, this time successfully. Also, during that period little pressure was exerted upon the Government and ONE to meet the sector development objectives. When the project implementation was stalled in 1994, the Bank threatened to suspend disbursements, kept a close dialogue with the Government to persuade it of the need to expedite the project implementation, reform the power sector reform, enable private sector participation in the form of IPPs, and reorganize ONE. Then the project was restructured successfully, gained momentum, and when the sector began to show progress on tariff setting, recovery of arrears, reorganization of ONE, and the study on a sector reforrn, the Bank was flexible and waived noncompliance with important covenants. However, the Bank denied a request for the extension of the loan closing date because the portfolio was restructured and the Government requested cancellation of some US$70 million (para. 42-43). Overall, Bank  vii supervision can be considered as marginally satisfactory, mainly in account of the important changes it induced in the project and power sector after 1995. Borrower Performance 21. Project preparation by the Borrower (the GOM) and ONE as the project executing agency, was very slow and considered as deficient regarding the initial project financing and institutional arrangements. It took the Borrower about two years to prepare the project with a structure which proved to be unfeasible for rural Morocco and protracted loan effectiveness during 30 months. In fact the GOM had to negotiate an amendment to the original loan agreement to meet the conditions for loan effectiveness by doing a major change in the financing and institutional arrangements of the project by including FEC as financing intermediary. However, FEC and ONE were unable to implement the project at a fast pace due to lack of timely sufficient allocation of funds by the GOM, heavy bureaucracy to handle a large number of sub-loans and sub-projects among FEC, ONE and local communities, failure to open the special account to expedite loan disbursement, and initial weak interest of ONE in the project. The project gained momentum and began to progress quickly only following its restructuring in 1994/1995. From then until end-1997, about one third of the original physical objectives were met, which were completed in a satisfactory manner by ONE's Directorate of Rural Electrification (para. 44). 22. Regarding the power sector, until 1993 the Government was lax in taking measures to initiate payments of its arrears to ONE and authorize electricity tariffs adjustments. Only in 1994 and 1996 did the Government initiate actions to pay arrears and approve tariff adjustments allowing ONE to start complying with the self-financing covenant ONE's situation has also changed positively since early 1996 as a result of the its reorganization, which has decreased bureaucracy by decentralizing ONE's functions and devolving management and operational power to the regions. FEC's initial weak organization had a difficult time in dealing with an overwhelming number of small loans made to many small local communities. FEC's reorganization in 1994 and the new financing arrangements dwarfed its role in rural electrification (paras. 45-46). 23. Considering: (a) the great importance attached by the Bank to the project's financial and institutional development objectives reflected in loan covenants not fully complied by the GOM; (b) the innovative financing and institutional arrangement for the PERG made by the GOM based on the experience gained with two failures of financing and institutional arrangements; (c) the inclusion of the PNER II as part of the PERG; and (d) the fully satisfactory implementation of the reduced physical components made by ONE, Borrower performance is considered as deficientfor compliance with covenants, and as marginally satisfactory for project implementation (para. 47). Project Sustainability 23. The prospect for the project to be sustainable is likely because: (a) the reorganization of ONE is now complete and has begun to show satisfactory results. For example, on the rural electrification front, ONE's Directorate of Rural Electrification does the planning, contracts for the physical implementation of the works through turnkey arrangements, and does the supervision and commissioning of the works. Then, ONE's Distribution Department takes over  viii the operation and maintenance of the rural networks and customer services; (b) the satisfactory financial arrangements are working well; (c) the reliance on the private sector for investment in power generation through IPPs, has decreased public investment in the power sector and started to show positive results on ONE's finances since 1996; (d) ONE's financial performance indicators have begun to show positive results as a consequence of actions taken to abate arrears and reduce investment; and (e) there is a satisfactory plan for future project operation. A new dynamic in ONEs operations was already sensed by a supervision mission in December 1996 and confirmed by the ICR mission in December 1997 (para. 48). Project Outcome 24. The outcome of the project is somewhat difficult to assess but, overall is considered at the margin as satisfactory (para. 49). While this is indeed a borderline call, consideration has been given to the positive achievements which outweigh the less satisfactory results: (a) physical components of the project, although reduced in scope and delayed, were satisfactorily implemented; (b) the project prompted the creation of the PERG -- based on the experience had with the PNER-I and PNER-II-- which is performing well and expected to complete rural electrification of Morocco in the long run; (c) the project increased the rural electrification coverage by only 3.5 percent; (d) the recalculated economic rate of return of the physical components implemented (15.3 percent) is comparable to the appraisal estimate for the whole project (17.8 percent); (e) ONE's finances were partially improved in terms of some key indicators of financial performance (internal cash generation, debt coverage ratio, tariff adjustments), while the arrears due to ONE by the Regies and Offices remain below targets; (f) the project prompted the studies of ONE's reorganization and power sector reform; (g) the project sustainability is likely; and (h) the project costs were lower than originally expected. Future Project Operation 25. The measures taken by the Government to reorganize ONE, to operate the PNER-II within the framework of the PERG, to promote private participation, and to improve ONE's reflect a plan that could contribute tolfuture satisfactory operation of the project. The Government is considering shaping a power sector reform along the lines of the current Bank paradigm for power sector development (separating the regulatory and policy-making functions of the Govemment from the commercial functions of distribution, transmission and power generation to enable efficient private participation in the sector through fair competition). The commissioning of the IPP in Jorf Lasfar in 1997 and the proposed IPP at Tahadart are indicative of the opening of the sector to private operators. ONE's reorganization completed in 1997, decentralized and reallocated activities, and new directors and managers were appointed. Its steady-state operation is expected during 1998 once all the software supporting the information systems becomes operative. In particular, the Distribution Departmt and its regional units now have the authority to make operational decisions without consulting ONE's headquarters. On the pervasive problem of arrears, ONE is abating arrears by cutting service to delinquent customers, replacing the bi-annual billing system with quarterly billing to the Administration, and rescheduling payments of arrears with entities providing essential economic benefits to the country when cutting service is not an option. It is also important to note that the sector is monitored through a set of performance indicators in line with those  ix recommended by the Bank, and that additional indicators will be used to monitor and evaluate the performance of the rural electrification program (paras. 50-55 and Part II, Table 6). Key Lessons Learned 26. The following main lessons can be drawn from the project (para. 56): Lesson 1. A rigorous economic analysis of the benefits of rural electrification can justify the relative high investment costs of a rural electrification project. In particular, the value of the consumers' surplus benefit needs to be carefully evaluated because it plays a key role in the economics of the project. In this case the value of the consumers' surplus benefit is of the same order of magnitude of benefit proxied by the revenue yielded by the electricity tariffs. Lesson 2. Successful implementation of a rural electrification project requires that the Government be fully committed to clear objectives and stable project financing and institutional arrangements. In the Moroccan project, the Govemment's hesitant commitment to two financing and institutional setups hampered and delayed project implementation. Lesson 3. Establishing an appropriate institutional organization and simple procedures for project planning, financing, procurement of goods and construction services, and operation and maintenance is of paramount importance to successfully implement a rural electrification project involving many small communities. For example, the implementation of the Moroccan project gained momentum as soon as the Directorate of Rural Electrification was created, the role of FEC was minimized, and a steady and automatic flow of funds for project financing was ensured through the transfer to ONE of part of the VAT allocated to the local communities and the surcharge on the kWh billed to urban customers and collected by ONE. Lesson 4. Recovery of the connection cost from rural consumers is possible if spread monthly over a relative long period of time, at a level appropriate to the means of the rural population. In the Moroccan project, the willingness to pay and payment capability by rural consumers led to establishing a monthly connection charge of 40 DH (about US$4.2) over 7 years, plus a charge for electricity consumption billed at the domestic tariff rate. Lesson 5. Early assessment of the technology and standards available to achieve rural electrification at low cost should be a prerequisite for planning and designing a rural electrification program. In the Moroccan project, this was not done because the adoption of European standards for urban and rural projects (also involving standardized equipment) by ONE many years ago, made a shift to American standards very difficult. However, based on a recent study made by ONE with the assistance of consultants, a pilot project is exploring the feasibility of such a change. The latter, if adopted in appropriate terrain, could result in significant savings in investment costs.  x Lesson 6. A contract program between the Government and a Government-owned utility (ONE in this project) has no effective value because the Government is no legally liable to meet its conmnitments and it is not a truly commercial contract. Consequently its non- compliance with the contract program impedes the utility's ability to meet its own commitments.  IMPLEMENTATION COMPLETION REPORT MOROCCO SECOND RURAL ELECTRIFICATION PROJECT (Loan 3262-MOR) A. Statement and Evaluation of Objectives Introduction 1. The degree of electrification in Morocco is low compared to other Middle East and North African countries. Electricity consumption per capita is now about 467 kWh (it was 343 kWh in 1986), reflecting a low level of rural electrification. Electricity consumption per capita is low compared to 650 kWh in Algeria, 669 kWh in Tunisia, 755 kWh in Egypt, and 1,016 kWh in Jordan. It has grown at an average rate of 4.8 percent from 1990 to 1997. Electricity service covers about 70 percent of the Morocco's population, which is low compared to Algeria and Tunisia (94 percent), Egypt (95 percent), Iran (96 percent), and Jordan and Lebanon (98 percent). 2. During the period 1973-1992 the Bank made five loans to Morocco's power subsector totaling US$320 million. These loans assisted Morocco in developing thermal and hydroelectric generation, transmission systems, power distribution, and rural electrification. These loans also attempted to improve the organization of the Moroccan power subsector and its economic, operational, and financial performance. In particular, Loan 3262-MOR, the subject of this ICR, followed and overlapped with Loan 2910-MOR (Power Distribution Project). These two loans had the common objective of improving the institutional side of the power sector. Project Objectives and Components 3. The main objectives of the project were to: (a) expand electricity supply to the rural areas; (b) improve the reliability and quality of service of the existing rural distribution network; (c) strengthen the administrative, planning and financial capabilities in the power subsector; (d) implement institutional reforms aimed at delineating and streamlining the responsibility for planning, implementing, operating and managing the rural distribution system; and (e) encourage further reforms in the electricity tariff structure. Also, the project was expected to contribute to the Government's policy of improving the efficiency of energy consumption. 4. To achieve the physical objectives, the project included components to connect to the main grid about 170,000 consumers in about 462 villages located in 34 provinces. To achieve the institutional objectives, the project included a technical assistance component to carry out studies on electricity tariffs, stock management, integrated distribution works management, and staff training on the engineering, design, and marketing of distribution networks (including computer hardware and software required to implement the recommendations of the studies and the training). Additionally, a set of covenants in the loan and project agreements established specific actions to be taken by the Government and ONE to adjust electricity tariffs, reduce  2 arrears, reorganize ONE, and implement the recommendations of the studies intended to improve the operational performance of ONE and the power sector. 5. The physical components included: (a) construction of about 5,850 km of medium-voltage (MV) and low-voltage (LV) lines, and distribution transformers with a total installed capacity of about 70 MVA; (b) construction of about 170,000 consumer connections; (c) construction of about 10,000 square meters of floor space in the regional offices; and (d) supply of vehicles and specialized equipment for operating and maintaining the distribution network in the newly electrified villages. 6. The technical assistance component included: (a) consultant services for carrying out studies on stock management, integrated distribution works management, and implementing a national tariff policy; and (b) training of ONE's staff in distribution network engineering design and marketing, and the supply of computer hardware and software for implementing the recommendations of the studies and the training. Later, this component also supported studies on ONE reorganization. 7. The project was expected to increase the electrification index of the rural population in concentrated areas from 25 percent in 1990 to 45 percent' at project completion in 1997, and to assist ONE in improving its planning, accounting, and financial performance. 8. The project's objectives were relevant to the power subsector of Morocco. They were congruent with those pursued by the Government and with Bank policies for the power subsector prevailing at that time.2 The objectives were clearly stated in the Staff Appraisal Report. The project was to support phase II of the Rural Electrification Program (PNER II). It was defined as a logical continuation of the Village Electrification Project (Loan 1695-MOR) which, at loan closing in 1986, had not completed all the consumer connections planned in the project, but had completed the procurement of the material and equipment necessary to connect about 60,000 new rural consumers.3 9. With the benefit of hindsight it can be stated that the project components were appropriate to achieve the physical objective of extending electricity service to the rural SAR, para. 3.03, page 18. 2 In 1988, the Bank's policy for the electric power subsector was detailed in OMS 3.72. PCR (para. 4.01), Bank Report No. 7325 dated June 23, 1988.  3 population and the institutional objective of improving the ONE's financial and operational 4 performance B. Achievement of Objectives Implementation Organization 10. Physical components are being implemented by ONE. Project execution was assigned to ONE, where a Directorate of Rural Electrification created in June 1995 is now carrying out the implementation of the physical components in a satisfactory manner. In ONE, project coordination and financial matters are being handled by its Finance Department. FEC, as a financial intermediary, intervened in the on-lending of Bank funds to the local communities, which in turn contracted with ONE to build the distribution networks. FEC's performance, however was not satisfactory. FEC's weak organization had a difficult time in making a very large number of sub-loans to the small communities, but its reorganization in 1994 relieved its administrative burden by leaving it in charge of only 341 sub-loans already made. However, FEC still has not been able to set up records to monitor the progress of the sub-loans. ONE's skilled staff performed satisfactorily in implementing the physical components of the project. Physical Objectives 11. Physical objectives were partially achieved. Whereas the project was designed to increase rural electrification coverage from 25 percent in 1990 to 45 percent by 1997, it only achieved about 28.5 percent coverage, or an improvement of only 3.5 percent. The number of new rural communities connected to electric service by ONE has been very close to the appraisal estimate. On the other hand, the number of new consumers has been substantially less than the goal set by the SAR. Compare, for example, the 423 new rural communities and 76,500 new rural customers connected by the project to the appraisal estimate of 462 communities and 170,000 connections. In 1992, the rural electrification program comprised seven parts (tranches), designated D, E, F, G, H, I, and J. Parts D and E including 284 villages were not part of the Bank project, but were implemented with financing from the European Investment Bank (EIB). The Bank project included parts F and G which in turn were split in parts FlA (31 villages, 100 percent of connections completed), FG (250 villages, 53 percent of connections completed), and CFG (complement of FG 144 villages, 31 percent of connections completed). Parts H, I and J were removed from the project in 1994 and are being implemented by the newly defined PERG. Even, if the on-going works were completed in 1999, the number of new rural connections achieved would be only about half of the appraisal estimate. The low achievement of the original physical objectives is also illustrated by the completion of only 1,993 km of 22- 4 Conditions were a follow-up of those contained in the Power Distribution Project financed by Loan 2910- MOR.  4 kV lines (SAR goal: 3,264 kmn), 1,987 km of low-voltage lines (SAR goal: 2,580 km), and 53 MVA in power distribution transformers (SAR goal: 720 MVA) (Table 1.1). Table 1.1 Physical Achievements SAR Actual 1997 Ongoing Achieved To be achieved estimate 1998/99 1997 (%) 1999 (0 O) Number of provinces 44 42 2 95.5 100.0 Number of 462 423 54 91.6 103.2 communities New rural connections 170,000 76,500 10,500 45.0 51.2 Rural population 912,600 440,000 54,600 48.2 54.2 22 kV lines (km) 3,264 1,993 158 61.1 65.9 Transformers (MVA) 720 405 53 56.3 63.6 Low-voltage lines (km) 2,580 1,987 130 77.0 82.1 Electrif. coverage (%) 45 28.5 n.a. 63.3 n.a. Electrif. cov. increase 20 3.5 | _ n.a. 17.5 n.a. 12. The partial physical achievement of the project to date, and the on-going works expected to be completed by the end of 1999, can be explained by the long delay in loan effectiveness caused by the non-compliance of the GOM with the agreements established in the project as originally structured and by the weak implementation arrangements (executing unit). Despite the financing restructuring of 1992, the project did not progressed. The results began to improve only after the project was restructured in 1994/95 by reducing its scope, making new financing arrangements, and creating the Directorate of Rural Electrification in ONE in June 1995 (paras. 30-33). 13. ONE's technical operations. In spite of past financial problems, the technical operations of ONE have somewhat improved. Electricity production increased steadily from 8,815 GWh in 1990 to 11,703 GWh in 1996 (average growth of 4.8 percent per year), including electricity imports from Algeria and purchase from local suppliers. The imports and local purchases of electricity amounted to about 11 percent of total electricity output during the drought experienced in 1992- 1995, especially in 1993 when the hydroelectric plants delivered only one third of their average generation and about half the estimate for a dry year (Tables 1.2 and 1.3). Hydroelectric generation is not fully reliable because, in addition to the limitations posed by the stochastic nature of the hydrology, ONE must give priority to irrigation needs in releasing available water from its multipurpose plants.  5 Table 1.2 ONE: Energy and Power Generation Generation (GWh) Installed Capacity (MW) Effective Capacity (MW) 1990 1993 1996 1990 1993 1996 1997 1990 1993 1996 1997 Hydro 1220 454 1966 620 687 927 1167 592 657 881 1121 Steani 7124 7866 9376 1185 1185 1845 1845 1175 1176 1830 1830 Combustion 225 1343 153 146 444 642 642 130 308 309 309 Local 143 109 . purchase I I _ _ Algeria 103 794 . purchase I I I Total 8815 10318 11703 2316 2316 3414 3654 1897 2141 3020 3260 Table 13 ONE: Hydroelectric Generation (GWh) *_______ | 1990 1991 1992 1993 1994 1995 1996 1997 Appraisal 690 800 845 845 1085 1085 1095 1298 estimate (*) _ Actual 1220 1266 981 454 855 618 1966 _ _ Percentage 176.8 158.3 116.1 53.7 78.8 57.0 179.5 of estimate (*) Estimated guaranteed hydroelectric generation (dry year). 14. Physical expansion of the power system. ONE's installed capacity grew from 1,952 MW in 1990 to 3,654 MW in 1997 (average growth of 9.4 percent per year), of which 3,260 MW is effective because a substantial part of the increase was in gas turbines. Major capacity additions to the system occurred in 1995-1996 with the commissioning of the Jorf Lasfar thermal power plant and the Al Ouaha hydroelectric plant in 1997. Also, the transmission and distribution systems were significantly extended during the period 1990-1996, with the addition of 1,408 km of 220-kV lines; 1,375 km of 60-kV lines; 6,362 km of distribution lines; 2,091 MVA in 220-kV power transformers and 1,290 MVA in 60-kV power transformers; and numerous high- and medium-voltage substations. 15. Energy losses. ONE is making an effort to keep distribution losses in the range of 6-7 percent, which is considered the economic level for large distribution systems. ONE will benefit from implementation of the recommendations made by the EdF/ESMAP loss reduction study (a one percent reduction in energy losses could save ONE about DH 32 million/year). ONE's losses in power plants (due mainly to consumption by auxiliary services) and its high voltage transmission system are in line with utility experience elsewhere and do not pose a particular problem.  6 16. Efficiency of thermal plants. Oil and coal steam plants decreased fuel consumption to about 2,334 kCal/kWh in 1996 from 2,501 kCal/kWh in 1990, a 6.7 percent improvement. This improvement was due mainly to the commissioning of the Jorf Lasfar coal-fired thermal power plant, which has a lower specific coal consumption. Also, gas turbines decreased their fuel consumption to about 3,086 kCal/kWh in 1996 from 3,947 kCal/kWh in 1990, a 22 percent improvement, because of the installation of more efficient gas turbines. Similarly, diesel plant efficiency improved to about 2,130 kCal/kWh in 1996 from 2,597 kCal/kWh in 1990, a 18 percent improvement. For all plants combined, the average fuel consumption improved to 2,344 kCal/kWh in 1996 from the 2,545 kCal/kWh in 1990, a 79 percent improvement. Institutional Objectives 17. Institutional objectives were partially achieved. The project accomplished some improvements in the financial performance of ONE and in its managerial autonomy. The actions taken as a result of tariff studies and ONE's reorganization financed by the project, and the pressure to comply with loan covenants, contributed to improving the financial and operational performance of ONE toward the end of the project. 18. Overall ONE's financial performance has been mixed. (Part II, Table 8C: Financial Statements). It was not satisfactory until 1994/1995 because: (a) ONE's high investments program and debt service were not matched with the internal cash generation forecast at the project appraisal (expected in the range 28 to 49 percent of the investment program) and Government contributions did not materialize as needed; (b) poor collection made actual accounts receivable exceed by more than 40 to 68 percent the appraisal estimates; (c) electricity tariffs level and structure were not set in accordance with economic principles, nor were they adjusted in a timely manner when changes occurred in fuel oil and coal prices; and (d) the attempts to improve ONE's financial performance through contract programs with the Government failed and were abandoned in 1994. Only in recent years have ONE's self financing and debt service coverage indicators improved and reached the covenanted targets. However, the accounts receivable and arrears to ONE remained very high and never met the covenanted targets, but began to decrease significantly in 1996 and 1997. 19. ONE's self-financing and debt service coverage. Until 1993 cash generation enabled ONE to finance less than 19 percent of its annual investment program (in 1992 it did not finance any). Only in 1994 did cash generation begin to finance 30 percent or more of ONE's investment program because of less investment, less fuel consumption (and more hydroelectric generation) once the drought was over, and more revenues from a boost in sales and tariffs. Self-financing reached 30 percent in 1995, and 33 percent in 1996. Until 1992 debt service coverage was adequate. Although in 1993 and 1994 the debt service coverage ratio was below 1.5, ONE did not default on this covenant. In 1995 and 1996 ONE's debt service coverage again reached an acceptable level (Table 1.4). 20. Accounts receivable. Accounts receivable and arrears have become a chronic problem for ONE. They were very large until 1992 (in the range 9.2-9.5 months) and declined steadily to 4.7 months in 1996, and it is expected that in 1997 it will reach 3.0 months, yet are still far above the  7 two months required by the Bank. The main delinquent customers have been the Regies, the Offices and the local governments and the Administration (Table 1. 4). 21. The large arrears of the Regies are explained by (a) the insufficient margins between the retail tariffs and bulk tariffs of ONE to the Regies; and (b) the poor payment records to the Regies by the Administration and local governments. However, the arrears of Casablanca (the main culprit) have begun to diminish following its privatization in August 1997: the concessionaire is paying in a timely manner both the monthly electricity bills and the arrears (a total of 1,300 million DH), which were rescheduled over the next 3 years. 22. The Offices, mainly the railways (ONCF), the water utility (ONEP), and the phosphate concerns (OCP) have built up significant arrears to ONE because their economic importance for the country mitigates against disconnecting them from electric service. Payment of these arrears were rescheduled in 1996 for ONCF (24 months) and ONEP (36 months), which are now paying the monthly bills and the rescheduled arrears in a timely manner. The Administration and local governments have also had a poor payment record because of the insufficient budget allocated to pay utility services. 23. Although ONE has devoted considerable effort to reducing arrears to an acceptable level, past measures have only been of a temporary nature. Some of the measures taken to improve collection rates have been: (a) cutting service to delinquent customers; (b) replacing quarterly billing for bi-annual billing to the Administration; and (c) rescheduling of arrears of small, insolvent communities and of some Offices (ONCF and ONEP). Also, the coupon system (vignettes) launched by the Government in 1992-93 for the payment of utility bills by the Administration and local governments was insufficient to cover payment for electricity service until 1995. It began to be effective in 1996, and by 1997 the system was working well, though 100 million D]H of old arrears have remained constant. Table 1.4 ONE's Investment Program, Cash Generation, Self-Financing, Debt Service Coverage and Accounts Receivable Indicators Investment Cash Self- Debt service Accounts receivable Year program generation financing coverage DH million DH million Percent Ratio DH million Months 1991 3,605 604 18 1.8 4,466 9.2 1992 3,170 -218 -4 1.6 5,031 9.5 1993 7,176 455 17 1.2 4,806 8.5 1994 5,274 1,290 30 1.0 3,853 6.1 1995 2,998 1,119 30 1.5 3,909 5.8 1996 2,337 371 33 1.6 3,959 5.4 24. Electricity tariffs. The level and structure of the tariffs prevailing until 1994 were not appropriate to recover costs based on economic principles. As indicated above (para. 19), they were  8 insufficient to meet the self-financing ratio and debt service coverage in every year. Until 1992, tariffs had yielded an average revenue of DH 0.72/kWh (about 8.5 UScents per kWh), had subsidized consumption of up to 500 kWh per month (industrial and commercial consumers bearing the difference), and were uniform to the end consumer countrywide. An small increase was made in 1993 which yielded an average revenue of 0.76 DH/kWh in 1993 and 0.80 DH/kWh in 1994 and 1995 (about 8.7 UScents per kWh). As a result of the pressure exerted by the Bank (including threatening suspension of disbursements and cancellation of a proposed Power Sector Loan), tariffs were increased effective January 1996. This adjustment to the level and structure of tariffs eliminated some of the problems: the average tariff was increased by 6 percent and the block of domestic subsidized consumption was set at 100 kWh per month, which nonetheless is still high (Table 1.5). This increase yielded an average revenue of 0.86 DH/kWh (about 10 UScents per kWh) in 1996 and 1997. It is worth noting that in terms of current DH, the average revenue has increased by 21 percent since 1990, but in terms of constant 1990 DH, it has decreased by 8.5 percent. As a way to move the tariffs closer to their economic structure, the tariffs for industry connected at medium voltage were decreased by 6 percent in October 1997. An additional reduction of 14 percent to the industry would be applied over the next 5 years. Electricity price in Morocco is high compared to the electricity price prevailing in countries of the MENA region: Algeria (4.3 UScents/kWh), Egypt (4.3 UScents/kWh), Tunisia (6.4 UScents/kWh), Lebanon (7.0 UScents/kWh), however Morocco's tariffs reflect a very high taxation rate on fuels used for power generation. Table 1.5 ONE Average Revenue 1990-1997 ___________________ 1990 1991 1992 1993 1994 1995 1996 1997 Average revenue (current-DH/kWh) _____ _ _____ Lowvoltage 0.73 0.77 0.74 0.78 0.81 0.86 0.89 0.89 Medium voltage 0.91 0.89 0.91 0.96 l.01 0.98 1.03 1.03 Regies 0.67 0.68 0.68 0.71 0.75 0.76 0.81 0.81 Industry 0.68 0.67 0.69 0.72 0.78 0.79 0.83 0.83 Other 0.82 1.17 0.96 1.04 0.80 0.82 0.87 0.87 Total 0.71 0.72 0.72 0.76 0.80 0.81 0.86 0.86 1990 Deflator index 1.00 1.064 1.094 1.143 1.170 1.246 1.314 1.31 4 Average revenue (Constant 1990-DH/kWh) _ Low voltage 0.73 0.72 0.68 0.68 0.70 0.69 0.68 0.68 Medium voltage 0.91 0.84 0.83 0.84 0.86 0.79 0.78 0.79 Regies 0.67 0.64 0.62 0.62 0.64 0.61 0.62 0.62 Industry 0.68 0.63 0.63 0.63 0.67 0.63 0.63 0.63 Other 0.82 1.10 0.88 0.91 0.69 0.66 0.66 0.66 Total 0.71 0.68 0.66 0.66 0.68 0.65 0.65 0.65  9 25. Financial management. In April 1996, foreign consultants issued a report on assets insurance. The recommendation of ONE remaining self-insured were implemented during 1997 following internal consultation. Local and foreign consultants also reviewed the stock control management and recommended changing over to a more efficient system, particularly in the procurement of equipment and spare parts for operational units. The recommendations were implemented and now a satisfactory system of stock control and management is in place. External auditing of accounts is done routinely, though with some delays. 26. Draft contract program for 1993-1995. A contract program between ONE and the Government for 1989-19915 had specified the measures to be taken by the Government and the complementary actions by ONE to improve the financial situation of the latter. This contract did not achieve its objectives. Since the Government did not meet its commitments, ONE could not meet its own. ONE's financial situation was reviewed in 1992. This led to a draft contract program for 1993-1995 setting up measures to be taken by the Government on tariffs, contribution to ONE's investment program and pay off of arrears, and complementary actions to be carried out by ONE. The revised draft contract program was never signed, but regardless, its objectives were partially achieved: in 1994 and 1996, the electricity tariffs were increased (para. 24) and measures were taken to reduce the arrears (paras. 22-23). Training 27. A training component was included as part of the technical assistance component of the project but was not described in the SAR. During implementation, neither the Bank nor ONE ever defined a training program for staff involved in the project. ONE chose other means of carrying out and financing its staff training. Under bilateral agreements at better financial terms than offered by the Bank, most of them non-reimbursable, donor countries (France, Canada, and Italy) have made available training programs for Morocco and, consequently, the training component included in the project was taken out of control of the Bank. Funds allocated in the loan for staff training were not utilized. Project Costs 28. The project is expected to be completed at a cost of US$118.6 million, or 46.1 percent below the appraisal estimate of US$220.0 million. That can be explained by the significant reduction of the physical components implemented, and by the lower cost of installation and construction works, custom duties and taxes (Part II, Table 8A: Project Cost). Project Financing. 29. The Bank's contribution to project financing was only US$36.5 million, i.e., 30.8 percent of the estimated actual project financing requirements and certainly much less than the 51.8 percent estimated at project appraisal. The reason for such a significant decrease was the s The contract program was established under Loan 291 0-MOR.  10 reduction in the physical components implemented that led to cancellation of 66.2 percent of the Bank loan (para. 37). It is estimated that ONE financed US$12.0 million (10.1 percent), local communities (municipalities) US$59.1 million (49.8 percent) and the Government US$11.0 million (9.3 percent, mainly custom duties and taxes and interest during construction) (Part II, Table 8B: Project Financing). Project Economic Performance 30. The project's economic performance was reevaluated using the method described in the SAR, i.e., by calculating the internal rate of return of the stream of net benefits associated with the physical components implemented. The cost stream comprises: (a) the capital costs of the project net of taxes and custom duties; (b) the cost of power delivered to the rural electrification networks, derived from an estimate of the long-run marginal of power plus losses in the distribution network; and (c) the operating and maintenance cost of the distribution system. The benefit stream is composed of: (a) revenue from electricity sales at the prevailing tariff rates; and (b) estimated consumers' surplus for households that replace butane, kerosene, candles and batteries with electricity, and for small low-voltage and medium-voltage industrial customers that otherwise would use electricity produced by small diesel generating units. All costs and benefits were expressed in 1990 prices using deflator indices to account for local inflation and rate of exchange variations. The recalculated internal economic rate of return is 15.3 percent, which compares well with the 17.8 percent estimated in the SAR for the total project (Part II, Table 9: Economic Costs and Benefits). C. Major Factors Affecting the Project 31. The main factors affecting the project were the initially inadequate project financing and institutional arrangements which did not ensure availability of local funds from the GOM. Two attempts were made to correct the financing and institutional arrangements, the first in 1992 and the second in 1994/95, as explained below. Additional factors were the GOM's tepid initial commitment to implement measures which would have enhanced the sector financial situation and given autonomy to ONE, and an uncontrollable natural event (the 1992-1995 drought that reduced hydroelectric generation) which affected ONE's operational performance during project implementation. 32. Originally, the PNER II was to be financed by: (a) the transfer of the Bank loan from the GOM to ONE in two parts: (i) an equity contribution of US$96.5 million to finance the foreign exchange cost of distribution lines, substations and transformers; and (ii) a loan of US$ 17.5 million to finance the foreign component cost of the connections to rural consumers; and (b) funds equivalent to about one third of the VAT transferred by the GOM to the local communities (municipalities) to finance the local cost of the project. Originally, the physical implementation of the project was assigned to ONE as an entity but without identifying a project unit in it. The GOM did not implement these financial arrangements and, consequently, the loan effectiveness was delayed until the financing arrangements and institutional setup were restructured in December 1992. The project restructuring introduced FEC as financing intermediary between the GOM and the rural communities, and ONE as implementing agency of the communities' sub-  11 projects financed by FEC's sub-loans. Under this arrangement the project was to be financed by: (a) US$ 94.9 million of the Bank loan on-lent to FEC by the GOM at an annual interest rate of 12 percent; (b) US$ 19.1 million of the Bank loan on-lent to ONE under the same terms of the Bank loan, to finance the foreign component cost of the connections to rural consumers; and (c) funds equivalent to about one third of the VAT transferred by the GOM to the local communities (municipalities) to finance the local cost of the project. In turn, FEC was to provide sub-loans to the local communities at a rate of 13.5 percent to finance the foreign component of the rural electrification sub-projects. The local communities had to contract with ONE the physical implementation of the rural sub-projects. The restructured loan became effective in February 1993. Unfortunately, this arrangement led to very slow project starting because of the heavy bureaucracy created by the many on-lending agreements among the Government, FEC, ONE and hundreds of local small communities. Additionally, the FEC sub-loans at an annual interest rate of 13.5 percent became very expensive for the small communities. As a result, the project implementation was stalled until 1994. The issue was resolved in 1994/95, and the PNER II gained momentum, when a new country-wide rural electrification program (the PERG) was defined, the scope of the PNER II reduced, new financing and institutional arrangements were put in place to expedite the flow of funds to ONE as executing agency and FEC's role was minimized. 33. Financing of the PNER-II is now done under the modality applied in the PERG: (a) a surcharge of 0.02 DH/kWh on electricity sold by ONE finances about 35 percent of the rural electrification cost (this money flows directly into ONE's treasury); (b) one third of the VAT allocated to the local communities finances about 20 percent of the cost (this money flows into an ONE's account in the Treasury); (c) a monthly connection charge of 40 DH (about US$4.2) paid to ONE by the rural customer during 7 years which finances about 25 percent of the cost; and (d) the balance of 20 percent of the cost is contributed in kind by ONE's provision of planning, engineering, procurement and supervision services. Moreover, ONE has access to soft credits available from foreign lenders and it has now secured a credit from OECF (Japan) to finance the rural electrification program for an amount equivalent to the part of the Bank's loan which was canceled. 34. The institutional arrangements for the PNER II are now clearly defined: (a) the Directorate of Rural Electrification created in ONE is the sole responsible for implementing the physical components of the PERG and completing the PNER II; (b) the ONE's Distribution Department is responsible for the operation and maintenance of the PERG's facilities after completion by the Directorate of Rural Electrification; (c) the FEC does not play any role in the PERG other than to administer the sub-loans it had already made to local communities under the PNER-II. 35. The Government was somewhat committed to implementing the physical part of the project but initially tepid in implementing the measures needed to improve performance in the power subsector, e.g., it did not provide financial and management autonomy to ONE, nor did it allow the cost of service to be recovered through appropriate level and structure of tariffs, nor did it pay off its arrears, nor did it simplify bureaucratic procedures -- in particular those which also affected the procurement of goods and services and disbursement of funds for the PNER II.  12 36. Procurement of goods and services was significantly delayed because loan effectiveness took 30 months, and the project financing arrangements and institutional setup which were finalized only in 1995. Procurement of equipment (awarding of contracts) was completed in October 1996, and the awarding of construction contracts was completed in July 1997, involving 46 calls for bids for the supply of equipment and construction services. (Part 11, Table 5: Indicators for Project Implementation). Several of the contracts awarded in 1996 and 1997 were of the turn-key type (supply of equipment and construction services by a single contractor) as a way to expedite the implementation of project components. Irn addition, the studies contemplated in the project were carried out through 6 contracts for consultant services. Procurement was done in accordance with Bank guidelines. 37. The performance of contractors has been satisfactory, the supply of goods and services has been of good quality, and ONE's technical staff has performed satisfactorily in supervising the quality of the equipment and materials and the construction works. 38. Loan disbursement was very slow compared to the appraisal estimate (Part II, Table 4. Loan Disbursement). Disbursements began with a delay of more than 3 years and reached a cumulative level of less than 9 percent of the appraisal estimate 4 years after loan approval. This was caused by the 30 month delay in making the loan effective. A total of 131 withdrawal applications were submitted to the Bank by the Governrment. Out of the US$36.5 million disbursed from the loan, the GOM on-lent US$31.05 to FEC and US$5.45 million to ONE, and in 1996/97 requested to cancel the balance of US$75.4 million. 39. To facilitate loan disbursements and payments to suppliers, the Bank and the Government had agreed that special accounts for ONE and FEC were to be opened in the Treasury. However, the special account were never opened because no simple procedure was found to reconcile the internal procedures of ONE and FEC with the demands of the Treasury. ONE and FEC were ultimately authorized by the Treasury to commit payment to suppliers through letters of credit arranged through the Bank. 40. The dry hydrology during the period 1992-1995 forced ONE to decrease low cost hydroelectric generation, install gas turbines burning expensive liquid fuel, generate more from thermal plants, and purchase more power from Algeria (at 4.0 UScents/kWh) and local suppliers. Consequently, ONE's operational costs increased significantly during those dry years. D. Bank Performance 41. Bank performance was mixed in project identification, preparation and appraisal. The Bank staff identified and prepared the project as a follow-up to the first Village Electrification Project (technically that project was successfully completed6); the project design was similar to 6 Page (v) of PCR on Morocco Village Electrification Project (Loan 1695-MOR), Bank Report No. 7325, June 1988.  13 the first project except for different project financing arrangements (para. 32). On the positive side, the Bank staff devoted important effort to project preparation which is reflected in a SAR of good quality. The SAR defined sound project objectives, clear physical scope of the project based on field surveys made by the COSPER (Comite de Suivi du Programme d' Electrification Rurale) with the assistant of consultants, specific criteria for eligibility of communities to be electrified, and included an excellent project economic analysis and extensive discussion of the power sector issues. On the other hand, the Bank failed to assess the full implications of the financing arrangements envisaged for the project which hinged in the GOM's commitment to making funds available for project implementation. It suffices to recall that the Village Electrification Project completed in 1988 (100 percent financed by GOM contributions and advance payment of connections by the consumers) was significantly delayed by the GOM not making available to ONE in full and timely the funds required by the project implementation. In the loan approved by the Bank in 1991 the GOM and the local communities were expected to finance 50 percent of the project cost each (including the Bank loan). The local communities were to receive contributions equal to one third of the VAT to be allocated by the communities to development projects including rural electrification. The loan was so signed but its effectiveness became protracted because the financing arrangements contemplated in the appraisal were- undermined by, again, the low level of commitment of the GOM to making funds available for project implementation. Project identification and preparation can be considered as satisfactory, but appraisal can be considered as deficient, mainly in account of the unsatisfactory assessment of the GOM's willingness to comply with the financial plan designed for the project and of the weak implementation arrangements (executing unit). 42. Bank performance in supervision was also mixed. The Bank carried out extensive supervision of the project from July 1990 to December 1996, comprising 8 supervision missions (6.4 staff-weeks costing US$237,000) of which 3 missions were carried out between loan approval and effectiveness. (Part II, Table 12. Bank Resources: Staff Inputs; Table 13: Bank Resources: Missions). Since the project financing arrangements as appraised did not work, they were revised during project supervision. In late 1992 the Bank agreed to amend the loan by introducing FEC as financial intermediary, and declared the loan effective in 1993. But that change was not satisfactory either and the financing and institutional arrangements were changed again in 1994/95, this time successfully (paras. 31-34). Also, during that period little pressure was exerted upon the Government and ONE to meet the sector development objectives. Thus, Bank supervision can be considered as less than satisfactory until early 1994. 43. Bank supervision improved since 1994. When the implementation of the PNER II was stalled in 1994, the Bank threatened to suspend disbursements and supported a second, this time successful, restructuring of its financing and institutional arrangements. The Bank gave good advice, not always heeded by the Government, about the importance of expediting implementation of the PNER II, increasing electricity tariffs, eliminating subsidies at a fast pace, reducing arrears, and giving full autonomy to ONE as a way to improve its financial and operational performance. The Bank expanded the close dialogue with the Government and ONE to attack the roots of the problems affecting the Moroccan power subsector and succeeded in persuading the Government and ONE to initiate a sector reform along the new paradigm fostered by the Bank. For this purpose, the Bank financed consultants to carry out studies on the  14 reorganization of ONE, on a new Electricity Law, and also financed advisors for the negotiations with Independent Power Producers (IPP), the latter two withi funds from Loan 291 0-MOR. The PNER II gained momentum and, as result of further pressures exerted in later stages of project implementation, the power sector began to improve. Hence, the Bank was flexible and waived non-compliance with important covenants when progress was made in project implementation, tariff setting, recovery of arrears, and the reorganization of ONE. However, the Bank denied a request for extension of the loan closing date because the Bank's portfolio was restructured and the Government requested cancellation of some US$70 million. Overall, Bank supervision can be considered as marginally satisfactory, mainly in account of the important changes it induced in the project and sector towards the end of the project. E. Borrower Performance 44. Project preparation by the Borrower (the GOM) and ONE as the project executing agency, was very slow and considered as deficient concerning the initial project financing and institutional arrangements. It took the Borrower about two years to prepare the project with a structure which proved to be unfeasible for rural Morocco and protracted loan effectiveness during 30 months. In fact the GOM had to negotiate an amendment to the original loan agreement to meet the conditions for loan effectiveness by doing a major change in the financing and institutional arrangements of the project by including FEC as financing intermediary (para.32). However, FEC and ONE were unable to implement the project at a fast pace due to lack of timely sufficient allocation of funds by the GOM, heavy bureaucracy to handle a large number of sub-loans and sub-projects among FEC, ONE and local communities, failure to open the special account to expedite loan disbursement, and initial weak interest of ONE in the project. Until 1994, procurement of goods and services was very slow (four years' delay), loan disbursement was dismal and little progress was achieved in implementing physical components. The project gained momentum and began to progress quickly only following its restructuring in 1994/1995 (para. 33). From then until end-1997, about one third of the original physical objectives were met, which were completed in a satisfactory manner by ONE's Directorate of Rural Electrification (Table 1.1 and Part II, Table 6: Key indicators of Project Implementation). 45. Initially, the Government had a low level of commitment to the institutional development objectives of the project but reacted positively late in project implementation (Part II, Table 10: Status of Covenants). Until 1993 the Government was lax in taking measures to initiate payments of its arrears to ONE and to authorize electricity tariffs adjustments. Only in 1994 and 1996 did the Government initiate actions to abate arrears and approve tariff adjustments allowing ONE to start complying with the self-financing covenant. But until then the Government had not devolved full power to. ONE to enable it to become autonomous in managing its operations and finances. This situation has changed positively since early 1996 as a result of the reorganization of ONE which has decreased bureaucracy by decentralizing ONE's functions and devolving management and operational power to the regions. As a by-product of ONE's reorganization, the PNER II benefited with the creation of the Directorate of Rural Electrification. 46. FEC, as a financing intermediary has had a difficult time in dealing with an overwhelming number of small sub-loans made to many small local communities. FEC's reorganization in 1994  15 and the new financial arrangements for rural electrification dwarfed its role in the PERG. But, FEC still has not been able to set up records to monitor the progress of the sub-loans. It is to be also noted that FEC was instrumental in supporting cancellation of US$62 million from the Bank to avoid the payment of commitment fees on Bank money not to be utilized by FEC. 47. Considering: (a) the great importance attached by the Bank to the project's financial and institutional development objectives reflected in loan covenants (not fully complied by the GOM); (b) the innovative financing and institutional arrangement for the PERG made by the GOM based on the experience gained with two failures of financing and institutional arrangements; (c) the inclusion of the PNER II as part of the PERG; and (d) the fully satisfactory implementation of the reduced physical components made by ONE, Borrower performance is considered as deficient for compliance with covenants, and as marginally satisfactory for project implementation. F. Assessment of Project Outcome and Sustainability Project Sustainability 48. Sustainability of the project is likely because: (a) the reorganization of ONE is now completed and has begun to show satisfactory results. For example, on the rural electrification front, ONE's Directorate of Rural Electrification does the planning, contracts for the physical implementation of the works (now through turn key arrangements), and supervises the contractor's execution and commissioning of the works. Then ONE's Distribution Department takes over the operation and maintenance of the rural networks and customer services; (b) the new financing arrangements for the PERG are providing a steady and automatic flow of money to ONE for rural electrification; (c) reliance on the private sector for investment in power generation through IPPs has decreased public investment in the power sector and since 1996 has started to show a positive effect on ONE's finances; (d) ONE's financial performance indicators have begun to show positive results as a consequence of actions taken to abate arrears and reduce investment; and (e) there is a satisfactory plan for future project operation (paras. 50-55) A new dynamic in ONE's operations was already sensed by a supervision mission in December 1996 and confirmed by the ICR mission in December 1997. Project Outcome 49. The outcome of the project is somewhat difficult to assess but, overall is considered at the margin as satisfactory (para. 49). While this is indeed a borderline call, consideration has been given to the positive achievements which outweigh the less satisfactory results: (a) physical components of the project, although reduced in scope and delayed, were satisfactorily implemented; (b) the project prompted the creation of the PERG -- based on the experience had with the PNER-I and PNER-II-- which is performing well and expected to complete rural electrification of Morocco in the long run; (c) the project increased the rural electrification coverage by only 3.5 percent; (d) the recalculated economic rate of return of the physical components implemented (15.3 percent) is comparable to the appraisal estimate for the whole project (17.8 percent); (e) ONE's finances were partially improved in terms of some key indicators of financial performance (internal cash generation, debt coverage ratio, tariff  16 adjustments), while the arrears due to ONE by the Regies and Offices remain below targets; (f) the project prompted the studies of ONE's reorganization and power sector reform; (g) the project sustainability is likely; and (h) the project costs were lower than originally expected. G. Future Project Operation 50. The measures taken by the Government to reorganize ONE, to operate the PNER-II within the framework of the PERG, promote private participation, and to improve ONE's finances could contribute to satisfactory operation of the project in the future. 51. On sector reform, the Government has been cautious, but is considering shaping a power sector reform along the lines of the current Bank paradigm for power sector development (unbundling of the commercial functions of distribution, transmission and generation of power from the regulatory and policy making functions of the state, and enabling efficient private participation in the sector). 52. The commissioning of the IPP in Jorf Lasfar in 1997 and the proposed IPP at Tahadart are indicative of the opening of the sector to private operators. These operations will send a clear message on the market's willingness to pay for power generation and, consequently, will serve as reference points for adjusting electricity prices accordingly. 53. ONE's reorganization was initiated in 1995 and completed in 1997. It entailed decentralization and re-allocation of activities and appointment of new directors and managers. ONE is expected to reach steady-state operation during 1998 once all the software supporting the information systems becomes operative. For example, the Distribution Department and its regional units now have the authority to make operational decisions without consulting ONE's headquarters. 54. On the pervasive problem of arrears, ONE has initiated aggressive measures to abate arrears by cutting service to delinquent customers, replacing the bi-annual quarterly billing of the Administration with a quarterly billing system, and rescheduling payment of arrears with entities providing essential economic benefits to the country, when cutting service is not an option. 55. It is also important to note that ONE is already monitoring the sector through a set of performance indicators in line with those recommended by the Bank, and that additional indicators will be used to monitor and evaluate the performance of the rural electrification program (Part 11, Table 6: Key Indicators for Project Operation). H. Key Lessons Learned 56. Based on the experience gained with this lending operation, the following lessons can be offered in relation to rural electrification projects: Lesson 1. A rigorous economic analysis of the benefits of rural electrification can justify the relative high investment costs of a rural electrification project. In particular, the value of the consumers' surplus benefit needs to be carefully evaluated because it plays a key role in  17 the economics of the project. In this case the value of the consumers' surplus benefit is of the same order of magnitude of benefit proxied by the revenue yielded by the electricity tariffs. Lesson 2. Successful implementation of a rural electrification project requires that the Government be fully committed to clear objectives and stable project financing and institutional arrangements. In the Moroccan project, the Government's hesitant commnitment to two financing and institutional setups hampered and delayed project implementation. Lesson 3. Establishing an appropriate institutional organization and simple procedures for project planning, financing, procurement of goods and construction services, and operation and maintenance is of paramount importance to successfully implement a rural electrification project involving many small communities. For example, the implementation of the Moroccan project gained momentum as soon as the Directorate of Rural Electrification was created, the role of FEC was minimized, and a steady and automatic flow of funds for project financing was ensured through the transfer to ONE of part of the VAT allocated to the local communities and the surcharge on the kWh billed to urban customers and collected by ONE. Lesson 4. Recovery of the connection cost from rural consumers is possible if spread monthly over a relative long period of time, at a level appropriate to the means of the rural population. In the Moroccan project, the willingness to pay and payment capability by rural consumers led to establishing a monthly connection charge of 40 DH (about US$4.2) over 7 years, plus a charge for electricity consumption billed at the domestic tariff rate. Lesson 5. Early assessment of the technology and standards available to achieve rural electrification at low cost should be a prerequisite for planning and designing a rural electrification program. In the Moroccan project, this was not done because the adoption of European standards for urban and rural projects (also involving standardized equipment) by ONE many years ago, made a shift to American standards very difficult. However, based on a recent study made by ONE with the assistance of consultants, a pilot project is exploring the feasibility of such a change. The latter, if adopted in appropriate terrain, could result in insignificant savings in investment costs. Lesson 6. A contract program between the Government and a Government-owned utility (ONE in this project) has no effective value because the Government is no legally liable to meet its commitments as it is not a truly commercial contract. Consequently its non- compliance with the contract program impedes the utility's ability to meet its own commitments.  18 IMPLEMENTATION COMPLETION REPORT MOROCCO SECOND RURAL ELECTRIFICATION PROJECT (Loan 3262-MOR) PART II: STATISTICAL TABLES Table 1 Summary of Assessment A. Achievement of Substantial Partial Negligible Not applicable objectives Macro-economic policies X Sector policies X Financial objectives X Institutional development X Physical objectives X Poverty reduction X_______X Gender concemns X Other social objectives X Environmental objectives .__ X Public sector management X Private sector development | . __ X B. Project sustainability Likely Unlikely Uncertain Operational & Policy X . _____ C. Bank performance Highly satisfactory Satisfactory Deficient Identification X Preparation assistance X Appraisal X Supervision X 1/ D. Borrower performance Highly satisfactory Satisfactory Deficient Preparation x Implementation X I/ Covenant compliance x Future Operation X E. Assessment of outcome Highly Satisfactory Unsatisfactory Highly satisfactory unsatisfactory 1/ MARGINALLY SATISFACTORY  19 Table 2 Related Bank Loans Loan No. Title Amount Date of Status (US$ m) approval L-0936-MOR Power Project 25.0 October 1973 Completed L-1299-MOR Sidi Cheho-Al Massira Hydro Project 49.0 July 1976 Completed L-1695-MORI Village Electrification Project 42.0 April 1980 Completed L-2910-MOR Power Distribution Project 90.0 June 1989 Completed L-3262-MOR Rural Electrification Project 114.0 October 1992 This ICR Total (US$ million): 320.0 Table 3 Project Timetable Steps in project cycle Date planned Actual date Identification n.a. September 22, 1988 Preparation n.a. December 9, 1988 Pre-appraisal n.a. March 15, 1989 Appraisal n.a. October 28, 1989 Negotiations n.a. May 18, 1989 Board presentation n.a. October 4, 1990 Signing n.a. June 14, 1991 Amendment approval n.a. July 7, 1992 Amendment signing n.a. November 11, 1992 Effectiveness September 12, 1991 February 2, 1993 Project completion December 31, 1996 by end 1999 Loan closing June 30, 1997 June 30, 1997 Last disbursement October 31, 1997 October 31, 1997 Table 4 Loan Disbursement: Cumulated, Appraisal Estimate and Actual (US$ thousand) | FY91 FY92 FY93 FY94 FY95 FY96 FY97 Appraisal 1.7 10.4 26.6 54.3 84.4 108.6 114.0 Actual 0.0 0.0 0.0 4.8 10.9 25.6 36.5 Percent of Appraisal 0.0 0.0 0.0 8.8 12.9 23.6 32.0 Date of final disbursement: 10/31/97  20 Table 5 Key Indicators for Project Implementation Implementation Indicators as indicated Estimated Actual/Estimated in SAR -- Engineering start January 1990 January 1992 --Engineering completion June 1993 December 1998 -- Procurement start - equipment February 1990 April 1992 -- Procurement completion - equipment September 1991 October 1996 -- Supply of equipment start July 1991 September 1992 -- Supply of equipment completion September 1993 December 1998 -- Procurement start - construction December 1990 December 1993 -- Procurement completion - construction November 1991 July 1996 -- Construction start - 22-kV July 19911 April 1994 7Construction completion - 22-k December 1995 December 1999 -- Construction start - low voltage October 1991 July 1994 -- Construction completion - low voltage December 1996 December 1999  21 Table 6 Key Indicators for Project Operation Indicators for ONE Unit Annual electricity production GWh Annual electricity purchased GWh Annual sales GWh Average tariff of electricity sold DH/kWh Number of customers Number Numbers of employees (electricity) Number Employees per thousand customers Number Average duration of outages Hours/customer Sales per employee MWh Energy losses Percent Production cost DH/kWh Cash operating margin Percent Self financing Percent Debt service coverage ratio Number Debt/Equity ratio Number Accounts receivable Days of billing Arrears per category of client Days of billing Indicators for PNER-II within the framework of the PERG Number of provinces electrified, total and per year Number Number of centers electrified, total and per year Number Number of rural customers connected, total and per year Number Number of new population electrified, total and per year Number Rural electrification coverage Percentage 22 kV lines constructed, total and per year km and km/year Transformer substation installed, total and per year MVA and MVA/year Cost of transformer substation DHlkVA Cost of household connection DH/connection Monthly average consumption of rural consumer, low voltage kWh Monthly average consumption of rural consumer, medium kWh voltage Average tariff for rural customer, low voltage DH/kWh Average tariff for rural customer, medium voltage DH/kWh Losses in the rural distribution network Percent  22 Table 7 Studies Included in Project No. Study Purpose as defined at Status Impact of the study appraisal 1. Electricity Tariffs To assist the Government in Completed; new New structure Study implementing a national tariff tariff level and introduced TOD policy in the power sector. structure tariff for HV and effective since MV consumers, and January 1996. social tariff only for household monthly consumption of less than 100 kWh 2 Integrated Works To assist ONE's Distribution Completed and Decision making is Management System Department in defining and implemented now devolved to Study implementing an adequate during 1996/97. regional system for monitoring and management; new controlling projects costs, systems of expenditures and management implementation. information and project cost accounting and control are improving ONE's performance. 3 Inventory Control and To study ONE's stock control Completed and New systems are Material Management and material management implemented operating well and Systems Study systems and recommend during 1996/97 improving ONE's improvements . performance. 4 Reorganization of ONE To study ONE's organization Study started in Implementation structure and recommend 1995 and is now began in 1996 and improvements. completed. completed in 1997; results show a positive impact on ONE's operations and management.  23 Table 8A Project Cost (US$ million) Appraisal estimate Actual Component Local Foreign Total Local Foreign Total Variation costs costs cost costs cost cost (%) A. Engineering services 0.3 1.3 1.6 1.7 0.0 1.7 6.3 B. Eq. LVand MV networks 0.0 23.0 23.0 0.0 23.2 23.2 0.1 C. Inst. and erection works 36.3 45.5 81.8 26.7 20.0 46.7 -42.9 D. Consumers connections 4.8 13.4 18.2 4.8 13.4 18.2 0.0 E. Specialized equipment 0.0 1.7 1.7 0.0 0.0 0.0 -100.0 F. Vehicles 0.0 0.6 0.6 0.0 0.6 0.6 0.0 G. Operating buildings 1.4 1.0 2.4 1.4 1.0 2.4 0.0 H. Technical assistance 0.3 1.2 1.5 0.0 1.8 1.8 20.0 I. Project administration 12.5 0.0 12.5 13.0 0.0 13.0 4.0 J. Custom duties and taxes 19.3 0.0 19.3 2.3 0.0 2.3 -88.1 Total Base Cost 74.9 87.7 162.6 49.9 60.0 109.9 -32.4 - Physical contingencies 5.2 6.0 11.2 0.0 0.0 0.0 0.0 - Price contingencies 17.5 20.3 37.8 0.0 0.0 0.0 0.0 Sub-Total 97.6 114.0 211.6 74.8 96.6 109.9 -48.1 - Interest during construction 0.0 8.4 8.4 0.0 8.7 8.7 3.6 Total Project Cost 97.6 122.4 220.0 74.8 105.3 118.6 -46.1 Note: Appraisal base costs are expressed in constant 1990 US dollars. Table 8B Project Financing (US$ million) Appraisal Estimate Actual/Latest Estimate Local Foreign Total Total Total Source costs costs (%) IBRD loan 0.0 114.0 114.0 36.5 30.8 ONE 0.0 1,3 1.3 12.0 10.1 Government 97.6 7.1 104.7 11.0 9.3 Local communities 0.0 0.0 0.0 59.1 49.8 TOTAL 97.6 122.4 220.0 118.6 100.0  Table 8C ONE Financial Statements ______ ______________ 1991 ______ 1992 19 94____- 19 9619 ONE-Income Statement ~Appraisal Actual - _Appraisal Actal ~ ppasal cta Apra-i-sal Acua pprisl Actual ~5pasI Actual AppralsaI estimatle Sales (GWh) 81~~~~~~a21 8101 8665 8726 9245 8961 9865 9489 10626 993 11231 10230 11987 10844 twer~~e revenue (DllIkWh) ~ 0.82 0.72 0.85 0.73 0.85 0.76 0.86 0.80 0.85 0.81 0.85 0.87 0.85 0.87 Revenue (electrcity sales} - 6876 5852 7337 6348 7828 6774 8353 7603 81 05 91 88 118 93 Electricit surcharge (R.E.) _ 000 _a000m 95019026 Other 182 144 214 408 __-----258 276 300 ___268 338 533 355__ 175 363 283 Total 6858 ___ 5996 7551 6756 8086 ~~~~~ ~~~~~ ~~~~~7050 8653 7869 9251 8598 9865 9231 10511 9933 O p~~~atin~~~E xpenses: - _ _ _ - - - _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __~~~~- - - ------ - ---- FuLabod Enryln uchss 32 29 312 36 66 45 3865 _ 4423 3342 3912 3367 2889 33521 6443 Labor ~~~~ ~~~~ ~~~675 668 760 731 846 85 947 918 1068 991 1188 1064 1339 109 Other 463 395 569. 393 625 490 679 - 712 765 466 85 636 957 419 Depreciation 707 775 757- 975 827 1004 ___1467 1193 1525 1898 1596 3058 1674 2028 Total 4969 5057 5238 ~~~~~ ~~~~~ ~~~~~5960 5904 6561 6958 7246 6700 7267 7001 7646 7322 998 OPlant Rntalso 18891 939 2313 796 2182 489 1695 623 2551 1331 28641 1584 3189 10 1- Platherntalo00e 0 0 0 0 0 _ _ 0 0 0 0 0 475 4 Other Income _____ _____ -103 --92 121 119 - 139 117 159 143 180 417 202 733 223 212 Deductions: Interest 591 653 632 600 ~~~~~~~~~~~- -682 754 866 1012 1015 1212 1084 1218 1089 1335 Spxcialfnd_Ios 300 .---263 _ 330 189lg _ 352 0 376 0 401 0 428 0 457 0 Exchanle losses 165~~---- 106 - 121- -126 100 167 82 552 19 522 18 54369 nsomtu 25 _ 33 45 36 --364 20 ---125 22 419 23 492 257 566 27 Total Deducton _____ 11 _ 1055 ____1551 _951 '1498 941 1449 1588 1954 1757 2192 1979 2418 1457 Net Income ___779 -24 _ 883 .36 823 -335 405 -820 777 -9 8-74 339 994 4 O nPera gatiO (1) -.72 84 69 -88 73 93 8 9 72 85 71 ___7  Table 8C ONE Financial Statements (continuation) ________________________ 1991 1992 ~ _____ _ 1993 1994 _ ___ 1995 1996 19 OCNE - BAL ANCE SHEET Apralsal Actual Appraisal Actual Appraisal_ Actual Apailsal Actual prIsa Actual Appraisal Actual Appraisal lActual Current Assets:______ ___ _______ Cash 1079 166 376 -99 _ 244 86 80 193 83 351 143 397 129 ____ Accounts rece bivabl ___ ____ ___ -Energy ~~~~~ ~~~3202 44866 304_4 53 289 4806 2720 3853 2599 3909 2732 3959 2873 ____ -Works 179 47 193 29 206 819 218 75 232 0 244 0 244 ____ Other 584 697 810 1001 839 1026 645 1076 624 1020 521 1372 531 Inventories 905 552 1079 661 1319 736 1481 830 1 592 946 1753 937 1889 ____ _Total Current Asets 5949 596 5502 6841 5457 7473 5144 6027 5130 6226 5393 6664 5666 ____ Fixed Assets 15029 13092 16344 15708 19600 17515 29605 31415 32887 34059 36631 38210 38647 Less: Accumulated dep~reciation 5949 5939 6706 675 733_ 7576 9000 8557 10524 10440 12120 12728 137941 Net Fixed Assets In Service 9080 7153 9638 892 12067 999 20605 22858 22363 23619 24511 25481 24853 ____ Worlk In progress --4468 5618 7631 6224 9534 11420 4003 2430 5645 __ 2619 6927 913 9556 Foreign ExchanEa Losses - 463 609 376 676 290 919 203 1127 116 479 30 294 -57 ____ Other 190 53 190 52 190 49 190 230 190 162 190 126 190 ____ TOTAL ASSETS 20170 19561 23337 22745 27538 29800 30145 32681 33444 33305 37051 33479 40208 ____ Curent Liabilitiles: Overdraft 283 326 263 240 263 297 263 3 263 56 263 0 263 Suppies2116 2439 2015, 2920 2251 3885 2275 2827 2378 2790 2488 1955 25451_____ Other 1359 411 18271 566 2191 734 2316 1631 2735 1542 3227 1790 3793 ~Current portof oLTD -. 971 572 _ 672 598 696 915 1234 _ 132 1256 1381 1336 - ____ 1345 ____ Sub total current IkubIlilies 4709 3748 - 4777 4324 5401 5831 6086 6713 __ 6032 5769 7314 3745 7946 bo ___Oet(TD 71 8 9__093 10004 9217 - 11994 14084 13063 15829 13977 16718 15135 16064 15921 _Less currentprloqn of LTD 9__71 572 672 598 696 915 1234 1325 1256 1381 1336 ____ 1345 ____ Sub-total Net LTD 7747 8521 9332 8619 11298 13149 11829 14504 12721 15337 13799 16064 14576 _ __ Other: _____ Consumer Advances 146 155 155 178 166 197 177 230 189 251 202 280 216 Retirement Fund 508 388 587 430 677 463 779 520 896 581 1028 637 1179 Government eq uity y 879 879 879 3012 879 3012 879 3012 879 3012 879 3012 879 ____ Government contributions 3553 4044 3678 4433 3929 5633 4348 6817 4835 7185 5171 7496 5266 ____ Customers corrtributins 1240 1431 1327 1446 1410 1850 1487 2251 1558 2544 1620 2648 16601 F,E. SpeciaL Fund 1233 891 1563 830 1915 565 2291 354 2692 354 3120 987 3577 Retained Earning] 155 -529 1038 -565 1863 -900 2268 -1719 3044 -1728 3917 -1390 4911 Sub-total Other and Equity 7___714 6716 9227 9156 108391 101601 12229 10715 14093 11367 15937 12753 17688 TOTAL LIABILITIES and EOUIT 20170 1961 233 275 27538 298001 30146 32681 334461 333051 370501 33479 420____  Table 8C ONE Financial Statements (continuation) ONE: Sources and 1991 1992 _ 1993 1994 1995 1996 1997 Application of Funds Appraisal Actual AppaAisalsal Actual Appraisal Estimate Operating Income 1889 939 2302 796 2154 489 1643 623 2481 1331 2797 1584 3138 Add: Depreciation | 707 755 757 975 827 1004 1467 1193 1525 1898 1596 3058 1674 Other Income 103 92 121 119 139 117 159 143 180 417 202 733 223 Sub-total___ 2699 1806 3180 1890 3120 1610 3269 1959 4186 3646 4595 5375 5035 Deductions: Interest _ 591 653 632 600 682 754 866 1012 1015 1212 1084 1218 1089 Amonization and Bonds _ 1048 328 972 _ 572 673 598 696 901 1234 1256 1255 1718 1336 Income tax 157 33 468 36 364 20 125 22 419 23 492 257 566 Increment in workin capital_ 189 163 257 426 87 -509 -148 -1391 -18 166 203 979 288 _ Other 0 25 0 474 0 291 0 124 0 -129 0 832 0 Total Deductions __ | __ 1985 1202 2329 2108 1806 1154 1539 668 2650 2528 3034 5002 3279 CashAvailableforlnvestment _ 714 604 851 ___ -218 1314 455 1730 1290 1536 1119 1561 371 1756 Investment Pr ram 4161 3605 4459 3170 5159 7176 4473 5274 4925 2998 5026 2337 4644 Finanging Gap 3447 3001 3608 3388 3845 6721 2743 3984 3389 1879 3465 1966 2888 Financed by: _:_______ ______ ___._. L-T borrowing 3694 2797 2220 760 2637 5086 1744 2516 2085 2229 2293 1415 1907 Consumeradvances 0 23 0 23 _ 0 19 0 33 0 21 0 0 0 Consumer contributions 193 43 208 1 5 222 404 236 225 250 293 264 69 263 Government contribution 64 395 125 _ _2522 251 _ 1199 419 1185 487 368 351 584 94 Total 3951 3258 2553 3320 3110 6708 2399 3959 2822 2911 2908 2068 2264 Cash Increase (Decrease 504 257 -1055 -68 -735 -13 -344 -25 -567 1032 -557 103 -624 Debt service coverage rato_ 1.5 1.8 1.6 1.6 _ 2 1.2 1.9 1 _ 1.6 1.5 1.7 _ 1.8 1.8 Sell-finiancng rat (9 _ _-_ 17.16 18 19.08 -4 25.47 17 38.68 30 31.19 30 31.06 33 37.81  Table 9 Econoinic Costs and Benerits - ~~~L77iT7 ~~~~~ Sales jmlo W ~Costs (!loD1Benefits (milion DHJ --_Cummulative Conniectionsmsi oeti te oa Toa Prjc agnlOeainRevenue Rvne-Cnue_upu_NI Year_ LV Domestic Other LV MV Rpae Additional LV LV MV Costs__ Costs Costs LV MV LV MV BENEFIT 1991 0 0 0 0 DCX) 0.00 OWD OW W0 0 OW01 DOD OW OCX1) __ .W OW0 1992 2600 2184 416 --2 0.71 0,W 0.683 139 0.38 28.19 0.92 0.56 1.09 0.36 1.99 0.4 1 ..25.80) 1993 5200) 4368 832 4 1.42 0.38 1.483 3.28 0,76 25.88 2.10 0.52 _2.56 0.72 4.13 0.89 J2U) 1994 7800 6552 1248 6 2.13 0.76 1.77 4.66 1.15 26.3) 3.02 0.53 3.63 1.08 5.62 1.33 (18.17) 1968 25000 21WDD 40W) 20 6.83 1.15 4.86 12.83 3.82 187.93 8.66 3.78 10.01 3.61 18.99 4.43 _Al65.31) 1998 501XX 42X000_ 80) 49 13.65 3.67 10.57 27.89 9.38 288.10 19.37 5.32 21.78 8.85 35.06 10.86 (24..26) 1997 __765 8428) 12240 104 20.88 7.35 17.22 4.6 19.88 258.14 33.97 5.18 35.46 18.79 55.01 2304 147 -99 -DO 67200 128W 150 -.21.84 11.25 20.18 53.21 28.65 34W0 4286) 0.68 41.55 27.10 60)32 33.23 84.84 199 835W 70140 1338) 200 22.80 11.76 21.06. 55863 38.20 34.0 48.79 088a 43.39 36-14 62.98 4431 103.26 2(XX 87000 73080 __13920 240 23.75 12.27 21.98 58W0 45.84 OW0 54W0 OW0 45.24 43.36 65.64 53.17 153.42 2001 87W) 7306 13920 240 23.75 12.79 22.29 58.83 45.84 OW _ 54.43 _OWM 45.89 43.38 66.04 53.17 154.04 2W2 87W) 73080 13920 240 23.75 12.79 22.29 58.83 45.84 OW0 54.43 O.W0 45.89 43.36 66.04 53.17 154.04 2003 87000 7308 13920 240 23.75 12.79 22.29 58.83 45.84 OW -) 54.43 OW0 45.89 43.36 66.04 __53.17 154.04 2DD4 87M _3 J392 240 23 75 12.79 22.29 58.83 45.84 __OW 54.43 GOW 45.89 43.35 68.04 53.17 154.04 2W6 87000 7308 13920 240 23.75 _12.79 22.29 5883 4584 OW0 54.43 OW0 45.89 43.36 66.04 53.17 154.04 20)6 87000 73080 12M.240 23.75 12.79 22.29 58.83 .45.84 - OCX 54.43 OCX) 45.8 433 660 53.17 154.04 2007 87W)0 -73080 13920 -240 23.75. -12.79 22.29- 5883 45.84 OW0 54.43 OW0 45.89 43.36 66.04 53.17- 154.04 2008 87000 7306 132 240 23.75 12.79 22.29 58 83 45.84 OW0 54.43 OW0 45869 43.36 66.04 53.17 154.04 20091 870Xf 73060 13920 240 23.75 12.79- 22.29 58.83- 45.84 OW.0 54.43- OW0 45.89 43.36 66-04 53.17 154.04 .2010 -8700) 73060 1392 24) -23.75 -12.79 -.-22.29- --5883 45.84, OCX)00- 54.43 OW0 45.89.- 43.36 66804 -53.17- 154.04 - .. - . ~~~~~~~~~~~~ ~ ~ ~ . ~ ~ ~ ~ .. . - - - - _ _ _ _ ~~~~~~~~~~~~~~~~~IER R 4% 15:34 Fraction of LV doetcconcin 084 _-Margna cost of suppy (LRMC). (I)HIWh 0.52 Revenue LV (DHIkV 0.78 -- Aver~~g~ consumption MV: jj~~iwhIyea 191(X) Operatin costs-as a fraction of proiect cos 0.02 Revenue MVIHLN __.94 Avrg onumto of other LV. as a fraction of domestic consumrin:3n-_ 1990-DHIiJUS1.2 _ yearl- 0_98 ___Year Pr. CsDeator Pro.st Project Cost-- y. O 0U LS$millioi to 199 1w1 USI Million 199-Dl1 I y~~~r~ . . .. ~0,61 1992 _3.54 0.962 3.41 28,19 Average domestic consumption: ~~~~~ ~~1993 .354 0,882 3.13 25.88 JYear I JkWh/year 250 . 19 5 09 .8 26.3 ....- Year2 (kwhlyear 32519 245 96 22.70 187.93 -.ye~~~~~~~~ar3~ (-WhIyear- 1996 -3408B 0.943 3.14~ 266.10- Domestic consumer surplus: (HWh 1.71997 36.13 _0863 31.18 258.14 - - L~~~~~~iL. L~~~kWhIyta, - 1998 4.77 086 4.12 34-09 ---.----. Other LV consumer surplus: (DH/kWh) 1.29 . 1999 4.77 0,863 4.12 34.09 . --MV consumers~urjp us (OH/kWh]p 1.16 20)0 4 77 ~0.863 -0.00 .OW __ -. ..~~~.... ... . - . .. . -- .~~~~~. . - Total~ _ 1I