Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT IN THE AMOUNT OF SDR 33.5 MILLION (US$50 MILLION EQUIVALENT) REPUBLIC TO THE OF C~TE D'IVOIRE FOR AN URGENT ELECTRICITY REHABILITATION PROJECT Energy Group Sustainable Development Department Africa region May 11,2009 Report No: CI 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.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective March 3 1, 2009) CurrencyUnit = FCFA 500FCFA = US$1 US$ = SDR FISCAL YEAR January 1 - December31 ABB ADDCI AFD AfDB ANARE ANDE APL ARCC ATCI bbl bcf BOAD BOOT BTU cc CESAG CFAF CFL CIE CFL CFO CIPREL CNO CPAR CQS CTCI DDP DGE DH DMP DPL DSM EdF ABBREVIATIONS AND ACRONYMS Asea Brown Boveri Limited Association des Districts et Departements de Cbte d Ivoire (Association of Districts and Regions of C6te d lvoire) Agence Frangaise de Developpement (French Development Agency) African Development Bank Autorite Nationale de Regulation du Secteur de 1 Electricite (National Power Regulatory A uthority) Agence Nationale de 1 Environnement (National Agency of Environment) Adaptable Program Loan Autorite de Regulation du Cafe et du Cacao (Coffee and Cocoa Regulation Authority) Agence des Telecommunications de Cbte d Ivoire (Telecommunications Agency of C6te d Ivoire) barrel Billion Cubic Feet Banque Ouest Africaine de Developpement (West Apican Development Bank) Build, Own, Operate, Transfer British Thermal Unit Coordination Committee Centre Africain d Etudes Superieures en Gestion (African Center for Management Studies) Franc de la Communaute Financikre Africaine (West African countries currency) Compact Fluorescent Lamps Compagnie Ivoirienne d Electricit6 (Ivorian Power Utility) Compact Fluorescent Lamps Chief Finance Officer Compagnie Ivoirienne de Production d Electricit6 (Private Independent Power Producer) Centre, Nord et Ouest (Center, Northern and Western ureas of C6te d lvoire) Country Procurement Assessment Report Selection Based on Consultants Qualifications Conseil des Telecommunications de Cbte d Ivoire (Telecommunications Council of C6te d Ivoire) Direction de la Dette Publique (Directorate of Public Debt) Direction GBnBrale de l Electricit.6 (Directorate of Electricity) Direction des Hydrocarbures (Directorate of Hydrocarbons) Direction des Marches Publics (National Tender Board) Development Policy Loan Demand Side Management Electricite de France (French Electricity Company).. 11

3 FOR OFFICIAL USE ONLY EECI EEI EGRG EIRR ESA ESIA ESMF EO1 EU FBS FCFA FDI GDP GoCI GPN GT HDI HIPC HQ Hv IC ICB IDA IDP IFC IFR IGE IMF IPP IPS ISADE ISN LCS LSDP LV M&E MMBTU MMCFD MME MoU Mv MW NCB NGO O&M ONMP PCU PDO PEMFA Energie Electrique de CGte d Ivoire (Electrical Energy of C bte d Zvoire) Energie Electrique Ivoirienne (Private Independent Power Producer) Economic Governance and Recovery Grants Economic Internal Rate of Return Environment and Social Assessment Economic and Social Impact Assessment Environmental and Social Management Framework Expression Of Interest European Union Selection under a Fixed-Budget Franc Communaute FinanciBre Africaine (currency used in the African Financial Community) Foreign Development Investment Gross Domestic Product Government of CGte d Ivoire General Procurement Notice. Gas Turbines Human Development Index Heavily Indebted Poor Countries Headquarter High Voltage Individual Consultant International Competitive Bidding International Development Agency Internally Displaced Persons International Finance Corporation Interim Unaudited Financial Report Inspection Genkrale d Etat (State Internal Audit Unit) International Monetary Fund Independent Power Producers Industrial Promotion Services (CBte d Ivoire), S.A. Institut Supkrieur Africain pour le DBveloppement de 1 Entreprise (African Institute for Development Studies) Interim Strategy Note Least-Cost Selection Letter of Sector Development Policy Low Voltage Monitoring and Evaluation Million British Thermal Units Million cubic feet per day Ministbre des Mines et de 1 Energie (Ministry of Mines and Energy) Memorandum of Understanding Medium Voltage Megawatt National Competitive Bidding Non-Governmental Organization Operations & Maintenance Observatoire National des Marches Publics (Public Procurement Regulation Framework) Project Coordination Unit Project Development Objective Public Expenditure and Financial Accountability This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

4 PIU PPA PPIAF PRG PRGF PRSP PSC PSIA QCBS RPF SBD SICF SOPIE SOGEPE SPN tcf TOR UERP UN UNDB UVICOCI WAEMU WAPP Project Implementation Unit Project Preparation Advance Public-Private Infrastructure Advisory Facility Partial Risk Guarantee Poverty Reduction and Growth Facility Poverty Reduction Strategies Paper Production Sharing Contract Poverty and Social Impact Analysis Quality and Cost Based Selection Resettlement Policy Framework Standard Bidding Document SocBt6 Ivoirienne des Chemins de fer (Ivorian Railway Company) Soci6t6 d Op6ration Ivoirienne d Electricit6 (National Company for Electric Operations) Soci6t6 de Gestion du Patrimoine du Secteur de l Electricit6 (Holding Company for Sector Assets) Specific Procurement Notice Trillion Cubic Feet Terms of Reference Urgent Electricity Rehabilitation Project United Nations United Nations Development Business Union des Villes et Communes de CBte d Ivoire (Association of Cities and Towns ofcbte d Ivoire) West African Economic and Monetary Union West Africa Power Pool Vice President: Country Director: Sector Manager: Task Team Leader: Obiageli K. Ezekwesili Madani M.Tall Subramaniam V. Iyer Sunil W. Mathrani iv

5 . COTE D'IVOIRE Urgent Electricity Rehabilitation Project CONTENTS Page I STRATEGIC CONTEXT AND RATIONALE... 1 I1 A. B. C.. A. B. C. D. E. I11. A. B. C. D. E. F. IV. A. B. C. D. E. F. G. Country and sector issues... 1 Rationale for Bank involvement... 5 Higher level objectives to which the project contributes... 6 PROJECT DESCRIPTION... 7 Lending instrument... 7 Project development objective and key indicators... 7 Project components... 7 Lessons learned and reflected in the project design Alternatives considered and reasons for rejection... 9 IMPLEMENTATION Partnership arrangements Institutional and implementation. arrangements Monitoring and evaluation of outcomeshesults Sustainability Critical risks and possible controversial aspects Grant conditions and covenants APPRAISAL SUMMARY Economic and financial analyses Technical Fiduciary Social Environment Safeguard policies Policy Exceptions and Readiness Annex 1: Country and Sector Background Annex 2: Major Related Projects Financed by the Bank and/or other Agencies Annex 3: Results Framework and Monitoring Annex 4: Detailed Project Description Annex 5: Project Costs Annex 6: Implementation Arrangements Annex 7: Financial Management and Disbursement Arrangements Annex 8: Procurement Arrangements V

6 Annex 9: Economic and Financial Analysis Annex 10: Sector Institutional Issues Annex 11: Letter of Sectoral Development Policy Annex 12: Safeguard Policy Issues Annex 13: Project Preparation and Supervision Annex 14: Documents in the Project File Annex 15: Statement of Loans and Credits Annex 16: Country at a Glance Annex 17: Map (IBRD 36874) List of Tables Table 1: Project Cost Breakdown... 8 Table 2: Risk Rating Table 3: Safeguards Table 4: Electricity generating capacity Table 5: CIE Investment Plan Table 6: Three-year Investment Plan Table 7: Results Framework Table 8 : Arrangements for results monitoring Table 9: Project costs and financing Table 10: Cost of Component Table 11 : Cost of Component Table 12: Cost of Component Table 13: Summary of Project Costs Table 14: Beneficiaries for technical assistance component Table 15: Key Risks to project objectives Table 16: Weaknesses and Financial Management Action Plan Table 17: Expenditure categories and funding percentages Table 18 : Procurement Plan Table 19 : Goods & works Table 20: Consulting Services: Table 21 : Public sector payment arrears to CIE. end 2008 (in million CFAF) Table 22: Electricity sales by tariff category Table 23 : Share of gas supply to power sector Table 24 : Results of Financial Simulations Table 25: Results of Financial Simulations Table 26: Economic Internal Rate of Return - UERP List of Figures Figure 1 : Results Chain for the UERP Figure 2: UERP Funds Flow Figure 3 : Customer revenues Figure 4: Average Cost of Gas US$/MMBTU Figure 5 : National Energy Sales - historical & projections (SOGEPE s scenario)... 70

7 Figure 6: Demand and Supply capacity. historical & projections (SOGEPE s scenario) Figure 7 : Average cost and marginal costs per kilowatt hour historical & projections Figure 8: National sales of energy in Cote d Ivoire. Figure 9: Demand and Supply Capacity. historical & projections Figure 10: Average cost of gas US$/MMBTU Figure 11 : Cash inflow vs average cost and marginal cost (Recovery scenario) vii

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9 C~TE D'IVOIRE URGENT ELECTRICITY REHABILITATION PROJECT PROJECT APPRAISAL DOCUMENT AFRICA AFTEG Date: May 12,2009 Country Director: Madani M. Tall Sector Manager: Subramaniam V. Iyer Project ID: P Lending Instrument: Specific Investment Loan Team Leader: Sunil W. Mathrani Sectors: Power (1 00%) Themes: Infrastructure services for private sector development (P) Environmental screening category: Partial Assessment [ ]Loan [ ]Credit [XI Grant [ ]Guarantee [ 3 Other: For Loans/Credits/Others: Total Bank financing (US$m.): Borrower: Republic of CBte d'ivoire Responsible Agency: SOPIE (Societe d'op6ration Ivoirienne d'electricit6) 01 BP 8529, Abidjan 01, CBte d'ivoire Phone : / Fax : SOGEPE (Societe de Gestion du Patrimoine du Secteur de l'electricit6) 01 BP 1345, Abidjan 01, CBte d'ivoire Phone : / Fax : CIE (Compagnie Ivoirienne d'electricit6) 01 BP 6923, Abidjan 01, CBte d'ivoire Phone : /Fax : Ministry of Mines and Energy BP V 6, Abidjan, CBte d'ivoire Phone: / Fax: Vlll

10 2Y lnnual 3urnulative Estimated disbursements (Bank FY/US$m) Does the project depart from the CAS in content or other significant respects? [ ]Yes [XINO Ref; PAD I.C. Does the project require any exceptions from Bank policies? Ref; PAD IK G. [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [ IN0 Is approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated substantial or high? [XIYes [ ]No Re$ PAD III. E. Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ]No Re$ PAD IK G. Project development objective Re$ PAD II.C., Technical Annex 4 The project development objective is to help improve the availability, reliability, efficiency and financial viability of electricity supply in C8te d Ivoire. Project description [one-sentence summary of each component] Re$ PAD ILD., Technical Annex 4 The project consists of three main components and is estimated to cost US$54 million (including PPF refinancing, physical andprice contingencies, but excluding duties and taxes). 0 Component 1 : Distribution Network Rehabilitation and Expansion (US$44 million). This component will address the lack of regular maintenance over the last ten years and it includes rehabilitation and upgrading of medium and low voltage distribution equipment and facilities. 0 Component 2: Preparatory activities for the future transmission network investments (US$4 million). The project will provide resources to finance the consulting expertise required to carry out feasibility and Environmental Impact Assessment studies as well as bidding documents for the projects needed to restructure and upgrade the HV network. 0 Component 3 : Project oversight and institutional support (US$6 million). This component will provide funds for a diverse program of technical assistance, training, studies and a $2m contribution to a revolving fund to pre-finance electricity hookup charges for low income households. Which safeguard policies are triggered, if any? Re$ PAD IKF., Technical Annex 12 The project has been assigned an environmental risk Category By because the planned activities might have some minor environmental impacts on human populations in urban areas. OP/BP 4.01 and OP/BP 4.12 are triggered. Significant, non-standard conditions, if any, for: Re$ PAD IIIJ Board presentation: None Loadcredit effectiveness: 0 The Subsidiary Agreement has been executed on behalf of GoCI and SOGEPE (the Project Implementing Agency); ix

11 0 The Co-financing Agreement has been executed; SOGEPE s Procedures Manual has been updated and adopted. Covenants applicable to project implementation: Financial Covenants : 0 GoCI to take all necessary measures to reduce costs and raise revenues of the electricity sector progressively so as to eliminate operating subsidies to the sector from the budget by end- 2011; 0 GoCI to complete liquidation of EECI and transfer all remaining assets to SOGEPE by end- 2009; 0 GoCI to complete valuation of the sector s physical assets and legally assign them to the sector s asset holding company (SOGEPE ) by end-2010; 0 GoCI to undertake a power tariff study and implement its recommendations by end-2010; 0 GoCI to establish a transparent electricity tariff regulation process that would be implemented by ANARE with effect from mid ; 0 GoCI to ensure that arrears in payment for electricity by public bodies are progressively reduced from the level of CFAF 15 billion at end-2008 to CFAF 6 billion by end-2010, and that thereafter outstanding payments receivables do not exceed 60-day billing; 0 SOGEPE to appoint no later than one month after the Effective Date a procurement specialist, satisfactory to the Association; 0 SOGEPE to appoint no later than four months after the Effective Date external financial auditors, satisfactory to the Association. Other covenants: 0 GoCI to seek cabinet approval of a revised Electricity Law by mid-2011; 0 GoCI to contribute $ lm to the low-income customer connection revolving fund by end X

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13 ~ I. STRATEGIC CONTEXT AND RATIONALE A. Country and sector issues 1. C6te d Ivoire, with a population of 18.5 million, is the largest economy in the West African Economic and Monetary Union (WAEMU) and is critical to the overall development of the sub-region. C6te d Ivoire has an important economic influence over the rest of the region, given its size (accounting for 40 percent of GDP in the WAEMU), its relatively high income per capita (US$960 in 2007 as per the Bank s Atlas methodology), and its role in transit trade for landlocked neighboring countries. With its large immigrant population, C6te d Ivoire has also been an important source of worker remittances for other countries in the sub-region. The country is the largest exporter of cocoa in the world, and its level of total goods exports is the fourth largest in sub-saharan Africa (after South Africa, Nigeria and Angola). It has a relatively diversified agricultural economy as well as significant manufacturing and services sectors. However, the civil war in and subsequent years of stalemate in the peace process have taken a heavy toll on the economy and social outcomes, as reflected by data from a recent Poverty Reduction Strategies Paper (PRSP) household survey which shows that while only one in ten Ivorians was poor in 1984, this had risen to one in two in As a result, C6te d Ivoire s ranking in the UN Human Development Index (HDI) deteriorated from 154 h (out of 174 countries) in 1999 to 166th (out of 177) in 2007, considerably lower than what would be expected given the country s income level. 2. Despite negative real GDP growth between 2000 and 2006, electricity demand continued to increase, albeit slowly. As the political normalization process continued during 2007, the economy registered a modest recovery, thanks to a more stable environment, and a rise in private sector confidence (albeit from very low levels). Combined with efforts to rehabilitate public infrastructure, these together contributed to an estimated real GDP growth rate of 1.6 percent in 2007 and about 2.9 percent in In the last two years, electricity demand growth has accelerated to about 7 percent annually and even faster in the greater Abidjan urban area, which accounts for 60.5 percent of total national electricity consumption. This is due in part to a sharp influx of people displaced by the socio-political crisis. Very little investment in the power system took place during the past eight years. As a consequence, C6te d Ivoire has been obliged to cut its electricity exports to its neighbors since its own needs have grown to the point where it has very little surplus generation capacity. In addition, the energy losses of the electric power system have increased sharply to over 24 percent in 2008*, while the quality of service has declined considerably from an average outage duration of 13 hours in 2000 to 36 hours in Numerous new urban areas have been settled on the periphery of Abidjan and these are frequently served by unofficial lines and illegal household connections. The theft of electricity is now commonplace. The transmission and distribution network is overloaded and is inadequate to serve existing demand. Further demand growth as the economy picks up will severely strain the power system. 4.5 percent GDP growth is forecast for 2009, rising to 6 percent in 2010, which would translate into electricity demand growth of over 7 percent annually. A further boost to electricity demand is likely when service is normalized in the zone Centre Nord-Ouest (CNO). 1 Historically Cote d Ivoire was a net exporter of 1000 to 1500 GWh in total to Ghana, Burkina, Togo and Benin. Losses were only 14 percent in

14 Hence, in the absence of rapid corrective action, there is a real risk that the power system will become an obstacle to economic recovery. Sector issues 3. Lack of generation capacity in the short term to meet growing demand: The current power supply/demand balance is very tight and additional generation capacity is urgently needed, both for the domestic market as well as exports to the neighboring countries. While there is a total nameplate capacity of about 1200MW (about half of which is hydro), available capacity varies between MW, due to vagaries in gas and water availability. Peak demand (excl. exports) was over 800MW in 2008, so CGte d Ivoire may face the risk of load shedding at peak times in May-June 200g3. The CIPREL 111 expansion4 is ongoing and will add about 1 lomw capacity at the beginning of 2010, to be followed by a further 120MW from a new IPP developer, Energie Electripe Ivoirienne, in late The Government of CGte d Ivoire (GoCI) has also signed a MoU with Lushann for a new 120MW gas turbine plant to be sited at Grand Bassam, which if implemented could enter service in Both of these projects have yet to complete financial closure, and prospects of doing so have deteriorated due to the global financial crisis. Adding a combined cycle to the existing Azito plant is also under consideration, but is not likely before Converting the CIPREL plants to combined cycle would also be economically justified in the medium term. In the event that the new IPP entrants are unable to proceed, one of these latter projects would need to be fast-tracked. In summary, GoCI has an ambitious generation expansion plan, which if built in its entirety would create a substantial capacity surplus in the medium-term, particularly if exports to Ghana, Togo and Benin cannot be resumed on a large scale6. For the longer term, GoCI is also planning to develop the SoubrC hydroelectric project on the Sassandra River, which would deliver 270 MW and 1200 GWldyear, but the earliest date for its commissioning would be The project is expected to cost over US$500 million. GoCI has decided to seek bilateral financiers to develop it as a public sector project. 4. Lack of system expansion planning: The chaos caused by years of civil strife meant that investment planning became virtually impossible. A return to more normal conditions since 2007 inevitably led to pressure to adopt ad hoc solutions to pressing supply problems in the sector, as can be seen by the decision to proceed with more combined cycle plants. In addition, political imperatives have led to scarce sectoral resources being diverted to rural electrification, rather than being used for addressing transmission bottlenecks or distribution upgrades in urban areas. However, now that stability has returned, the planning vacuum needs to be rapidly filled and investment decisions taken after more thorough assessment and deliberation of choices and costs. In its Letter of Sector Development Policy (cf. Annex II), GoCI has affirmed that future IPPs will be selected by means of a transparent, competitive process. Imports from Ghana may help avert this. CIPREL was CBte d Ivoire s first IPP and was partly fbnded by IDA in the 1990s. The main shareholder is the Bouygues Group. Currently 288MW of single cycle gas turbine capacity, this IPP is ajoint venture of ABB, EDF and IPS. IFC was a lender to Azito Energie and IDA also provided a partial risk guarantee for the project in All three are also expanding their own national generating capacities at the same time as Cote d Ivoire. Hence completion of the transmission interconnection with Mali is a priority as this is a potentially large new export market. 2

15 5. Interconnections with neighboring countries: C8te d Ivoire is geographically positioned to be the main hub of electricity trading in the sub-region. It is already interconnected to Ghana and Burkina and is a supplier to Togo and Benin (via Ghana), until its recent supply shortages forced it to cut back on exports. An interconnection with Mali is proceeding and is likely to be completed in 2011, with financial aid from India. Studies are underway to interconnect westwards with Guinea, Liberia and Sierra Leone as part of the West Africa Power Pool (WAPP). These projects have important implications for the strengthening of Cbte d Ivoire s transmission system as well as the need to expand generation. The Bank is fully supportive of these regional interconnections under the auspices of the WAPP, and it is evident that the Bank needs to assist in restoring the Ivorian power sector to be able to play the central role it has in the power pool. 6. Uncertainty over gas supply: C8te d Ivoire s currently proven gas reserves of about 1 trillion cubic feet (tcf) are insufficient to meet the needs of the both the existing and new generation projects described in paragraph 3 for their entire economic lives. Gas deliveries to the power sector in 2008 were about 115 million cubic feet per day (MMCFD), of which over 70 percent came from a single non-associated gas field, Foxtrot. Gas production capacity is now a bottleneck and is currently being expanded in order to deliver greater volumes ashore by end- 2009, when CIPREL I11 will enter service. Exploration activities are underway to enlarge the reserve base and there are indications that prospects for proving up further reserves are good. In addition, GoCI would like to interconnect with the West African gas pipeline that currently terminates at Takoradi in Western Ghana, in order to be able to draw on Nigeria s substantial gas reserves. 7. Investment and maintenance backlog: As described above, the electricity sector is now facing the risk of major technical breakdowns resulting from the obsolescence of facilities and difficulties in carrying out timely maintenance at a time of rising demand on the supply system. The sums required to restore the Ivorian power system to its former level exceed half a billion dollars. The distribution utility, Compagnie Ivoirienne d Electricite (CIE) estimates that a lowvoltage network rehabilitation program specifically aimed at reducing energy losses by 1.5 percent annually over the three-year period would require an investment of CFAF 100 billion (US$200 million). This would need to be continued thereafter, because even if successful, overall system losses would still be about 18 percent. 8. Access expansion in peri-urban areas is a priority: There has been minimal investment in extending electricity service over the past few years, despite a rapid expansion of urban areas, so there is a major backlog of investment in distribution, both to connect new customers, regularize illegal connections and upgrade existing overloaded lines and substations. The proportion of households connected to grid electricity is only about 17 percent, despite the fact that 71 percent of the population is living in electrified localities. For low-income households the initial connection charges can often be a barrier to access, as these often amount to US$ and have to be paid in full prior to receiving service. 7 It also requires the strengthening of the existing HV network between Laboa-Ferkessedougou. 8 Certified in 2007 by Gafhey & Cline, who estimated that in addition to the 1 tcf there are probable reserves of 400 bcf. 3

16 9. Insolvent sector finances: During the first decade of private power distribution ( ), many improvements took place in terms of service quality, operational performance and increased access to electricity. The mid/late 1990s were also characterized by the entry of Independent Power Producers (IPPs), thereby expanding the sector's generation capacity. Private management of distribution was one of the key elements facilitating the entry of IPPs as their risks of non-payment were considerably diminished. However, fundamental financial flaws remained in the sector, because inadequate provision was made in the tariff structure for debt service and asset renewal. The "affermage" (leasing) contract with CIE does not require it to carry out investments, which remain the responsibility of GoCI, with the result that during the past decade the sector has been starved of investment resources. 10. Since the outbreak of the political crisis in CGte d'ivoire, CIE was unable to bill and collect revenue in the northern zone of the country (CNO), while continuing to supply it. At end-2006, the amount owed to the sector by consumers in the CNO zone was CFAF 45 billion (US$ 90mn). The GoCI's limited financing capability during the conflict years and the frozen level of tariffs to consumers during six years ( ) meant that the sector was increasingly short of funds for major maintenance and asset renewals. New investments were virtually halted, with the exception of some rural electrification schemes. Since 2005, rising oil prices led to higher fuel costs to the power sector as a result of the uncapped indexation formula in the gas price. In 2008, gas costs alone amounted to 68 percent of total power sector revenues, an unsustainably high proportion. Consequently, the electricity sector is presently unable to cover its operating costs, meet its debt service or contribute to investments. Budgetary subsidiesg to the sector in 2008 were about CFAF 70 billion (US$140 million), considerably more than the country can afford. Although tariffs were unchanged for six years, the increase in rates since May 2008 was only about 10 percent on average and solely for non-residential users. Rates for some residential customers were increased by 10 percent with effect from lst April 2009, but the lifeline tariff, which accounts for 16.5 percent of residential users remains at its 2001 level". Despite this rate increase", there is a risk that the sector could fall into payment arrears to independent power producers (IPPs) and gas suppliers. With Bank support, GoCI is undertaking a review of international practice in gas pricing and contracting with a view to bringing them into line with international best practice. 11. Dysfunctional institutional framework: Major institutional changes were undertaken in the late 1990~~ leading to the creation of three state bodies, Autorite' Nationale de Re'gulation du Secteur de 1 'Electricite' (ANARE) the regulator, Socie'te' de Gestion du Patrimoine du Secteur de 1 'Electricite' (SOGEPE) which is intended to be the asset holding entity responsible for major investments, and Socie'te' d 'Ope'ration Ivoirienne d 'Electricite' (SOPIE) which is responsible for project management and technical supervision of power operations. These changes were introduced by decree and the 1985 Electricity Law has never been amended. This institutional arrangement has now proven to be unwieldy, costly and increasingly ill-adapted to the real needs of the sector. SOGEPE does not legally own the assets in the sector and thus cannot use its 9 GoCI chose to forgo the income due to it on gas under the terms of the PSCs, in order to pass on this benefit to the ower sector, thereby enable the latter to honor its payment obligations to private energy suppliers. The price of the first 80 kwmonth is FCAF 36kWh (USc7kWh). I' It is equivalent to only a 2 percent rise in total sector revenues because most residential consumers do not fall in this category. 4

17 balance sheet for borrowing purposes. Demarcation of responsibility for investment versus maintenance remains problematic, while there are overlapping areas of responsibility between the three state bodies. ANARE has a purely advisory role on tariff matters and the Ministry of Energy, while retaining most decision-making authority, lacks adequate skills to provide proper leadership to the electricity sector. GoCI recognizes these shortcomings and in the LSDP (cf. Annex 11) has given undertakings to address them over the next two years. The recentlyapproved IDA budgetary support operation (Second Economic Governance and Recovery Grant -EGRG 11) indicates that as part of the policy measures expected of GoCI for further budgetary assistance, it would need to take action to clarify SOGEPE s legal status as the electricity sector asset holding company and issue a decree confirming the transfer of all state-owned electricity sector assets to SOGEPE. 12. As a first step, GoCI is seeking financial assistance from the Public-Private Infrastructure Advisory Facility (PPIAF) to recruit legal consultants to inter alia, review all existing sectoral legislation and proposals for modifications and to draft new legal instruments that capture the spirit of the institutional changes announced in the LSDP. The proposed project will also provide funds for these activities. 13. Government strategy and sector policies. Government s Letter of Sector Development Policy for Electricity (LSDP) contains a frank assessment of the problems and weaknesses of the sector. GoCI s goal is to provide good quality power supply to the country at least cost and without recourse to operating subsidies from the state. The LSDP affirms GoCI s commitment to (a) restore the sector to financial viability, (b) improve the sector s institutional and legal framework and (c) ensure that electricity supply is expanded and access to it increased significantly among the population. The proposed project will assist GoCI in pursuit of all three objectives. B. Rationale for Bank involvement 14. Following C6te d Ivoire s emergence from its socio-political crisis and normalization of political and economic activity, there is a pressing need to restore infrastructure to an acceptable level. The Bank approved an Emergency Urban Infrastructure project to tackle water, sanitation, solid waste and road rehabilitation in mid-2008, Restoration of satisfactory electricity supply is equally critical for the country s economic recovery, given that C6te d Ivoire has a fairly broad manufacturing and services sector, for whom reliable power supply is vital. As described in paragraph 11 and Annex 2, the proposed project also complements the second Economic Governance and Recovery Grant (EGRG 11) operation that was approved by the Board on March 3 1, 2009., 15. The Bank s return to the sector after a long hiatus should help to revive donor participation in the electricity sector, and would be a signal of considerable value to the government and the donor community. The last IDA electricity investment project was approved in 1995 and closed in 2004, after multiple extensions. Despite the scale of unmet needs in the sector, the proposed project is necessarily modest in size and scope, given the macroeconomic imperative of Private Sector Energy project (Cr. 2754). An IDA partial risk guarantee for the IFC-supported Azito thermal power plant was approved in

18 concentrating the bulk of IDA assistance in the form of budget support to GoCI. Co-financing from other donors for this operation is not possible, but would be forthcoming in the mediumterm, particularly for generation and transmission investments. So far, only the European Union has committed 42 million (US$55 million) to a number of small rehabilitation projects in electricity transmission and distribution, as well as new electrification schemes. The Agence Franqaise de De veloppement (AD) has indicated readiness to fund preparatory studies until such time as it can resume lending to state bodies. AfDB is likely to re-engage soon, since CBte d Ivoire s arrears to it have just been settled. BOAD is interested in lending to the sector once the institutional framework has been improved (cf. paragraph 11). 16. The proposed project would essentially serve to address some of the most urgent needs in electricity distribution, improve the efficiency of supply and help restore the sector s financial viability. It would also start the needed regulatory and institutional reforms of the sector that are currently obstructing greater donor involvement. Investment requirements for improving electricity supply are much greater than can be addressed by the proposed project, but it will accelerate preparation of new transmission projects, including those that are part of the West Africa Power Pool (WAPP) program of regional interconnections. If successful, there could be follow-on project with the participation of co-financiers, within months of Board approval of the proposed operation. To increase power generation capacity, the World Bank Group is also exploring the possibility to participate (through an IFC loan and an IDA partial-risk guarantee) in an expansion of the Azito thermal power station by transforming the existing single cycle gas turbines to combined cycle operations, which would increase capacity by 150 MW. C. Higher level objectives to which the project contributes 17. The Interim Strategy Note (ISN) for CBte d Ivoire, dated March 14, 2008, envisages interventions designed to assist civil war affected populations and to boost economic growth and the proposed operation is fully consistent with this approach. The focus of the project upon the neighborhoods ( quartiers prdcaires ) in Greater Abidjan settled in recent years by internally displaced persons (IDPs) will contribute to welfare improvements for the IDPs by increased access to electricity through an additional 60,000 connections under soft financing terms for lowincome households (cf. paragraph 27 and Annex 4). 18. Greater confidence in the country s future prospects and rising consumer demand for goods and services will translate into economic growth if the low level of capacity utilization in the manufacturing sector can be tapped to raise output. An adequate and reliable power supply is a prerequisite for this to occur. In the longer term, for the country to once again become a preferred destination for Foreign Direct Investment (FDI), it has to be in a position to offer reliable public utility services to potential investors. Without undertaking the urgent rehabilitation investments proposed by this operation, it is not evident that C6te d Ivoire s electricity supply industry can meet this challenge. Finally, by contributing to improving the efficiency and revenue collection in the sector, the project will reduce the dependence on subsidies from the state budget. 6

19 11. PROJECT DESCRIPTION A. Lending instrument 19. An IDA grant is a suitable instrument for the specific investment operation proposed because project activities are well-defined and can be implemented over a specific time period. The grant will be used to finance part of the electricity sector s urgent rehabilitation needs during the period About 7 percent of the project cost (amounting to about US$4 million) will be covered by a contribution from CIE and GoCI. B. Project development objective and key indicators 20. The project development objective is to help improve the availability, reliability, efficiency and financial viability of electricity supply in C6te d Ivoire. 21. Key output indicators for the hardware components of the project include a platform of operational and commercial performance targets that were agreed with CIE and SOPIE during appraisal, along with appropriate monitoring indicators, as detailed in Annex The key output indicators include the following: Distribution extensions, rehabilitation and reinforcement: 0 Outages and average outage duration in the project targeted areas; 0 Energy losses in the Abidjan area; 0 Number of additional consumers connected. Project Oversight & Institutional Support: 0 SOGEPE asset register updated and valued; 0 SOGEPE formally acquires sector assets on its balance sheet; 0 Elimination of operational subsidies to the power sector; 0 Reduction in public sector payment arrears for electricity; 0 Electricity Law amended; 0 Tariff study and poverty/social impact assessment carried out and findings implemented; 0 Training program designed and implemented. C. Project components 23. The project consists of three main components and is estimated to cost about US$54 million (including PPA refinancing and physical and price contingencies, but excluding duties and taxes). 24. A summary project cost breakdown by main components is provided in the following table with further details on the activities and costs for each sub-component given in Annexes 4 and 5. 7

20 Table 1: Project Cost Breakdown r cost Project Component Distribution network rehabilitation and expansion (million US $) 44 Preparatory activities for future transmission network investments 4 Project oversight and institutional support 6 TOTAL 54 IDA contribution million us $ Component 1 : Distribution Network Rehabilitation and Expansion (US$44 million) 25. This component will address the lack of regular maintenance over the last ten years due to the socio-political crisis in C6te d Ivoire and the progressive deterioration of the financial position of the power sector. It includes rehabilitation and upgrading of medium and low voltage distribution equipment and facilities mainly in the greater Abidjan area, by: (i) expanding distribution substations and feeders to connect awaiting customers and those customers with unofficial connections; (ii) replacing existing run-down, overloaded and over-aged medium and low voltage equipment; (iii) replacing overloaded HV/MV transformers to improve security of supply; and (iv) installing compensation devices in substations to comply with operating voltage standards and reduce losses. The specific sub-projects have already been selected by the operator (CIE) based primarily on their impact in terms of security of supply, potential for connecting new customers and reduction of losses. About 60,000 additional consumers are expected to be connected to the grid as a result of investments made under the project. To enhance SOPIE s project supervision capability, ten project vehicles will also be purchased under this component. Component 2: > million) 26. The project will provide resources to finance the consulting expertise required to carry out feasibility and Environmental Impact Assessment studies as well as bidding documents for the projects needed to restructure and upgrade the HV network, as well as contribute to greater exchanges of electricity with neighboring countries via the WAPP. These studies will enable GoCI to fast track the second generation of transmission projects urgently needed to deal with the acceleration of electricity demand growth since the end of the socio-political crisis13. Details of the studies are given in Annex 4. Component 3: Proiect oversight and institutional support WS$6 million) 27. This component will provide the Government with a diverse range of technical assistance and training necessary to: (i) implement and supervise the project; (ii) carry out legal, institutional and financial studies for the implementation of the policy reforms spelt out in the l3 Potential donors were sensitized to the need for funding of such projects during a round table meeting organized in January Several showed willingness to re-engage, provided project proposals are well-prepared and packaged for them. 8

21 LSDP; (iii) upgrade SOPIE s system planning skills; (iv) build capacity in the three sector entities as well as the MinistGre des Mines et de 1 Energie (MME) to ensure smooth management succession in the medium-term, and (v) design programs for energy efficiency improvements such as demand side management and the dissemination of low-energy bulbs. In addition, a financing mechanism with a revolving fund of US$3m will be set up to facilitate household connections for low-income families. Details are contained in Annex 4. 28, The total cost of the proposed project is estimated at US$54 million, of which IDA will finance US$50 million, GoCI will finance US$lmillion and CIE will finance the remaining US$3 million. D. Lessons learned and reflected in the project design 29. Lessons learned from similar operations in the Bank that are relevant to the proposed project include: Designation of a steering committee for the proposed project with full responsibility for coordination and management of the Project. 0 Project implementation should be based on supply and installation contracts in order to minimize risks due to lack of coordination and to put full responsibility on the contractors; 0 Early preparation of procurement documentation to ensure fast implementation; it is intended that bidding documents will be available by the time of Board approval to enable initial payments to contractors to take place shortly after effectiveness. 0 A good project monitoring system is necessary for effective results evaluation. A detailed monitoring and evaluation component, including collection of all baseline data, has been built into the project. The performance indicators will be monitored either annually or bi-annually. E. Alternatives considered and reasons for rejection 30. Since this project is conceived as an urgent response to the neglect of the power sector during the past decade, rapidity of execution is of the essence. Hence, generation rehabilitation and major transmission network reinforcements were all ruled out, due to the long lead times prior to commencement of physical works. Funding for rural electrification was excluded, due to need to address problems in urban areas, where the number of beneficiaries is greater, the payback period on investments is much shorter and operational impacts are higher in terms of loss reduction Although this project is conceived as a first intervention by IDA in the sector, and is likely to be followed by another project in the near term, the use of the Adaptable Program Loan (APL) instrument was not felt to be appropriate at this juncture. The continuing uncertainty over the electoral timetable and the need to have a government with a clear mandate in place in order to be able to commit to a longer term roadmap for sector development were felt to be serious constraints to the use of an APL. 9

22 111. IMPLEMENTATION A. Partnership arrangements 32. The project is co-financed by GoCI and CIE. The latter will fund electricity meters and customer service centers at a cost of about US$3m, or about 7 percent of total costs. GoCI will contribute US$lm to the revolving fund that is to be set up to facilitate service hookups by lowincome families. B. Institutional and implementation arrangements 33. GoCI will transfer the IDA grant to SOGEPE (acting in its capacity as the manager of the electricity sector s financial flows. SOGEPE will oversee the implementation of the UEW with the assistance of SOPIE and CIE as technical partners. A Coordination Committee chaired by the Managing Director of SOGEPE has been set up14 and includes representatives of SOPIE, SOGEPE, CIE and the Directorate of Electricity (Direction GCnCrale de 1 ElectricitC-DGE). The Managing Director of SOGEPE will sign all the contracts and payments documents relating to the proceeds of the Grant. 34. A Project Coordinator has been appointed to carry out day to day project activities, centralize information related to project implementation and carry out regular progress reporting to GoCI and IDA. The coordinator will also act as secretary of the Project Coordination Committee. 35. Procurement activities under the project will be handled by the Procurement and Logistics Department of SOPIE, assisted by a consultant recruited under the project. The Director of that department, assisted by an engineer is responsible for reporting to the Project Coordinator. The disbursement and financial management activities will be handled by the Finance Department of SOGEPE. The Director of Finance assisted by a project specialist will oversee the financial management aspects of the project, including the consolidation of financial statements for project activities, providing quarterly interim financial reports, monitoring financial transactions of the project s designated account in coordination with the Directorate of Public Debt (Direction de la Dette Publique-DDP); and making the necessary arrangements for the annual financial audit. SOGEPE will be strengthened by appropriate staff training (funded under the project) during implementation to cope with the resulting increased activity level. 36. An assessment of SOPIE and SOGEPE implementation capacities shows that external support will be necessary in (i) procurement; (ii) for adaptation of the existing procedures manuals; and (iii) for the acquisition and implementation of a new project management software covering financial management, procurement and the Monitoring & Evaluation (M&E) aspects of the project. (cf. Annexes 7 and 8). These actions will be financed under Component 3 of the project. l4 by executive order signed by the Minister of Energy on 24 March 2009 (in project file). 10

23 37. The activities of supervision, control and acceptance of works will be collectively led by SOPIE and CIE, in line with the terms of the concession contract between GoCI and CIE. Technical validation will fall under CIE s responsibility, while SOPIE will undertake its own checks before certification of invoices. The respective roles of SOPIE and CIE have been spelt out in a memorandum of understanding between them. C. Monitoring and evaluation of outcomedresults 38. The monitoring and evaluation of results and outcomes will be the responsibility of CIE and SOPIE. CIE already has a good management information system which enables it to track the agreed performance indicators specified in Annex 3 (in terms of reduction of outages, losses and compliance to operating standards). Most of the required indicators can be easily monitored with the existing data collected contractually by CIE and provided to GoCI. The data for the remaining indicators will come from project progress reports. The format, contents and frequency of implementation progress reports as well as reporting procedures are specified in Annex 3 and the Project Coordinator will consolidate reports from the different stakeholders. The project will be closely supervised from the start, given the need to for rapid implementation and a mid-term review will be carried out 18 months after Board presentation to evaluate progress towards achievement of the project development objectives and to take corrective action if required. D. Sustainability 39. The project is aimed at bolstering the sustainability of the energy sector through physical rehabilitation, financial recovery, and capacity building in key institutions. The Government has shown its commitment to sectoral development goals in the LSDP. However, the financial, institutional and legal reforms underpinning the LSDP are complex and require broad consultation and ownership among stakeholders prior to their introduction if they are to be sustainable. PPIAF and IDA will support GoCI s efforts in these areas through the provision of the necessary advisory services. It is expected that the resulting legal reforms of SOGEPE s status will enable it to become eligible for long-term borrowings for sector investments. 40. Physical implementation and operation of the project is low risk, given the simple nature of the works to be carried out and SOPIE/CIE s experience in supervising such activities in the normal course of their operations However, to achieve full sustainability, the sector will need considerably more financial support than this operation will provide. Long term assistance will be required to upgrade the entire power system and to set up and implement a comprehensive rural electrification scheme to aggressively expand access to electricity in rural areas. 42. The weak finances of the sector are a major issue that needs resolution to ensure achievement and sustainability of the PDO. These problems are also being addressed in a concerted manner by the Bank and IMF through the macro-economic dialogue. Under the recently-approved Poverty Reduction and Growth Facility (PRGF), the Government agreed with l5 Protocole SOPIE-CIE dated March 25,2009 contained in the project file 11

24 the Fund to limit budgetary support to the electricity sector to CFAF 25 billion (US$50 million). However, this may prove difficult to achieve without further tariff adjustments or gas price reductions, particularly if oil prices remain above US$SO/bbl. The Bank s next budget-support operation will continue to emphasize the restoration of financial viability to the sector as a central theme. E. Critical risks and possible controversial aspects Table 2: Risk Rating Risks Mitigation Measures To PDO Failure to reach agreement on gas pricing jeopardizes return of sector to financial solvency Reluctance by GoCI to apply adequate tariffs perpetuates dependence of sector on budget subsidies A study on gas pricing for power generation is to be done rapidly and will enable GoCI to present a strong case in its discussions with gas suppliers. The IMF s PRGF caps GoCI Risk rating with Mitigation S H To PDO & component results Deterioration of the political situation leading to difficulty in executing works Coordination problems between SOGEPE, SOPIE & CIE lead to implementation delays CIE unable to make impact on illegal connections and electricity theft Overall Exogenous factor beyond the Bank s influence; however, the focus on Abidjan means that the project is somewhat insulated from a recurrence of unrest in the interior. Tripartite Steering Committee set up; MoU between SOPIE & CIE defines roles of each. Amendment to electricity law making theft of electricity a penal offence under consideration. Lower connection charges for poor families will reduce incentive to make illegal connections S M M 12

25 F. Grant conditions and covenants Conditions for Effectiveness: The Subsidiary Agreement has been executed on behalf of GoCI and SOGEPE; The Co-financing Agreement has been executed and delivered; and SOGEPE s Procedures Manual has been updated and adopted. The principal, non-standard, covenants are summarized below: Financial Covenants: GoCI to take all necessary measures to reduce costs and raise revenues of the electricity sector progressively so as to eliminate operating subsidies to the sector from the budget by end GoCI to complete liquidation of EECI and transfer all remaining assets to SOGEPE by end- 2009; 0 GoCI to complete valuation of the sector s physical assets and legally assign them to the sector s asset holding company (SOGEPE ) by end-20 10; 0 GoCI to undertake a power tariff study and implement its recommendations by end-201 0; 0 GoCI to establish a transparent electricity tariff regulation process that would be implemented by ANARE with effect from mid ; 0 GoCI to ensure that arrears in payment for electricity by public bodies are progressively reduced from the level of CFAF 15 billion at end-2008 to CFAF 6 billion by end-20 10, and that thereafter outstanding payments receivables do not exceed 60-day billing; 0 SOGEPE to appoint no later than one month after the Effective Date a procurement specialist, satisfactory to the Association; and 0 SOGEPE to appoint no later than four months after the Effective Date external financial auditors, satisfactory to the Association. Other covenants: 0 GoCI to seek cabinet approval of a revised Electricity Law by mid-201 1; and 0 GoCI to contribute US$lm to the low-income customer connection revolving fund by end IV. APPRAISAL SUMMARY A. Economic and financial analyses Economic Analysis: 43. The distribution upgrading and expansion investments to be carried out under the project will lead directly to an increase in the number of customers supplied, as well as progressively reduce the energy lost as a result of technical factors like overloaded lines and transformers. 13

26 These are the directly measurable economic benefits that have been used to estimate the EIRR of the project. No attempt has been made to quantify the economic benefits resulting from the improved quality of supply (less outages and more stable voltage etc). The base case EIRR has been estimated to be 15 percent, using conservative assumptions. Sensitivity analyses show that slower implementation and lower than forecast electricity sales do not have a major adverse impact on the EIRR. Details of the EIRR calculations are contained in Annex 9. Financial Analysis: 44. The financial analysis carried out as part of the appraisal process focuses on financial flows through the sector as a whole, to assess its viability. As the principal project entity responsible for managing the project funds from IDA, SOGEPE (the state asset holding company) would ordinarily be the object of financial evaluation by the Bank. However, as it does not yet have legal ownership of the state s electricity sector assets, they are not reflected in its balance sheet. Nor are the operating expenses of the sector as a whole recorded in its accounts. In addition, the private Ivorian power supply utility (CIE), which is paid a fixed management fee per unit of electricity sold, is not a legal party to the proposed project. Its financial performance (in term of shareholder returns) is dependent upon controlling operating costs. 45. In terms of cash management, the sector s deficit has risen steadily over the past few years, due to factors such as: (i) late collection of export revenues, (ii) increase in the amount of unpaid public entities bills and electricity theft, (iii) inability to collect revenues in the CNO Zone and (iv) rising expenditures on rural electrification (v) sharply rising gas prices and (vi) frozen tariffs from Despite a partial tariff increase implemented in 2008, (which raised total revenues from private customers by 9 percent), at the end of the year, the cash deficit of the sector was about CFA 6 billion (US$12 million). Until now, such a cash deficit was managed by deferring investments, delaying payments due to CIE and ceasing payment of the state s shares of gas revenues. Treasury problems are expected to arise soon because gas costs continue to rise due to a lag in the indexation formula. It is possible that as a result, in the coming months, SOGEPE would be forced to delay its payments to the IPPs and/or to the gas suppliers. Currently, there is a backlog of payments to contractors on rural electrification projects of more than CFAF 25 billion (US$50 million), but IPPs and gas suppliers have been paid on time until now. As shown in Table 25 of Annex 9, the cash deficit in 2009 is expected to be about CFAF 12 billion (US$24 million). The total implicit subsidy to the sector in 2009 is expected to be high: around CFAF 46 billion (US$92 mllion), not including investments. Details are given in Annex During the period, the cost of gas supplied to the sector more than doubled, rising at cumulative annual average rate of 19 percent. The current uncapped escalation clause in gas prices poses an unreasonable burden on the power sector. A reduction in the high gas price from the Foxtrot field, (which is currently about $8-9/MMBTU)16 is a critical element to restoring solvency to the sector. 16 By way of comparison, gas from the Niger delta delivered to Ghana by pipeline over 600 km in length costs about $5-6MMBTU. 14

27 48. GoCI is in discussions with the gas field owners to revisit the terms of the pricing formula, in the light of the recent windfall gains arising from high crude prices. The project is financing the services of a consultant to advise GoCI on international best practice in this field. 49. Eliminating budgetary subsidies for operating costs of the electricity sector will take several years and in its letter of sectoral development policy, GoCI has committed to doing so progressively over the three-year period to Improvements in operational efficiency, including bill collection and the reduction of technical and non-technical losses, are also a high priority, but require the injection of substantial funds, only part of which will be provided from the proposed project. 50. The financial recovery plan for the sector for the period presented in Annex9 shows that the GoCI target of zero subsidy for power by the end of the period is achievable, provided that (i) gas prices can be brought down on average to US$S/MMBTU; (ii) tariffs are raised by 10 percent per year in ; (iii) the government pays the electricity bills of public bodies; and (iv) the sector in turn pays the State s share of the cost of gas. B. Technical 5 1. CIE and SOPIE have implemented investment projects of a similar nature with acceptable standards of quality, including a previous Bank-funded project during the 1990s and they have an ongoing 42 million project with European Union (EU) support. They have well-qualified staff to do the design engineering, planning and implementation of the investment components of the proposed project. 52. Design studies and preparation of bidding documents are ongoing and will be completed by Board presentation. Technical standards and criteria used are in line with international practices. The Bank team advised changes to the project s geographical layout to prevent negative social and environmental impacts during implementation. 53. Modern technological practices in rehabilitating and extending the distribution networks will be used including (i) replacing old and/or overloaded equipment with more efficient and standard equipment (ii) compensating reactive power at the level of HV/MV substations to enhance quality of service for the maximum number of customers, and (iii) creating new distribution substations and feeders to enable more reliable and efficient operation of the distribution system and to minimize Operations & Maintenance (O&M) costs and outage duration. 54. The main technical issue anticipated is the implementation of rehabilitation works without the operator s close involvement in the studies and execution of works. In accordance with the Memorandum of Understanding (MoU) between SOPIE and CIE, the adopted supply and installation contract packaging will allow CIE to lead the design and supervision of these types of activities (sub-components 1.2 and 1.3). Furthermore, CIE will supervise commissioning of facilities built under the project in coordination with SOPIE. 15

28 C. Fiduciary Financial Management 55. A financial management assessment was carried out to determine whether SOGEPE has acceptable financial management arrangements. The conclusion of the assessment was that the financial management system in place, subject to some reinforcement measures, satisfies the Bank s minimum requirements under OPiBP10.02, and therefore is adequate to provide, with reasonable assurance, accurate and timely financial management information on the status of the project. The financial management arrangements will be strengthened with the implementation of the action plan described in Annex 7. Procurement 56. Procurement of this proposed project would be carried out in accordance with the (i) Guidelines: Procurement under IBRD Loans and IDA Credits dated May 2004, revised October 2006; and (ii) Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated May 2004, revised October A procurement capacity assessment, carried out during appraisal, showed that while SOPIE and other project entities are competent at procurement in general, they have no experience of the Bank procurement rules. Provisions have been made under the Project to recruit a procurement specialist familiar with Bank practices who will be responsible for quality review of procurement activities for operations covered by the project. The recruitment process is ongoing and the specialist is expected to be operational in June In addition, key procurement staff will take the courses on World Bank procurement during the implementation. SOPIE s operational manual will be updated in accordance with the implementation arrangements agreed for this project. In accordance with its statutes, SOGEPE s Managing Director will be responsible for contract signing, regardless of their value, once they have been approved by the Board of Directors. The average time for getting the Board s clearance is expected to be two weeks. This will permit the project to avoid the lengthy delays before payments that are experienced during normal Ivorian public procurement practices requiring ministerial approval. Details of the procurement arrangements for the project are given in Annex 8. D. Social 57. The project will have some positive impacts by addressing the urgent household electricity connection needs of the population living in badly or un-served areas, and enhance their access to public street lighting and thereby greater security. It is also expected that some of the civil works would be a source of employment, as majority of the workers will be locally recruited. It will thus contribute to improved economic and social development in poor neighborhoods. 58. The negative social aspects of the project are expected to be minor. The project will not undertake disruptive civil works requiring land acquisition, demolition of structures, damage to crops, etc. Given that the physical activities under the project will deal with distribution network rehabilitation, upgrading of existing substations and preparatory studies for the future transmission network, potential adverse impacts are considered unlikely. The vast majority of 16

29 project-funded works will replace or upgrade existing distribution lines in urban areas. While it is not expected that there will be land acquisition or restriction of access to sources of livelihood, as an additional precaution a Resettlement Policy Framework (RPF) was prepared and disclosed in-country and at the Bank s Infoshop on February 7 and 9,2009, respectively. 59. The project will develop a communications strategy to promote beneficiary empowerment and the active involvement of local communities during project implementation. Thus, a communication committee constituted by SOPIE, CIE, UVICOCI (Union des villes et Communes de CBte d Ivoire), ADDCI (Association des Districts et DCpartements de CBte d Ivoire) and local NGOs; will be set up to promote specific information mechanisms and tools that reinforce stakeholders participation in the project. A local NGO will be used to play a facilitation role between the project and the beneficiaries. E. Environment 60. The project is rated as a category B project. The minor civil works associated with upgrading and expansionhestructuring of CIE s distribution networks will lead to some sitespecific environmental impacts, but these are expected to be small and thus easily remediable. Since the sites of the future sub-projects are not known and project preparation is evolving, an Environmental and Social Management Framework (ESMF) will be the appropriate safeguards instrument and this will (i) establish the mechanisms to determine and assess future potential environmental and social impacts; and (ii) put in place mitigation measures to be taken into account in the design, construction and operation of the sub-projects to reduce, offset or eliminate adverse environmental and social consequences of the sub-projects. 61. To address the site-specific environmental impacts of minor civil works associated with upgrading and expansionhestructuring of CIE s distribution networks, an Environmental and Social Management Framework (ESMF) was prepared by SOPIE/CIE. The ESMF was disclosed in-country and at the Bank s Infoshop on February 7 and 9,2009, respectively. F. Safeguard policies 62. The Bank s safeguard policies applicable to this project are: (i) Environmental Assessment (OP/BP 4.01) and (ii) Involuntary Resettlement (OP/BP 4.12). The project has been assigned an environmental risk Category B, because the planned activities might have some minor environmental and social impacts that will be site-specific and thus easily remediable. 63. The ESMF and RFP instruments will also be used for screening subprojects. The screening process will ensure that the project does not finance any activities that require relocating people or limiting their access to public amenities. However, if at screening stage, the proposed subprojects show adverse effects depending on the type, location, nature and magnitude of their potential environmental and social impacts, an EIA or a RAP will be developed along with the necessary mitigation measures. SOPIE will upgrade the capacity of its environment unit during implementation (with IDA support under the project) in order to address environmental and social issues safeguard issues. 17

30 Table 3: Safeguards Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP 4.01) Natural Habitats (OP/BP 4.04) [ XI [I Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OP/BP 4.10) Forests (OP/BP 4.36) Safety of Dams (OPBP 4.37) Projects in Disputed Areas (OP/BP 7.60)* Projects on International Waterways (OPBP 7.50) G. Policy Exceptions and Readiness 64. There are no policy exceptions. The following indicators show that the project is ready for implementation: 0 Design studies and preparation of bidding documents are ongoing and will be completed by June 2009; 0 Preparation of key activities under component 3 are at an advanced procurement stage; and 0 Implementation arrangements are formalized between stakeholders. I * By supporting the proposedproject, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas 18

31 Country Economic Overview Annex 1: Country and Sector Background C6TE D IVOIRE: Urgent Electricity Rehabilitation Project 1. CGte d Ivoire is emerging from a political crisis that began in 1999 and erupted in a serious socio-political crisis in September During , the annual real rate of GDP growth declined by -0.4 percent. But a political normalization has been ongoing since 2007 and economic growth is once again positive. The country is eligible for assistance under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative since December The government still has to face a complex post-conflict environment with huge basic social needs of its population, as well as the necessity to build an enabling environment for the development of the economy. 2. Energy is one of the major economic issues facing GoCI as the country is back on a high energy demand growth path. First, electricity demand growth has accelerated to about 7 percent annually during the last three years, leading to a low generation reserve margin and a reduction of electricity exports. Second, the spatial pattern of this demand growth creates congestion in the network and degradation of its reliability. Moreover, the entire power system suffered from a deficit of maintenance and new investment during the crisis period, which has worsened its operational performance. This situation is most acute in the greater Abidjan urban area, which accounts for percent of total national electricity consumption and has experienced an influx of more than 1.5 million displaced persons during the past decade. 3. In total, there is an urgent need to upgrade and rehabilitate the entire power system to make up for the deficit of maintenance during the crisis period and face up to the high energy demand growth resulting from the political normalization process. Energy sector overview Substantial energy resources 4. C8te d lvoire has a substantial hydroelectric potential capacity of over 1900 MW which can theoretically generate about 10,000 GWWyear. The development of its power generation capacity was based on hydroelectricity up to the mid 1980 s when oil and gas discoveries allowed development of thermal generation units to mitigate the risk of drought, such as the one experienced in C8te d Ivoire has 100 million barrels of proven crude oil reserves as of January 2008, according to estimates published by Oil and Gas Journal. A 2007 assessment by Gaffney & Cline shows that the current proven gas reserves amount 969 bcf. These reserves are mainly offshore and are expected to increase, given ongoing exploration programs. 6. In 2007, C8te d Ivoire produced an average of 48,000 bbls/day of oil and 140 MMBTU/day of gas. The bulk of the gas produced is used for electricity generation but is not sufficient to meet the growing needs of the electricity sector in the medium term. 70 percent of 19

32 the gas used in power generation is supplied by the Foxtrot field, which is expected to increase its output in to 13OMMCFD in order to meet additional demand from the power sector. Complex organization of the sector 7. The organisation of CGte d Ivoire s energy sector is rather complex, with: 0 three main components (oil and gas production, electricity, and oil refining and product distribution); 0 a mix of private and state participation; and 0 a wide range of energy-related enterprises and infrastructure 8. Energy Policy is primarily under two ministries: Ministkre des Mines et de 1 Energie (MME) and the Ministkre de 1 Economie et des Finances (MEF). Three main departments within these two set and implement policy as instructed: 0 within the MME, the Directorates of Electricity-DGE (for electricity) and Hydrocarbons- DH (for oil and gas, including oil products); 0 within the MEF, the department of participations and privatisations. There are other concerned departments as well, such as for renewable energy (in MME) or for budgets and finance (in MEF). 9. One of the key features of the energy sector today is that there are strong interactions between the gas and electricity sub-sectors, with cross-participation of the same private investors. In addition, there are different centers of decision-making at the State level, as it intervenes as policy-maker, investor, energy off-taker and regulator. 10. The Ivorian power sector is currently governed by Law of July 29, 1985 which is the legal foundation of the sector and organizes the generation, transmission and distribution of electricity in CGte d Ivoire. It defines the transmission, distribution, import and export of electricity in CGte d Ivoire as a State monopoly, while electricity generation is liberalized. According to this law, the Government of CGte d Ivoire is authorized to concede the power system operations to a commercial/industrial company for a fixed period of time, subject to renewal or extension and under governmental control Three public enterprises (socie te s d &at) - National Electricity Sector Regulation Authority (Autorite Nationale de Re gulation du Secteur de 1 Electricit&-ANARE); Electricity Sector Asset Management Company (Socie te de Gestion du Patrimoine de 1 Electricitk- SOGEPE); and Ivorian Electricity Operation Company (Socie te d Ope ration Ivoirienne de 1 Electricit&-SOPIE) are in charge of sector regulation, asset management, and technical supervision, respectively. More information on these entities is given in Annex In the 1980~~ low operating efficiency and weak financial management led to the stateowned electricity company, Electrical Energy of CGte d Ivoire (Energie Electrique de C6te d Ivoire-EECI) a vekically integrated monopoly which was responsible for electricity generation, transmission, and distribution, unable to service its debt. Accordingly, a reorganization of the sector was launched in 1985, and, in 1990, EECI was restructured and its transmission and distribution assets conceded to the Ivorian Electricity Company (Compagnie 20

33 Ivoirienne d Electricitk-CIE), a private operator jointly owned by Electricite de France (EdF) and the Saur Group, which was awarded a 15-year lease contract (contrat d affermage) for system operation and maintenance (this contract was renewed for another 15 years in 2005). 13. EECI remained a public enterprise, however, and also retained ownership of all facilities and continued to be responsible for system planning as well as the establishment of new facilities. In 1998, EECI was further unbundled into the above-mentioned three public enterprises. ; Autorite Nationale de Rkgulation du secteur de 1 Electricite (ANARE) was created by Decree no of December 16, 1998 to monitor the compliance of power sector operators to laws and contracts, to resolve conflicts between operators themselves or with the Government and to protect consumer interests. Decree no of December 16, 1998 also created Socie te de Gestion du Patrimoine du secteur de 1 Electricite (SOGEPE) to ensure the adequate management of the assets and financials flows in the power sector. Finally, a third decree no created the Socie te d Ope ration Ivoirienne d Electricite (SOPIE) which is charged with monitoring the management of energy flows, power system planning, implementing new projects and controlling government projects executed by CIE. CGte d Ivoire has three private sector generating companies: CIE, CIPREL, and Azito Energie. 14. The Compagnie Ivoirienne d Electricite, whose major shareholder (54 percent) is the Bouygues Group (France), is the operating concessionaire of the state-owned sector assets under a 15 year leasing ( affermage ) contract signed in October, 2005, which was the first extension of its initial 1990 concession. GoCI holds 15 percent of the shares. Under its concession agreement the CIE has a monopoly to operate all transmission grids and for distributing electricity to customers, including exports. CIE is not responsible for investment in major asset replacement or system expansion and these remain the under the State. 15. There are two independent power producers operating in the C6te d Ivoire under BOOT contracts. The Compagnie Ivoirienne de Production d Electricite (CIPREL) operates four gas turbine units at its Vridi site with an installed capacity of 212 MW, representing 16 percent of total Ivoirian generation capacity. CIPREL is currently constructing an additional single cycle GT unit that is expected to be in operation in early The main shareholder in CIPREL is the Bouygues Group (France). GoCI recently acquired a minority stake in the company. 16. Azito Energie has two gas turbine units with an installed capacity of 288 MW (21 percent of the total) at its Azito site. The major shareholder in Azito Energie is EdF (France), with ABB (Switzerland) and IPS holding the remainder of the capital. 17. CIPREL and Azito Energie both have single cycle gas turbines with relatively low efficiencies although Azito has plans to add a combined cycle by adding a turbine using waste heat from its first two turbines. CIPREL has also made provision for that in its third phase, pending a new contract with GoCI. 21

34 Name Azito 1 Vridi Ciprel TAG5000 AYame 1 AYame 2 Kossou Taabo Buy0 Fayo Total Thermal TOTAL Hydro Total Table 4: Electricity generating capacity TY Pe Ownership Commissioning Capacity Net Energy date (Mw) generated 2008 (GWh) Thermal Gas Turbine Thermal Gas Turbine Thermal Gas Turbine Hydro Reservoir Hydro Reservoir Hydro Reservoir Hydro Reservoir Hydro Reservoir Private State 1999/ ,209 Private , State State State State State Run of river State , ,884 1,212 5, The map in Annex 17 shows the location of the power stations as well as the existing transmission system (1849 km of 225kV line, 2528 km of 90kv lines and 42 substations) which cover slightly the whole country but needs reinforcement in the eastern and western region. The distribution system comprises km of MV network, 1560 km of LV network and 8161 substations. Government Strategy 20. GoCI has decided to take measures both in the short term to fix the financial, institutional and technical difficulties of the sector, as well as in the mediudlong term, to increase the capacity of the power system to enhance the quality of supply and access to electricity for the population. The main measures as spelt out in the LSDP (cf. Annex 11) are as follows: 22

35 21. Restore financial viability of the sector by 2012, using among other measures, loss reduction at the technical and commercial level. This is one of the justifications for the urgent need to invest in upgrading the distribution network. 22. Increase the generation capacity by rehabilitating the existing hydropower stations, developing new generation plants and interconnection lines with neighboring countries. New IPP contracts were negotiated in 2008 and Power Purchase Agreements signed for additional 350 MW of gas thermal capacity. This gives time to prepare and develop the country s hydropower potential (1944 MW) with Soubre hydropower project (240MW) as a first site to be in service by Additional gas exploration is needed and/or connection to the West Africa Gas Pipeline to secure sustainable fuel supply to the generation system. 23. Upgrade and extent the transmission infrastructure by (i) completing the 225kV loop and creating new sub-stations in the greater Abidjan area, (ii) developing the HV network in the eastern and western regions; and (iii) reinforcing part of the transmission network in the Northern region to secure import/export of power energy with the neighboring countries. 24. Upgrade, restructure and extend the distribution network to increase access to electricity for the population, improve service quality and reliability and reduce losses. 25. Develop Demand Side Management and efficiency actions to enhance the overall efficiency and sustainability of the system. Investment Needs: 26. Following the renewal of the CIE lease contract in 2005, a long term investment plan was prepared by CIE and discussed with GoCI as a basis for future sector investments. The table below shows the investments planned for the period Table 5: CIE Investment Plan, Source : Plan Prkvisionnel d Investissements ti Long Terme (PPILT), CIE, 13 juillet This document does not contain explanatory or justificatory texts on the above investments. It is thus difficult to estimate the correctness or the necessity of these investments. However, GocI is committed in its electricity policy letter to develop a comprehensive Master plan. 23

36 ~~ 28. A rolling three-year plan extracted from the long term plan above and agreed between CIE, SOPIE and SOGEPE is shown in the table below, covering the investments, with a total funding requirement of CFAF 209 billion (US$464 million). The estimates are consistent with the need to deal with the past deficit of maintenance and new investments. Renewing aged facilities and creating new lines and substations to upgrade the system capacity represent almost 50% of the budget. However, this 3-year plan is unlikely to be feasible in its totality, given the tight resource position of the sector as well as GoCI. Items Table 6: Three-year Investment Plan, (FCFA million) Engaged before 2008 Planned To be committed after 2010 Rehabilitation Generation 13,603 13,603 3,303 3,303 3,830 3,830 4,470 4,470 2,000 2,000 10,300 10, REPLACEMENT 44,524 1,111 12,304 13,085 6,926 32,315 11,198 Generation Transmission & Telecommunications Distribution EXTENSION Distribution RENFORCEMENT Transmission & Telecommunications Distribution INFRASTRUCTURE DEVELOPMENT 3,748 33, ,446 2, , ,436 8,200 5,984 21,620 10,585 7, ,422 2, , , ,549 5,804 2,826 16,179 0 I 16,179 I 0 I 7,549 I 5,804 I 2,826 I 16,179 I 01 30, ,145 13,756 1,452 29, , ,995 3, , , ,150 9,831 1,452 17, , ,800 12,400 37,330 60,530 84,763 Generation I 3,000 I 0 I 800 I 800 I 800 I 2,400 I 600 I Transmission & Telecommunications I 12, ,600 26,530 28,130 84,163 Distribution (new developments) 30, ,000 10,000 10,000 30,000 0 RURAL ELECTRIFICA TION 60, ,000 20,000 20,000 60,000 0 TOTAL 310,017 4,414 68,628 69,515 70, ,677 96,456 24

37 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies C6TE D IVOIRE: Urgent Electricity Rehabilitation Project 1. IDA has no ongoing projects in the electricity sector. The last operation was a Partial Risk Guarantee (PRG) for the Azito Power project, approved in December A Second Economic Governance and Recovery Grant (EGRG 11) for US$l50 million equivalent was approved by the Board on March 31, This one-tranche Development Policy Operation supports the Government s efforts to pursue the implementation of governance reforms initiated under the EGRG I, approved by the Board in April Under the first operation, the Government commissioned three audits, financed by the World Bank, in the areas of: (i) oil and gas exploration, development and production; (ii) oil refining; and (iii) electricity. The audit of the electricity sector is complete and the Government has submitted in February 2009 a letter of electricity sector policy, satisfactory to the Bank, reflecting the key recommendations of the audit, aimed to improve the sector s efficiency and restoring its financial viability. 3. The European Union is contributing 17 million to the cost of electrification of rural localities, while SOGEPE and the concerned municipalities finance the remaining amount of 16 million. The projects are at the contracting phase and works will start in mid The EU is also providing a further 9 million towards the cost of various electrification works in Abidjan and Bouake. 25

38 Annex 3: Results Framework and Monitoring C6TE D IVOIRE: Urgent Electricity Rehabilitation Project Table 7: Results Framework PDO To improve the availability, reliability, efficiency and financial viability of the power electricity supply in CGte d Ivoire Intermediate Outcomes Component 1: Distributi Improved availability and reliability of the distribution network Project Outcome Indicators Reduction of outages and average outage duration in the project area (Abobo area, Abidjan North &South, Yopougon): -Number ofpermanent MV outages Baseline: 1149 I Target: 837 -Average outage duration in the Abidjan area Baseline: I Ohours 40 minutes Target: 9hours 50 minutes Reduction of energy losses in the Abidjan area Baseline: 26.75% Target: 24.5% Amount of state subsidy to power sector [once a year1 Baseline: FCFA 72 billion Target: 0 by end Reduction of arrears in payment of public bodies electricity bills Baseline: FCFA 15 billion Target: FCFA 6 Billion by end Intermediate Outcome Indicators I Network Rehabilitation and expansion Number of new customers connected in Abidjan Baseline: 0 Target: Number of overloaded MVLV substations Baseline: 120 Target: 56 Number of overloaded MV feeders Baseline: 29 Target: 20 Number of overloaded HVMV transformers replaced Baseline: 0 Target: 6 Number of 15kV outgoing circuit breakers replaced in Abidjan Use of Project Outcome Information Will measure the improvement in availability and reliability of the electricity supply Will measure the improvement of the efficiency of the electricity supply Will measure the improvement in the financial viability of the electricity sector Ibid. Use of Intermediate Outcome Monitoring Will measure the improvement of the access (availability of the energy to customers). Will measure the improvement of the capacity of the network to connect additional load (availability) and back up transformer capacity (reliability). Will measure the improvement of the reliability through capacity of the network the provide alternative supply source after outage Will measure the improvement of the reliability through capacity of the network to provide alternative supply source after outage. Will improve the availability and reliabilitv of the network 26

39 Voltage drop on the Eastern HV line at peak period Baseline: 22%, Target: 5% in Will allow the eastern 90kV network to operate within the standard voltage limits. Component 2: Preparal Portfolio of 7 bankable transmission projects ready for implementation y activities for future transmission network in1 Bidding documents finalized Baseline: 0 Target: 7 stments Environmental Action plan and resettlement plan in line with WE3 Safeguard Baseline: 0 Target: 7 Component 3: Project o Improved institutional framework Electricity law modified Baseline: No Target: Yes, by mid ANARE Statute modified Baseline: No Target: Yes, by mid SOGEPE opening balance sheet accepted Baseline: No Target: Yes mid-2010 Energy Sector Policy prepared. Number of reports: Baseline: 0 Target: 4 Tariff study completed and findings implemented by mid

40 Y) -.- r.a

41 1. SOGEPE will bear the primary responsibility for project M&E, and, as such will establish standard formats and guidelines for data collection and reporting, and will organize training sessions, for project partners, in their use. SOGEPE will rely on one focal point in each implementing agency (SOPIE, CIE and DGE), for ensuring supervision of contracted executing agencies, and for reporting on the implementation of their respective activities funded under this Grant. SOGEPE will develop a database to allow for an efficient consolidation of the project data. CIE will play the biggest role in data collection as system operator, but most of data needed are already part of its contractual performance monitoring system. 2. Monitoring of Outcome Indicators: Project outcomes will be monitored and measured by implementing agencies as part of their contractual reporting responsibilities with SOGEPE. Executing agencies will provide information on beneficiaries and their activities - including subtasks - to the focal point, who will enter the data in the Project database and then send it to the Project Coordinator at SOGEPE for consolidation. 3. Evaluation of project performance: The Government, through the Coordination Committee (CC), will be asked to perform evaluations jointly with the Bank team, supervision or implementation support missions at least twice a year. Missions will be based on the latest quarterly implementation and financial monitoring reports prepared and submitted by SOGEPE in collaboration with project implementation partners, e.g. concerned technical directorates and implementing agencies. 4. A Mid-Term Review will be carried out 18 months after project effectiveness, or sooner, if circumstances so require. Before the mission, the Government, through the Coordination Committee, will prepare and submit to the Bank a mid-term evaluation report assessing the project s technical, financial, economic, social and environmental achievements and expressing major shortcomings upon which the evaluation should focus. 5. At Project closing, the Government, through the Coordination Committee, will prepare a completion report documenting the Project s achievements and results and drawing lessons for future interventions. The completion report will in part be based on the project s technical, economic, social and environmental impact survey studies, as well as an assessment of beneficiaries satisfaction. The Bank will issue an Implementation and Results Completion Report (ICR) at the latest six months following the project closing date, based on the findings of the final supervision mission and including the government s contribution. 6. Reporting on project performance: Project implementing agencies and participating financial institutions will be in charge of collating basic information on project implementation necessary to measure key performance indicators and to gauge progress in implementation of project activities. As part of capacity building for project beneficiaries (Component 3), these agencies will ensure that accurate information is retained in their management system, including baseline data on each client. They will provide such information to SOGEPE through their monthly datasheets and quarterly reports as part of their contractual duties. The Project will prepare and submit a quarterly progress report along with a financial monitoring report (FMR). 7. Capacity: SOGEPE will define effective M&E procedures. SOGEPE will need to develop its M&E capacity, in particular for focal points and executing agencies to ensure sound monitoring and evaluation of the project s performance at all levels. 29

42 Y u 0 m 3 r, 00 N \o 8 w s 2 N 0 6 B &? 5 B 0 3 F 0 k 0 b P z

43 P CI P t- c d 2 0 z z"

44 Project Objective Annex 4: Detailed Project Description CdTE D IVOIRE: Urgent Electricity Rehabilitation Project 1. The main project development objective is to help improve the availability, reliability, efficiency and financial viability of the power electricity supply in Cate d Ivoire. This will be done through the following actions aimed at reducing outages, the cost of O&M, and cutting energy losses: e Replacement of old and/or overloaded distribution equipment with more efficient and up to standard ones; e Extension and restructuring of the distribution network; 0 Promotion of Demand Side Management activities. Project Main Components 2. Due to the large financing requirements and implementation challenges of the three-year investment program, criteria were needed to prioritize actions and be focused and effective. 3. The criteria used to prioritize distribution projects are based on the need to limit the impact of a long outage due to the loss of an HV/MV transformer or MV bar and to have enough line capacity as a backup to reconnect the load affected by an MV line outage. Given that general criteria, the following operation are given priority: a) Remove all congestion points, replace weak equipment and connect customers on waiting lists mainly by: e Splitting or reducing length of overloaded MV feeders; e Restructuring the network to allow back up for feeder reaching 80% of their capacity; e Replacing network sections with congestion and aged conductors or cables; e Replacing overloaded equipments (transformers, circuit breakers...); and e Reinforcinghestructuring network in areas with high voltage drop; b) Connect new urban districts under construction with associated upstream network reinforcement; c) Remove illegal connections in precarious areas and establish a proper distribution network. 32

45 Illegal Connections in Boribana neighborhood (Abiaan) 4. Upgrading and extension of the HV network will require proper and comprehensive feasibility and ESIA studies including elaboration of bidding packages. However, urgent replacement of overloaded HV/MV transformers in Abidjan can be carried out as well as installation of capacitors to restore the HV voltage level within standard limits. 5. Technical Assistance and other preparatory studies are also needed for the project implementation and other institutional related activities. In line with the above criteria and needs the table below gives the three components chosen to be covered by the present IDA grant: All costs exclude taxes and duties; US$l=FCFA500 33

46 Component 1: Distribution Network Rehabilitation and Expansion (base cost US$38.6 million, excluding contingencies) 6. This component will address the lack of regular maintenance over the last ten years by providing resources to rehabilitate and expand the distribution network mainly in Abidjan. It will also cover some urgent restructuring needs in the distribution network of Yamoussoukro and two secondary cities in the western region (SoubrC & Gueyo). 60,000 new household connections are expected to be made under the project, which will also bring about a better quality of supply for around 227,000 existing customers, mainly by restoring a good voltage level in Abidjan and the eastern region during peak period. The critical activities to be implemented under this component are described below. Sub-component 1.1: Distribution network expansion in the Abidjan region (US$9 million) 7. This sub-component will expand Abidjan s existing distribution network to connect around 60,000 new customers mainly in precarious areas where illegal connections are the normal way of getting electricity supply. High customer density areas like Abobo, Anyama, Bingerville and Yopougon are included, as well as 17 precarious areas. Sub-component 1.2: Distribution network upgrade and restructuring (US$l8.9 million) 8. This sub-component will provide resources to replace existing run-down, overloaded and aged medium and low voltage equipments on one hand and carry out grid restructuring operations on the other hand. 9. Restructuring operations will aim at adapting the MV network to the increase of demand density and feeder backup needs in areas like Abobo, Cocody, AdjamC, Bingerville, Koumassi and Yopougon in Abidjan as well as in secondary cities of Yamoussoukro, SoubrC and Gueyo. The total cost is estimated at US$ 9.9 million. The upgrading activities will cover all Abidjan areas and will consist of creating new substations and feeders and replacing equipment on the Abidjan MV and LV network to meet operation standards and reduce losses for a total cost of US$9 million. Sub-component 1.3: Upgrading of HVMV substations (US$ 7.2 million) 10. This sub-component will cover urgent replacement of overloaded HV/MV transformers in Abidjan and installation of capacitors for compensation of reactive energy to reduce losses and meet voltage level operational standards. Moreover, fifteen 15kV outgoing circuit breakers in Abidjan substations will be replaced to avoid explosion and associated outbreak of fire as they can no longer handle the current short circuit level, as it is beyond their capacity. Sub-component 1.4: Logistics to promote Demand Side Management (DSM) and connection of new customers & enhance capacity of supervision (US$3.8 million) 11. This sub-component will cover the following actions to complement the above investments and enable it meet project goals and fast track its profitability: 34

47 0 0 0 Supply and installation of Compact Fluorescent Lamps (CFLs), which will reduce losses and peak demand; Additional customers logistics from CIE including meters and customer service centers in the areas concerned by the project; Given the size of works planned (including a 42 million distribution project cofinanced by EU), it is necessary to enhance SOPIE s logistics in support of its increased supervision responsibilities. As a result, 10 pickup type vehicles will be acquired to ensure mobility for project supervision staff and avoid implementation delays. The total cost for component 1 is detailed in the table below: Table 10: Cost of Comp Sub-components Sub-component 1.1 Distribution Network expansion in existing connected areas (Abobo, Anyama, Yopougon, Bingerville) Distribution Network expansion in newly settled w/ unofficial service Sub-component 1.2 Restructuring of MV network on Abidjan, Yamoussoukro, Soubre and Gueyo upgrade of MVLV network in Abidjan Total 1.2 Sub-component 1.3 Replacement of 6 Hv/MV Abobo, Bia-Sud and Yopougon Substations Supply and Installation of Attakro, Agnibilekro and Abengourou Hv substations Replacement of 15KV outgoing circuit breakers in Abidjan substations lent 1 Millions CFA 2,520 1,980 4,500 4,950 4,500 9,450 2, Millions US$ IDA share (Millions US%) Meters and customer service centers Project supervision vehicle Supply and installation of CFLs 1, o o Total 1.4 I Total Component 1 (contingency not included) 1, , All costs exclude taxes and duties; US$l =FCFA

48 Component 2: Preparatory activities for the future transmission network investments (base cost US$3.7 million, excluding contingencies) 12. The project will provide resources to finance the expertise required to carry out feasibility and Environmental Impact Assessment studies as well as bidding documents for the projects needed to restructure and upgrade the HV network. This will enable GoCI to fast track the second generation of projects urgently needed to face the acceleration of the demand growth recorded after the end of the political crisis, and to secure energy export markets as well as to be able to wheel power in the WAPP framework. A Project Preparation Advance (PPA) has been processed to finance the studies (except for Laboa-Ferkessedougou) and advance procurement is ongoing. Sub-component 2.1: Preparatory studies for the extension and upgrade of the HV network in the Greater Abidjan area (US$O.9 million) 13. The studies will cover the expansion of Riviera HV substation, creation of new 90/15kV substations at Anoumabo, la Djibi and Anani and connection of la Djibi to Riviera with a 90kV cable. These projects will restore the reliability and flexibility of the Abidjan HV network by creating more backup possibilities in case of perturbations. These feasibility, detailed design and environmental studies as well as bidding document preparation will be carried out for an estimated cost of US$0.9 million. Sub-component 2.2: Preparatory studies for the extension and upgrade of the HV network in the eastern and western regions (US$2.8 million) 14. The studies will cover the expansion of the HV network in the eastern and western region where degradation of the voltage level and congestion are evident. It will also cover the reinforcement of the 225kV network in the northern region to secure regional power energy exchanges. Three projects will be studied: 0 Completion of the 90kV loop in the eastern region by interconnecting Agnibilekro and Serebou substations through a new substation to be created at Bondoukou. 0 Connexion of the Zagne-Tai-Tabou areas to the 90kV grid kV line between Laboa-Ferkessedougou. 15. Feasibility, detailed design and environmental studies as well as bidding document preparation will be carried out for an estimated cost of US$2.8 million. The total cost for component 2 is detailed in the table below: 36

49 Table 11 : Cost of Component 2 Sub-Components Sub-component 2.1 Preparatory studies for the extension and upgrade of the HV network in the Greater Abidjan area Total 2.1 Sub-component 2.2 Preparatory studies for 90kV line Agnibilekrou-Bondoukou- Serebou Preparatory studies for connexion of Zagna-Tai-Tabou to the 90kV grid Preparatory studies for the 225kV Laboa-Ferkessedougou line Total 2.2 Millions CFA , Total Component 2 (contingency not included) 1,842 Millions US% IDA share (Millions US%) Component 3: Project oversight and institutional support (base cost US$ 6.lmillion, excluding contingencies) 16. This component will provide the Government with a diverse range of technical assistance and training needed to: (i) implement and supervise the project; (ii) carry out legal, institutional and financial studies for the implementation of the policy reforms spelt out in the LSDP; (iii) upgrade SOPIE s system planning skills; (iv) build capacity in the three sector entities as well as MME to ensure smooth management succession in the medium-term; and (v) design programs for energy efficiency improvements such as demand side management and the dissemination of low-energy bulbs. In addition, a financing mechanism with a revolving fund of US$3 million will be set up to facilitate household connections for low-income families. Sub-component 3.1: Assistance for the project implementation (USSO. 77 million) 17. Consulting services to prepare an Environmental and Social Management Framework (ESMF) and Resettlement Policy Framework (RPF) as the project falls into, Environmental category B (cf. Annex IO). This task was pre-financed under the PPA as advanced disclosure was required in-country and at the Info shop. Total cost: $20, During the pre-appraisal and appraisal missions, it was concluded that GoCI will need assistance on the procurement and fiduciary aspects of the project. 19. Technical assistance is needed to implement WJ3 procurement practices. SOPIE and SOGEPE have extensive experience of procurement based on C6te d Ivoire s public procurement code. As the specialists who were involved in the last IDA project in the early 2000s are no longer in place, it is proposed to bring in a procurement specialist to assist them during the implementation of the project and provide on the job training under a six (6) months renewable contract. The estimated cost is $60,

50 20. While SOGEPE has the capacity to handle the financial management of the project, the existing computerized and integrated financial management system (SAGE- 1000) is appropriate, but needs to be updated and extended to accommodate additional workstations. However, consultations with SAGE specialists showed that it is not the cost effective solution compared to purchasing suitable software adapted to manage the project that will include Financial Management, Procurement and M & E Modules. The provisional cost of this purchase, including the configuration testing and training of staff is estimated at US$30,000. An additional $20,000 is provisioned to adapt the existing SOGEPE Procedures manual to IDA requirements. 21. As highlighted in sub-component 1.4, there is a need to enhance SOPIE s supervision capacity. Hence, it is planned to bring in additional support through an external supervision firm to support SOPIE for a total cost of $240, Additional logistics will be provided by CIE for the works planned under subcomponents 1.1 to 1.3, as well as for commissioning of the concerned facilities. The contribution from CIE is estimated at $360, Finally, an external auditor will be hired for the annual review of project expenses for a total cost of $ 50,000 during the life of the project. Sub-component 3.2: Assistance for the implementation of the energy policy letter (US$ 0.7 million) 24. To implement the GoCI electricity policy letter, GoCI will need consulting expertise, studies and funding mechanisms. The following assistance was identified during the appraisal mission: 0 Advisory services on gas pricing: Fuel charges appear to be one of the causes of the sector deficit because of an uncapped indexation based on cruse oil prices. It is planned to hire a consultant who will carry out a gas pricing study and provide SOGEPE with best international practices on gas supply. The estimated cost is US$80, Human resources capacity assessment and capacity building program: The electricity sector is experiencing difficulty in renewing its human resource and skill base, due to lack of recruitment of qualified younger staff, particularly trained engineers. As a result, there is a risk of massive retirement of most of the sector s experts in the medium term. This action will consist of an assessment of the situation as well as the design and implementation of a capacity building program to ensure sustainable management of the sector as a whole in the longer term. The estimated cost is US$700, Assistance for energy efficiency and demand side management (DSM): Advisory services will be provided to the DGE to define an institutional framework and specific programs for residential customers, street lights and public buildings including pilot projects. The estimated cost is US$200,

51 Setting up of a revolving fund to facilitate subsidized connections for low-income customers in the area of the project: It appears that the cost of connection (minimum US$150) constitutes an entry barrier which could jeopardize achievement of the project s objectives. A provisional amount of US$ 2 million is planned from the IDA financing and will be complemented by $1 million cofinancing from GoCI. The Revolving Fund, managed by SOGEPE, will offer a pre-financed connection for low income people seeking to connect their homes to the public supply for the first time. Out of an average total cost of $170, the customer will pay upfront $40 and the Fund will pre-finance the remaining $130 through CIE. This financing will be reimbursed by the customer through a fixed amount of $10 added to each bimonthly electricity bill. Moreover, eligible customers will not be allowed to increase their subscribed capacity beyond lkva unless they first settle the full outstanding amount of the pre-financing. In addition, the landlord will be responsible for settling any outstandings in cases where the tenant terminates the lease contract prior to full reimbursement. An agreement has been signed between SOGEPE and CIE to set up the detailed implementation arrangements for the revolving fund. Assistance to SOGEPE for the update of electricity sector asset register: This includes a physical inventory, cost evaluation and accounting etc. It will allow SOGEPE to establish an opening balance sheet after a formal transfer of all the assets of the sector and be able to use it for borrowing purposes. The estimated cost is US$540,000 Undertaking a comprehensive tariff study to adapt the tariff structure to the shift to thermal generation since the 1990 s. This is also needed to support the establishment a tariff regulation procedure required as part of the financial recovery plan of the electricity sector. In addition, a Poverty and Social Impact Assessment (PSIA) will further examine issues such as barriers to electricity access, ability to pay etc. The total estimated cost of these two studies is $ 700,000. Legal assistance to speed up the institutional reform by reviewing the existing texts and redrafting the legislation in a way to eliminate the inconsistencies noticed. An amount of $100,000 has been budgeted to finance part of this activity not covered by PPIAF. 39

52 Table 12: Cost of Component 3 Sub-Components Sub-component 3.1 Consultancy services for the EIA and Resettlement policy frameworks Procurement advisory services Consultancy services for the adaptation of SOGEPE Procedures Manual Project Management software for SOGEPE Technical supervision services for SOPIE Supervision and commissioning by CIE External Auditor Total 3.1 Sub-component 3.2 Advisory services on gas pricing and contracting HR assessment and Capacity building program Energy Efficiency and DSM program Customer connection Revolving Fund Assistance to SOGEPE for asset evaluation and balance sheet preparation Tariff Study and PSIA Legal adviser for institutional reform Millions CFA , ,660 Millions US$ OO IDA share (Millions US$) Total Component 3 (contingency not included) All costs exclude taxes and duties; US$] =FCFA 500 3,

53 Annex 5: Project Costs C6TE D'IVOIRE: Urgent Electricity Rehabilitation Project Preparatory studies for the extension and upgrade of the HV network in Abidjan area I 450 I 0.2 I 0.7 I 0.9 Total 2.1 I 450 I 0.2 I 0.7 I

54 Total 3.2 Total Component 3 Total baseline Cost Physical contingencies (5%) Price contingencies (7%) Total Financing required 2, , , , ,

55 A. Annex 6: Implementation Arrangements COTE D'IVOIRE: Urgent Electricity Rehabilitation Project General Institutional and Implementation Arrangements. 1. The project will be managed by SOGEPE with the assistance of the other electricity sector's entities namely SOPIE, CIE and DGE. SOGEPE will receive the IDA grant through a subsidiary agreement signed with the Government, and subject to the Project Agreement signed with the Bank. 2. The Managing Director of SOGEPE will oversee the overall management of the project and sign all the contracts and payments documents. The Director of Finance will deal with the financial management and disbursement issues while the Director of Assets will act as Project Coordinator in charge of the day to day project management and coordination of the technical tasks handle by SOGEPE, SOPIE, CIE and DGE. 3. Given the multiplicity of entities involved, a Coordination Committee (CC) chaired by the Managing Director of SOGEPE has been set up by a ministerial order17 and includes representatives of SOPIE, SOGEPE, CIE and Ministry of Energy. 4. The key factor for successful implementation of the project without delays is the ability of the Project Coordinator to handle a matrix management system by working with technical departments of SOPIE, SOGEPE, CIE and Ministry of Energy. The critical part of this task is the sharing of responsibility between SOPIE and CIE on the technical aspects (technical design, procurement of goods and services, supervision and control). 5. A protocol (MoU) has been signed to clarify and formalize the respective roles of SOPIE and CIE before the appraisal of the Project. The MoU specifies how each task and sub-task should be implemented and indicates the reporting format. It also has a provision for a dispute resolution mechanism by the CC. 6. As part of its overall role, SOGEPE will establish and maintain the required financial management systems, including the hiring of financial and audit staff, flow of funds, accounting records, budget, preparation and submittal of financial reports and statements to allow external auditing of the project (cf. Annex 7). SOGEPE will also report to GoCI and the Bank on project execution and implementation and compliance with agreed conditions with the Bank. B. Specific Implementation Responsibilities. 7. The arrangement for the different components is based on the MoU signed by SOPIE and CIE for component 1 and a full technical implementation responsibility of the beneficiaries for the other components. Sharing of task and responsibility will be as follows: 17 Arrete n0021/mme-cab signed by Energy Minister on March 24,

56 B. 1. Distribution Network Rehabilitation and Expansion SOGEPE will: Assume all functions and responsibilities of project coordinator through its Director of Assets; Prepare SOGEPE Procedures Manual and update the manual as needed, with support from the SOPIE and CIE; Prepares and update, as required, the overall project procurement plan on the basis of the information provided by other entities involved; Follow up on all procurements processes in coordination with SOPIE; Participate in bid evaluation and negotiation of all contracts for the supply of goods, works and services in coordination with SOPIE, CIE and DGE; Sign all contracts for the supply of goods, works and services; Prepare all required project progress reports, including those for financial management and procurement for presentation to the CC and reporting to the Bank; and Establish and maintain all project files. SOPIE will: Establish and update and the project procurement plan and provide all information needed to SOGEPE; Prepare detailed budgets, economic evaluations, engineering and design, technical specifications and the required infomation for completion of the bidding documents for projects in sub-component 1.1 ; Prepare all bidding documents in coordination with the assistance of CIE; Lead all procurement processes, including the bid evaluations and for award of contracts for the supply of goods, works and services in coordination with CIE and SOGEPE; Finalize and negotiate all contracts for the supply of goods, works and services in coordination with SOGEPE, CIE and DGE; Supervise the construction and supply contracts for installation of electrical facilities in coordination with CIE in joint supervision teams; Approve construction and supply certificates for payment purposes by SOGEPE; App,rove final acceptance certificates for works and goods in coordination with CIE; and Maintain all budget and accounting figures, financial statements and audit information that might be needed and transfer them to SOGEPE. CIE will: e Prepare detailed budgets, economic evaluations, engineering and design, technical specifications and the required information for completion of the bidding documents for projects in sub-components 1.2 and 1.3; e Participate in bid evaluation and negotiation of all contracts for the supply of goods, works and services in coordination with SOPIE, CIE and DGE; 44

57 0 0 Assist SOPIE in the supervision of the construction and supply contracts for installation of electrical facilities by participating in joint supervision team; and Supervise proper commissioning of facilities built under the project in coordinate with SOPIE. B.2. Logistics to promote Demand Side Management, connection of new customers & enhance supervision capacity 0 0 DGE will be responsible for the implementation of the Compact Fluorescent Lamps (CFL) component; and SOPIE will be responsible of the purchase of the ten project vehicles. However, SOGEPE will sign the contracts and handle payments. B.3. Preparatory activities for the future transmission network investments These activities will be totally managed and coordinated by SOPIE. However, SOGEPE will sign the contracts and handle payments. The process is ongoing with pre-financing from a PPA signed in January, B.4. Technical assistance This component has various beneficiaries as shown in the table below: Component 3 Sub component 3.1 Procurement advisory services Consultancy services for the SOGEPE Procedures Manual Project Management Software Technical supervision services External Auditor Sub component 3.2 Advisory services on gas pricing and contracting HR assessment and Capacity building program Energy Efficiency and DSM program Tariff Study and PSIA Customer Connection Revolving Fund Assistance to SOGEPE for Asset evaluation and balance sheet preparation Legal Adviser for institutional reform Beneficiary SOPIE/SOGEPE SOGEPE SOGEPE SOPIE SOGEPE SOGEPE DGE DGE DGE SOGEPE SOGEPE DGE 8. Each beneficiary will prepare terms of reference for all consulting services, as well as bidding documents if necessary and proceed with the procurement process under the oversight of SOGEPE s Project Coordinator. SOGEPE will sign all contracts and make payment upon certification of the invoices by the beneficiary. Supervision of services and approval of reports/outputs will also be the responsibility of the beneficiary. 45

58 9. A MoU signed between SOGEPE and CIE governs the implementation of the Customer Connection Revolving Fund, given the fact that the latter plays the operational role in the relation with the customers. CIE will manage all the relations with customers in accordance with the MoU provisions (contracts, installation, collection of payments and transfer to SOGEPE). SOGEPE will compensate CIE for the connection cost (supply and installation) and manage the financial flows. 46

59 Annex 7: Financial Management and Disbursement Arrangements C6TE D IVOIRE: Urgent Electricity Rehabilitation Project Country issues 1. A Public Expenditure and Financial Accountability (PEMFA) review was undertaken in 2008 and the report concluded that although some improvement in Public Financial Management reform implementation, key risks and challenges remain and require improvement in area of: (i) Quality and timeliness of in-year budget reports (ii) Stock and monitoring of expenditure payment arrears (iii) Effectiveness of internal audit (iv) Oversight of aggregate fiscal risk from other public sector entities (v) Effectiveness of measures for taxpayer registration and tax assessment (vi) Legislative scrutiny of external audit reports (vii) Effectiveness of payroll controls. 2. In dialogue with external partners, GoCI shows commitment to implement the action plan resulting from the last PEMFA framework to track progress in strengthening public financial management and identify areas where country fiduciary systems are not yet in line with international standards. 3. The use of the country system, notably the Treasury Department and the supreme audit institution (Chambre des Comptes), will be implemented progressively. The Bank is working with GoCI to set up an arrangement in which public accountant and controllers will be involved in project financial management. The arrangement is being tested with some projects as a pilot. In the meantime, implementation of the UERP will be coordinated by SOGEPE under a retrocession agreement set up by GoCI. Risk assessment and mitigation 4. The objectives of the project s financial management system are: 0 to ensure that funds are used only for their intended purposes in an efficient and economical way; 0 to ensure that funds are properly managed and flow smoothly, adequately, regularly and predictably in order to meet the objectives of the project; 0 to enable the preparation of accurate and timely financial reports; 0 to enable program management to monitor the efficient implementation of the project; and 0 to safeguard the project assets and resources. 5. Furthermore, the following are necessary features of a strong financial management system: 0 the internal control system should ensure the conduct of an orderly and efficient payment and procurement process, and proper recording and safeguarding of assets and resources; 0 the accounting system should support the project s requests for hding and meet its reporting obligations to fund providers (GoCI, IDA); 0 the system should be capable of providing financial data to measure performance when linked to the outputs of the project; and 47

60 0 an independent, qualified auditor should be appointed to review the project s financial statements and internal controls. 6. The table below identifies the key risks that the project management may face in achieving these objectives and provides a basis for determining how management should address these risks. 48

61

62 I and efficiently for intended purpose) Internal Control SOGEPE does not have an internal Audit unit Funds Flow Disbursement of external assistance has been slow; in particular Bank financed projects have experienced low disbursement rate compared to the subregion. The involvement of public financial management procedures in the disbursement scheme may have delayed project implementation, since the new arrangement with GoCI is in a pilot phase and is not well mastered by actors involved. Financial Reporting The project team does not have experience in producing interim unaudited financial reports. S S S - SOGEPE is a small size entity subject to regular state internal audit conducted by the Inspection Ge'ne'ral de I'Etat (IGE). SOGEPE is annually audited by statutory auditors which report to the Board (Conseil d 'Administration). In addition, conditions of recruitment of an internal auditor financed under the resources of the project, have been agreed upon during negotiation. - The updated administrative manual will outline and clearly define approval and authorization procedures that should aim to build an adequate internal control system in SOGEPE. - The Bank will pay attention to the internal control system during supervision mission and ensure of the - effective control in asset management and control. A designated account opened at the Central Bank BCEAO. - A projects' account will also be opened and located in a reliable commercial Bank. This account will be managed by SOGEPE in coordination with the Directorate of Public Debt. - Training and IFR guidelines will be provided to the project management team and IFR will be used over the life of the project. However, the project is not eligible for now to disbursement based on IFR due to the weaknesses/complexity of the M&E system. - Training will be provided to financial, accounting and M&E staff and the M&E system will be simplified. M M M Auditing The audit TORS will be developed to cover the fiduciary risks of the project and external auditors then will be appointed. M - The format, content, and periodicity of IFR will be discussed during negotiation and will be agreed upon. - An external Auditor with experience and qualifications satisfactory to the Bank will be recruited.. The financial audit will cover the review of the mechanism of revolving fund for subsidized connections. M OVERALL RISK S M In view of the general country financial management issues and the issues peculiar to the UERP, the overall financial management risk rating for this project is Moderate 50

63 Strengths 7. The financial management capacity built in SOGEPE under the PPA will be consolidated and strengthened to handle the financial management system of the project. 1 I I I Weaknesses Action Responsible Completion Date Body Existing software is not Purchase a suitable software SOGEPE By effectiveness adapted to manage the project and its updating is adapted to manage the project that will include Financial not cost efficient Management, Procurement and 1 M & E Modules. Financial procedures Administrative and Financial relevant to the UERP are Procedures Manual I not included in the Manual There is no reliable asset Undertake a stock taking and SOGEPE End of December register in the sector value the sector s physical assets 2010 Absence of an External Recruitment of an External SOGEPE Four months after Auditor with experience and effectiveness I Auditor qualifications satisfactory to the 2 I Specific Administrative and I Update the existing I SOGEPE I By effectiveness 3 4 Institutional and Implementation Arrangements 8. SOGEPE will be responsible for the overall implementation of the project. During project execution SOGEPE shall coordinate project implementation and manage: (a) procurement, including purchases of goods, works, and consulting services; (b) program monitoring, reporting and evaluation; (c) contractual relationships with IDA; and (d) financial management and record keeping, accounts and disbursements. 9. SOGEPE will constitute the operational link to the IDA and Government of C6te d Ivoire on matters related to the implementation of the project. GoCI will transfer the IDA grant to SOGEPE (acting in its capacity as the manager of the electricity sector s financial flows). SOGEPE will oversee the implementation of the UERP with the assistance of SOPIE and CIE as technical partners. A Coordination Committee chaired by the Managing Director of SOGEPE has been set up and includes representatives of SOPIE, SOGEPE, CIE and Ministry of Energy. The Managing Director of SOGEPE will sign all the contracts and payments documents relating to the proceeds of the Grant. Program Accounting and Financial Software 10. SOGEPE will purchase a computerized and integrated information system, which will be capable of recording and reporting in a timely manner the program operations by origin of funds, by regions, components, and activities. The computerized financial management system will be multi-currency, multi-location, multi-donor and it will include, among others, the following modules: general accounting, cost accounting, budgeting, assets management, contract management, preparation of withdrawal 51

64 applications and tracking of disbursements by donors, reports generating, including quarterly financial monitoring reports and semi-annual financial statements. 11. Currently SOGEPE does not have a reliable asset register. There is a need to undertake a stock taking and valuation of physical all assets.of the electricity sector to better manage and monitor them. This exercise will be funded from the proceeds of the IDA grant, under component 3 of the project. Project Financial and Accounting Manual 12. As part of the Project Implementing Manual, a Financial and Accounting Procedures Manual was developed by a national consultant in 2000 in coordination with SOGEPE. It will have to be updated to include a description of salient features of the financial management system and financial policies and procedures (i) the accounting system to be used: chart of accounts, budget coding, accounting standards; (ii) the main transactions cycles; (iv) internal control procedures; and (iii) a summary of the various operational procedures related to budget management (planning, execution and monitoring) and management of assets, procurement of works, goods and services, and disbursements. Financial Reporting Arrangements 13. SOGEPE will be responsible for overall reporting on the project. The FMS will ensure that on a quarterly basis, the Interim Unaudited Financial Reports (IFR) are produced and transmitted to the Bank no later than 45 days from the end of the quarter. The first IFR shall be furnished to the World Bank no later than 45 days from the end of the first calendar quarter after the Effective Date, and shall cover the period from the incurrence of the first expenditure under the project, through the end of the first calendar quarter. 14. The financial reports will be based on Annex A, Sample I11 of the Bank s Guidelines on financial reports sent to SOGEPE and t will detail (i) the contributions by Donors (ii) the expenditures of the quarter broken down by components/categories or activities (iii) cumulative expenditures-to-date for the financial year, including comparative (prior year) information (where requested); (iv) the Net fund available (v) details of any commitments and contingencies (vi) a Note to the Financial Statements. External and Internal Auditing 15. The audit report should reflect all the activities of the Project, including those financed by CIE and the Government, and must be submitted to IDA within six months after the end of each financial year. The first audit will also cover the PPA (Project Preparation Advance). 16. The external audit will be subcontracted to a private auditing firm. The selected external auditor will be acceptable to IDA in terms of independence, qualifications, and experience, and will conduct year-end audits based on Terms of Reference (TOR) cleared by IDA. In addition to the audit report, the auditor will be required to prepare a Management Letter highlighting internal control weaknesses and recommendations for improvements. 52

65 17. SOGEPE is subject to reviews by state internal audit unit - Inspection ge'ne'rale d'etat (IGE). Statutory auditors annually undertake the audit of SOGEPE and report to the Board (Conseil d 'Administration). It was agreed upon during negotiations that the project will finance the recruitment of an internal auditor to strengthen the internal control system of the entity, as and when required. Funds Flow Arrangements 18. The Project will have a Designated Account located at the Central Bank of West African States (BCEAO) operated in coordination with the Directorate of Public Debt and an advance account in a commercial bank that will be managed by SOGEPE, in accordance with Bank guidelines Disbursement Methods 19. By effectiveness, the project will use the transaction-based disbursement procedures, i.e., replenishment, direct payment, reimbursement, and special commitments. When project implementation begins, the quarterly IFRs produced by SOGEPE will be reviewed. If the reports are found to be well prepared and produced on a timely basis, and the Recipient requests conversion to report-based disbursements, a review will be undertaken to determine if the project is eligible for report-based disbursement. Minimum Value of Applications 20. The minimum value of applications for reimbursement, direct payment and special commitment is 20 percent of outstanding advance made to the designated account. Reporting on credit proceeds 21. The supporting documentation for reporting eligible expenditures paid from the designated account should be a summary report of the statement of expenditures and records evidencing eligible expenditures for payments against contracts valued US$500,000 or more for goods, US$500,000 or more for works, US$200,000 or more for consulting firms and US$50,000 or more for individual consultants and a list of payments against contracts that are subject to the Bank's prior review. The supporting documentation for requests for direct payment should be records evidencing eligible expenditures (copies of receipt, supplier's invoices, etc). All supporting documentation for statement of expense will be retained at by SOGEPE and will be made available for review by periodic World Bank review missions, internal and external auditors. In addition, for works, unless the activity to be financed has been subjected to a satisfactory prior review by an independent environmental safeguard specialist based on documentation to be provided by SOGEPE, disbursement against such activity will not occur. Designated Account 22. A Designated Account will be opened at the Central Bank (BCEAO) and will be managed by the Department of Public Debt (Direction de la Dette Publique - DDP) in coordination with SOGEPE. This account will replenish a Designated Sub-account 53

66 opened in a commercial Bank acceptable to IDA managed by SOGEPE. This account will be managed based on joint signatures of the General Manager and the CFO of SOGEPE, or their representatives. 23. The proposed ceiling for the Sub-Account is the same as for the Designated Account. The amount of the total advance is limited to CFAF 500,000,000 as indicated in the Bank s Disbursement Letter to for this project Counterpart Funding: 24. The Government will provide by end-2010 the equivalent of US$lmillion by way of counterpart parallel financing for the project. CIE s contribution of US$3million equivalent to the project will be in kind (equipment, buildings etc). Monthly Replenishment Applications 25. The designated account will be replenished through the submission of withdrawal applications on a monthly basis by the SOGEPE accounts unit and will include reconciled bank statements and other documents as may be required until such time as the Recipient may choose to convert to report-based disbursement. Disbursements by category 26. The table below sets out the expenditure categories and percentages to be financed out of the credit proceeds. Components Component 1 Component 2 Component 3 Contingency Total Amount Amount Allocated (expressed in US$) Percentage of Expenditures to be Financed exclusive of taxes

67 Direct payment I' I' I' I' I' FiPure 2: UERP Funds Flow,.I' I',' I' BCEAO Designated Account - \. \.'. Withdrawal -...'. applications -. I Directorate of Public Debt I' I' Suppliers Commercial Bank Withdrawal applications Supervision Plan 27. A supervision mission will be conducted at least once a year given the current risk rating. The frequency may vary in line with changes to the risks to the project. The mission's objectives will include ensuring that strong financial management systems are maintained for the project throughout its life. An SOE review will be carried out regularly to ensure that expenditures incurred by the project remain eligible for IDA funding. The Implementation Status Report will include financial management rating for the project. Conclusion of the Assessment 28. Supervision activities will include review of quarterly IFRs; review of annual audited financial statements as well as timely follow-up of issues arising; transaction review; participation in project supervision missions as appropriate; and updating the FM rating in the Implementation Status Report (ISR). 55

68 Annex 8: Procurement Arrangements C6TE D IVOIRE: Urgent Electricity Rehabilitation Project A. General 1. Following the 2004 CPAR, a new Procurement Code (Decree N dated February 24,2005), in line the WAEMU s procurement Directives and international good practices, and key implementing regulations and documentation have been adopted in A national procurement capacity building program exists and is being implemented at the central and decentralized entities level. An electronic system for collecting and disseminating procurement information and for monitoring procurement statistics has been set up and needs to be spread over all of the contracting authorities. However, persisting issues remain that affect transparency and efficiency of the national procurement system: (i) the National Procurement Code authorizes to re-bid automatically when at least 3 bids are not received; (ii) the national standard bidding document for works indicates that bids which prices are considered as too low or too high are automatically rejected, and authorizes the use of point systems; (ii) the mechanism for dealing with complaints from bidders are not operational yet and the Government has committed itself to do it through the new public procurement regulatory framework (ONMP) to be set up by June 2009; and (iii) no procurement compliance review has been done so far (iv). In addition, the volatile socio-political situation due to the sociopolitical crisis does not guarantee an effective functioning of the system and also has considerably increased fraud and corrupt practices: 2. In general, CBte d Ivoire s procurement code and regulations do not conflict with IDA guidelines. However, provisions related to the use of point systems and re-bidding when at least three bids were not submitted will not be applied for national competitive bidding. B. Use of Bank s Procurement Guidelines and Documents 3. Procurement for the proposed project would be carried out in accordance with: (i) the World Bank s Guidelines: Procurement under IBRD Loans and IDA Credits dated May 2004, revised on October 1, 2006; (ii) Guidelines: Selection and Employment o f Consultants by World Bank Borrowers dated May 2004, revised on October 1, 2006; (iii) the provisions stipulated in the Financing Agreement. The Bank s Standard Bidding Document, Standard Request for Proposals and evaluation forms will be used for the International Bidding process. In CBte d Ivoire, Standard Bidding documents are available but have not been updated to comply with the new National Procurement Code. Due to that, in the case of National Competitive Bidding (NCB), the Bank s standard document will be used with necessary adaptations. C. Advertisement Procedures 4. Upon Board Approval, a General Procurement Notice published in the UN Development Business (UNDB) online, (GPN) will be prepared and the Development Gateway s 56

69 dgmarket online, and in a national newspaper of wide circulation to advertise for major consulting assignments (above US$200,000 equivalent for firms and US$lOO,OOO. equivalent for individual consultants) and International Competitive Bidding (ICB) (above US$5,000,000 equivalent for works and US$500,000 equivalent for goods) for which specific contracts are expected. Specific Procurement Notices (SPN) for goods and works to be procured under ICB and for consultant services will be published in a national newspaper of wide circulation and be advertised in the UNDB and Development Gateway s dgmarket online in order to get the broadest interest possible from eligible bidders. Request for Expression of Interest (EOI) for other consulting services (below US$200,000 for firms and US$l 00,000 for individual consultants) will be advertised in a national newspaper of wide circulation or in an electronic portal of free access for all consulting firm services. At least two weeks will be allowed for submission of expressions of interest (EOI). In the case of National Competitive Bidding (NCB) below US$5,000,000 for works and US$500,000 for goods, a specific procurement notice will be published in the national gazette or a national newspaper or an electronic portal of free access. Contracts awards will be published in UNDB and dgmarket, in accordance with the Bank s Procurement Guidelines (paragraph 2.60) and Consultants Guidelines (paragraph 2.28). D. Advance Contracting 5. Given the urgency of the program, the Borrower wished to proceed with the initial steps of procurement before signing the related Credit Agreement. The procurement procedures including the advertising must be in accordance with the Guidelines in order for contracts to be eligible for Bank financing, and the Bank shall review the process used by the Borrower. The Borrower accepts to undertake such advance contracting at its own risk and this advance procedure does not commit the Bank to make a loan for the project in question. E. Procurement Methods Procurement of Goods 6. The total cost of contracts of Goods to be financed by the project is estimated at US$3 9.2 million equivalent, and would include: (i) Distribution Network expansion in the Abidjan area; (ii) Restructuration of MV network Abidjan North and Southern and Central regions of the country; (iii) Supply and Installation of underground cable to replace old paper isolated cable in Abidjan Northern district; (iv) ReinforcementLJpgrade of MV network in Abidjan; and (v) Reinforcement and Upgrade of substations (supply and installation of 6HV/MV transformers, capacitors and 15 outgoing circuit breakers as well as remote control systems). Supply of Compact Fluorescent Lamp Goods should be grouped in bid packages estimated to cost at least US$500,000 per contract and would be procured through International Competitive Bidding (ICB). 7. The project supervision vehicles are estimated to cost US$240,000 equivalent (Le. less than US$500,000 equivalent) may be procured through NCB. The project software 57

70 is estimated at US$ 70,000 equivalent, and would include: project management software and power system planning (software and training). Software contracts estimated to cost less than US$70,000 equivalent may be procured through shopping procedures. In case of shopping, contracts will be awarded on the basis of written solicitation issued to at least three (3) qualified suppliers. Following the evaluation of bids received in writing from such qualified suppliers, the award would be made to the supplier with the lowest price quotation for the required goods, provided it has the experience and resources to execute the contract successfully. Selection of Consultants 8. The total amount of consultant services is estimated at US$6.12 million. Consultancy services foreseen under this project include: (i) Feasibility, Engineering and Environmental studies, including bidding documents for the Abidjan network extension/ reinforcement projects; (ii) Feasibility and Environmental studies of HV transmission lines; (iii) Assistance to SOGEPE for asset register and valuation; (iv) HR assessment and capacity building program; (v) Tariff study; and (vi) External audit. Consultant firms will be selected through the (a) Quality and Cost Based Selection (QCBS) with prior agreement of IDA. 9. The total amount of individual consultants is estimated at US$250,000, including (i) the gas pricing and contracting specialist and the CFL dissemination study; (ii) Energy Efficiency and DSM program design; (iii) Procurement Advisory services; and (iv) Adaptation of SOGEPE Procedures Manual, for which contract amount are less than US$lOO,OOO equivalent. Individual Consultant (IC) will be hired in accordance with paragraphs 5.1 to 5.4 of the Bank Guidelines and sole sourcing may be used only with prior review of the Bank. 10. The use of a pool of experts or a list of pre-selected consulting firms and/or individuals may, therefore, be an appropriate method for supporting project implementation. Such a method will remain consistent with QCBS, CQS, and/or the Selection of Individual Consultants. No-Objection will also be given for sole-sourcing (single-sourcing) of consulting firms, where it presents a clear advantage over competition. Firms already working in the area and which have a proven track record in similar assignments may be the most suitable. 11. Short lists of consultants for services estimated to cost less than US$200,000 equivalent for firms and US$lOO,OOO for individual consultants per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines, provided that a sufficient number of qualified individual or firms are available. However, if foreign firms have expressed interest, they would not be excluded from consideration. 12. The use of civil servants as individual consultants or as a team member of Consultants firms will strictly follow the provisions of Articles 1.9 to 1.11 of the Consultant Guidelines. 58

71 F. Training and Workshops 13. Training will be carried out on the basis of approved programs on a yearly basis. The project will identify: (a) the general framework of training and similar activities for the year, including the nature and objectives of training and workshops as they relate to the project objectives; (b) the duration of the proposed training and number of trainees; and (c) an estimate of the cost (training or workshop budget). G. Assessment At the implementing agency level 14. SociCtC d OpCration Ivoirienne d ElectricitC (SOPIE), SociCtC de Gestion du Patrimoine du secteur de 1 ElectricitC (SOGEPE) and Compagnie Ivoirienne d ElectricitC (CIE) will be in charge of procurement under this project, including contract management, supervision, procurement, record-keeping, etc. A Memorandum of Understanding will be signed among these entities to formalize this specific technical partnership and responsibilities. An assessment of the capacity of SOPIE, SOGEPE and CIE to implement procurement actions financed under the project was carried out by the Bank in February SOPIE: 15. SOPIE is a state enterprise under Minister of Mines and Energy (MME). In 2007 & 2008 SOPIE approved contracts with an average value of about US$33 million annually. It will be responsible for technical supervision of the project. SOPIE has a procurement manual and has a focal person for handling procurement operations (the procurement specialist). The procurement focal person s experience has been mainly with contracts governed by national procurement practices using national bidding documents. SOPIE s internal process for approving the evaluation report and contract award is acceptable. SOGEPE: 16. SOGEPE, like SOPIE is a state enterprise under the Minister of Mines and Energy. SOGEPE participates in the bid evaluation and contract award stages of the procurement process led by SOPIE. SOGEPE s Managing Director will be responsible for contracts signature, regardless of their value, once they have been approved by the Board of Directors. SOGEPE is responsible for payments under these contracts. The average time for getting the Board s clearance and the Managing Director s signature is two weeks. This average is acceptable - CIE 17. CIE is a private company whose staff will participate in the technical design of works to be undertaken under the project as well as in the preparation of bidding documents along with SOPIE. CIE s staff has sufficient experience and knowledge, and the number to provide adequate support with respect to this mission of drafting the technical specifications and prepare bidding documents. 59

72 18. Based on findings of the assessment, the following issues has been identified: (i) the focal point of SOPIE had no IDA S procurement experience; (ii) the internal control is done by the board of SOGEPE; (iii) the external control is done by the National Tender Board (Direction des Marches Publics-DMP) which participates to the process when the contract is above US$ ; (iv) the procurement manual is based on the national procurement framework; (v) the filing is acceptable; and (vi) the national standard biddings document/proposal document are used. 19. The corrective measures proposed: SOPIE: (i) The recruitment of a procurement specialist (PS) mastering IDA practices for a 6 months renewable period with international experience and solid knowledge of Bank procurement procedures. The PS is expected to be operational in June, 2009 and will be responsible for quality review of procurement activities for operations covered by the project, namely (a) prepare and update the procurement plan; (b) review/quality control of bidding documents/request for proposal; (c) review/quality control evaluation reports and decision of contract awards, (d) filing of procurement documents, (e) prepare procurement activities reports, and (0 and train the focal of SOPIE to the World Bank s procurement procedures before the implementation of the project. (ii) update of SOPIE s operational manual in accordance with the project arrangement (iii) The World Bank s Standard Bidding Documents to be used for each procurement method, as well as model contracts for works, goods and consultants procured. (iv) The focal point would have to take the courses on World Bank procurement delivered by approved institutions (ISADE, CESAG, etc) during the early stages of proj ect implementation. SOGEPE: 20. According to national procurement procedures, all contracts exceeding CFAF 120 million (US$0.24 million) require approval of the Minister of Finance. SOGEPE is exempted from this procedure. The Managing Director signs contracts once the Board gives its clearance. This procedure is an exception to the usual practice for public procurement. However, it will be followed under the proposed project since experience has shown that the normal practice of ministerial approval results in lengthy delays before payments and affected negatively contract execution. Therefore, SOGEPE will directly handle all payments to suppliers and contractors for IDA funded activities. CIE: 21. The engineers involved in the project should be trained in Bank s financed project and procurement procedures, in order to ensure adequate and timely preparation of bidding documents. 60

73 At the Country level 22. Due to (i) the country s post-conflict environment and the persisting volatile sociopolitical situation, which do not guarantee an effective functioning of the procurement system and has considerably increased fraud and corrupt practices; and (ii) delays in implementing key actions of procurement reform like the setting up of the procurement regulatory body to ensure independent external control and complaints reviews, the procurement risk has been rated high and prior review thresholds have been fixed consequently. Overall Procurement Risk Assessment: Average Low High B I. Procurement Planning 23. A Simplified Procurement Plan should be prepared by the Borrower covering the first eighteen months of the project, providing the basis for agreement with IDA on the proposed packaging and the optimal methods of procurement for early project implementation. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. It will also be available in the project s database and in the Bank s external website. All procurement will be carried out in accordance with the formally agreed procurement plans (original and formally up-dated in accordance with the World Bank s Guidelines). J. Fraud, Coercion, and corruption 24. All procuring entities, as well as bidders, suppliers, and contractors shall observe the highest standard of ethics during the procurement and execution of contracts financed under the project in accordance with paragraphs 1.15 and 1.16 of the Procurement Guidelines and paragraphs 1.25 and 1.26 of the Consultants Guidelines. K. Thresholds for Procurement Methods and Prior Review 25. The Procurement Plan shall set forth those contracts which shall be subject to the Bank s Prior Review and contracts subject to Post Review by the Bank. For that purpose: (i) Consultancy services estimated to cost above US$200,000 per contract for firms, and single source selection of consultants (firms and individuals) will be subject to prior review by the Bank. Prior review of the evaluation process of the selection of individual consultants (i.e. comparison of three CVs) will be carried out for contract when the estimated cost is above US$lOO,OOO. Below this thresholds, prior review of the evaluation process of the selection of consultants (firms or individual consultants) will only be carried out in exceptional circumstances, for example when hiring an Advisor for 61

74 the entire project duration which could result in a substantial contract amount, or for a predefined number of contracts depending on the procurement performance of SOPIE. Such contracts will be identified in the procurement plan. (ii) Contract of goods estimated to cost above US$500,000 per contract will be subject to prior review by the Bank. Below this threshold, prior review of the procurement process will only be carried out in exceptional circumstances for a predefined number of contracts depending on the procurement performance of SOPIE. Such contracts will be identified in the procurement plan. Table 18 : Procurement Plan All Term of reference regardless of the value of the contract are subject to prior review 62

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77 Annex 9: Economic and Financial Analysis C6TE D IVOIRE: Urgent Electricity Rehabilitation Project A. Historical analysis of the power sector s finances 1. The Ivorian electricity sector has a complex arrangement for payments to the various parties involved in the production and sale of power, as illustrated below: The priority in the order ofpayments, and the 1999 Procedures Manual 2. The procedures for funds flow management in the sector that are currently in use are outlined in the manuel de proce dures, a decree of the Republic approved in 1999 as part of the sector reform that enabled the financing of the Azito plant. At the time, the decree was endorsed by the World Bank Group and all the private actors in the sector (companies and lenders). The decree specifies the following order of priority in the payment of the expenses of the sector: < Customer revenues b Figure 3 : Customer revenues Taxes (e.g VAT) A: CIE remuneration Taxes reimbursed (A portion of the VAT) B: Fuel + lpps C: CIE assets major maintenance D: Operating costs of regulatory bodies E: State / SOGEPE s debt F: Rural electrification 3. The rationale for such an order of priority was to guide the government in a sensible planning of expenses and in setting up a set of transparent and auditable procedures for the management of cash. For the past several years, the above payments mechanism has been in deficit due to rising costs (mainly gas), while at the same time tariffs have not been increased adequately. 65

78 Government subsidy to the power sector 4. GoCI has had to progressively forego its share of payments for gas used for power generation, in order to prevent a liquidity shortfall in the sector, but ever-rising gas prices have meant that the scope for using this device has now been exhausted. The nonpayment of the government s share of gas was necessary to enable the functioning of the sector without payment defaults to private parties, while also ensuring that funding was maintained for lower priority items, such as the overhead costs of running the three state bodies SOGEPE, SOPIE and ANARE and rural electrification schemes. In addition, GoCI also pays the sector s debt service on past loans contracted for sector investments. Accounting Compensations between the sector and the government 5. GoCI should have paid electricity bills to the power sector for the electricity consumption of public entities and bodies (schools, public buildings, etc.). Over the past 6 years ( ), these bills amounted to about CFAF 165 billion. Government Other public sector Total Public Sector Bodies Annual billed consumption Arrears, 31/12/2008 Number of billing days 24,650 11,002 35,652 2,500 12,500 15, GoCI should have received from the power sector its share of gas payments ( Part Etat Gaz ). The power sector has only been paying the share of the gas due to the foreign suppliers (Foxtrot, CNR, Afren) and to Petroci (the GoCI owned oil company). Over the past 6 years ( ), the Part Etat Gaz that should have been paid by the power sector was about CFAF 345 billion. This subsidy mechanism was devised by GoCI in response to the increase in the cost of gas and the unwillingness to pass through such an increase to the final users. 7. The non-payment of electricity bills by GoCI and the non-payment of the Part Etat Gaz by the sector have been settled through annual accounting compensations. In 2006, the State budget has also compensated CIE for some unpaid bills from the CNO zone and in 2007 the State compensated CIE for all the VAT reimbursements which had not been paid in the previous years. 8. These compensations have been carried out on an ad-hoc basis, to provide an accounting settlement of amounts due to and from the sector. These amounts do not represent a cash transaction. 66

79 Cash management of the power sector 9. In terms of cash management, the sector's deficit has risen steadily, due to factors such as: (i) late collection of export revenues; (ii) increase in the amount of unpaid bills and electricity theft; (iii) inability to collect revenues in the CNO Zone; and (iv) rising expenditures on rural electrification. 10. A partial tariff increase implemented in 2008 raised total revenues from private industrial customers by 9 percent, while not altering the prices charged to residential consumers. Some of these latter rates have now been increased with effect from lst April 2009, although the lifeline rates (for those using less than 80 kwwmonth) remain untouched. As shown in table 21, this category accounted for 17 percent of total sales revenue in ITEM Table 22: Electricity sales by tariff category, 2008 Quantity (MWH) Revenue (KFCFA) Average tariff %total revenue Moderate General Professional Conventional Public lights Free access (for utility 670, I99 35,220, ,999 36,432, ,431 37,950,267 20, I, ,624 I I, 5 I 0, % 17.05% 17.76% 0.18% 5.39% I TOTAL 3,713,497 I 213,665,467 I I 100% 11. At the end of the year 2008, the cash deficit of the sector was about CFAF 7 billion. Until now, such a cash deficit was managed by deferring investments, delaying payments due to CIE and ceasing payment of the state's shares of gas revenues. Treasury problems are expected to arise soon because gas costs to private suppliers continue to rise. It is possible that in the coming months, SOGEPE would be forced to delay its payments to the IPPs and/or to the gas suppliers. Currently, there is a backlog of payments on rural electrification, but IPPs and gas fields have been paid on time until now. The cash deficit has also been exacerbated by the inability of CIE to collect revenues in the north of the country", which amounted to CFAF 45 billion (US$90 million) at end-2006 (when a cross-debts settlement was carried out between CIE and GoCI). 12. The cash deficit of the sector shows that the order of priority specified in the procedures manual is not followed, since expenses are oversized compared to cash inflows, and politically-driven investments in rural electrification continue to be made, l8 Electricity supply to the Zone CNO was never cut. Uncollected revenues in this area are about CFAF 10.4 billiodyear (US20 million), for 450 GWh of energy delivered. (about 8 percent of the total energy delivered to the grid). 67

80 despite the deficit. Since GoCI has forgone all its dues for gas, there is no scope for further subsidies short of an outright cash injection from the Budget. Price of gas 13. The price of gas is indexed to the price of WTI crude, and for most fields, it is currently not capped, which has had severe consequences for the Ivorian power sector. The gas price for each month is based on the average WTI price of the previous 12 months. This implies that the high crude prices in 2008 will still have a heavy impact on the cost of gas in Assuming that for 2009 the price of oil will average $45 hbl, the forecast gas cost will be about $7.00/MMBTU. At $55hbl on average, the equivalent gas price works out at US$7.50/MMBTU Figure 4: Average Cost of Gas US$/MMBTU 14. As can be seen from the table below, the power sector, on average consumes about 70 MMCFD and is expected to consume about 65 MMCFD from the Foxtrot field in GOCI is presently attempting to obtain a lower gas price from Foxtrot. GoCI s case is likely to be strengthened as a result of the review of gas pricing and contracting that is being carried out under the Project. Thus, such a discount would not have an impact on the cost of gas for It would have an impact in the later years, if the new 68

81 plants CIPREL Phase 3, EEI and Lushann start operations in , as they will require additional gas volumes to run. B. Financial Projections 15. Presented here are two scenarios, one with parameters proposed by GoCI and the other reflecting the team s best judgment on a possible strategy for financial recovery in the sector. SOGEPE s scenario: assumptions 16. SOGEPE and GOCI have made financial projections, which rely on the following main assumptions: t Government subsidy: Electricity bills of public bodies and Part Etat gaz remain unpaid in the medium term t Domestic demand: expected to grow by an average of 9 percent per annum Exports: these are expected to increase substantially above the current level (to about 855 GWh in 2011). Exports are assumed to be paid in full and on time. t Generation capacity increase: considering the sharp increase in demand, generation capacity is assumed to increase with the entry in service of the CIPREL Phase 3, EEI, and Lushann plants. Tariffs and capacities are as in the concession contracts recently signed by the GOCI. Tariff increases: On 1 April 2009 the increase approved in the tariff general basse tension will be effective, and this would bring an increase of about 2 percent in domestic revenues for In 2010 and 2011, the assumed tariff increase (overall) is 7 percent per year. This increase has not been approved, but is considered by SOGEPE an obtainable target in the medium term. b Collection rate: on domestic customers, of about 92 percent (as for 2008), increasing by about 1 percent per year, to reach 96 percent in t Oil: WTI is expected to average $45/bbl in 2009, $55/bbl in 2010 and $75/bbl from 2011 onwards. b Gasprices: the formula for all fields is assumed to remain as it currently is for Foxtrot, CNR and for the portion to Petroci. An ongoing renegotiation with Afren on the tariff has recently led to a temporary increase in price to $4NMBTU. SOGEPE s assumption is that the price would increase to about $5/MMBTU from 2009, provided that Afren undertakes investments to guarantee at least a supply of 25MMCFD. l9 Includes the Part Etat Gaz. Estimate for

82 t t t t Gas fields: a study by Gaffney Cline & Associates in 2008 outlined the fwture projection of production for the main existing offshore fields. This expected level of production is reflected in the formulation of the scenario. CI-11 (the cheapest field) is being depleted, and will have a declining production. CI-27 (Foxtrot) is expected to represent a larger portion of the gas supply in the coming years, especially once the Manta field comes on stream. Distribution losses: Reduction in distribution losses of about 1.5 percent per year (except in 2009, where the reduction would be 0.5 percent), due to the planned investments in distribution by the World Bank and other donors. Asset Maintenance: CFAF 10 billion per year of travaux de renouvellement, in line with the historical expenditure. Rural electrijkation and cost of the state bodies: About CFAF 18 billion for Flux SOGEPE. This includes CFAF8 billion for the operations of the three sector agencies (SOGEPE/ANARE/SOPIE) and CFAFlO billion of payments for rural electrification. These works in rural electrification have already been started, so there is little scope to reduce them. 17. As can be seen in the graph below, SOGEPE s scenario assumes a high growth trend for domestic demand. Figure 5 : National Energy Sales - historical & projections (SOGEPE s scenario) Vente domestique d energle en CBte d lvoire - historique et projections 14 0% 12 0% 10 ox ~ 6 0% 4 0% 2 ova O h -2.0% % uB ZOO a W The high expected growth in demand, the high level of exports and the slow reduction in distribution losses give reason to the ambitious plan to increase generation capacity, as shown in the graph below. -6 0% 70

83 Figure 6: Demand and Supply capacity - historical & projections (SOGEPE s scenario) f **r 7 II. d.11 5?-?E; XI J *. I d12 SOGEPE s scenario: results 19. The financial impact of these parameters is as follows. Demand Scenario 1 Table 24 : Results of Financial Simulations In CFAF millions Domestic sales + exports (GWh) Sales, TVA and Redevance ER (P&L) Operating Costs (P&L) Net profit/loss Sales, TVA and Redevance ER (cash) Operating Costs (cash) Net cash inflow/outflow Actual ,225 4, , ,076 (272,605) (320,687) (46,192) (71,611) 189, ,636 (196,635) (225,053) (6,978) (6,417) Projected ,468 5,177 5,870 6,321 6, , , , , ,797 (309,885) (367,300) (439,150) (509,514) (526,802) (46,3 18) (53,724) (60,043) (67,795) (45,005) 216, , , , ,347 (229,991) (283,312) (332,791) (378,895) (391,455 ) (13,721) (21,133) (11,231) 2, , Over the past 6 years ( ) the power sector s cumulative financial loss has amounted to about CFAF 180 billion (US$360 million). As it can be seen from the table above, the sector s losses are expected to continue in the medium term. However, with an increase in tariffs of about 17 percent over three years, the sector should reach cash breakeven (provided that the WTI price and the other main cost assumptions develop as 71

84 expected), but the sector continues to make large losses of CFAF 60 billion (US$120 million) in In addition, the above scenario makes no provision for new investments. 21. In the two graphs below, an analysis of average costs and marginal costs per kilowatt-hour is compared to the cash inflows of the sector. Bearing in mind that (i) the Part Etat Gaz is not paid and (ii) the public electricity bills are not collected, in SOGEPE's scenario, the average cost of supply would not be recovered, even in the medium term. rginal costs per kilowatt hour I SOGEPE's scenario:filzancial impact of the planned new IPPs 22. An important development in the sector has been the signing of three concessions, for expansion of power production capacity. The new contracts signed are: CIPREL Phase 3: 110 MW, commercial operation date in January 2010, now under construction at Ciprel's existing Vridi site EEI: 104 MW, commercial operation date expected in the first quarter of 2010, to be built near Vridi; Lushann: 118 MW, commercial operation date in the second quarter 2010, to be built in Bassam; From a purely financial perspective, once the construction of these plants is completed, the sector will have to bear some additional supply costs compared to the current average of about CFAF 9.1kWh) due to: a. the level of "take or pay" engagement for these plants, which will oblige the sector to increase its use of thermal production, and in the initial period reduce its use of hydro production until the extra energy from the new plants is fully absorbed; b. the costs for the transmission interconnection of the EEI and Lushann plants to the grid, which will have an indirect impact on the power sector costs (and thus on the end-user tariffs); 72

85 c. a new gas pipeline (about 45 km for Lushann) and a new 225kV transmission line have to be built new investments to connect the CI-01 gas field have to be started and financed. 23. There are also concerns about the availability of adequate gas reserves and the supply volume that can come on stream in time for these new plants. In addition, in the absence of an increase in proven reserves resulting from new discoveries, there would be insufficient reserves for the existing and the new plants, unless new upstream fields are developed on time. 24. However, there are now growing indications that due to the global financial crisis the developers are unlikely to be able to come to financial closure on the EEI and Lushann plants. Sector Financial Recovery plan: assumptions 25. This section presents a preliminary recovery plan that provides a path to restoring solvency to the sector. In the judgment of the appraisal team, this combination of measures is a reasonable set of actions that addresses the key variables influencing financial performance. Its main features are: (i) reduction of gas costs to about US$S/MMBTU; (ii) tariff increases of about 10% per year for two years; (iii) progressive elimination of the Government subsidy; (iv) slight restructuring of export tariffs and more conservative export policy; and (v) lower expectations for demand growth. 26. Detailed assumptions of the recovery scenario are as follows:. Government subsidy: The subsidy is assumed to be eliminated by Thus, electricity bills of the public bodies are assumed to be paid (for 50 percent of their value in 2010, 75 percent in 2011 and 100 percent thereafter) and the Part Etat gaz progressively paid to the state (for 50 percent of the value in 2010, 75 percent in 2011 and 100 percent thereafter). Domestic demand: Expected to grow by 7.5 percent per year and public sector demand to grow by 1 percent per year, resulting in a total demand increase of around 6.7% per year.. Exports: Exports are planned to grow, but less quickly than under the SOGEPE s scenario (about 450 GWh in 2011). This reflects a more realistic view on demand from Ghana. Exports are assumed entirely paid and on time, according to a new remuneration formula which covers marginal cost. The increase compared to the current formula is about 5-10 percent in the overall price, depending on the export contract.. Generation capacity increase: It is assumed that one combined cycle plant can be developed by 2012 (Azito phase 3), and the results show that this would provide enough capacity in the medium term to satisfy demand. In the event of delays, imports from Ghana could help meet peak demand.. Tariff increases: On 1 of April 2009 the tariff increase approved for the tariff general basse tension became effective, and this would bring an increase of about 2 percent in domestic revenues for The assumed tariff increase (overall) is 10 percent per year, for the two years 2010 and

86 Collection rate: On domestic customers, of about 92 percent (as for 2008), increasing by about 1 percent per year, to reach 96 percent in 2013 (as in SOGEPE's scenario). Oil: The WTI price is expected to average $45/bbl in 2009, $55/bbl in 2010 and $75/bbl in (as in SOGEPE's scenario). Gas prices: the formula for all fields is assumed to be modified from 2010, adding a price cap to all gas fields at $5/MMBTU. Gasfields 'production: (as in SOGEPE's scenario). Distribution losses: Reduction in distribution losses of about 1.5 percent per year (except in 2009, where the reduction would be 0.5 percent), due to the planned investments in distribution by the World Bank (as in SOGEPE's scenario). Asset Maintenance: CFAF 10 billion per year of "travaux de renouvellement" in 2010, CFAF 20 billion in and CFAF 30 billion in Rural electrijkation and cost of the regulatory agencies: (as in SOGEPE's scenario). Figure 8: National sales of energy in Cote d'ivoire - historical & projections _I Venfe domestiaue d'enersie en COte d'lvolre - hisforlsue et prolackions - Ventas dnmemiques (CM) -Cms6ama snnoelle 1%) - x _I "_, ~ ~-^. x._ -lxili L 6000.' % 8500.'.. 120% 5000 ' %.. 8 OR, 45 0 I % 3540 '..' 20%.. 0 0% % -3 8% % o i : : : : : ; : : : : : : : : : : : : : : : '

87 ~ --"? Figure 9: Demand and Supply Capacity - historical & projections Demand6 et Productrble - WIstbrlqur et Proletee The key parameter of the recovery plan is that the gas price is reduced to about US$S/MMBtu, as shown in the graph below: Figure 10: Average cost of gas US$/MMBTU CoQt Mclyen du gaz par MMBtu 75

88 Recovery plan: results 28. The financial impact of the recovery scenario is expected to be as follows: Recovery Scenario Table 25: Results of Financial Simulations In CFAF millions Domestic sales + exports (GWh) Actual ,225 4,401 Projected ,550 4,719 5,057 5,416 5,849 Sales, TVA and Redevance ER (P&L) Operating Costs (P&L) Net profitlloss 226, ,076 (272,605) (320,687) (46,192) (71,611) 266, , , , ,534 (311,832) (325,668) (351,271) (371,269) (386,509) (45,686) (25,541) 1,233 10,126 23,025 Sales, TVA and Redevance ER (cash) Operating Costs (cash) Net cash inflowloutflow 189, ,636 (196,635) (225,053) (6,978) (6,417) 219, , , , ,057 (230,650) (290,360) (331,593) (371,269) (386,509) (11,547) (24,049) (2,669) 1,088 16, As shown in the table above, the sector can be brought to financial equilibrium in However, it would require that (i) the government subsidy is progressively eliminated, (ii) the gas price is reduced and (iii) that the tariff structure for exports and domestic demand becomes effectively cost-based. As shown in the graphs below, such a scenario would result in a full recovery of average cost and almost a full recovery of marginal cost. Figure 11: Cash inflow vs average cos1 n t n I t" I I LO I O PO nu 00 76

89 C. Economic Analysis of the Project 30. The economic analysis of the project is centered on the physical investments in upgrading of the distribution network, amounting to about US$44 million (excluding price contingencies), or almost 90 percent of the total project costs These investments yield economic benefits in the form of (i) incremental electricity demand served and (ii) an improved quality of supply. In the absence of an analysis of willingness to pay by potential project beneficiaries, the prevailing retail tariffs have been used as a proxy measure of economic benefits resulting from the increased sales of electricity. This is a conservative value, since experience in other countries shows that even among low income households there is a readiness to pay higher amounts than the utility tariff rates in order to access electricity from other sources (such as from car batteries), or to get lighting from other types of fuels. 32. The project is expected to enable an additional 60,000 households to be connected to the public electricity supply system. Based on records of consumption patterns of existing low-income clients, it is expected that they will use about 100 kwh of electricity per month. There is little risk of not meeting the connections target, because (a) the initial hookup cost is being brought down to $40-60, and (b) significant numbers of the potential beneficiaries are already electricity consumers, who pay a flat rate for minimum supply provided by unofficial re-vendors. 33. The project is also designed to reduce overloading on the distribution network in a broader zone than those areas targeted for new connections. This will result in a drop in energy losses, which has been estimated to be about 0.5 percent of total sales of electricity from onwards. The project will also contribute to reducing commercial losses through a reduction in illegal connections etc, but these have not been considered as economic benefits. 34. The table below contains details of the assumptions used to compute the project s economic internal rate of return (EIRR). The base case EIRR is 15 percent. Several sensitivity tests were undertaken to gauge the robustness of the EIRR to changes in key parameters. Unsurprisingly, the average tariff used to value benefits is a crucial variable and only a small reduction (of 1-2c/kWh) in this value drops the EIRR below 10%. On the other hand, the EIRR is not particularly sensitive to a slower pace of implementation - an additional year before project completion has little impact on the EIRR. Equally, a 20 percent lower than the assumed average consumption of electricity per new connection has a minor impact on the EIRR. 77

90 Table 26: Economic Internal Rate of Return - UERF' EIRR I 15.4% I I I I I I I I I 78

91 Annex 10: Sector Institutional Issues CdTE D'IVOIRE: Urgent Electricity Rehabilitation Project 1. The electricity sector in Cbte d'ivoire is characterized by a rather complex institutional framework. Overall responsibility for the sector rests with the Ministry of Energy and Mining (Ministdre de 1 'Energie et des Mines) and, specifically, with the DGE (Direction Ge'ne'rale de 1 'Electricite! in said Ministry. The Ministry of Finance (Ministire de I'Economie et des Finances) is also involved in decisions relating to the sector (a co-signatory to the concession and the decrees referred to below). Furthermore, three public enterprises (socie'te's d 'e'tat) - National Electricity Sector Regulation Authority (Autorite' Nationale de Re'gulation du Secteur de 1 'Electricitk-ANARE), Electricity Sector Asset Management Company (Socie'te' de Gestion du Patrimoine de 1 'E2ectricite'-SOGEPE), and Ivorian Electricity Operation Company (Socie'te' d 'Ope'ration Ivoirienne d'e1ectricite'-sopie) - were established by decrees in 1998 with the functions of sector regulation, asset management, and technical supervision, respectively. Another complexity in the framework is that the decrees set out the roles of each of these entities whilst not delegating expressly the powers to carry out these functions. Background 2. In the 1980~~ low operating efficiency and weak financial management led to the state-owned electricity company, Electrical Energy of Cbte d'ivoire (Energie Electrique de CGte d 'Ivoire-EEC1)-a vertically integrated monopoly which was responsible for electricity generation, transmission, and distribution - being unable to service its debt. A reorganization of the sector then began, with first a new Electricity Law in This clearly established that the functions of distribution and transmission of electricity would be a State monopoly (with all assets relating thereto belonging to the State) whilst electricity production would not be a State monopoly and the State would produce electricity alongside independent power producers operating under licences. 3. Then in 1990, EECI was restructured and the transmission and distribution assets of the State were conceded to the Ivorian Electricity Company (Compagnie Ivoirienne d'electricite', CIE), a private operator jointly owned by Electricite' de France and the Saur Group, which was awarded a 15-year lease contract (contrat d'affermage) for system operation and maintenance (this contract was renewed for another 15 years in 2005 under amendment No. 5). 4. EECI remained a public enterprise, retained ownership of sector facilities and continued to be responsible for system planning and major investments in network expansion. In 1998, EECI was further unbundled into the above-mentioned three public enterprises: (i) ANARE, which has a limited regulatory function (to monitor the sector operators to ensure that they are respecting the regulations and contractual obligations) and role of arbitrator between operators or between operators and consumers; (ii) SOGEPE, which manages the sector assets and is also responsible for sector financial management; and (iii) SOPIE, which is responsible for overall system planning, investment planning, execution of new projects, and supervision of CIE production, 79

92 transmission, and distribution activities. As mentioned above, each of the decrees establishing these entities sets out their functions, but neglects to delegate the power to carry out these functions. 5. Independent power producers-notably the Ivorian Electricity Production Company (Compagnie Ivoirienne de Production d 'Electricite'-CIPREL) and Azito Energie also entered the electricity sector in the mid- to late 1990~~ and remain active in power generation. National Electricity Sector Regulation Authority (ANARE) 6. ANARE is the public body with certain regulatory responsibilities, (but few powers). It was set up as a state enterprise, rather than as an Authority, despite its name. The legal framework does not provide ANARE with protection against interference and guarantee its effective independence. Three aspects stand out as being less than ideal, as far as the effective discharge of ANARE's functions as a regulatory body is concerned. 7. Budget. In the case of ANARE, the lack of financial autonomy appears to be an important obstacle to its independence. At present, no minimum amount is guaranteed to the agency in operational funds, and it is essentially dependent on SOGEPE for its funding. One possibility, as in many countries would be to ensure it had minimum resources for its operations through the allocation of a certain percentage of electricity revenues. 8. Structure. One possible regulatory model in the Ivorian context is the two-tier one of the telecommunications sector, which is regulated by the Telecommunications Agency of C6te d'ivoire (Agence des Te'le'communications de CGte d 'Ivoire-ATCI), an independent regulatory authority, and the Telecommunications Council of C6te d' Ivoire (Conseil des Te'le'communications de CGte d 'Ivoire-CTCI), the highest sector authority, which is responsible for arbitration in case of differences between ATCI, C6te d'ivoire Telecom - the telecommunications company - and private operators. The Coffee and Cocoa Regulation Authority (Autorite' de Rkgulation du Cafe' et du Cacao-ARCC) could also be another possible model. 9. Mandate. Typically, an administrative agency serves two major functions, rulemaking and rule enforcement (or adjudication). Where ANARE's rule-making function is concerned, its powers are currently unclear from the decree setting it up and it does not have a mandate in relation to tariff setting, nor does its coverage include the provision of natural gas to the electricity sector. These would appear to be two important gaps in its powers. Finally, where its rule enforcement function is concerned, it has little real authority as its decisions are not binding and it cannot take or prescribe action against a sector operator. It is also not clear to what extent its functions overlap with that of SOPIE in relation to oversight of the concession with CIE. Some form of delegation of sanction authority from the state would be needed for the agency to ensure compliance with sector regulations. However, it appears that the current Ivorian legislation with 80

93 respect to public bodies other than state enterprises may not be conducive to granting ANARE powers appropriate for a regulatory body. Electricity Sector Asset Management Company (SOGEPE) 10. Whilst SOGEPE is on paper the sector s asset management company, at present it has no interests in or rights over the public electricity assets and it is not clear where these assets are lodged. As the decree creating SOGEPE does not give it any rights over the assets, it is not clear on what authority it could manage the sector assets or manage resource planning and allocation. Nor is there a management contrict between the state and SOGEPE (just as there was none between the state and EECI during EECI management prior to 1990). In other words, both ownership and management responsibilities need to be clarified formally and definitively and enshrined in appropriate legal texts. 11. It is also difficult for SOGEPE to manage the State s financial investments in the assets, given that it does not own the assets and the assets are not ring-fenced. In order for SOGEPE to be able to borrow and usefully leverage sector assets for renewal and reinvestment purposes, the public assets or interests in the sector need to be transferred or ceded to SOGEPE. Its present status as a non-owner inherently limits its ability to manage the assets in a comprehensive and useful manner. Since the assets would necessarily be owned by the state, a concession agreement could be signed between the state and SOGEPE, as between the state and the Ivorian Railway Company (Socie te Ivorienne des Chemins defer-sicf). 12. Further, a full sector asset inventory needs to be carried out. All operational assets-that is, assets other than land and buildings-that were not conceded to CIE and are presently under SOGEPE management are not necessarily reflected in the SOGEPE asset register, which also has not been comprehensively updated to take account of asset additions made by SOPIE, particularly for rural electrification. As a separate but related matter, the liquidation of EECI-ongoing since 1998-must be completed on an urgent basis and the balance of remaining assets (essentially land and buildings) transferred to SOGEPE. Ivorian Electricity Operations Company (SOPIE) 13. It is not clear that the functions of the sector s technical actor (SOPIE) are entirely different from those of the financial actor, SOGEPE, or of CIE, the private operator. Certain tasks also overlap with those of the regulator. The decree establishing SOPIE has the same structure as the other decrees and so the functions are set out without any specific authority or power being delegated. There is confusion and duplication, and no clear responsibility for investment, as opposed to maintenance. One suggestion that has been made is the possible amalgamation of SOGEPE and SOPIE. 81

94 Compagnie Ivoirienne d Electricitd (CIE) 14. The State (Ministry of Mines & Energy and Ministry of Finance) entered into a concession agreement in 1990 with CIE for 15 years for transmission and distribution of electricity in Cote d Ivoire. The agreement has had 5 amendments, the last of which was in 2005 and under which the concession was renewed for a further 15 years until The concession agreement is more accurately described as an affermage (leasing) contract, as CIE has very limited investment obligations. Performance specifications are also rather limited and there are a number of obligations on the State as regards investment. CIE has full responsibility for collecting revenues from customers. There are some performance incentives as part of CIE s remuneration that are linked to revenue collection. CIE is also responsible for paying the revenues collected out to the various creditors, starting with the IPPs & gas suppliers, and the remainder into Investment Funds and a Stabilisation Fund. Amendment No. 5 established the priority of payments (amending the Sector Financial Procedures Manual for Concessionaire (Nov. 1998) so that the first priority payment is for CIE s fees (art. 55.2). 82

95 Annex 11: Letter of Sectoral Development Policy C6TE D'IVOIRE: Urgent Electricity Rehabilitation Project Republic of C6te d'lvoire Ministry of Mines and Energy Finance Ministry of Economy and Letter of Development Policy for the Electricity Sector (Unofficial translation) (January 2009) Office for Energy 01 BP 2541 Abidjan 01 Tel:

96 1. Objective of the Letter In November of 1990, the Government implemented a policy to restructure the electricity sector by concluding a leasing contract (contrat d 'affirmage) with the Ivorian Electricity Company (Compagnie Ivoirienne d'e1ectricite'-cie), a private operator, to perform activities under monopoly control (power distribution and transmission) throughout the country, and to operate the State's thermal and hydroelectric power stations. The CIE was therefore assigned the task of supplying power to the general population, thus replacing the former Ivorian Electricity Company (Energie Electrique de CGte d'lvoire- EECI), which has maintained a management role of the assets transferred to the CIE, as well as an oversight role with respect to design, sector work, and technical matters involving the concession holder. The following are the main objectives of this privatization effort: - Reduction in electricity rates; Financial self-sufficiency and equilibrium under the applicable rate structure; Optimization of the concessioned public service; and Coverage of the entire country through a power generation, transmission, and distribution system. - Under this arrangement, the State has continued to cover the investment costs related to grid renewal and expansion, but has authorized private operators to develop new generation capacity through independent power producers (IPP). As a result, two independent power producers have emerged in the sector: the Ivorian Power Generation Company (Compagnie Ivoirienne de Production d'e1ectricite'- CIPREL) in 1994 and AZITO ENERGIE in The stations of these two companies are operated with natural gas supplied by private operators who tap the country's natural gas reserves. In addition, the State started an institutional reform process in December 1998, with a view to streamlining organization of the tasks falling outside the purview of the concession-holder. The EECI was liquidated and three new specialized State companies were formed: (0 The National Power Regulatory Authority (Autorite' Nationale de Re'gulation du secteur de I'Electricite' ANARE), responsible for monitoring operators in the sector, handling conflict mediation, and protecting consumer interests; (ii) The Holding Company for Electricity Sector Assets (Socie'te' de Gestion du Patrimoine du secteur de I'Electricite' SOGEPE), responsible for managing the State assets of the sector, financial flows, and preparation of the sector's consolidated financial statements; and (iii) The Ivorian Company for Electricity Operations (Socie'te' d'operation Ivoirienne d'ele'ctricite' SOPIE), responsible for managing electricity flows and supervising investment activities for which the State is responsible in the area of transmission 84

97 grid renewal and expansion, as well as rural electrification. These different reforms and activities have produced mixed results. A number of limitations have been identified with the system implemented in 1990 and overhauled in In fact, for a number of years, the electricity sector has been unable to secure adequate resources to finance renewal and expansion of the' facilities, owing to higher production costs, the effects of fraud, and the inability to obtain concessional resources for rural electrification programs. The purpose of this letter is to present the measures that the Government intends to take during the period to ensure the sustainable development of the electricity sector and foster access by the population to electricity. It provides the implementation schedule prepared. 2. Context The current international energy situation is characterized by: (0 Heightened awareness of the vital and strategic nature of energy as countries increasingly attain higher levels of development, leading to a change in global demand for energy; (ii) Changes in energy markets characterized by the deregulation of the energy sector, higher inflows of private capital, and the integration of national and sub-regional markets; and (iii) Environmental concerns and growing interest in new sources of energy, renewable energy, and energy efficiency. At the national level, the country is emerging from a crisis, which has led to its partitioning and to a sharp deterioration in electricity infrastructure. As the country now emerges from the crisis, it must address an uptick in energy demand resulting from the return of investors. It is therefore necessary to invest in the rehabilitation of existing facilities and in the expansion of the electricity system in order to guarantee supply of electricity to households and industries. The electricity sector is currently experiencing a veritable financial imbalance owing to onerous operating and investment costs and a revenue shortfall. In fact, fuel expenses have more than doubled because of changes in the price of West Texas Intermediate (WTI) crude oil, a benchmark used to adjust the price of natural gas sold to the electricity sector in CBte d'ivoire. At the same time, electricity rates have remained unchanged between 2001 and In order to guarantee CBte d'lvoire an uninterrupted supply of electricity and maintain its top ranking in the sub-region's electricity market, the Government has undertaken implementation of a plan to provide CBte d'lvoire with power generation resources by signing new agreements with the following Independent Power Producers (IPPs): CIPREL phase 3 (1 10 MW), EEI (120 MW), and Lushan (120 MW). 85

98 3. Current Situation in the Electricity Sector The energy situation in CGte d lvoire is dominated by the biomass, which covers close to 70 percent of the country s energy needs. Consequently, the supply of and access to modern energy sources need to be boosted. The electricity penetration rate (number of cities supplied with electricity relative to the total number of cities in CGte d lvoire) currently stands at 31 percent. Although 71 percent of the population lives in an area supplied with electricity, access levels to electricity are very low in rural and peri-urban areas. The number of households connected to the power grid relative to the total number of households stands at 17 percent. The current situation in the electricity sector is characterized by a number of problems and malfunctions, namely: (i) Scant financial resources to renew and rehabilitate power generation, transmission, and distribution infrastructure. In fact, in 2008, the operating deficit rose to CFAF 70 billion; (ii) A very difficult cash flow situation with the cash flow deficit estimated at approximately CFAF 17 billion over the past five years; (iii) Increased fraud, which exacerbates distribution losses, currently in the vicinity of 20 percent. Collection problems occurs in addition to these losses. Unpaid bills in the CNO [central, northern, and western] zone alone amount to over CFAF 40 billion; (iv) Overlapping of responsibilities among the sector s State companies; (v) An unsuitable rate structure (which has remained the same since the period when hydroelectricity was dominant); (vi) Weak investment planning and project implementation capacity; (vii) Absence of a demand side management policy; (viii) The sector s inability to secure concessional funding for rural electrification; (ix) Low power generation capacity from renewable energy sources which, however, offers tremendous potential; and (x) No guarantee in the medium term of the supply of gas to current and future thermal stations (IPP contracts already concluded) from proven reserves in the country. 4. Energy Policy The Government undertakes, through this Letter of Development Policy for the Electricity Sector, to implement several measures to resolve the problems plaguing this sector. Its primary aim is to supply electricity at the highest quality and at the lowest cost without subsidizing the operating costs of the sector, by restoring its financial viability. These reforms revolve around three main pillars: 86

99 Pillar 1: Restore Financial Viability (i) Preparation and implementation of an overall financial restructuring plan aimed at restoring financial equilibrium in the sector. This financial restructuring plan is also aimed at restoring the self-sufficiency and borrowing capacity of the asset company; (ii) Establishment of an effective tariff policy based on a tariff study that encourages energy saving. Tariff rates should help eliminate operating cost subsidies over a three-year period; and (iii) Preparation and implementation of a plan to reduce losses and combat fraud. Pillar 2: Establish a Electricity Supply and Demand Balance (i) Develop electricity infrastructure; - Undertake a master plan study in order to ensure adequate electricity supply capacity needed to meet rapidly increasing demand; - Guarantee the supply of natural gas to thermal stations through the development of national gas potential and participation in the subregional gas pipeline project; Tap hydroelectrical potential estimated at 1,944 MW out of an annual output of 10,563 GWH, with the aim of rebalancing thermal production and hydroelectric production; Build the SOUBRE hydroelectric dam (270 MW) and create an entity to develop the Sassandra river basin; Develop grid connections with a view to improving the quality of the service and increasing exchanges with the countries of the subregion in order to permit CBte d Ivoire to play a central role in the emerging regional electricity market: and Diversify power generation energy sources by using primary energy sources like solar and uranium, given the fact that over the long term, gas will be in short supply. The State makes a commitment to use a transparent and competitive process for future IPPs. It is also necessary to adopt useful measures for the execution of transmission and distribution projects, in particular: * For the transmission network: Complete the Yopougon2 225/90/15kV substation; Establish a 225 kv node at the RiviCra substation with a loop opening at this substation for the Abobo-Prestea line in order to complete the 225 kv loop for Abidjan city; Build the 225 kv Laboa-FerkC line; Construct the Djibi 90/15 kv substation with a loop opening for the 90 kv 87

100 Abobo-Bongo line and a 90 kv underground link (Djibi-Riviera); Construct the 90/15 kv substation with a loop opening for one of the 90 kv lines (Bia Sud-RivCra); Build the 90 kv eastern loop (Agnibilekrou-Bondoukou-Serebou) with a 90/30 kv substation in Bondoukou; Renew telecontrol dispatching equipment in Abidjan; Construct the Buyo-Zagne line - construction with a 90/30 kv substation in ZagnC and reorganization of the High Voltage grid; Equip the ANANI 90/15 kv substation with two transformers (each 50 MVA) and a loop opening for the 90 kv RiviCra-Bassam line; * For the WAPP (West Africa Power Pool) projects: - Establish the connection between CGte d Ivoire and Mali through construction of the 225 kv FerkC-Sikasso line; Double the CGte d lvoire-ghana connection, by a new 330 kv Riviera-Prestea line, with the establishment of a 330 kv junction at Riviera; Construct the Medium Voltage Control center in Abidjan; and Double the 225 kv Kossou-Taabo line. * For the distribution network, restructuring, reinforcements, and expansions will be needed in order to remove the load-carrying and voltage fluctuation constraints experienced by consumers. (ii) Demand Side Management - Undertake actions to enhance energy efficiency in administrative buildings and industries; - Take into account consumer behavior in the tariff study aiming at energy savings; and - Encourage energy-efficient practices, in particular the use of low-power consumption lamps. (iii) Greater access to electricity - Prepare a master plan for rural electrification and access to energy services, with the aim of establishing a fund for electricity access by the poor in rural and periurban areas; and - Improve the real rate of access to electricity (number of households with electricity service relative to the total number of households in CGte d Ivoire) by providing connections for one million households over a five-year period, through the expansion of grids and provision of a connection subsidy for the poor, funded by the fees from the operating company. 88

101 Pillar 3: Improve the Institutional Framework (i) Amend the 1985 Law by taking into account the sub-regional electricity market; (ii) Reorient the missions of entities established, particularly those of the regulatory company and the asset company; and (iii) Strengthen regulation of the sector and transparency of its management by ensuring consistency between the institutional framework and the organization of the sector by vesting the regulatory authority with true autonomy and real prerogatives with respect to rate setting. The actions necessary for obtaining the outcomes expected from the implementation of the measures decided upon are set forth in the table below entitled main actions, along with an indication of the deadlines for execution and entities responsible. Minister of Mines and Energy Finance Leon-Emmanuel Monnet Minister of Economy and Koffi Charles Diby 89

102 ~ ~~~ ~ Main Actions Pillar 1 : FINANCIAL VIABILSry Recommendations Specific Actions Prepare an overall mclluing plan Amend &s CmWAe ofnatural gas aimed at restoring the sector s Conduct a rate study along with amechanism for rate adjustment hand equilibrium and Implement the rates resulting from the tariff study. establishing an efficient rate policy. Preparer a financial model as a strategic planning tool DE Prepare a plan for reducing losses and combating fraud. Prepare a plan for reducing losses and combating fraud. Make investments to reduce technical losses DE CIE Increase the supply of electricity and connections in the WAPP context. Establish a formal planning process Develop new thermal production resources Guarantee the availability of natural thermal facilities by developing national potential and participating in the subregional pipeline project. Conduct hydroelectric development projects Rehabilitate hydroelectric dams so that they can attain an optimal level of production (Buyo, Ayam6, Kossou, Taabo, and Fa I I Pillar 2: ESTABLISH A BALANCE BETWEEN SUPPLY AND DEMAND Control demand. Promote efficient energy practices. Seek financing to establish and upgrade interconnexion facilities mentioned (CI/Mali; CVLibera-Sierra Leone-Guinea; CVGhana; CIiT3urkina). Use plant, household, and agro-industrial waste for energyrelated purposes. Upgrade the transmission grid based on the needs described in the relevant paragraph above. Design a rural electrification master olan. Carry out electricity pilot projects using solar systems. Draft and design a suitable Demand Side Management plan. Revitalize the national energy efficiency program. Replace existing lamps with low-energy consumption lamps. Conduct energy audits of industries, services, and governments. 1 CIE SOPIE Redefine and clarify the responsibilities of State companies. 1 I Pillar 3: INSTITUTIONAL FRAMEWORK Strengthen regulation of the sector and transparency of its management. Transform the regulatory company (ANARE) into an independent regulator with the authority to regulate tariffss based on the different types of energy sales 2010 Establish a new electricity law taking into account, inter alia, the subregional electricity situation and market (WAPP) Establish an asset company and provide it with all necessary resources. Establish a fund to ensure rural electrification and access to energy services. Establish an atomic energy commission. I DE 90

103 Potential Long-Term Impacts Annex 12: Safeguard Policy Issues C6TE D'IVOIRE: Urgent Electricity Rehabilitation Project 1. This project falls into Environmental category B as no adverse long term or irreversible impacts are anticipated. It is however expected that rehabilitation and expansion works on distribution networks, have the propensity to generate potential small and site-specific environmental and/or land acquisition impacts, thereby triggering Involuntary Resettlement operational policy (OP/BP 4.12). These environmental and social impacts will be minor and localized. Appropriate safeguards instruments were prepared by SOPIE before appraisal to mitigate them, namely: Environmental and Social Management Framework (ESMF) and Resettlement Policy Framework (RPF). 2. The proposed project is organized into three components to meet its development objectives. The three main components are: Distribution Network rehabilitation and Expansion Preparatory activities for the future transmission network investments Project oversight and institutional support 3. The ESMF and RPF carried out during project preparation have provided mechanisms to identify impacts beyond the generic ones for which standard mitigation measures are built and to be applied during the implementation phase. Environmental protection clauses will be included in the contract documents for sub-projects pertaining to rehabilitation and expansion of the distribution network. Project Location and Salient Physical Characteristics Relevant to the Safeguard Analysis 4. It is expected that in the project, the civil works will take place mainly Abidjan. With some additional civil works expected in some parts of Yamoussoukro. and Soubre. The preparatory studies will be confined to the district of Abidjan and in some regions in the interior of the country, including Bondoukou, Agnibilekro, Sdbebou, Tai, Tabou and ZagnC. Measures Taken by the Borrower to Address Safeguard Issues 5. Since the locations and potential negative localized impacts of the future sub-projects were not known at appraisal, the Borrower prepared an Environmental and Social Management Framework (ESMF) and a Resettlement Policy Framework (RPF) for the purpose of identifying and mitigating potential negative environmental and social impacts at the sub-project planning stage. The RPF outlines the policies and procedures to be followed in the event that sub-projects require land acquisition leading to loss of revenue or access restriction to protected areas. 6. The RPF was prepared to minimize such land acquisition and define applicable principles and procedures to compensate for the losses undergone if necessary during the implementation of the works. It specifies the cases in which a specific plan (Resettlement Action Plan (RAP) or 91