IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA 42230) ON A CREDIT IN THE AMOUNT OF XDR 6.8 MILLION (US$ 10 MILLION EQUIVALENT) TO THE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank Report No: ICR2923 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA 42230) ON A CREDIT IN THE AMOUNT OF XDR 6.8 MILLION (US$ 10 MILLION EQUIVALENT) TO THE REPUBLIC OF MADAGASCAR FOR A POWER AND WATER SECTOR RECOVERY AND RESTRUCTURING PROJECT Energy Practice Sustainable Development Department Africa Region February 27, 2014

2 CURRENCY EQUIVALENTS Exchange Rate Effective October 28, 2013) Currency Unit = Malagasy Ariary (MA) 2205 MA = US$1 US$ = EURO 1.00 US$ = SDR 1 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ACCT ADER AFD AfDB APL BADEA BP CAS CFAA CFL CPAR CELCO DEEL DFB EBITDA EIB EIRR ESMF ESIA EMP FA FDI FMRs GDP GIZ GOM HFO IDA Agence Comptable Centrale du Trésor (Treasury s Central Accounting Agency) Agence de Développement Rural (Rural Development Agency) Agence Française de Développement (French Development Agency) African Development Bank Adaptable Program Loan Banque arabe pour le développement économique de l Afrique (Arabic Bank for African Economic Development) Bank Procedure Country Assistance Strategy Country Financial Accountability Assessment Compact Fluorescent Lamp Country Procurement Assessment Report Cellule de Coordination (Implementing Unit) Direction de l Equipement Electricité (Department of electrical equipment) Directorate of Finance and Budget Earning Before Interests, Taxes, Depreciation and Amortization European Investment Bank Economic Internal Rate of Return Environmental and Social Impact Management Framework Environmental and Social Impact Assessment Environmental Management Plan Financing Agreement Foreign Direct Investment Financial Monitoring Reports Gross Domestic Product Gesellschaft fur Internationale Zusammenarbeit (German Society for International Cooperation) Government of Madagascar Heavy Fuel Oil International Development Association ii

3 IERR Internal Economic Rate of Return IFC International Finance Corporation IG2P Integrated Growth Poles Project IPP Independent Power Producer IRR Internal Rate of Return ISN Interim Strategy Note ISR Implementation Status Report JIRAMA Jiro Sy Rano Malagasy (Stated-owned water and electricity utility) LSDP Letter of Sector Development Policy MAP Madagascar Action Plan M&E Monitoring and Evaluation MEM Ministry of Energy and Mines NPV Net Present Value OP Operational Policy ORE Organisme Régulateur du Secteur de l Electricité (Electricity sector Regulator) PA ` Project Agreement PDO Project Development Objective PRSP Poverty Reduction Strategy Paper RAP Resettlement Action Plan SIL Specific Investment Loan TA Technical Assistance Vice President: Makhtar Diop Country Director: Haleh Bridi Sector Manager: Lucio Monari Project Team Leader: Natalia Kulichenko ICR Team Leader: Natalia Kulichenko iii

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5 MADAGASCAR POWER/WATER SECTOR RECOVERY AND RESTRUCTURING PROJECT Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph CONTENTS 1. Project Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners... Annex 1. Project Costs and Financing... Annex 2. Outputs by Component... Annex 3. Economic and Financial Analysis... Annex 4. Bank Lending and Implementation Support/Supervision Processes... Annex 5. Beneficiary Survey Results... Annex 6. Stakeholder Workshop Report and Results... Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR... Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders... Annex 9. List of Supporting Documents... MAP IBRD34815 iv

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7 A. Basic Information Country: Madagascar Project Name: MAG Power/Water Sectors Recovery and Restructuring Project Project ID: P L/C/TF Number(s): IDA ICR Date: 09/10/2013 ICR Type: Core ICR Lending Instrument: APL Borrower: REPUBLIC OF MADAGASCAR Original Total Commitment: XDR 6.80M Disbursed Amount: XDR 5.71M Revised Amount: XDR 5.71M Environmental Category: B Implementing Agencies: JIRAMA Ministry of Energy and Mines Co-financiers and Other External Partners: B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 02/28/2006 Effectiveness: 10/15/ /30/2006 Appraisal: 05/19/2006 Restructuring(s): 07/24/2012 Approval: 07/13/2006 Mid-term Review: Closing: 04/30/ /30/2013 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Moderately Unsatisfactory Substantial Moderately Satisfactory Moderately Unsatisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Moderately Government: Unsatisfactory Unsatisfactory Quality of Supervision: Moderately Satisfactory Implementing Moderately Agency/Agencies: Unsatisfactory Overall Bank Performance: Moderately Unsatisfactory Overall Borrower Performance: Moderately Unsatisfactory v

8 C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project No at any time (Yes/No): Problem Project at any Yes time (Yes/No): DO rating before Closing/Inactive status: Moderately Unsatisfactory Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration 7 21 General energy sector Hydropower Theme Code (as % of total Bank financing) Infrastructure services for private sector development Regulation and competition policy 33 State-owned enterprise restructuring and privatization 5 E. Bank Staff Positions At ICR At Approval Vice President: Makhtar Diop Gobind Nankani Country Director: Haleh Bridi James Bond Sector Manager: Lucio Monari S. Vijay Iyer Project Team Leader: Natalia Kulichenko Stephan Garnier ICR Team Leader: Natalia Kulichenko ICR Primary Author: Nourredine Bouzaher F. Results Framework Analysis Project Development Objectives (from the Project Appraisal Document) The aim of the program is to restore an adequate public utility service for electricity and water in urban areas of Madagascar and to create the foundation for a sustainable expansion of a commercially oriented service in the most cost-efficient way. vi

9 Revised Project Development Objectives (as approved by original approving authority): The project development objective, revised in July 2012, was as follows: The objective of the project is to improve the availability of electricity in the short-term and prepare the ground for a sustainable long-term development of the sector. Table F (a): PDO Indicators 1 Indicators Original Project 1 Restructured Project 2 PDO Baseline End of Achieved Baseline Target Achieved at value APL2 in March Value Completion 2006 Target June 2013 Comme nt 1. Restore an adequate public utility service for electricity and water in urban areas improve generation efficiency (low), reduce electricity losses (high) improve generation efficiency (high), reduce electricity losses (low) Original Project generation efficiency: significant, electricity losses: moderate 2. Create the foundation for a sustainable expansion of a commercially oriented service in the most costefficient way. improve revenue manageme nt (poor) JIRAMA to: increase return on assets (insufficien t); improve revenue management (good)- JIRAMA to: increase return on assets (sufficient); revenue management: significant Financial indicators have improved and some were above the targets at project completio n in CY have adequate tariff indexing formula (none); & have adequate tariff indexing formula (in place); & Tariff indexing formula is in place; 1 The PAD indicates that the Project Outcome (Key performance) Indicators are determined at end of the APL-2. There are no specific PDO level indicators for APL-1. 2 For the baseline, target and achievement at completion of the Restructured Project, see Table F (b). vii

10 3. JIRAMA under new private management produce adequate tech., comm., & finan. reporting & communica te to GoM/Regu lator (not yet adequate) launch date of prequalifica tion (not yet); produce adequate tech., comm., & finan. reporting & communicat e to GoM/Regul ator (adequate) launch date of prequalificat ion ( Dec. 31, 2007); Regular performanc e reporting is in place 1. Improve the availability of electricity in the short term launch date of bidding documents (not yet); contract signed (not yet) launch date of bidding documents (April 1, 2008); contract signed - 3 Not achieved Restructured Project 4 - Improve generation efficiency See Table F (b) See Table F (b) See Table F (b) Achieved - Reduction of electricity losses See Table F (b) See Table F (b) See Table F (b) Partly achieved - Revenue Management - Financial See Table F (b) See See Table F (b) See See Table F (b) See Table F (b) Partly achieved Not achieved 3 A new private management contract, which was to replace the one separately funded by IDA prior to the implementation of the original project (see paragraph 9 for details). 4 The PDO indicators of the original project were for both APL-1 and APL-2. However, the APL-1 achievements were monitored through a set of Intermediate Outcome Indicators Arrangement for results monitoring APL-1, p of the PAD). Some of these Intermediate Outcome Indicators were chosen as the PDO level indicators in the restructured project. viii

11 outcomes 2. Prepare the ground for a sustainable long term development of the sector: Table F (b) Table F (b) - Scoping and analytical work and technical studies completed 3. Direct Beneficiaries (Number) of which females (%) 5 See Table F (b) See Table F (b) , % See Table F (b) 736,000 55% Partly achieved New Indicator. Substanti ally achieved. Table F (b) Intermediate Outcome Indicator(s) Indicator Baseline value 2006 Original Project End of APL1 Target Achieved March 2009 Baseline Value 2011 Restructured Project Target Achieved at Completion June 2013 Comments 6 Component A. Short Term Investments Improve generation efficiency Number of HFO units NA NA Dropped % of diesel generation over total generation 31% 14% 14.8% 22% NA NA Dropped Specific oil NA NA Dropped consumption g/kwh Generation from rehabilitated New hydro under project (MWh) Indicator 7 Reduction of electricity losses Energy 76.3% 77.6% 76.9% 70% 75.6% 67% Continued 8 billed/energy produced Length of 5 kv 5 New indicator added at the project restructuring and chosen as a PDO level indicator for the restructured project. 6 New or dropped refers to indicators added or eliminated at project restructuring 7 Indicator chosen as a PDO level indicators in the restructured project 8 The same as in Footnote 7 above ix

12 Indicator network converted to 20 kv Number of Compact Fluorescent Lamps distributed Revenue Management Revenue collected/energy billed: For industrial clients For Households Accounts receivable (months of billing) Number of prepayment meters Baseline value 2006 Original Project End of Achieved APL1 March Target 2009 Baseline Value 2011 Restructured Project Target Achieved at Completion June 2013 Comments NA NA Dropped 0 660,000 77% 92% 82% 93% Data Not available 87% 86% Data Not available 75% 80% 500, ,000 Revised 82% 93% 80% 76% Continued 9 Continued NA NA Dropped 6,897 14,200 8,640 8,640 10,000 10,000 Revised installed Financial outcomes EBITDA margin -50% 0% +47.2% -35% >0% -23% Continued 11 Adequate technical, commercial and financial reporting in place: yes/no Component B: Technical Assistance Scoping study of 6 potential sites and prefeasibility study of the selected hydro site completed Analytical work and technical studies completed No Yes Yes Yes Yes Yes Continued Scoping phase only No Yes. final reports Yes Yes New indicator Partly achieved 12 New indicator 9 The same as in Footnote 7 above 10 The same as in Footnote 7 above 11 The same as in Footnote 7 above 12 Subcomponent B1: Technical assistance and communication, and Subcomponents B5: Preparation of environmental studies for future investments were not implemented. x

13 Indicator Baseline value 2006 Original Project End of Achieved APL1 March Target 2009 G. Ratings of Project Performance in ISRs No. Date ISR Archived DO Baseline Value 2011 Restructured Project Target submitted IP Achieved at Completion June 2013 Comments 6 Actual Disbursements (USD millions) 1 12/28/2006 Satisfactory Satisfactory /18/2007 Satisfactory Moderately Satisfactory /18/2007 Satisfactory Moderately Satisfactory /09/2008 Moderately Satisfactory Moderately Satisfactory /23/2008 Moderately Satisfactory Moderately Satisfactory /02/2009 Satisfactory Moderately Satisfactory /30/2010 Unsatisfactory Unsatisfactory /27/2011 Unsatisfactory Unsatisfactory /01/2013 H. Restructuring (if any) Moderately Unsatisfactory Moderately Unsatisfactory Because of the political crisis in Madagascar, which triggered the application of OP 7.30 to the entire country portfolio, Project disbursements were put on hold in March 2009, thus halting project implementation. In May 2010, the Bank introduced a number of changes in the application of OP/BP 7.30 in the Madagascar portfolio. As a result, the closing date was extended to April 30, 2011, as an internal measure which does not require any resumption of disbursements. The Project was authorized only to resume payments for settling contractual arrears for works, goods and services already delivered and related to the contracts, signed before the application of OP/BP The project was not included in the selected number of projects with a strong poverty focus, which were authorized to resume disbursements for the ongoing or new activities. The authorization to resume disbursements on the entire portfolio was granted in May 2011, shortly after the closing date (April 30, 2011) had lapsed. The amount disbursed by April 30, 2011 was US$5.17 million, representing about 50% of the signed loan amount of US$10,427, The project was formally restructured, with Board approval on July 24, The reasons that led to project restructuring, and the key changes made at restructuring, are described in detail in Section 1 below xi

14 I. Disbursement Profile The historically disbursed amount is US$8.73 million, including the periods before and after restructuring. xii

15 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal 1. The Project was prepared in 2005/2006 in the context of a power sector crisis in Madagascar, characterized by capacity shortages, widespread load-shedding and acute financial distress of the national water and electricity utility, JIRAMA. The three key priorities set out in the Government of Madagascar s (GOM) Poverty Reduction Strategy Paper (PRSP) of October 2003 were: (i) improving governance; (ii) promoting broad based growth; and (iii) providing human and material security. Achieving rapid economic growth required improved infrastructure, particularly the availability of a reliable electricity supply. The absence of the latter was considered an additional cost to existing businesses and an impediment to attracting inflows of new foreign investment. 2. JIRAMA was in a severe financial situation. Tariffs remained frozen from 2001 to mid- 2005, even though this was a period of high inflation, sharp depreciation of the local currency and rising world oil prices. Furthermore, because of the shortages of generation capacity, and the fact that all additional demand had to be met by dispatching expensive diesel-powered units, electricity production costs rose substantially. The inaction on the part of the Government of Madagascar (GOM) to raise tariffs directly contributed to the financial insolvency of JIRAMA. The latter built up large arrears to its fuel suppliers with the resulting inability to service its debt. The failure on the part of JIRAMA to meet its contractual obligations for fuel payments and to run its power plants resulted in power cuts (which lasted from May to September 2005 and later in 2006) and brought matters to a head in mid The GOM was obliged to intervene and bail out JIRAMA with a cash injection to pay fuel suppliers to ease the power shortages. It was, therefore, crucial to the success of the government s PRSP that the electricity supply problems experienced in did not recur. These shortages badly hurt the manufacturing and export oriented industries, such as the garment manufacturing and seafood processing where factories were unprepared to deal with load shedding because they lacked standby generators. This crisis was a sharp warning to the authorities of the vulnerability of the entire economy and posed risks to the economic growth program. 3. While electricity demand increased substantially as the economy recovered from the political crisis of 2002, very limited new investments in new power took place in the years prior to the crisis of In 2005, most of the electricity production of JIRAMA s power plants and distribution services were inadequate to meet the demand in their service areas. Over 6,000 requests for new connections in the capital (backed by down-payments) were on hold, due to the lack of equipment needed to connect new customers and insufficient power supply to serve the incremental load. Additional generation capacity was added on an ad hoc basis, through expensive quasi-independent Power Producer (IPP)/leasing contracts awarded on a noncompetitive basis. The World Bank assessed JIRAMA s operational performance as unsatisfactory, pointing out the problems of high losses and poor maintenance. Thermal plants were generally in very poor condition. Billing, metering and revenue collection practices were weak. Unpaid bills of large consumers, both public (like universities) and private (e.g. numerous manufacturing enterprises), exceeded three months billings at the end of

16 4. In 2003, the government decided against the immediate privatization of JIRAMA. A diagnostic study and management audit of JIRAMA, which an international consultancy firm carried out at that time, revealed the severity of the problems faced by the utility. The study recommended a two-year management contract as the first step towards improving the JIRAMA s performance to a level, at which the utility could provide satisfactory service of delivering electricity and water to the consumers. Given the difficult international investment climate in the early 2000s (related to the Asian financial crisis in the late 1990s), and the lessons from privatization of utilities in other developing countries, the Bank concurred with the approach to delay the privatization of JIRAMA. The GOM further decided to have a short-term management contract for JIRAMA, which would be succeeded by a longer-term solution, based on a public-private partnership. 5. Large electricity tariff increases were introduced in 2005 (though belatedly), amounting to a cumulative rise of 75%. A further 10% increase in tariffs took place in April 2006, consistent with the GOM sector reform program. The average tariff in 2006 was about US$0.13/kWh. Average water tariffs were also raised by a third in 2005 and then by a further 20% in April As there is no national tariff policy for the electricity generation and distribution subsectors (an exception for regulated utilities in less developed countries), tariff hikes in the areas entirely supplied by thermal energy were substantially larger than in those areas that had access to cheaper hydroelectricity. As a normal practice, JIRAMA also applied time of day pricing to medium and high voltage customers. 7. Restoring and improving electricity supply to acceptable levels required both substantial new investment and major reforms to the power sector. The JIRAMA top management was replaced in early 2005, and the utility was put under a two-year, IDA-funded management and operation contract (this contract was funded separately and prior to the implementation of the original project, approved in 2006). The management contract, which was part of a two-phase reform process (Step 1: management contract; and Step 2: affermage and corporate restructuring of the isolated grids) brought about some positive results. These included optimization of the generation plant dispatch, optimization of plant operations, increased revenue collection and cost control measures - all these measures contributed to the improved cash flow and reduced financial losses. Financial recovery from a situation of near-bankruptcy seemed to be under way. The JIRAMA s balance sheet was also restructured through a mix of write-offs and debtequity conversions. However, the international consultancy firm, which was implementing the IDA funded management contract, was debarred from World Bank business before the contract renewal date (due to an unrelated case elsewhere in Africa). Because of this circumstance, it was decided that a few individual management consultants, paid by the government, would continue providing management services to JIRAMA, without the involvement of the debarred consultancy firm. The objective of this decision was to give enough time to the government to decide on the pace and direction of future utility reform. Later, with the civil unrest and eventual overthrow of the then head of state, some of these individual contractors faced allegations from the new leadership and had to abruptly terminate their services, and in one case to flee the country to avoid arrest. 2

17 8. At the time of the project preparation/appraisal, the GOM was preparing its secondgeneration PRSP, called the Madagascar Action Plan (MAP) that was to set out the roadmap, aiming to produce a quantum leap in the country s development process. In parallel, the Bank was also preparing a new CAS to support the implementation of the MAP. The CAS was to reflect the GOM s focus on infrastructure improvement and expansion to underpin growth and private sector development. Therefore, the project was a core element in the Bank s support to the MAP, because it addressed a critical gap in infrastructure development and a key constraint to private sector engagement into Madagascar s economy. 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) 9. According to the original project PDO, the aim of the program was to restore adequate public utility service for electricity and water in urban areas of Madagascar and to create the foundation for a sustainable expansion of commercially oriented service in the most costefficient way. 10. Key performance indicators of the APL program (APL-1 and APL-2) at approval were: (a) JIRAMA was to: improve generation efficiency; reduce electricity losses; improve revenue management; increase return on assets; have a tariff indexing formula in place; produce adequate technical, commercial and financial reporting of current operations and to communicate this reporting to the authorities (government and regulator); and (b) Contract signed for JIRAMA to be transferred to a private management firm on a long-term basis. 11. Only the APL-1 was implemented. The APL-2 was not initiated, mainly because the triggers for it were not met (see para. 40 below for details). The complete list of key indicators is presented in section F: Results Framework Analysis, above. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 12. The original project objectives and the key indicators were revised in July 2012 as part of adaptive restructuring of the project to address the 2009 political crisis and its aftermath, which triggered the application of OP 7.30 entitled Dealing with de facto governments. 13. The following revised PDO responds to narrower and more targeted goals: to improve the availability of electricity in the short-term and prepare the ground for a sustainable long term development of the sector. The rationale was to better align the Project with the strategy outlined in the Interim Strategy Note (ISN) by preparing technical and analytical basis for future development of the sector, in support of a realistic economic development strategy. 3

18 14. As shown in Section F above, the results indicators were revised to reflect the changed priorities and realities. The revised monitoring framework documented significant progress achieved during the project implementation before the 2009 crisis and then the backsliding after 2009, primarily because of the political crisis and the subsequent freeze in project implementation. The indicators were adjusted to reflect the project s revised PDO and planned activities. The following PDO indicators were added: Direct Beneficiaries (of which females %), Generation from rehabilitation of hydropower facilities, and Scoping and analytical activities. Indicators related to the already completed or abandoned activities were dropped as the PDO targets for the restructured project. The baselines for the indicators in the restructured project were defined, based on the 2011 values of the relevant indicators, as 2011 was the year, in which the Bank decided to resume disbursements on the entire Bank portfolio for Madagascar. 1.4 Main Beneficiaries 15. The primary target groups were the economy at large (industry, commerce and households), the Ministry of Energy and Mines (MEM) and JIRAMA, the national power and water utility, as well as the private sector. 1.5 Original Components (as approved) 16. The original APL-1 (of an APL program in two phases) had the following two components: (a) Component A: (implemented by JIRAMA): Short term Investments: (i) Subcomponent A1a: Power generation reinforcement Replacement of hydro-refrigerants system for the Andekaleka hydropower plant (2 x 32 MW); Rehabilitation of unit N 3 of the Antelomita 1 hydropower plant (0.8 MW); Renovation works in the Volobe hydropower plant (6.7 MW); Rehabilitation of small hydropower plants of Ankazobe, and Tsuazompaniry; Rehabilitation of mechanical auxiliaries of the Ambohimanambola thermal power plant (3 x 6 MW); and Rehabilitation of thermal plants in Mahajanga (Unit 1303). (ii) Subcomponent A1b: Retroactive financing Rehabilitation of the Ambohimanambola thermal power plant (3 x 6 MW) Rehabilitation of the Antsirabe thermal power plant Rehabilitation of the Mahajanga thermal power plant Rehabilitation of the Ambohimanambola thermal power plant (3 x 6 MW) Rehabilitation of the Ambohimanambola thermal power plant (3 x 6 MW). 4

19 (iii) Subcomponent A2: Reduction of transmission and distribution technical losses Reduction of losses: rehabilitation of transmission networks Reduction of losses: rehabilitation of distribution. (iv) SubcomponentA3: Revenue Management and modernization of information systems and acquisition of IT equipment. Revenue management Modernization of information systems and acquisition of IT equipment (b) Component B (implemented by the MEM): Technical Assistance and Capacity Building: (i) Subcomponent B1: Technical assistance and communication Contracting a private operator to take over JIRAMA (ii) Subcomponent B2: Extension of the current management contract (iii) Subcomponent B3: Preparation of future generation projects in coordination with IFC s IPP mandate (iv) Subcomponent B4: Strengthening the Ministry of Energy and Mines (v) Subcomponent B5: Preparation of APL-2 feasibility and environmental studies for APL-2 investments. (vi) Subcomponent B6: Program monitoring and evaluation; and (vii) Subcomponent B7: Assistance to the Ministry of Energy and Mines in project implementation. 1.6 Background: The 2009 political crisis 19. The effects of the political crisis of 2009 which took place two months before the initial closing of the original project on Madagascar s economic and social outcomes have been very severe. The following dimensions of the results of the protracted political crisis are particularly relevant: The economy has stalled: Overall economic growth has been flat over the period With high population growth (2.9%), income per capita in 2012 has returned to its 2003 level. Poverty has sharply increased: Preliminary estimates suggest that, from 2008 to 2012, the proportion of the population living under the poverty line, a proportion which was already high before the crisis, may have increased by 10 percentage points, with the larger effects over , as the crisis deepened. As a result, and combined with population growth, we estimate that there are now some four million more people in poverty than there were in Madagascar now has one of the highest rates of poverty in the world. Social outcomes have worsened: Despite crisis-related aid to social sectors, the number of out-of-school children has increased by more than 500,000. Acute child malnutrition remains a critical problem, having increased in some areas by more than 50%. These developments put the welfare of future generations at risk. 5

20 The crisis has stalled progress on long-standing challenges of weak governance and rule of law: Increasing insecurity, poor governance in natural resource exploitation (such as illegal rosewood logging), limited progress on the anti-corruption front, and the longstanding issue of weak transparency in the management of public resources have only become more pressing in recent years. The ability to deal with exogenous shocks is severely curtailed: Current risks to the global economy, especially in Europe, make Madagascar s economy even more vulnerable, given its connection to exports and tourism. The country is also highly vulnerable to natural disasters including cyclones as in 2008 and The political crisis is a major impediment to confronting and mitigating all these exogenous shocks, external and internal. Infrastructure has deteriorated: In addition to damages from cyclones, severe budget cuts in investment and maintenance have resulted in increasingly deteriorated roads, power and water infrastructure, impairing the medium- and long-term development of the Malagasy economy. 1.7 Revised Components 20. The restructured project had the same components and subcomponents as the original project with the exception of the following which were dropped: Subcomponent B2: Extension of the current management contract; and Subcomponent B6: Program monitoring and evaluation. The changes within the remaining subcomponents are described below: 21. Pursuant to the July 2012 restructuring, Components A and B were modified as presented below. For Component A, all its four subcomponents were considered still relevant, but changes of activities within the following two subcomponents were introduced: 22. Under Subcomponent A1a: Power generation reinforcement, the following two activities were abandoned after their cost increased significantly beyond the available budget, following a revision of the required scope of work: Activity (c): Renovation works in the Volobe hydropower plant; Activity (d): Rehabilitation of small hydropower plants. Activity (e): Rehabilitation of mechanical auxiliaries of the Ambohimanambola thermal plant was also abandoned because the plant was irreparably damaged by fire. 23. Under Subcomponent A3: Revenue management, activity (f): Investment in spot metering equipment and systems was replaced by Distribution of compact fluorescent lamps (CFLs). This change was done because JIRAMA already financed some of the metering equipment and, in the context of capacity shortages, the CFLs appeared to be the most cost effective way to rapidly reduce peak demand without increasing the cost to customers already affected by the social and economic crisis. 24. The title of Component B was changed to Technical Assistance. Available resources within this component were reallocated to analytical work and technical studies for which final reports were to be submitted by the project closing date. 25. Subcomponent B2: The extension of the management contract that was in place at time of appraisal was no longer considered relevant and was abandoned (see paragraph 9 above for 6

21 details). However, a study of management options for JIRAMA, and the diagnostic of sector institutions remained part of the analytical activities of the project (Subcomponent B3 below). 26. Subcomponent B3: This activity was changed to the following: Analytical work and preparation of future investment projects. The additional activities financed under this component included the following studies: governance of power sector institutions and management options for JIRAMA, review of the legal framework, tariff review, feasibility and environmental studies for priority investments, and rapid diagnosis of the power system. 27. Subcomponents B5 and B6 were eliminated. The required feasibility and environmental studies for future priority investments and monitoring and evaluation were included in Subcomponent B Other significant changes (in design, scope and scale, implementation arrangements and schedule, and funding allocations) 28. In a letter dated June 30, 2011, the GOM requested that the project be restructured and the closing date of the project extended, retroactively, for 26 months, from April 30, 2011 to June 30, The Bank had rated the overall implementation progress unsatisfactory, since the time disbursements were frozen. For this reason, as well as due to the difficult country context and its negative impact on the sector, the achievement of the development objective was also rated unsatisfactory. In addition to the changes to the project s components, described in section 1.6 above, the restructuring included other elements, listed below. 29. Project name and instrument. The name of the restructured project was changed to Power Sector Improvement and Recovery Project, eliminating the reference to the water sector. The original project indirectly covered the water sector, through the transfer of JIRAMA (the power and water utility) to a private management company that would have carried out water services (in addition to electricity services). Without this transfer, the Project activities would have impacted the water sector minimally. Therefore, at the time of the project restructuring, the reference to the water sector in the project name and its PDO was dropped. As part of the restructuring, the instrument was changed from an Adaptable Program Loan (APL) to a Specific Investment Loan (SIL) instrument, which was better suited to the reality on the ground. The APL instrument is usually best suited to accompany a predefined sector reform process, where milestones in the reform could be used as triggers for the different phases on an APL. However, there was no clear roadmap for sector reform after 2009, and the country was in the midst of a difficult political transition. Consequently, the APL instrument was no longer suited to the realities on the ground. 30. Extension of the closing date. As part of the proposed restructuring and as per the request of the GOM, the closing date was retroactively extended from April 30, 2011 to June 30, Implementation schedule. A new implementation schedule was put in place, and all activities of the restructured project were expected to be completed within the revised closing date of June 30, 2013, including purchases of goods and services, and completion of final drafts for technical studies and other Technical Assistance (TA) activities. 32. Reallocation of funds. A reallocation of funds between the Credit categories was also undertaken to ensure the completion of: (i) targeted activities to improve service delivery and efficiency over the short term; and (ii) preparatory activities for future investments seen as 7

22 critical for the long term development of the sector. The size of the categories stayed about the same, but the composition of activities, as outlined above, changed. 33. Covenants and condition of disbursement. a) In the Financing Agreement (FA), Schedule 1, Section V Other Undertakings the following changes were made: Dated covenant (b), which stated that no later than April 1, 2007, the Recipient shall have publicly disclosed the Electricity Tariff Indexation Formula and adjusted electricity tariffs in accordance with said formula, had not been complied with. The adjustment was not made on April 1, Therefore, the covenant was revised with a new date of April 1, 2013 agreed with the Borrower. The covenants (c) and (d) that related to the recruitment of a private operator for the management of JIRAMA were dropped as they were no longer relevant (see paragraph 9 above). With regard to the disbursement conditions in the FA, the condition (b) related to the Vatomandry hydropower plant was dropped, following the elimination of this activity from the Project scope. b) In the Project Agreement (PA), the dated covenant in Section IV related to JIRAMA s level of accounts receivables was dropped since improving the JIRAMA s commercial performance was not the primary focus of the restructured Project and its revised PDO. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry (including whether lessons of earlier operations were taken into account, risks and their mitigations identified, and adequacy of participatory processes, as applicable) 34. Soundness of the background analysis: The project was designed on the basis of a solid background analysis, an adequate and inclusive participatory process on the part of both the Government and the World Bank, and with due incorporation of lessons learned by the Bank from previous experiences in Madagascar. Based on the experience accumulated during the preparation, implementation and operation of energy projects in Madagascar, the following factors were identified as important criteria for the original project design: (a) the prioritization of investments based on technical, financial and economic merit, starting with the rehabilitation and increase in the efficiency of existing assets, and the increase in efficiency of plant and equipment, whenever justified; (b) the need for analytical work to lay the foundations for a private sector-led development in light of strong and sustained increase in demand for electricity; and (c) the need for realistic and simplified design, including the need to be more vigilant with respect to tariffs during inflationary periods, cost control, ownership by stakeholders and donors coordination. The Project Appraisal Document (PAD) presented the respective lessons learned in: Section B(3) - on project components; Section B(4) - on lessons learned and reflected in the project design; Section C(1) on partnership arrangements; and Section D(1) on economic and financial analyses. 8

23 35. Assessment of adequacy of project design: The Project s strategy to focus on ways to improve the financial viability of JIRAMA was relevant. While progress in increasing JIRAMA s revenue generation and establishing better concepts and tools for management was made under a previous Bank financed project (the Energy Sector Development Project), there was still a long way to go to achieve improvement in technical efficiency, cost recovery and financial sustainability of the utility. Therefore, project design provided the right path for assisting JIRAMA to advance further towards these goals. The Project s strategy to focus on priority investments on the basis of technical, financial and economic criteria was reasonable. The Bank, in coordination with other donors, financed some of the high-priority investments, such as the rehabilitation of existing power infrastructure, included in JIRAMA s much larger recovery plan. This was the centerpiece of the PWSRRP (APL-1), whose primary goal was to restore the capacity of JIRAMA to a minimum acceptable level of operational and financial performance, as a precondition for attracting private sector investment. The specific investments had been selected, based on their short payback periods and high impact on the JIRAMA s earnings. The APL-1 also supported the long-term objective of improving the electricity and water sectors performance by providing funds for analytical work on tariffs and preparatory work on new investments, particularly in hydropower. 36. Combining utility governance, investments, capacity building, and institutional strengthening under the PWSRRP was the right strategic choice. However, the project activities were numerous, including costly investments in generation and distribution networks (even though these investments were critical), and the available project budget was inadequate to result in any substantial impact. Outputs of the technical assistance and capacity-building component were directed towards establishing a suitable framework and an enabling environment for effective implementation of the physical investments component, such as the establishment of public-private partnerships for JIRAMA. Project design left open the options for the reform of JIRAMA, which were to be assessed in a study financed under Component B of the project. The project activities, such as the focus on the JIRAMA s financial situation, had contributed to the government decision to increase tariffs to cost recovery levels prior to the 2009 political crisis. This, in turn, had strongly contributed to the sector s capacity to implement the project. 37. Adequacy of government commitment: The commitment to, and ownership of, the project was strong at the time of project preparation and appraisal. During project design, the GOM repeatedly expressed its interest in the Bank s continuing support to the energy sector. The government reiterated its interest in Bank support for the energy sector in the Sector Development Policy Letter (briefly summarized in the PAD). The letter described actions that GOM intended to take to ensure the JIRAMA s financial recovery, long term management options for JIRAMA, as well as other actions to support the sector, including equity contributions and tariffs adjustments. 38. Assessment of risks: The political risk associated with the (then) forthcoming elections to stall the reforms was rated as moderate. The fact that the APL-1 investments were to be committed prior to the elections was considered to be a mitigating factor. A number of risks, including the inability of JIRAMA to make the needed investments due to its difficult financial position; the high fuel costs not compensated by tariff adjustments, the decrease in collection rates, the increase in accounts receivable, and governance problems were addressed through the 9

24 mitigation measures proposed in the PAD. The following actions were seen as mitigating these risks: (i) In the short run: (a) upfront agreement and close monitoring of JIRAMA s investment program financing and business plan, and a stricter process for capital budgeting and financing decisions; (b) revision of the electricity tariff adjustment formula, especially to allow for speedy adjustments to changes in fuel prices; (c) strengthened governance of JIRAMA through private sector participation; and (d) strengthened sector institutions; and (ii) The long-term involvement of the private sector to manage the utility was seen as providing additional mitigation. 39. The risk of weak institutional and implementation capacity of the MEM was identified at appraisal and rated moderate. A strong mitigating measure - the recruitment of a technical adviser as a condition of disbursement of funds to finance activities under Component B proved ineffective, as it was ultimately waived. The implementation of activities under Component B was significantly delayed, as described in Section 2.2 below. The risks related to labor union resistance to the internal JIRAMA reforms and the insufficient interest by foreign utilities in managing JIRAMA were both rated as moderate at appraisal. These risks, which never materialized, and the related subcomponents were rendered irrelevant at the time of the interruption of the project implementation (following the March 2009 political crisis), and the 2012 restructuring of the project. 40. Overall, the risk analysis of the project was adequate. The mitigation measures were also overall appropriate and commensurate with the identified risks. However, the mitigation measure to address the weak institutional and implementation capacity of the MEM by tying disbursements on Component B to the recruitment of a technical advisor was too rigid and led to delays in the implementation of the component. 2.2 Implementation (including any Project changes/restructuring, mid-term review, Project at Risk status, and actions taken, as applicable) 41. The Project was part of a two-phase, six-year APL program. Only Phase 1, APL-1 (mid-cy 2006 to mid CY 2013) of the proposed APL program has been implemented, and, therefore, it is the subject of this evaluation. The IDA funding for APL-1 was about US$10 million. The APL-1 operation aimed at assisting the Government to prepare JIRAMA for improved operations and private participation. The content of APL-2 was not defined in detail at the time of appraisal, but the intention was to select some of the APL-2 components from the JIRAMA s investment program. The APL-2 was not implemented for a number of reasons including the political crisis in Madagascar, the availability of funding and the fact that the triggers were not met (among which was the completion of the recruitment of the long-term private management firm for JIRAMA). 42. The efficiency of the Project implementation was mixed, and the capacity of the sector institutions to implement a relatively modest investment program may have been overestimated, especially for Component B, for which the MEM was the implementing agency. There were delays in the implementation of Component B, mainly because of the condition for disbursement (the recruitment of a technical advisor), which the MEM could not satisfy. Although the MEM agreed to recruit a technical adviser, the Ministry reversed its decision later, 10

25 because it thought the work could be done in-house, without external assistance. At the end, the Bank accepted to waive this condition of disbursement. After the condition of disbursement was waived, the implementation of some subcomponents moved more quickly, and the majority of the scoping and analytical work was completed before the project closing date. The planned environmental studies for future investments were not implemented. In the original project results framework there were no intermediate results indicators for Component B. Two intermediate results indicators for Component B were introduced at the time of the project restructuring in July 2012 (see Section F(b) above). With regard to Component A of the original project, by March 2009 (one month before the original closing date), the PDO indicators related to the JIRAMA s operational and financial performance were mostly met. With regard to the disbursement achieved by March, 2009, only 54% of the project funds disbursed because many of the short-term investments (Component A) were delayed. The delays in Component A were mainly due to procurement issues, such as the delays in the preparation of bidding documents, especially for hydropower rehabilitation, unsuccessful or unresponsive bids and bid re-issuance. 43. Because of the political crisis of March, 2009, the implementation of the initial project (APL-1) was put on hold from March, 2009 to May, Disbursements were suspended in line with the application of policy OP 7.30 dealing with de facto governments, which also led to the restructuring of the project in July After the initial turnaround, achieved during the first two years of project implementation, JIRAMA s financial situation worsened after The level of deterioration of the gains of the first two years of the project implementation (i.e. prior to March, 2009) can be seen in the intermediate results indicators table of Section F. Almost all of the indicators were revised in 2011, at a level lower than that achieved prior to the political crisis in The implementation of the restructured project was short-a period of only nine months, between September 24, 2012 (when the amended and revised financing agreement was signed), and the closing date of the project on June 30, The team focused its attention on the implementation of Component B 14, which was least advanced, and engaged in an active dialogue with the counterparts (JIRAMA, MEM, and the Regulator (ORE)) with regard to the studies and consultancy services. The team and the counterparts considered Component B important, as it was to lay the ground for future sector development. The team also worked with other donors to facilitate harmonized interventions when re-engagement in the sector becomes possible. 45. Another aspect that had an impact on the project implementation was the fact that the JIRAMA s management attention focused primarily on responding to the enormous pressure from government authorities and the public to find a solution to the load shedding and the company s difficult financial situation. 14 Subcomponent B1: Technical assistance and communication, and Subcomponents B5: Preparation of feasibility and environmental studies for future investments, were not implemented (see Annex 2 for details). 11