Document of The World Bank FOR OFFICIAL USE ONLY GOVERNMENT OF NIGERIA. POWER SYSTEM MAINTENANCE AND REHABILITATION PROJECT (Loan 3116-UNI)

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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 IMPLEMENTATION COMPLETION REPORT GOVERNMENT OF NIGERIA Report No.: POWER SYSTEM MAINTENANCE AND REHABILITATION PROJECT (Loan 3116-UNI) Water, Urban and Energy 1 Africa Region June 30, 1997 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 Currency Unit = Nigerian Naira (N) US$1.00 = N6.90 N1.00 US$0.14 FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES 1 kilometer = miles 1 square kilometer (kin) = square miles 1 kilovolt (kv) = 1,000 volts 1 megawatt (MW) 1,000 kilowatts 1 megavolt ampere (MVA) = 1,000 kilovolt amperes 1 gigawatt hour (GWh) = 1 million kilowatt hours 1 ton of oil equivalent (toe) = 10,500,000 kilocalories ABBREVIATIONS AND ACRONYMS AfDB = African Development Bank DCA = Development Credit Agreement FGN Federal Government of Nigeria GTC = Generation and Transmission Company ICR = Implementation Completion Report IDA = International Development Agency MPS Ministry of Mines, Power and Steel NEPA = National Electric Power Authority PICT = Project Implementation Coordination Team SAR = Staff Appraisal Report TCPC = Technical Committee for Privatization and Commercialization UPP = Utility Partnership Program Vice President: Jean-Louis Sarbib Country Director: Yaw Ansu Task Manager: Alfred Gulstone ICR prepared By: Alfred Gulstone

3 PREFACE NIGERIA FOR OFFICIAL USE ONLY POWER SYSTEM MAINTENANCE AND REHABILITATION PROJECT (Loan 3116-UNI) IMPLEMENTATION COMPLETION REPORT CONTENTS EVALUATION SUMMARY Introduction... Project Objectives... Project Results and Implementation Experience... Summary of Findings, anid Lessons Learned... i i ii ii PART I: PROJECT IMPLEMENTATION ASSESSMENT A. Introduction... li B. Statement and Aclievement of Project Objectives... 2 C. Project Implementation Experience... 4 D. Bank Performance... 6 E. Borrower Performance... 6 F. Project Outcome, Sustainability and Future Operation... 7 G. Major Lessons Learned... 8 PART II: STATISTICAL TABLES AND APPENDICES Tables: Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8A: Table 8B: Table 9: Table 10: Table I 1: Table 12: Table 13: Summary of Assessments Related Bank Loans Project Timetable Loan Disbursements: Cumulative Estimated and Actual Key Indicators for Project Implementation Key Indicators for Project Operation Studies Included in the Project Project Costs Project Financing Economic Costs and Benefits Status of Legal Covenants Compliance with Operational Manual Statements Bank Resources: Staff Inputs Bank Resources: Missions Appendices: Appendix A: Operational Plan Map: IBRD No R This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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5 IMPLEMENTATION COMPLETION REPORT FEDERAL REPUBLIC OF NIGERIA POWER SYSTEM MAINTENANCE AND REHABILITATION PROJECT (Loan 3116-UNI) PREFACE This is the Implementation Completion Report (ICR) for the Power System Maintenance and Rehabilitation Project for which Loan 3116-UNI in the amount of US$70 million equivalent was approved on August 29, 1989 and made effective on November 13, The loan for the project was closed on December 31, 1995 and 96 percent of the loan was disbursed. Co-financing was provided by German Commodity Aid and Krediet Anstalt fur Wiederaufbau (KFW). The ICR was prepared by Alfred Gulstone, Principal Power Engineer (AFTU 1), and reviewed by Fauzia Najm under the supervision of Jeffrey Racki, Technical Manager, AFTUI. The content of the ICR is based on material in the project file and completion information provided by the National Electric Power Authority (NEPA). NEPA provided comments on the draft ICR and these have been incorporated. NEPA did not provide its own completion report.

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7 IMPLEMENTATION COMPLETION REPORT FEDERAL REPUBLIC OF NIGERIA POWER SYSTEM MAINTENANCE AND REHABILITATION PROJECT (Loan 3116-UNI) Introduction Evaluation Summary 1. As Nigeria's economy began to slow down in the early 1980s, the condition of the electric power system began to deteriorate. As oil earnings declined so did the foreign exchange available to maintain the power system. Furthermore, systematic maintenance was not an integral part of the power system's operation and when oil prices and foreign exchange earnings were higher there was a tendency to allow facilities to deteriorate and then add new capacity. The result was a system which appeared to have over-capacity in terms of units installed but a low level of availability. By the late 1 980s, with only 39 of the 65 generating units functioning, and with many transmission components out of service, the system had become highly unreliable, subject to frequent outages and on the verge of total collapse. The National Electric Power Authority (NEPA), the state enterprise in charge of operating the public electricity system, was in financial difficulty because of limited power to sell, inadequate billing and collection systems, substantial debt and low tariffs. In 1988, when the Bank appraised the project, it had experience with six power projects in Nigeria. These projects had been successful in the physical development of the power system but had not led to satisfactory institutional progress. The Power Maintenance and Rehabilitation Project (Power VII) was an emergency project responding to the system's severe supply constraint but also was to be an initial step towards the commercialization of NEPA to improve its technical and financial performance. Project Objectives 2. The Power System Maintenance and Rehabilitation Project had two main objectives: (a) helping NEPA to implement overdue rehabilitation and maintenance of its power system; and (b) improving the institutional framework for more reliable, efficient system operation. The project also included covenants for meeting specific financial goals in support of NEPA's commercialization. The project's objectives were clear and justified by the system's diminished availability and outages. The project partially achieved its objectives for physical improvements to the system and the commercialization of NEPA but its achievements in improving NEPA's financial performance were negligible. To attain the physical objectives, the project contained the following components : the rehabilitation of seven inoperable generating units (606 MW); major overhauls of 10 operating units (850 MW); transmission system improvements; spare parts; training; metering equipment; and vehicles. The implementation of the project's physical components was within the

8 - iicapability of the utility with the engineering services and technical assistance which the project provided. Project Results and Implementation Experience 3. The project's main result was keeping the system from total collapse in order to allow NEPA time to make important structural changes and plan for future investment projects. The project completed most of its components but with a two-year delay. It began about a year late due to a delay in completing co-financing arrangements for the project, which was a condition of effectiveness. The original closing date of the project was December 31, However, the project did not close until December 1995, to allow NEPA time to complete components which were not part of the original project but became part of the project during implementation because of their importance to the safe, efficient operation of the power system: the emergency repair of the Kainji dam and billing system improvements. The project completed the billing system improvements; however, by the end of the second extension, FGN had not taken the necessary steps to do the repair and the Bank closed the project. 4. The key factors affecting project performance were devaluation of the Naira and NEPA's lack of actual autonomy from the Federal Government of Nigeria (FGN). The devaluation affected NEPA's operations. There were two rates of exchange, one for the Government entities, and one for the public. NEPA was unable to obtain sufficient foreign exchange at the Government rate to support its operations; it was unable to buy foreign exchange at the public rate because tariffs were not increased. The devaluation reduced the amount of rehabilitation work the project could accomplish because of increase costs per unit and subsequently adversely affected NEPA's finances by increasing the cost debt service. In theory NEPA became a commercialized entity during the project's implementation program. However, in practice, NEPA lacked sufficient autonomy from FGN for timely procurement and obtaining the necessary revenue to meet financial requirements. The performance of the Bank overall was satisfactory. NEPA's performance was satisfactory in project preparation. However, its performance in implementing the project and complying with covenants was deficient, mainly due to the company's lack of autonomy from FGN. Summary of Findings, Future Operations and Lessons Learned 5. The project was satisfactory in preventing total power system collapse and helped initiate the process of commercializing NEPA. However, the scale of the rehabilitation effort was lower than anticipated at appraisal; the project did not meet some important financial objectives; and the sustainability of the project's achievements is uncertain. Therefore this ICR rates the outcome as only marginally satisfactory. The sustainability of the project's achievements is uncertain because NEPA, in practice, does not have the autonomy and the resources to ensure adequate maintenance of facilities. The project's operational plan, attached as Appendix C, outlines the essential elements necessary to sustain and build upon project achievements: solidifying institutional change; continuing

9 - iii - rehabilitation in the medium term; and planning for long-term development. A follow-up project, the Power System Rehabilitation and Development Project (Power VIII) was prepared in 1992 but never finalized. However, it continues to serve as a basis of dialogue with FGN on the future of Nigeria's power system. Its objective would be to help FGN restructure the power system according to the multiple utilities model which would restructure NEPA as a generation and transmission company which would sell power and capacity to regional distribution companies. The main lessons learned in the project are the following: (a) (b) (c) (d) Institutional deficiencies are the source of NEPA's technical and financial problems and any project that attempts a technical solution without a major institutional change that guarantees autonomy in operations will produce results that are not sustainable and waste scarce investment resources. In co-financing arrangements for power system rehabilitation projects, or other projects which have components that are not interdependent, conditionality that requires all agreements to be in place before the project as a whole can start can be counter-productive and delays, especially in the case of an emergency rehabilitation project, can be costly. With hindsight, given more than a decade of experience with FGN reluctance to approach tariff-setting on an economic basis, the Bank should have kept the clause to provide a safety net to help NEPA meet the project's financial objectives. For a state-owned power company in a very weak technical and financial position, the partnership with an experienced, efficiently managed utility should be considered an investment in improved power system performance in all areas. By granting NEPA autonomy to raise tariffs, FGN could have helped NEPA obtain a greater return from the partnership, by allowing the improvement in the system's technical performance to be reflected in financial returns to the utility.

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11 NIGERIA POWER SYSTEM MAINTENANCE AND REHABILITATION PROJECT (Loan 3116-UNI) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. INTRODUCTION 1. The condition of Nigeria's electric power system began to decline in the early 1980s, as the economy, heavily dependent on oil revenues, slowed down after international oil prices declined. The Federal Government of Nigeria (FGN), facing a major financial crisis, did not have sufficient foreign exchange to properly maintain the power system. Furthermore, systematic maintenance was not an integral part of the power system's operation. In an era of high oil revenues, there was a tendency to allow facilities to deteriorate and then add new capacity. The result was a system which appeared to have over-capacity in terms of units installed. However, the system also had a low level of capacity availability. By the late 1980s, with only 39 of the 65 generating units functioning, and with many transmission components out of service, the system had become highly unreliable, subject to frequent outages and on the verge of total collapse. The installation of expensive private captive generating capacity had grown to compensate for unstable power supply from the public electricity system, which the National Electric Power Authority (NEPA) operated. NEPA's revenue base was eroding due to a combination of limited system availability, competition from private generating capacity; high losses, inadequate billing and collection, substantial debt and low tariffs. 2. In 1987 the Bank had appraised the Power System Improvement Project, which was to finance an ambitious power system recovery and development program at a total cost in the order of US$900 million. However, the Bank did not proceed with the project because Ministry of Mines Power and Steel (MPS) was not taking sufficient measures to grant NEPA sufficient autonomy for it to operate efficiently. Realizing that it could take a long time for NEPA to obtain this autonomy in practice, the Bank instead decided to take a cautious approach, financing a series of modest size projects (US$ million) and assisting in NEPA's commercialization. As a first step in this process, the Bank approved the Power System Maintenance and Rehabilitation Project (Power VII) in 1989 to assist Nigeria in a selective emergency maintenance and rehabilitation program for restoring system reliability. The project also was to support the commercialization of NEPA which was part of FGN's enterprise reform program. Prior to Power VII, the Bank had made six loans to Nigeria for the power sector (Part II, Table 2). These projects had been successful in the physical development of the power system but had not led to satisfactory institutional progress.

12 - 2 - B. STATEMENT AND ACHIEVEMENT OF PROJECT OBJECTIVES 3. The Power System Maintenance and Rehabilitation Project had two main objectives: (a) helping NEPA to implement overdue rehabilitation and maintenance of its power system; and (b) improving the institutional framework for more reliable, efficient system operation. The project also included covenants for meeting specific financial goals in support of NEPA's commercialization. The project partially achieved its objectives for physical improvements to the system and the commercialization of NEPA but its achievements in improving NEPA's financial performance were negligible. 4. The project's rehabilitation and maintenance of selected generation, transmission and distribution facilities was a high priority as evidenced by the system's diminished availability and outages. To attain the physical objectives, the project contained the following components : the rehabilitation of seven inoperable generating units (606 MW); major overhauls of 10 operating units (850 MW); transmission system improvements; spare parts; training; metering equipment; and vehicles. The project component also included engineering services for the supervision and monitoring of the conversion of the Egbin thermal power plant to gas operation. The implementation of the project's physical components was within the capability of the utility with the engineering services and technical assistance which the project provided. 5. The project's main achievement in terms of physical plant was keeping the system from total collapse in order to allow NEPA time to make important structural changes and plan for future investment projects. Start up delays and devaluation of the Naira led to increased rehabilitation costs per unit. As a result, the project only could help rehabilitate about a third of the capacity planned at appraisal, even with allocating more funds than planned to generation improvements. It rehabilitated and returned to service about 610 MW of generation, which accounted for about 23 percent of NEPA's available capacity at the time of project appraisal. 6. The generation rehabilitation work covered the following capacity: 134 MW at the Afam power station ( two 67-MW gas turbine units); 476 MW at the Sapele power station, (two 67-MW gas turbine units); and three 114-MW steam units. The project also completed most of the related operations and maintenance training and helped improve the reliability of the transmission and distribution system by financing spare parts. The improvements to the transmission system resulted mainly from technical inputs, such as assistance from project consultants in setting relays. However, despite system improvements losses remained high during the project's implementation, about 30 percent of generation. The project was not able to make enough improvements to the distribution system to reduce technical losses and the completion of the new billing system, a key factor in reducing non-technical losses was not completed until the end of the project. 7. The second major objective was to help strengthen NEPA's operational capability in delivering a reliable, economic supply of electricity to its customers. This strengthening was to be an essential step in the eventual commercialization of NEPA. Many of the

13 - 3 - system's operational problems had resulted from external constraints on management, the lack of an adequate reward system to motivate staff, and insufficient foreign exchange for spare parts. Other factors which adversely affected performance were: the lack of an adequate preventive maintenance program; FGN's cumbersome approval process for contracts; and inadequate staff training. The project had three components to support institutional strengthening: technical assistance from an experienced partner utility; studies and preparation work for future projects to prepare a least-cost priority investment program; and consultant service to help project implementation and management. 8. To strengthen NEPA's financial position, the project's legal covenants specified financial targets for NEPA to achieve during the project's implementation period (Part II, Table 10). These targets included earning a 6-8 percent minimum rate of return on fixed assets in operation, contributing at least 30 percent of its annual investment program from internal sources; and incorporating in the tariff structure a provision for adjusting tariffs in line with fuel costs. The covenants were very ambitious at the time of appraisal given NEPA's financial problems and their achievement hinged on the commitment of FGN to quickly translate intentions for commercialization of NEPA into supportive policy actions, which did not materialize during the project's implementation period. 9. The achievement of the project's institutional objectives was important given the deteriorating physical state of the system, which stemmed directly from institutional deficiencies and the lack of a solid program for change. Essentially NEPA operated more like a government department than a corporate entity. Often politically expedient measures overshadowed staff decision making. A clear set of rules was lacking concerning functions which FGN was to delegate NEPA. The Bank believed that without serious action for institutional change, continued financing of the power sector would produce only temporary improvements and perpetuate an inefficient unstable power system. Overall, NEPA's management and operations improved with the technical assistance under the project. The main achievements were detailed diagnostic evaluation of the company's operations, successful completion of the project's physical components, reduced outages, and improvements in the accounting and billing system. However improvements in the authority's financial situation were negligible. 10. The project's Utility Partnership Program (UPP) was a collaboration between an experienced efficient power utility and NEPA in the operation of NEPA's power system for three years. The UPP prepared a comprehensive set of diagnostic studies covering: generation, transmission, distribution, meter reading, billing and collection systems, finance, organization, and personnel and training. These studies were extremely valuable in development planning for NEPA, providing the utility and the Bank with an information base to make decisions on future system development. The diagnostic work led to a least-cost expansion program for the period The key elements of the plan are the following: no new plant acquisitions before 2001; the rehabilitation ofthe Kainji hydropower plant and the remaining three steam units and Afam III gas turbines; the use of modern, baseload gas turbines for any additional thermal capacity. On the basis of the diagnostic work and the expansion plan. the Bank and NEPA agreed on priority

14 - 4 - actions which became the objectives of the Power System Rehabilitation and Development Project (Power VIII). 11. During the project's implementation, NEPA became a partially commercialized entity according to FGN's Privatization and Commercialization Decree. This designation meant that NEPA was supposed to generate enough revenue to cover its operating expenses and contribute partially to its investment program. FGN was to continue financing NEPA, which was to operate as a purely commercial enterprise subject only to the FGN's regulatory authority. NEPA's Board of Directors was to be the main decisionmaking body for NEPA, providing strategic guidance to the management based on guidelines from the FGN. As a first step in commercialization, NEPA prepared a corporate plan and submitted it to the Government and the Technical Committee for Privatization and Commercialization (TCPC). Discussions among FGN, NEPA and TCPC led to a revised corporate plan. NEPA and the Ministry of Power and Steel signed a performance contract that defined the lines of authority between NEPA and FGN. However, the contract was not enforced and NEPA had to seek approval of MPS even for small spare parts orders. 12. During the project's implementation, FGN and the Bank took some initial steps toward planning the restructuring of the power sector. The Bank organized a workshop in November 1992 to discuss various options for power sector development. The workshop included representatives from FGN, NEPA, Bank staff and consultants experienced in power utility restructuring from Chile, New Zealand, and the United Kingdom. Most of the options presented involved breaking the utility into main finctional components and attempting to introduce private participation either through direct investment or by performance-based management contracts. (para. 17) Implementation Record C. PROJECT IMPLEMENTATION EXPERIENCE 13. The project completed most of its components but with a two year delay. It began about a year late due to a delay in completing co-financing arrangements for the project, which was condition of effectiveness. The original closing date of the project was December 31, The Bank extended the project's closing to December to allow NEPA time to complete components which were not part of the original project but became part of the project during implementation because of their importance to the safe, efficient operation of the power system: the emergency repair of the Kainji dam and billing system improvements. A second closing date extension, to December 31, 1995, was necessary because a political crisis had delayed clearance of the necessary documents for Kainji dam repair. However, by the end of the second extension, FGN had not taken the necessary steps to do the repair and the Bank closed the project. Overall the project took about five years to complete: November 1990 to December 1995 (Part II, Table 3). 14. Total project cost amounted to US$ million, about 10 percent lower than the

15 original estimate of US$154.6 million; this was due mainly to the lower cost of the transmission and distribution components which outweighed the higher costs of the generation improvements (Table 8A). The only significant change in the project's financing arrangements was a lower contribution from NEPA, due to lower local costs and increased financing from co-financiers (Table 8B). The Bank financed 48 percent of total project costs with loan disbursements amounting to US$67.9 million, or 97 percent of the original loan amount (US$70 million). Factors Affecting Project Implementation 15. Factors Outside Control of the Borrower. The Bank expected Nigeria's economy to be stable during the project's implementation period but instead it took an unpredicted downturn and became highly unstable, with inflation at times in the order of percent. The general economic climate constrained the physical rehabilitation of the system and institutional changes. The Naira devaluation resulted in increased cost of NEPA's foreign debt service and spare parts. Furthermore, both inflation and devaluation increased the overall costs of maintaining the power system. Given the unfavorable economic climate, FGN became less inclined to allow NEPA the autonomy it was supposed to have and make important supportive policy changes such as tariff increases and gas price increases. 16. During the project's implementation, the Bank discovered that because of a problem with the emergency spillway and the leakage under the saddle dam, the dam for the Kainji hydroelectric plant was unsafe. This plant, which had been operational since 1968, was overdue for a major overhaul. An inspection of the plant found inoperable gates that would prevent full operation of the spillway in the event of a flood and that, without correction, dam failure would cause a 30-meter high wave that would destroy the surrounding area for many kilometers, resulting in thousands of downstream casualties. In 1992, the Bank agreed with NEPA to allocate project funds for consultants to recommend a solution and manage the work of contractors to do the repairs. However, FGN's approval took too long to allow the work to be financed under the project. As a result FGN funded the repair work from its own resources. 17. The main factor that constrained NEPA's performance was the lack of sufficient autonomy from FGN to ensure the timely completion of project components and the utility's ability to meet the project's financial covenants. FGN did not allow NEPA to increase tariffs to offset increased costs and meet financial objectives. Also, FGN did set a much lower level of procurement subject to government approval than agreed under the performance contract and subjected NEPA to a cumbersome, bureaucratic approval procedure. According to a performance contract with the Ministry of Mines, Power and Steel (MPS), NEPA was to have authority to award contracts of up to N50 million without MPS approval. However, in practice NEPA had to seek MPS approval for contracts over N 15 million meaning that the company could not even proceed with relatively small spare parts orders on its own. In addition FGN required a special form for imports and the waiting period for approval was up to six months. As a result,

16 - 6 - average time between the order and delivery of parts was about two years. Factors within Control of the Borrower 18. The main factors that affected project implementation, which were subject to the control of the Borrower, were the timely, effective implementation of the project's components and reporting on implementation progress. NEPA established the Project Implementation Coordination Team (PICT), as required and kept the PICT in operation throughout the project. NEPA did a good job preparing documents and evaluating bids for the project's goods and services, but unfortunately its attempts at timely implementation were constrained by the bureaucracy of the FGN approval process. Nevertheless, NEPA's diligence in executing its tasks in the procurement process helped to mitigate project delays. Timely reporting on implementation progress contributed to the quality of project monitoring and to the decision-making process, especially concerning project modifications. The compliance with financial covenants was originally supposed to be within NEPA's capability, assuming FGN provided NEPA with the authority to have an impact in its finances. However, the lack of sufficient autonomy put compliance with many of the project's covenants outside NEPA's control. D. BANK PERFORMANCE 19. Bank performance overall was satisfactory. The preparation of the project benefited from more than a decade of discussion with FGN on power sector development and the Bank's gradual approach to participation in Nigeria's power sector was sound. The Bank focused mainly on the emergency needs of the NEPA system and initiated some institutional improvements, making the project essentially a bridge to future power development under a completely new structure. The project's appraisal benefited from extensive preparation and an Energy Assessment which had identified the main power sector issues. In supervision, the Bank was diligent in stressing to FGN the seriousness of the Kainji Dam problem and was flexible in modifying the project to fund the cost of repairs and the need for billing system improvements. The Bank also made a major effort to sustain and expand the achievements under Power VII. Within the first two years of the project's implementation it became clear that the power sector's rehabilitation and institutional needs were way beyond the capacity of Power VII and the Bank appraised a follow-up project (Power VIII). E. BORROWER PERFORMANCE 20. The Borrower for the Project was NEPA with FGN as the guarantor. NEPA's perfornance was satisfactory in project preparation. NEPA also did a very good job in the implementation of tasks directly under its control such as the preparation and evaluation of bidding documents, and reporting on the projects implementation progress. Despite this satisfactory performance, project implementation was delayed due to FGN's slow procurement process. NEPA's compliance with covenants was deficient mainly

17 - 7 - because the authority did not meet the financial objectives which the covenants specified. However, the lack of compliance was mainly due to inadequate autonomy from FGN. F. PROJECT OUTCOME, SUSTAINABILITY AND FUTURE OPERATION 21. The project was mainly a stopgap measure to avert total power system collapse and begin the process of commercializing NEPA. In this respect, the project's outcome was satisfactory. However, the scale of the rehabilitation effort was lower than anticipated at appraisal; the project did not meet some important financial objectives; and the sustainability of the project's achievements is uncertain. Therefore, this ICR rates the outcome as only marginally satisfactory. 22. The sustainability of the project's achievements is uncertain because NEPA, in practice, does not have the autonomy and the resources to ensure adequate maintenance of facilities. According to sound utility practice, supervision reports have indicated that NEPA will need to spend about US$ 100 million annually on maintaining its generation facilities alone. This is a small amount compared to annual losses due to system outages which prior to the project cost Nigeria's economy upwards of US$1 billion annually. However, NEPA's budget allocates virtually no funds for maintenance. Project experience has indicated that NEPA will not be able to maintain the power system without increased autonomy, restructuring, and privatization of some of the authority's functions. The project's operational plan, attached as Appendix C, outlines the essential elements necessary to sustain and build upon project achievements: solidifying institutional change; continuing rehabilitation in the medium term; and planning for longterm development. 23. In 1992 the Bank prepared a draft appraisal report for a follow up project-- the Power System Rehabilitation and Development Project (Power VIII). The objectives of this proposed project reflect priority actions in the operational plan for Power VII. The objective of the proposed Power VIII project was to help NEPA rectify weaknesses identified by in the diagnostic phase of the UPP under Power VII. The two key elements of the operational plan which the proposed project would support are: reinforcing the supply system to improve the quality of service to NEPA's customers; increasing revenues to cover operating and maintenance costs; and eventually contributing to about 30 percent of the investment program. 24. Although the Power VIII project was never finalized, it serves as a basis for continued dialogue with FGN on the future of Nigeria's power system. Proceeding with the project will be contingent on macroeconomic stabilization and the restructuring of the power sector. The basic approach in restructuring is to look at each part of the system and decide the best way to manage it. After reviewing several restructuring options, the Bank, FGN and NEPA have agreed that the "multiple utilities option" is the most appropriate one for meeting the power system's needs. This option would involve restructuring NEPA to form a generation and transmission company (GTC) and creating regional distribution companies (DCs) that would purchase capacity and energy from the

18 - 8 - GTC but not be confined to GTC supply. The DCs could operate under public, private or joint public/private ownership. They could purchase electricity from generating companies that would have the right to access the transmission system and be subject to appropriate licensing arrangements covering technical safety and environmental maters. G. MAJOR LESSONS LEARNED 25. The major lessons learned from the project are the following: * Institutional deficiencies are the source of NEPA's technical and financial problems and any project that attempts a technical solution without a major institutional change that guarantees autonomy in operations will produce results that are not sustainable and waste scarce investment resources. Therefore the priority for any follow on project should be a restructuring that will allow the company to manage its physical plant and financial resources efficiently and provide reliable electricity service to its customers according to sound international utility practice. Also given the long history of NEPA's operating problems as a state-owned enterprise, the large private sector in Nigeria, and the country's well-developed financial system, the privatization of at least the transmission and distribution parts of the utility appears to be the most efficient way to meet power system needs. * In co-financing arrangements for power system rehabilitation projects, or other projects which have components that are not interdependent, conditionality that requires all agreements to be in place before the project as a whole can be counter productive. In the case of the Power VII Project, the delay in the conclusion of one agreement caused a year's delay in the entire project, and constrained the project from taking the emergency actions for which it was designed. * In designing the Power VII Project, the Bank originally wanted to include an automatic fuel adjustment clause so that NEPA would not have to request a tariff increase from FGN in the event of increased fuel costs. Under pressure from FGN, the Bank ultimately dropped this requirement. With hindsight, given more than a decade of experience with FGN reluctance to approach tariff-setting on an economic basis, the Bank should have kept the clause to provide a safety net to help NEPA meet the project's financial objectives. * For a state-owned power company in a very weak technical and financial position, the partnership with an experienced, efficiently managed utility should be considered an investment in improved power system performance in all areas. From this perspective, by granting NEPA autonomy to raise tariffs, FGN could have helped NEPA obtain a greater return from the partnership, by allowing the improvement in the system's technical performance to be reflected in financial returns which would help the company maintain an acceptable level of system reliability and restore customer confidence.

19 PART II: STATISTICAL TABLES AND APPENDICES

20 Tables: PART II: STATISTICAL TABLES AND APPENDICES Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8A: Table 8B: Table 9: Table 10: Table 11: Table 12: Table 13: Summary of Assessments Related Bank Loans Project Timetable Loan Disbursements: Cumulative Estimated and Actual Key Indicators for Project Implementation Key Indicators for Project Operation Studies Included in the Project Project Costs Project Financing Economic Costs and Benefits Status of Legal Covenants Compliance with Operational Manual Statements Bank Resources: Staff Inputs Bank Resources: Missions Appendices: Appendix A: Operational Plan

21 Table 1: Summary of Assessments A. Achievement of Project Objectives Assessment Substantial Partial Negligible Not Applicable Categories Macroeconomic Policies Sector Policies Financial Objectives Institutional development Physical objectives Gender concerns Other social objectives X X X X X X X Environmental _ X Public sector X management Private sector X development Other X B. Project Sustainability Likely Uncertain Unlikely x

22 Table 1: Summary of Assessments (continued) C. Bank Performance Stage of Project Highly Satisfactory Satisfactory Deficient Cycle Identification Preparation Appraisal Supervision X X X X D. Borrower Performance Stage of Project Highly satisfactory Satisfactory Deficient Cycle Preparation Implementation Covenant Compliance X X x E. Assessment of Outcome Highly Satisfactory Marginally Unsatisfactory Highly Satisfactory Satisfactory Unsatisfactory x

23 Preceding Operations Table 2: Related Bank Loans Title : Power I Loan no. :372-UNI Year of approval: 1964 Purpose : Extend the 330 and 132-kV national transmission system; sub-transmission and distribution for Lagos, Port Harcourt, and Ibadan. Amount Status : US$42.3 million : Closed. Title : Power II Loan no. : 383-UNI Year of approval : 1964 Purpose : Construction of the Kainji hydroelectric station (four, 80-MW units) and associated 330-k-V transmission system. Amount Status : US$82.0 million : Closed. Title : Power III Loan no. : 572-UNI Year of approval: 1968 Purpose : Finance the cost increases of the Kainji project and extend the 330-kV transmission system. Amount Status : US$16.5 million : Closed. Title : Power IV Loan no. : 847-UNI Year of approval: 1972 Purpose : Extension of the Kainji project and second 330-kV transmission line to Lagos, and extensions of the 330-kV transmission grid and village electrification. Amount Status : US$76.0 million : Closed.

24 Table 2: Related Bank Loans (Continued) Title : Power V Loan no. : 1766-UNI Year of approval: 1979 Purpose : Expansion of the distribution system for metropolitan Lagos; training and institution-building, additional emergency spares, etc. Amount Status : US$100.0 million : Closed. Title : Power VI Loan no. : 2085-UNI Year of approval : 1982 Purpose : Construction of the transmission system/substations linking the Igbin power plant to the 330-kV grid and 132-kV Lagos distribution network; 132 through 11-kV distribution facilities; training; and institutional strengthening. Amount Status : US$100.0 million : Closed. Following Operations Title : Power System Rehabilitation and Development Project Loan no. : NA Year of approval : NA Purpose : Support the commercialization program for NEPA; rehabilitate and develop parts of NEPA's power system to improve power supply reliability; and help in further institutional strengthening, partly through private sector participation. Amount : US$150.0 million (proposed) Status : Under discussion. NA=Not applicable

25 Table 3: Project Timetable Steps in project cycle Date planned Date actual/estimate Identificationi March 1988 March 1988 Preparation March - September 1988 March - September 1988 Appraisal September 1988 September 1988 Negotiations April 1989 April 1989 Letter of development policy NA NA Board presentation August 1989 August 1989 Signing June Effectiveness October 1989 November 13, 1990 Project completion August 1995 August 1996 Credit closing December 31, 1993 December 31, 1995 Source: Project files and Bank staff estimates. Table 4: Credit Disbursements: Cumulative Estimated and Actual (in US$ million equivalent) Fiscal Years Appraisal Estimate Actual Actual as % of estimate Date of last disbursement: May 22, 1996 Source: Bank MIS and Bank staff estimates.

26 Table 5: Key Indicators for Project Implementation Key Implementation Indicators in the Estimated Actual/ICR SAR/President's Report estimate Rehabilitation/overhauls of seven generating units out of service at Afam, Delta and Sapele power stations Overhauls of ten units in operation at the Afam and Sapele power stations Technical services for operations, maintenance and training for generation Transmission system improvements Distribution system improvements Meter procurement and installation Vehicle acquisition Egbin Plant conversion for gas use Institutional strengthening Additional Indicators Repair of the Kainji Dam / Billing System Improvements / Completed with funds from the Government after the project was closed. Source: Project files and Bank staff estimates. Table 6: Key Indicators for Project Operation. Not applicable to this project. Table 7: Studies Included in the Project Study Purpose J Impact Investment Program Studies necessary for the Completed. Generation preparation of a least-cost expansion studies available investment program for investment planning. Project Preparation Studies required to prepare Completed. Power VIII investment projects for project prepared but not international financing financed because of institutional concerns. Source: Project files and Bank staff estimates.

27 Table 8A: Project Costs (in million US$ equivalent) Physical Components Item Appraisal Estimate (US$mm) Actual/latest estimate (US$mm) Local Foreign Total Local Foreign Total costs costs costs costs costs Costs Generation I Improvements Transmission improvements Distribution Improvements Metering equipment Vehicles Conv. of Egbin to operation on gas Base Cost Physical Contingency Price contingency Subtotal Institutional Strengthening Utility Assistance Program Data Processing Training Subtotal Project Management Studies/Future Project Prep. Refinancing of PPF Advance TOTAL COST Source: Project files and NEPA

28 Table 8B: Project Financing (in US$ million equivalent) Source ] Appraisal estimate ) Actual/latest estimate Local Foreign Total Local Foreign Total costs costs costs costs costs Costs IBRD Fed. Rep. of Germany Gerrnan Commodity Aid KFW Loan UK/ODA Grant Supplier's Credit NEPA Internal Funds Federal Government of Nigeria TOTAL Source: Project files and NEPA Table 9: Economic costs and Benefits After repeated requests, starting in August 1996, insufficient data has been received to re-estimate the project's economic rate of return. The projected economic rate of return was 18.4%.

29 Table 10: Status of Legal Covenants Agreement Covenant Covenant description, status and comments Section type Loan Project Borrower to implement project with due diligence and efficiency in Agreement Execution conformity with appropriate administrative, financial, engineering and public utility practices (a) Partial compliance (b) Project Borrower to maintain a project implementation team to ensure Execution effective project execution. Compliance Project Procurement of goods, works and services to follow the provisions Execution of Schedule 4 of the PA. Compliance Management Borrower to conduct operations in line with sound utility practices and under the supervision of qualified management with adequate staff. Operations Partial compliance Management Borrower to maintain plant, equipment, etc. in accordance with and sound utility practice. Operations Partial compliance Management Borrower to take out and maintain insurance against risks in and appropriate amounts. Operations Compliance. 5.01(a) Financial Borrower to maintain records on its operations and financial condition in accordance with sound accounting practice. Compliance (b), (i) Financial Borrower to have records, financial statements and Special Account audited for each fiscal year by independent auditors acceptable to the Bank. Delayed compliance. 5.01(b), (ii) Financial Borrower to fumish Bank with audit reports and certified copies of. financial statements for each FY of the project, within six months after the end of the fiscal year. Delayed compliance. 5.01(b), (iii) Financial Borrower to furnish the Bank such other information concerning records and accounts as reasonably requested by the Bank. Compliance.

30 Table 10: Status of Legal Covenants (continued) Agreement Covenant Covenant Description, Status and Comments Section Type 5.01 (c) Financial For withdrawals under the Loan Account the Borrower is to maintain adequate records and accounts; retain all records at least I year after the audit report; enable Bank representatives to examine the records, and ensure that the records are included in the annual audit. Compliance (a) Financial Borrower to take all action necessary to earn an annual return on the average net value of fixed assets in operation, as follows: 6% for FY91, 7% for FY 92; and 8% for FY 93 and thereafter. Non-compliance (b) Financial Borrower to review whether it will be able to meet requirements of section 5.02 (a) and furnish results of the review to the Bank Partial compliance (a) Financial Borrower to produce funds from internal sources equivalent to at least 30 % of the FY90 annual investment program and continue to produce this level of funds for each additional FY of the project. Non- compliance (b) Financial Before October 31 of each fiscal year, Borrower to review whether it will meet the requirements of section 5.03 (a) and furnish a copy of the review to the Bank. If the review shows the Borrower will not meet the requirements, the Borrower is to take all necessary measures to meet them. Non-compliance (a) Financial NEPA not to incur any debt, if after the incurrence of such debt the ratio of debt to equity shall be greater than 40 to 60. Non-compliance 5.07 Financial NEPA to incorporate into its tariff structure appropriate provisions for electricity rates to be adjusted to changes in the cost of fuels to NEPA. Table 11: Compliance with Operational Manual Statements Not applicable to this project.

31 Table 12: Bank Resources: Staff Inputs Stage of Planned Actual project cycle Weeks US$ Weeks US$ Through appraisal 20.8 Appraisal Negotiations through Board approval 18.4 Supervision Completion 4.5 (--) Planned data not available consistently throughout the project cycle for meaningful comparison with actual data. NA=not applicable Source: Bank MIS and Bank staff estimates Table 13: Bank Resources: Missions Stage of project Month/Year Number of Days in Specialized Performance Types of cycle persons field staff skills rating problems. represented Preparation Preparation 1 1/ FA NA Preparation 2 2-3/ FA, PE NA Preparation 3 02/ PA NA Preparation FA, 2PE NA Preparation / FA, EC, PE, OA, CA, SC, GM

32 Table 13: Bank Resources: Missions (continued) Stage of project Month/Year Number of Days in Specialized Performance Types of cycle persons field staff skills rating problems represented Appraisal through Board approval Appraisal 1 04/ EC,FA, PE, PO, TS NA Post-Appraisal I Post-Appraisal 2 09/ EC, FA NA 05/ PE NA Appraisal / EC, 2FA, PA, OP, TS NA Post-Negotiations 06-07/ YP NA Supervision Supervision 1 08/ FA, PE NA EFF Supervision 2 06/ PE NA EFF Supervision 3 05/ FA, PE 3 Supervision 4 04/ FA, PE 2 FIN Supervision 5 12/ EC, PE 2 OBJ, COV Supervision 6 06/94 Supervision 7 06/ PE Completion * * * * * * Notes: * There was no completion mission for this project. Specialization codes: EC=Economist; FA=Financial Analyst; PE=Power Engineer, CA=Computing Activities Specialist; SC=Systems Control and Transmission Specialist; and GM=General Maintenance.; PO=Project Officer; TS=Training Specialist.; OP=Operations Officer Problem Codes: EFF = effectiveness; FIN = financial; OBJ = project objectives; COV covenants