FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED ADDITIONAL GRANT IN THE AMOUNT OF SDR 3.4 MILLION (US$5.2 MILLION EQUIVALENT)

Transcription

1 Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY Report No: DJ Public Disclosure Authorized PROJECT PAPER ON A PROPOSED ADDITIONAL GRANT Public Disclosure Authorized IN THE AMOUNT OF SDR 3.4 MILLION (US$5.2 MILLION EQUIVALENT) FROM THE IDA CRISIS RESPONSE WINDOW (CRW) RESOURCES TO THE REPUBLIC OF DJIBOUTI FOR THE POWER ACCESS AND DIVERSIFICATION PROJECT ADDITIONAL FINANCING II Public Disclosure Authorized Sustainable Development Department Middle East and North Africa Region May 23, 2012 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective March 31, 2012) Currency Unit = Djiboutian Franc (DJF) DJF = US$1.00 SDR 1 = US$1.55 US$1 = SDR 0.65 FISCAL YEAR January December 31 ABBREVIATIONS AND ACRONYMS AF CNMP CRW EA EDD EHS GAC GFDRR HFO IDA kwh INDS MW PDNA PDO PMU OECD ONEAD WBG MEF Additional Financing National Procurement Commission (Commission Nationale des Marchés Publics) Crisis Response Window Environmental Audit Djibouti Electricity Utility (Electricité de Djibouti) Environmental Health Safety Governance and Anti-Corruption Global Facility for Disaster Reduction Recovery Heavy Fuel Oil International Development Agency Kilo Watt Hour Initiative Nationale pour le Développement Social MegaWatt Post-Disaster Needs Assessment Project Development Objectives Project Management Unit Organization for Economic Co-operation and Development Djibouti National Bureau of Water Supply and Sanitation (Office National de l Eau et de l Assainissement de Djibouti) World Bank Group Ministry of Economy and Finance, in charge of Industry and Planning Vice President: Inger Andersen Country Director: A. David Craig Sector Director Junaid Kamal Ahmad Sector Manager: Patricia Veevers-Carter Task Team Leader: Ilhem Salamon

3 REPUBLIC OF DJIBOUTI POWER ACCESS AND DIVERSIFICATION ADDITIONAL FINANCING II CONTENTS Project Paper Data Sheet... 1 I. Introduction... 3 II. Background and Rationale for Additional Financing... 3 III. Proposed Changes... 7 IV. Implementation Arrangements V. Risk and Design Considerations VI. Appraisal Summary Annex 1: Revised Results Framework and Monitoring Indicators Annex 2: Operational Risk Assessment Framework (ORAF) Annex 3: Detailed Description of Modified or New Project Activities Annex 4: Revised Estimate of Project Costs Annex 5: Revised Implementation Arrangements and Support Annex 6: Economic Analysis... 34

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5 Project Paper Data Sheet REPUBLIC OF DJIBOUTI POWER ACCESS AND DIVERSIFICATION ADDITIONAL FINANCING II Basic Information Additional Financing (AF) Country Director: A. David Craig Sectors: General Energy Sector (70%) Oil & Gas (30%) Sector Manager/Director: Patricia Veevers-Carter/ Themes: Natural Disaster (100%) Junaid Kamal Ahmad Team Leader: Ilhem Salamon Environmental Category: B Project ID: P Expected Closing Date: March 31, 2014 Expected Effectiveness (150 day after signing of Joint IFC: No Date: Financing Agreement) Lending Instrument: Emergency Recovery Loan - Joint Level: N/A ERL Additional Financing Type: Crisis Response Window (CRW) Basic Information Original Project Project ID: P Environmental Category: B Project Name: Power Access and Expected Closing Date: March 31, 2014 Diversification Lending Instrument: Specific Investment Loan - SIL Joint IFC No Joint Level: N/A AF Project Financing Data Loan Credit Grant (Crisis Guarantee Response Window (CRW) Proposed Terms: AF Project Plan (US$m) Source Total Amount (US$m) Total Project Cost: 5.2 Cofinancing: - Borrower: - Total Bank Financing: IBRD: - IDA: 5.2 New: 5.2 Recommitted: - Client Information Recipient: Republic of Djibouti Responsible Agency: Contact Person: Ministry of Economy, Finance and Planning Simon Mibrathu Permanent Secretary Ministry of Economy, Finance and Planning Djibouti Telephone Number: / Fax Number: smibrathu27@gmail.com AF Estimated Disbursements (Bank FY/US$ m) FY Annual Cumulative

6 Project Development Objective and Description Current project development objective: i) To increase access of underserved populations to electricity services; and ii) To improve Electricité de Djibouti s (EDD) efficiency through execution of investment operations aimed at reducing EDD s electricity losses. Revised project development objective: i) To increase access of underserved populations to electricity services; ii) To improve EDD s efficiency through execution of investment operations aimed at reducing EDD s electricity losses, and; iii) To reduce the negative effects of drought on water pumping in both rural and urban areas by strengthening the country s power supply resilience to natural catastrophes, through the creation of High Fuel Oil (HFO) and diesel security stocks. Project description: The proposed activities to be financed under the Power Access and Diversification Additional Financing II will consist of the following: i) Component 1: Setting up petroleum security stocks through: The purchase of diesel and High Fuel Oil (HFO) The rental of long term storage capacity ii) Component 2: Institutionalizing the management of petroleum security stocks by: Assisting the Government of Djibouti in purchasing petroleum products and negotiating the maintenance and rental of storage capacity Designing a simple regulation of security stock management Strengthening the PMU capacity through the recruitment of a local financial management expert Safeguards and Exception to Policies Safeguard policies triggered: Environmental Assessment (OP/BP 4.01) Yes No Natural Habitats (OP/BP 4.04) Yes No Forests (OP/BP 4.36) Yes No Pest Management (OP 4.09) Yes No Physical Cultural Resources (OP/BP 4.11) Yes No Indigenous Peoples (OP/BP 4.10) Yes No Involuntary Resettlement (OP/BP 4.12) Yes No Safety of Dams (OP/BP 4.37) Yes No Projects on International Waterways (OP/BP 7.50) Yes No Projects in Disputed Areas (OP/BP 7.60) Yes No Does the project require any waivers of Bank policies? Yes No Have these been endorsed or approved by Bank management? Yes No Financing Agreement Reference Article V. Para 5.01(a) Article V. Para 5.01(b) Conditions and Legal Covenants Description of Condition/Covenant The Manual of Operations for the projects has been revised and approved by the Recipient. The International Adviser and the local FM specialist for the PMU have been recruited satisfactory to the Association. Date Due Effectiveness Effectiveness 2

7 I. Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide a second Additional Financing (AF II) in the amount of US$5.2 million equivalent, in the form of a grant, to the Republic of Djibouti for the Power Access and Diversification Project. The proposed project is being processed as an emergency operation under Operational Policy/Bank Policy (OP/BP) 8.00 Rapid Response to Crises and Emergencies. 2. AF II introduces a scale-up of the activities and outreach of the amended scope of the Power Access and Diversification Project (Credit IDA and Grant IDA H5740-DJ) by providing a crisis response mechanism in the event of drought in Djibouti. All other ongoing activities remain unchanged. 3. AF II would finance the costs associated with activities aimed at expanding the project s outreach to energy disaster risk management tools that will benefit both rural and urban areas. This scaling up of the project was validated through a multi-sectoral drought post-disaster needs assessment (PDNA) that was completed by the Government of Djibouti, in partnership with the international community, on October 25, The scope of AF II was also agreed to by a letter from the Minister of Economy and Finance, in charge of Industry and Planning, dated February 2, II. Background and Rationale for Additional Financing Background 4. This is an emergency operation and does not fall under the Country Assistance Strategy for Djibouti. The latest drought in the Horn of Africa, one of the worst on record over the last 60 years, has severely affected the region and caused severe water shortages and food crisis across Somalia, Kenya, Ethiopia and Djibouti, threatening the livelihood of more than 13.3 million people. In response to international appeals, and in close collaboration with the international partners, the World Bank Group (WBG) launched a comprehensive assistance program to support countries in the Horn of Africa to address immediate vulnerabilities and build longerterm natural hazard resilience. On September 15, 2011, the WBG approved US$250 million from the IDA Crisis Response Window (CRW) (Report: IDA/R2011) which seeks to maximize efficiency gains from existing World Bank operations and technical assistance, while promoting strategies that support sustainable, economically strong livelihoods, and potentially negate the need for routine emergency appeals. 5. As a result of the initial assessment, a number of priority activities were identified and a request for drought mitigation funding in the amount of US$13.2 million was presented to World Bank s Board in August The proposed interventions (which are in line with the Government s seven pillar drought mitigations priorities) were approved by the Board on September 15, Of this amount, US$5.2 million was approved to scale up the Power Access and Diversification project to reduce the negative effects of drought on water pumping in both rural and urban areas by creating Heavy Fuel Oil (HFO) and diesel security stocks that would provide a critical buffer supply of fuel to cover surges in power demand from pumping in urban 3

8 and rural areas. The scaling up of the project has been validated through the completion of a multi-sectoral drought PNDA that was completed by the Government of Djibouti in partnership with the international community, on October 25, The scaling up of project activities will be carried out using the additional financing mechanism and will be built upon the existing US$7.0 million IDA Credit DJ and US$6 million Grant H5740-DJ. The envisaged AF II complements well the rural community driven development and water operation, also supported by IDA CRW financing. 6. In accordance with OP/BP 8.00, the constitution of HFO and diesel security stocks under AF II will address the following priorities: (a) assisting with the crucial initial stages of building capacity for longer-term disaster management and risk reduction; and (b) supporting measures to mitigate or avert the potential effects of imminent emergencies or future emergencies or crises in countries at high risk. Project Background 7. An IDA Credit of US$7 million was approved on November 1, 2005 for the Power Access and Diversification Project and became effective on March 29, The original Project Development Objectives (PDOs) were to: (i) increase access of underserved populations to electricity services, through priority investments in distribution and new electricity connections in Balbala; (ii) increase reliability of electricity services through the development of alternative sources of production and targeted technical assistance by introducing a pilot wind farm of an estimated capacity of 3.5 to 4.5 MW near Arta, West of Djibouti Ville, and; (iii) improve the efficiency of the electricity utility, through technical assistance, by carrying out three studies, including an electricity tariff study, an electricity loss reduction study, and a commercial management study for the electricity and water sectors jointly. 8. The project went through five restructurings with the second restructuring having the most impact. Indeed, by end 2008, right in the middle of a severe global energy crisis, delays in the implementation of the Project s wind component coincided with a severe cash crisis at the electricity utility EDD linked to high oil prices which were not translated into tariffs. The Bank s Board of Executive Directors agreed to a request by the Government of Djibouti and reallocated the funds originally earmarked for the wind component of the project for the emergency procurement of fuel oil for EDD s main power plant; some adjustments to the TA activities were also made. The PDOs were thus amended to read as follows: (i) to increase electricity access; (ii) to ensure the emergency reliability of power generation; and (iii) to provide some diagnostic tools to improve the efficiency of the power utility. 9. A first additional financing (AF I) grant in the amount of US$6 million was approved on July 27, 2010 bringing the total financial support of the project to US$13 million. That additional financing was provided to the Government of Djibouti to deepen the impact of the project and scale up its activities. The project closing-date was extended by three years, from June 30, 2010 to June 30, The current PDOs, further revised under AF I, are: (i) To increase access of underserved populations to electricity services; and (ii) To improve EDD s efficiency through execution of investment operations aimed at reducing EDD s electricity losses. 4

9 10. A fifth restructuring took place in May This restructuring cancelled component 2 support for project management and implementation of AF I, as no funds were initially allocated to implement it. The activities planned under this component were added to component 3 of the parent project. Indeed, the latter had remaining funds that were reallocated to execute the technical assistance activities. Lastly, in order to accommodate the 9-month delay in the effectiveness date of AF I and provide time to execute the new activities, the Closing Date was extended by 9 months, from June 30, 2013 to March 31, Status of Implementation 11. The parent project experienced delays in implementation, particularly in its early postapproval stages. Component 1 focusing on the electricity distribution expansion in Balbala was completed and rated highly satisfactory. The project s wind power component (original Component 2) however faced major implementation delays and uncertainties, primarily as of a result of the unexpected wind power equipment supply constraints on world markets that led to price hikes and a steep decline in the interest of suppliers for small tenders. The project was subsequently restructured and this component was replaced by an emergency assistance to EDD for fuel purchase, a component that has received sustained attention from counterparts and has been rated satisfactory. The original project also included technical assistance (Component 3) that has been rated satisfactory, as it allowed EDD to better diagnose some of its challenges and enabled energy sector stakeholders to clarify the least-cost electricity expansion priorities for Djibouti. Lastly, component 4 of the original project focused on strengthened capacity for project implementation and has been rated satisfactory as its implementation led to the head of the PMU being well versed in Bank procurement guidelines and project management. Following the second project restructuring, close to 97 percent of the funds allocated have been disbursed as of January 31, Most of the remaining funds are committed and a marginal balance remains. 12. AF I included three components, all of which have been rated satisfactory. While the progress toward the PDOs has been consistently rated as satisfactory, the assessment of project implementation following the approval of the additional financing led to a moderately unsatisfactory rating in June Indeed, the project experienced a 9-month delay in its effectiveness that resulted mostly from coordination issues amongst the counterparts in Djibouti during the very demanding presidential campaign in Consequently, delays in procurement were registered and a new procurement plan was established to accommodate them. Project implementation however went back on track with a moderately satisfactory Implementation Progress rating in December While no disbursements have taken place yet, all the consultants required by the implementation support component have been hired and the procurement documents for the electricity access expansion component and for the loss reduction investments component have received the World Bank s no-objection and have been published on February 6, Finally, all legal covenants, and audit requirements are complied with, although the latest audit and financial management reporting were received after the deadline. 5

10 Rationale and Eligibility for the Power Access and Diversification Project Additional Financing II 13. The drought in the Horn of Africa has caused a major food crisis, generated widespread water shortages and threatened the livelihood of millions of people. In Djibouti, the impact of the drought is felt in different ways, but the absence of mitigation measures specific to the energy sector worsens the crisis. Indeed, in urban areas, the Office Nationale de l Eau et de l Assainissement de Djibouti (ONEAD), the national water utility is unable to meet the increased water demand due to the additional electricity requirements for pumping not being satisfied by EDD. EDD s difficulty to expand production therefore translates into water shortages that have dramatic consequences on the country s urban areas. Similarly, small villages in rural areas find it extremely difficult to get the additional diesel oil required to fuel their generators to pump water, a daily task that is made even more crucial by the drought. 14. At its core, the problem stems from the fact that Djibouti doesn t have any mechanisms to prevent energy risks associated with natural hazards, a situation that renders the country incapable of meeting its energy needs when disasters occur. Contrary to what is practiced in all developed nations and in an increasing number of developing countries, there are no security oil stocks 1 in place in Djibouti. In the OECD, the common practice is to have security energy stocks equivalent to at least 90 to 120 days of consumption. Closer to Djibouti, an increasing number of Sub-Saharan nations have security stocks of petroleum products equivalent to 10 to 30 days of consumption that help them mitigate the impact of disasters when they take place. In Kenya, for instance, petroleum security stocks currently amount to 21 days of consumption and the country is planning a large expansion that will bring this number to 90 days in the long run. Ghana also has similar expansion plans and security stocks of petroleum products should rise from 14 consumption days-equivalent to a minimum of 60 days by In the absence of such energy specific crisis mitigation mechanisms, the drought taking place in the Horn of Africa has had a significant impact on the social and economic well-being of the Djiboutian population. Given that Djibouti suffers from droughts on a regular basis, a disaster mitigation strategy centered on energy should thus be to set up petroleum security storages equivalent to several inter alia days of national consumption of the petroleum products that are critically important: HFO, used for electricity generation, and Diesel oil, used for powering water pumps in rural areas. Indeed the country went through severe power outages, which reportedly lasted up to 48 hours. 16. Currently, all of the country s electricity generation facilities run on imported diesel and HFO. The electricity they produce is used to meet all of the demand throughout the year, except during summer when Djibouti can import cheap hydroelectricity from neighboring Ethiopia 2. Indeed, since 2011, an interconnection between the two countries makes it possible to import 1 Security stocks are different from strategic stocks. While the former are meant to prevent energy shortages, the latter are intended to influence international market prices, and are used in Europe, Japan and the USA. 2 The cost of imported hydroelectricity is between 6 to 8 cents per kw/h. Conventional electricity produced by EDD is a lot more expensive as the cost for fuel only is around 13 cents per kw/h produced when the crude oil barrel is at around US$100. The low hydroelectricity price is explained partly by the fact that hydroelectricity is produced very competitively and partly by the fact that the Power Purchase Agreement (PPA) between Ethiopia and Djibouti is for surpluses only. Ethiopia has no firm selling commitment towards Djibouti. 6

11 electricity during summer, a season when Ethiopia produces enough excess hydroelectricity to cover 65 percent of Djibouti s needs. When a drought hits the East African region however, Ethiopia has lower surpluses and can lose its capacity to export hydroelectricity to its neighbor. EDD can therefore only rely on its own HFO and diesel powered thermal facilities to meet the electricity demand. This, however, is made difficult by the limited financial capacity of the electricity utility and by the absence of security HFO/diesel stocks in the country. Consequently, when ONEAD s needs increase as a result of the drought, EDD is incapable of meeting them, and power and water shortages occur in most urban areas. In this context, ONEAD is also incapable of producing additional water, which could be distributed in rural areas using water tankers. This is all the more problematic since in rural areas, the pumping of water for consumption and agro-pastoral activities is made more difficult during droughts when water tables are low. In this case, pumping water requires additional diesel oil. However, no security stocks of diesel oil are available, water-pumping is thus limited and the negative impact of the drought on rural areas is more harshly felt, as stressed by the PDNA. 17. The need for HFO and diesel oil security stocks is apparent. The Government of Djibouti, aware of its vulnerability, has previously indicated an interest in obtaining the assistance of the World Bank to set up such security stocks and the regulation that is required for such an undertaking. Security stocks are energy risk management tools meant to address major catastrophes including severe natural disasters. They are therefore not supposed to be used for minor and recurrent climatic events. In a country like Djibouti, a regulation should be put in place to establish clear qualitative criteria to ensure that the use of security storage is only allowed in clearly defined emergency situations, and the modalities of such use should be clearly defined. The purpose of the regulation is to avoid using the security stocks in non-life threatening situations. In addition, regulation is also needed to ensure the sustainability of the security stocks by identifying feasible replenishment rules. Such rules generally include price mechanisms that allow for a marginal taxation of luxury oil products, such as gasoline, in order to finance stocks replenishment as well as the cost of storage and its maintenance. Lastly, these regulations also make it mandatory for the private operators of the downstream oil business to complement public security stocks, in line with international best practices. As knowledge on these regulations is widely available, setting them up is feasible. 18. In short, AF II can support the creation of emergency response mechanisms quickly and efficiently while helping increase the resilience of Djibouti to disasters by setting up risk prevention devices in the energy sector. III. Proposed Changes Project Development Objectives 19. In addition to the existing PDOs, AF II aims at reducing the negative effects of drought on water pumping in both rural and urban areas by strengthening the country s power supply resilience to natural catastrophes, through the creation of HFO and diesel security stocks. The changes in PDOs are summarized below. 7

12 Table 1: Revised PDOs Current i) To increase access of underserved populations to electricity services; and ii) To improve EDD s efficiency through execution of investment operations aimed at reducing EDD s electricity losses. Revised i) To increase access of underserved populations to electricity services; ii) To improve EDD s efficiency through execution of investment operations aimed at reducing EDD s electricity losses; and, iii) To reduce the negative effects of drought on water pumping in both rural and urban areas by strengthening the country s power supply resilience to natural catastrophes, through the creation of HFO and diesel security stocks. Project Activities 20. Within the allocated grant resources of US$5.2 million, the proposed project can provide Djibouti with 5 days of security stocks of HFO, 5.2 days of diesel, two years of storage and maintenance for the products and the TA needed to assist the government in procuring the goods and establishing the regulation needed to replenish and maintain the stocks. While AF II allows for a very limited number of days of security stocks, its impact shall however be significant. Indeed, the longest disruption to energy supply reported in the country was of two days. As such, the security stocks envisaged by AF II will be enough to prevent a similar situation from taking place again. Furthermore, security stocks are traditionally used to cover the consumption of a whole nation. In the case of the security stocks envisaged by AF II for Djibouti however, they will be set up so that they can only be used to pump water to villages (diesel) and urban areas (HFO) during drought peaks. Since water pumping is only one component of the energy demand in the country, diesel and HFO security stocks financed by the project (equivalent to five days of total national energy consumption) are in effect equivalent to at least 14 to 30 days of energy consumption 3 from water pumping. Moreover, a regulation will be passed to match these publically funded stocks with contributions from the private operators of the downstream oil market in Djibouti, as is the case in most countries around the world. 21. AF II will thus finance the following two components that are described in detail in Annex Component 1: Setting up petroleum security stocks (US$4.87 million).this component will include (1) the purchase of diesel and HFO for security stocks (US$4,246,297 i.e. 87% of component cost) and (2) the rental of long-term storage capacities for both petroleum products in Horizon Djibouti Terminals Limited storage facility (US$619,629 i.e. 13% of component cost). According to the assessment developed in Annex 3, the Government of Djibouti should be able to afford around 5 days of consumption of HFO and 5.2 days of diesel within the allocated budget, as well as a 2 year rental and maintenance contract for the storage tanks, though the precise figures will depend on the outcome of the procurement procedure. 23. Component 2: Institutionalizing the management of petroleum security stocks (US$330,000). This component will include: (1) the recruitment of an international individual consultant to advice the Government of Djibouti in purchasing petroleum products and in negotiating the maintenance and rental of storage capacity (contract estimated at US$100,000 i.e. 3 There aren t any national statistics available on the breakdown of energy consumption in Djibouti. The figures presented in this document come from various counterparts estimates. 8

13 30% of component cost); (2) the hiring of a consulting firm to design a simple regulation required for security stocks management, including guidelines for releasing and rebuilding security stocks (contract estimated at US$185,000 i.e. 56% of component cost); and (3) the recruitment of a local financial management expert to strengthen the PMU s capacity and ensure the timely execution of the activities of the project (contract estimated at US$45,000 i.e. 14% of component cost). 24. Several new activities are added to the original project description to these ends, while all existing activities will continue to be implemented. Original Extension of access and rehabilitation in Arta and Balbala* HFO procurement** Smart metering*** Technical Assistance**** Table 2: Original and Revised Activities Revised Extension of access and rehabilitation Arta and Balbala HFO procurement Smart metering Technical Assistance Setting up petroleum security stocks Institutionalizing the management of petroleum security stocks. * Activity financed under Component 1 of the initial project (Credit DJ) and expanded under AF I (Grant H5740-DJ) ** Activity financed under Component 2 of the initial project (Credit DJ) *** Activity financed under Component 2 of AF I (Grant H5740-DJ) **** Activity financed under Component 3 of the initial project (Credit DJ) Changes in the Closing Date 25. s in Closing Date are envisaged. The Closing Date for the AF II is proposed to be fully aligned with the current Closing Date of the Djibouti Power Access and Diversification Project (Credit No DJ (P086379) and AF I (Grant H5740), namely March 31, Changes in the Result Framework 26. The result framework has primarily been updated to enable the monitoring of the new activities financed by the proposed AF II. As shown in Annex 1. A few minor adjustments were also made to the wording of a couple of intermediate indicators, a more realistic target value for a few intermediate indicators was set, and a few missing baselines were added. The main changes are summarized in Table 3 below. Table 3: Changes in Project Outcome Indicators Current Increased number of newly connected houses and increase in street lightening Deployment of smart meters and consequent loss reduction Revised Increased number of newly connected houses and increase in street lightening Deployment of smart meters and consequent loss reduction Days of HFO security stocks (purchased, stored and maintained) Days of Diesel security stocks (purchased, stored and maintained) Design and Implementation of a regulation of the security stocks 9

14 Revised Costing 27. The Power Access and Diversification Project was launched under Credit DJI in 2005 (US$7 million) and benefited from a first additional financing through Grant H5740-DJ (US$6 million) in July The proposed AF II (US$5.2 million) will bring total project financing to US$18.2 million. Changes in project cost are summarized in Table 4 below. Table 4: Changes in Project Cost Cost Status Credit DJI / Parent Project: Extension of Access and Rehabilitation US$3.0 million Completed HFO Procurement US$ 4.9 million Completed Technical Assistance and Implementation Support US$1.1 million Ongoing Sub-total US$7 million Grant H5740-DJ / Additional Financing I Extension of Access and Rehabilitation US$4.0 million Ongoing Smart metering US$2.0 million Ongoing Sub-total US$6 million Proposed Grant / Additional Financing II Setting up Petroleum Security Stocks US$4.87 million Not yet started Institutionalizing the management of petroleum security stocks US$0.33 million Not yet started Sub-total US$5.2 million TOTAL PROJECT COST US$18.2 million Changes in Environmental and Social Safeguards 28. AF II does not entail any changes in the environmental project category, which remains classified as B. 29. Environmental safeguards. OP4.01 is triggered by Component 1 of AF II and the proposed classification of AF II is thus B. The second component of the AF II does not trigger any environmental operational policy. The diesel and HFO security stocks developed under this second additional financing will represent a very small fraction (around 1 percent) of the existing capacity of the privately-owned Horizon Djibouti Terminals Limited storage facility, which is proposed to be used to store the hydrocarbons purchased under AF II. Therefore, the proposed operation does not increase the environmental impacts of the existing storage facility. Since the HFO and the Diesel will be stored in an existing facility, the PMU prepared an Environmental Audit (EA) to assess the hazards of the existing terminals and define the corresponding prevention measures and emergency plan. The Environmental Audit concludes that Horizon Djibouti Terminals Limited storage facility has an Environment Health Safety (EHS) policy in place and is maintaining a risk-based emergency response system to control and mitigate the effects of any incident that might occur. The Environmental Audit has been reviewed by the World Bank and disclosed in French in Djibouti on March 18, 2012 and at the Infoshop on March 26, Social safeguards. OP 4.12 is not triggered by AF II. The rental of existing storage facilities is the current and only option envisaged for the storage of the security stocks to be purchased. These tanks, owned and managed by Horizon Djibouti Terminals Ltd, are located on 10

15 privately owned facilities. As such, the implementation of the project would not necessitate any construction, acquisition of land or displacement of population. Changes in Fiduciary Management 31. Procurement. While the PMU has extensive experience in contracting consultant services, AF II involves a challenging procurement process and an international consultant will be hired to strengthen the procurement capacity as needed. The purchase of fuel should fall under World Bank documents on Procurement of Crude Oil/Petroleum Products. 32. Financial Management. Given the limited capacities of the existing PMU, a local financial management specialist will be added to the team to ensure the timely execution of the activities of the project. This will be a condition of effectiveness. IV. Implementation Arrangements 33. AF II would be implemented using the existing PMU under the same procurement and disbursement arrangements. However, the oversight of the activities planned under AF II will be directly performed by the Ministry of Finance rather than EDD, as they pertain to national risk prevention and not electricity. Moreover the implementation framework will be updated according to the latest Bank s Procedures/Guidelines, inter alia Procurement and Consultants Guideline, dated January 2011 and the PMU staff will be trained on these new Bank's guidelines, which are expected to be used in project implementation. The PMU has performed relatively well under the current project and has acquired capacity in fiduciary, procurement, and safeguard policies and procedures applicable to Bank projects. The continuation of implementation arrangements would also prevent a gap in knowledge, engagement and commitment of staff, which has often proven costly in other projects in Djibouti. 34. It is proposed that the cost sharing arrangements between IDA and the Recipient with regard to the functioning of the PMU remain in place. All activities undertaken by the PMU under AFII will be overseen and coordinated by the Ministry of Economy, Finance and Planning in charge of Privatization. The Ministry of Economy, Finance and Planning in charge of Privatization would be the authority in charge of enforcing security stocks regulations by authorizing the release of HFO and diesel security stocks. 35. All project components should be completed within 12 to 15 months. Component 2 could be implemented under the rule of advanced procurement in order to jump-start the technical assistance when the project becomes effective. It is assessed that activities funded under this AF II can be completed by the original project s Closing Date. 36. Consistent with OP/BP 8.00 procedures, the task team will provide close implementation support, particularly with respect to financial management, procurement, safeguards and project management. 11

16 V. Risk and Design Considerations 37. The risks of the proposed AF II are expected to be moderate since the scope largely focuses on setting up HFO and diesel security stocks, using spare storage capacities. Likewise, the technical assistance component is not anticipated to be problematic as it will mainly involve recruiting consultants to work on topics that are commonly tackled worldwide. 38. The major risk is on procurement as petroleum procurement capacity is limited in Djibouti. Lessons learnt from past experience in this field show that petroleum product purchase should be made with specialized support provided to counterparts. Therefore, in addition to using Bank procurement guidelines, an experienced international consultant specialized in procurement of petroleum products is being hired under the project. 39. Another risk is to inefficiently deplete security stocks if the Government of Djibouti authorizes their release during the dry season rather than in the event of drought peaks. This risk is important and should not be overlooked as it would defeat the whole purpose of developing security stocks. The design of a sound regulation of the downstream oil sector and security stocks management however will mitigate this risk. The design and implementation of such a regulation should be straightforward as it is widely applied internationally and the operators of the downstream oil business in Djibouti are familiar with the rules that will be set up and used to abide by them. 40. Finally, the short project life might threaten the completion of the new activities. Any derailing in the timeline of the procurement and implementation of the new activities would cause some challenges to project achievements. Close support by the Bank team, in particular with matters related to procurement, will be required. VI. Appraisal Summary Financial Management 41. An evaluation of the financial management capacities of the PMU, responsible for delivering the proposed AF II was conducted as part of project preparation. AF II would be implemented using the existing PMU under the same procurement and disbursement arrangements. AF II will be overseen by the Ministry of Economy, Finance and Planning in charge of Privatization. The PMU has performed well under the original project and has acquired solid capacity in fiduciary procedures applicable to World Bank projects. The assessment identified the following weaknesses: (i) the PMU s Administrative and Financial Procedure Manuel dates from March 2006 and needs to be updated with regard to the new World Bank guidelines and to the local news regulation; and (ii) the PMU software is not fully used and needs to be updated through a maintenance contract. The last project rating of the Financial Management team was Moderately Satisfactory and the overdue audit was received. In this context, the overall financial management risk is deemed to be low at this stage. From now on, the PMU should ensure it meets the recommendations listed above. 12

17 42. No exceptions to World Bank policies are envisaged for AF II. The involvement of government counterparts and the implementing agency in project preparation and appraisal has been significant. There are no conditions for negotiations or disbursement. The effectiveness conditions are the following: (a) The Manual of Operations for the projects has been revised and approved by the Recipient. (b) The International Adviser and the local FM specialist for the PMU have been recruited satisfactory to the Association. Procurement 43. The PMU of the original project will be in charge of the implementation of AF II and will administrate all procurement-related transactions to be financed under this project. The PMU is usually subject to the rules and regulations falling under the Public Procurement Code of the Government of Djibouti. Above 5,000,000 DJF (US$ 28,500 equivalent), all procurement decisions (bid opening, evaluation report, contract award, etc.) are subject to the prior review of the National Procurement Committee (Commission Nationale des Marchés Publics - CNMP). Overall, the new Djiboutian procurement Manual of Procedures for goods, works and employment of consultants remains in line with the World Bank's procedures and the country has, since May 2010, adequate standard bidding documents and request for proposals similar to those of the Bank s. 44. The PMU is familiar with World Bank procurement guidelines and procedures through its management of two earlier projects. However, given that the procurement under AF II will be very specialized (petroleum products), the PMU s coordinator and staff members involved in procurement will require full support from an experienced international consultant specialized in procurement of petroleum products. The consultant will assist the PMU throughout the procurement process, thus allowing the PMU to develop all bidding documents and contracts in line with international best practices and World Bank procurement guidelines. Through this process, the PMU will see its capacity strengthened. The World Bank supervision team will be working very closely with the PMU (and the consultant) to ensure full compliance of the procurement procedure with World Bank Procurement guidelines. 45. Taking into account Djibouti s context and the limited capacity of the PMU to deal with the procurement process for the purchase of petroleum products, the overall assessment of procurement risk is high. Social and Environmental Safeguards 46. The implementation of the proposed activities does not trigger any social safeguards policies. There are no exceptions to or waivers of Bank policies necessary and applicable. The proposed additional financing does not raise the environmental category of the project ("B") nor trigger any new safeguard policy. The proposed changes also do not involve any exceptions to Bank safeguards policies. The Environmental Audit prepared by the PMU is satisfactory to the World Bank and has been disclosed in Country on March 18, 2012 and at the Infoshop on March 26,

18 Economic and Financial Analysis 47. The quantity of petroleum stocks and the potential for electricity generation. The petroleum products purchased can be used to generate extra electricity, thus avoiding a certain amount of blackout for grid supplies, and unavailability of diesel supplies to rural households. The quantities purchased can be converted into kilowatt-hours of electricity using standard conversion factors. The maximum quantities of electricity generation made possible by the utilization of all the security stocks are shown in the table below. Table 5: Purchase of petroleum products and extra electricity production made possible HFO Diesel Quantity purchased (tons) Days of national consumption 5 5 Volume conversion 276 gallons/ton 1176 liters/ton Generation conversion (kwh per unit) Total hours generation (million kwh) The economic value of the extra generation. Blackouts and shortages of diesel impose costs on users well above the tariffs for normal supply. This cost of unserved energy is widely used in power system planning, and for the economy as a whole has been estimated at US$6 per kilowatt-hour in Djibouti. For agriculture the value may be lower and, based on an international survey for developing countries, a conservative value of US$1/kWh was used in this study. Furthermore, in Djibouti, some rural water supply will go to household use instead of agriculture - providing access to drinking water during a drought can have a positive effect on mortality and morbidity. Bearing all the points in mind a value of US$1/kWh for the costs of unserved energy to supply water provides a conservative economic value for the project of US$14.0 million (details are available in Annex 6). 14

19 Annex 1: Revised Results Framework and Monitoring Indicators To increase access of underserved populations to electricity services; and, Revised Results Framework and Monitoring PDO Project Outcome Indicators Use of Project Outcome Information Current Proposed Current Proposed Current Proposed Number of additional connections, improved connections, reconnections established in Balbala project site To improve EDD s efficiency through execution of investment operations aimed at reducing EDD s electricity losses. Number of new street lighting units Reduction in electricity losses as a % of total billed in selected 20KV feeder due to the deployment of smart meters To reduce the negative effects of drought on water pumping in both rural and urban areas by strengthening the country s power supply resilience to natural catastrophes, through the creation of HFO and diesel security stocks Days of HFO security stocks (purchased, stored and maintained) Days of Diesel security stocks (purchased, stored and maintained) Design and implementation of a regulation of the security stocks Use to measure the expansion of access, and consequent further expansion planning needs. Use in estimating loss rates after introduction of smart meters, and thus decide on further use of smart meters; and on other loss reduction measures Future planning of HFO security stocks Future planning of Diesel security stocks Future authorization to deplete security stocks and their replenishment Intermediate Outcomes Intermediate Outcome Indicators Use of Intermediate Outcome Monitoring Current Proposed Current Proposed Current Proposed Completion of (i) 1.85 km of 20 kv primary lines; (ii) completion of km of 400/200 V secondary lines; installation of 3x400kVA and 3x800kVA transformers (20kV/400/200 V) and installation of 243 street lighting units. Completion of pilot smart metering project including 5,000 smart meters and associated equipment Completion of 36 km of overhead 20 kv primary lines. Completion of pilot smart metering project including 3,341 smart meters and associated equipment Completion of km line of overhead 20 kv primary lines. Number of new connections and re-connections Rate of progress on primary and secondary lines, on transformers and installation of lighting units. Engineering, Procurement and Construction Contract for Smart Meters signed Rate of progress on installation of smart meters Rate of progress on installation of emergency line, and its contribution to providing better performance. Future planning of power sector investment and Monitoring and Evaluation Reports Monitoring and Evaluation Report; next stage of smart metering installation program. Measurement of reliability of line; Monitoring and Evaluation Report. 15

20 Intermediate Outcomes Intermediate Outcome Indicators Use of Intermediate Outcome Monitoring Current Proposed Current Proposed Current Proposed Contract signed for the project management services and for the financial auditing services respectively Recruitment of a consultant for the purchase of HFO and Diesel and the negotiation of their storage and maintenance Recruitment of a consultant for the draft of a security stocks regulation Contracts signed and services performed. Sector Improvement Planning, Monitoring and Evaluation Report. -- Consultant Recruited -- Instrumental support to petroleum procurement and negotiation of long term storage facilities -- Consultant Recruited -- Design of a regulation 16

21 Arrangements for results monitoring Project Outcome Indicators Original Baselines Target Values (cumulative) Data Collection and Reporting At AF II YR1 YR2 YR3 Frequency Data Collection Responsibility for Appraisal 04/ / / / / /2014 and Reports Instruments Data Collection Current Proposed Number of additional connections, improved connections, reconnections established in Balbala project site ,800 Number of new street lighting units Reduction in electricity losses as a % of total billed in selected 20KV feeder due to the deployment of smart meters Reduction in electricity losses as a % of total billed in selected 20KV feeder due to the deployment of smart meters Days of HFO purchased, stored and maintained Days of Diesel purchased, stored and maintained New security stocks regulation designed and implemented Not applicable 12% 12% 3% 3% None None 5 days of HFO domestic consumptionequivalent are purchased 5.2 days of Diesel domestic consumptionequivalent are purchased Contract is signed is work and under way 5 days of HFO purchased, stored and maintained 5.2 days of Diesel purchased, stored and maintained Regulation is designed and implemented Semi-annual reports and end of project report Semi-annual reports and end of project report Semi-annual reports and end of project report Semi-annual reports and end of project report Semi-annual reports and end of project report Semi-annual reports and end of project report EDD Register for new connections Monthly Progress Reports Financial reports EDD Monthly Progress Reports Monthly Progress Reports Monthly Progress Reports PMU/EDD PMU/EDD PMU/EDD PMU/MEF 4 PMU/MEF PMU/MEF 4 Ministry of Economy and Finance, in charge of Industry and Planning 17

22 Intermediate Outcome Indicators Current Proposed Completion of 1.85 km of 20 kv primary lines; completion of km of 400/200 V secondary lines; installation of 3x400kVA and 3x800kVA transformers (20kV/400/200 V) Engineering, procurement and construction contract for Smart Meters signed N/A Rate of progress on installation of 5000 smart meters Primary lines, secondary lines, transformers and street lighting installed Contract signed for the project management services and for the financial auditing services respectively -- Engineering, procurement, and construction contract for extension of Balbala distribution network and extension of the 20 kv line to Arta. Rate of progress on installation of 3,341 smart meters Recruitment of a consultant for the purchase of HFO and Diesel and the negotiation of their storage Original Baselines Target Values (cumulative) Data Collection and Reporting At AF II Appraisal 0 new primary lines, 0 new secondary lines, 0 new transformers No contract signed No contract signed No contract signed No contract signed YR1 YR2 YR3 0 new primary lines, 0 new secondary lines, 0 new transformers Bid launched on February 1, 2012 Bid launched on February 1, km of new primary lines, 8 km of new secondary lines, 0 new transformers Contract signed June 15, 2012 Contract signed June 15, km primary lines; km secondary lines; 3x400kVA and 3x800kVA transformers End of contract December 31, 2013 End of contract December 31, % 100% 0 new primary 0 new primary lines, 0 new lines, 0 new secondary lines, secondary lines, 0 0 new new transformers, transformers, street lights street lights No contract signed 0 new primary lines, 0 new secondary lines, 0 new transformers, 199 street lights No contract signed Contracts signed -- No contract signed No contract signed 1.0 km of new primary lines, 8 km of new secondary lines, 0 new transformers, 349 street lights Contract signed and petroleum products are purchased 1.85 km primary lines; km secondary lines; 3x400kVA and 3x800kVA transformers, 442 street lights Petroleum security stocks stored and maintained Frequency and Reports Semi-annual reports and end of project report Semi-annual reports and end of project report Semi-annual reports and end of project report Semi-annual reports and end of project report Semi-annual reports and end of project report Semi-annual reports and end of project report Semi-annual reports and end of project report Data Collection Instruments Monthly Progress Reports Verification of contract and of installed smart meters Verification of contract Responsibility for Data Collection PMU/EDD PMU/EDD PMU/EDD Verification of contracts and of PMU/EDD installed smart meters Verification of PMU/EDD lines, transformers and street lights installed Verification of contracts and of installed smart PMU/EDD meters Verification of contract PMU/MEF 18