Document of The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED SECOND ADDITIONAL FINANCING GRANT

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED SECOND ADDITIONAL FINANCING GRANT IN THE AMOUNT OF 7.7 SDR MILLION (US$12 MILLION EQUIVALENT) TO THE DEMOCRATIC REPUBLIC OF CONGO IN SUPPORT OF THE Report No: ZR EMERGENCY MULTISECTOR REHABILITATION AND RECONSTRUCTION PROJECT Transport Group Country Department 9 Africa Regional Office November 15,2007 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 DEMOCRATIC REPUBLIC OF CONGO Emergency Multisector Rehabilitation and Reconstruction Project Second Additional Financing PROJECT PAPER DATA SHEET :Y jnnual 3umulative Does the project require any exceptions from Bank policies? Have these been approved by Bank management? Is approval for any policy exception sought from the Board? No N/A No Borrower IDA Others Total: Source Local Foreign Total

3 FOR OFFICIAL USE ONLY ABBREVIATIONS AND ACRONYMS APL BCECO BCMI CAS DRC EMRRP GDP GoDRC IDA IP MW PDO PMPTR PRSP RDPMDP SNEL WBG Adaptable Program Loan Bureau Central de Coordination (Project implementation agency for Project component B) Bureau de Coordination des Marche's d 'Infiastructures (Project implementation agency for Project component A) Country Assistance Strategy Democratic Republic of Congo Emergency Multisector Rehabilitation and Reconstruction Project Gross Domestic Product Government of DRC International Development Association Implementation Progress Megawatt Project Development Objective Programme Minimum de Partenariat pour la Transition et la Relance (Minimum Partnership Program for Transition and Relaunch) Poverty Reduction Strategy Paper Regional and Domestic Power Markets Development Project Socie'te' Nationale d'electricite' (DRC's national power utility) World Bank Group This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

4 FOR OFFICIAL USE ONLY DEMOCRATIC REPUBLIC OF CONGO Emergency Multisector Rehabilitation and Reconstruction Project CONTENTS. INTRODUCTION BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING. 1 I I1 I11. PROPOSED CHANGES... 7 IV. CONSISTENCY WITH THE COUNTRY ASSISTANCE STRATEGY... 7 V. EXPECTED OUTCOMES... 8 VI. BENEFITS AND RISKS... 9 VI1. FINANCIAL TERMS AND CONDITIONS FOR ADDITIONAL FINANCING... 9 ANNEX 1 : PROCUREMENT. FINANCIAL MANAGEMENT & DISBURSEMENT ARRANGEMENTS ANNEX 2 : SECTORAL ALLOCATIONS Tables Table 1 : Electricity Sector Activities Cost Overruns (US$ million)... 5

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6 I. Introduction 1.1 This Project Paper seeks the approval of the Executive Directors to provide an additional grant in the amount of 7.7 SDR million (US$12 million equivalent) to the Democratic Republic of Congo (DRC) for the Emergency Multisector Rehabilitation and Reconstruction Project ( EMRRP, P057296), approved in June The Project is an integral part of a large multi-donor Program of the same name, prepared by the Government of DRC in 2001 with the assistance of the Bank. The Project is rated Satisfactory for both the Project Development Objectives (PDO) and Implementation Progress (IP), per the most the recent Implementation Status and Results report (June 2007). 1.2 The proposed additional grant, formally requested by the GoDRC in August 2007, would help finance the costs associated with completion of certain priority activities included in the original Project scope, which are subject to unanticipated cost overruns and financing gaps. No new activities, changes to the Project objectives or modifications of general design and implementation modalities are proposed. The focus of the support will be for: (i) urgent rehabilitation of key elements of electricity sector infrastructure, and (ii) project execution and supervision across the infrastructure component of the Project in order to ensure that activities are completed by the Project closing date. As a result, the expected outcome of the proposed second Additional Financing is that: (i) the original development objectives of the electricity sector component continue to be achieved, namely to rehabilitate and reconstruct the electricity supply networks serving major cities, and (ii) that overall execution and supervision of the Project continues smoothly until Project completion. 1.3 The proposed second Additional Financing will complement activities to be carried out under the recently approved Regional and Domestic Power Markets Development Project ( RDPMDP, Southern African Power Market Program Phase, APL-lb). The RDPMDP will fund activities in some of the same areas of the electricity sector as those proposed in this Additional Financing, but they are designed as medium-term investments to bring about structural improvements in electricity sector reliability and reach. The investments proposed here are, by contrast, designed as more immediate, urgent interventions that will help to preserve the existing reliability and reach of electricity service, pending the more extensive overhaul and grid extension work supported to be supported under the RDPMDP. 1.4 The urgency of the emergency activities described here is such that they would be completed within the same timeframe as the first Additional Financing - i.e. by December 31, Accordingly, the proposed second Additional Financing will not require an extension of the current Project closing date. 1.5 A range of development partners were involved in both the design and parallel financing of the. underlying Program, in close consultation with the Transitional Government of DRC. The Project, however, is 100% financed by IDA, as will be the proposed second Additional Financing. 11. Background and Rationale for Additional Financing Country Context 2.1 Conflict, mismanagement and political paralysis in DRC over the past forty years have taken a heavy toll. Annual GDP per capita declined from US$380 in 1960 to about US$120 in 2005, six times lower than the average for sub-saharan Africa. Between 1997 and 2002, disease and casualties in the civil conflict caused more than 3.3 million deaths. 75 percent of the population lives on less than a dollar a day. The Additional Financing will thus address the first situation described in the guidance to staff on processing Additional Financing, updated in April Development partners involved in the Program include Canada, Belgium, China, Germany, the European Union, the Kuwait Fund, USAID and UNICEF. 1

7 2.2 Since the emergence of a durable peace process in 2001, considerable progress has been made in overcoming the legacy of mismanagement and conflict, and in establishing effective institutions of government. The elections in December 2006 marked an important moment in Congolese history when the government, parliament and local authorities assumed power through a democratic process, with intensive support from the international community. With a new cabinet appointed in early February 2007, the postelection period provides a rare opportunity to push forward with much-needed reforms. An important dividend of the peace process and subsequent political consolidation has been the return of a degree of economic stability. As a result, economic growth turned positive in 2002 and has remained above 5 percent since. These efforts have been rewarded by strong private sector investment inflows. Political and economic progress will, however, continue to face a complex array of challenges, including that of stabilizing and upgrading dilapidated infrastructure, in particular in the electricity sector. Electricity Sector 2.3 The proposed Additional Financing will provide support to the electricity sector component of the EMRRP. Despite the country's enormous power potential, particularly in hydropower, DRC has managed neither to provide adequate energy services for the vast majority of its own population nor to capitalize on the opportunity of significantly higher electricity exports across Africa. Household access is now less than before the war, at only 6.5 percent of households, compared to the sub-saharan Africa average of 24 percent. Frequent blackouts hit even high priority parts of the network and have become more frequent and severe over the last year. 2.4 All parts of the electricity network deteriorated extensively in the 1990s, with particular declines in the capacity and reliability of installed power plants (particularly the Inga site, which accounts for over 70 percent of total installed capacity in DRC), in the reliability of the transmission infrastructure and in the reach and reliability of the electricity distribution grid in Kinshasa: Currently, available capacity at the Inga 1 and Inga 2 plants totals about 700 MW out of 1775 M W of installed capacity. Both plants need urgent repairs as well as extensive rehabilitation for longer-term viability. Inga is the main source of electricity for Kinshasa. Transmission lines connecting to Kinshasa are heavily overloaded and operating beyond their design limits. Malfunctions and breakages result in frequent service outages. Maintenance of the distribution system has primarily been on an emergency repair basis, with virtually no systematic rehabilitation. A litany of shortcomings has rendered the entire system highly unreliable, including: saturated lines, due to insufficient number of lines to carry the system load; distribution transformers at precariously high levels of capacity due to inadequate numbers and insufficient maintenance; and dilapidated poles due to lack of maintenance. The result is frequent localized service outages, high technical losses and reduced voltage in the network. 2.5 The situation has deteriorated at an accelerated rate in the past few years, in part because an improved security situation and the resulting acceleration of economic activity has increased demand for power, placing further pressure on an already-overloaded network. 2.6 The Societe Nationale d'electricite (SNEL) is DRC's national power utility Original Project Description 2.7 The overall purpose of DRC's Emergency Multisector Rehabilitation and Reconstruction Program, developed in in conjunction with development partners, was to meet immediate social needs and relieve critical infrastructure bottlenecks to jumpstart the economy, in a manner consistent with long-term 2

8 reconstruction and economic rehabilitation. The original overall cost of the Program was estimated at US$l.74 billion. 2.8 As part of the Program, IDA is financing a Project whose specific objectives are to assist the DRC to: (i) reconstruct and rehabilitate critical infrastructure; (ii) start rebuilding agricultural production and enhance food security; (iii) restore essential social services and build community infrastructure; and (iv) strengthen capacity of government to formulate, implement, and manage medium and long-term development programs. 2.9 The Project was among the first IDA-financed projects to be prepared for the DRC once conditions in the country permitted IDA to re-engage. The Association s total contribution to the Program costs was originally envisaged to be $579 million. However, constraints in DRC s IDA allocation meant that IDA S contribution to the Project was reduced to US$454 million equivalent (including a grant of US$44 million equivalent), or $125 million short of the original target. Of this US$454 million of financing, $72 million was allocated to the electricity sector (including contingencies). The credit and associated grant were approved by the Board in August 200L3 Although the Project became effective in November 2002, physical works to rehabilitate infrastructure started only in November As a result, the closing date of the Project was extended by one year, from June 30,2005 to June 30, Both the multi-donor Program and the associated IDA-financed Project comprise four components. Component A includes rehabilitation and reconstruction of critical infrastructure (transport, water supply, electricity, and urban infrastructure). Component B includes agriculture, delivery of social services (education, health, social protection) and community development. Component C includes development of sector strategies for the medium and long terms, and strengthening of human and institutional capacities. Component D includes management, monitoring, and evaluation of the implementation of the Program and the IDA-financed Project. First Additional Financing 2.11 A first Additional Financing for the Project, approved in November 2005 and effective as of March 2006, filled the $125 million shortfall in IDA funding resulting from the initial IDA allocation to the Project, allowing activities to go ahead for which alternative sources of finance had not been found. A portion of the additional resources was also used to implement activities, particularly in the social services and community development sectors, in new locations that had become accessible as a result of the improved security situation in DRC. The electricity sector was allocated $5 million out of these supplemental monies; when combined with gains from the depreciation of the US dollar against the SDR over the Project period, the total allocation for the sector increased by US$9 million following the first Additional Financing. The new closing date for the Project (and for the first Additional Financing) is December 3 1, Current Performance 2.12 The Project has been rated in the latest Implementation Status and Results report (June 2007) as Satisfactory for both the PDO and IP. There are no outstanding or unresolved fiduciary, environmental, social or any other safeguard problems. The Government is committed to the successful completion of the Project, and has complied with the covenants specified in the Development Credit and Grant Agreements The midterm review of the Project, completed in April 2005, affirmed that despite early delays, the Project is likely to achieve its objectives. There were substantial initial delays in signing contracts for some components (including in the electricity sector) for a variety of reasons, including contract bids higher than estimates and unforeseen complications. There have also been delays in the implementation of some of the A Development Credit Agreement for SDR325.6 million and a Grant Agreement of SDR33.2 million were signed on August 14,

9 construction contracts for a number of reasons, including inefficiencies and lengthy customs procedures at the port of Matadi4, social and political upheaval, the difficulty of accessing some of the more remote work sites and the weak performance of some contractors, among other factors. GoDRC and the Bank agreed on precise measures at the midterm review to speed up implementation and to ensure that the Project meets its objectives, and the two project management agencies, the Bureau Central de Coordination (BCECO) and the Bureau de Coordination des Marches d Infrastructures (BCMI) have been proactive since that time in following up on implementation issues. Overall, as of the last supervision mission in July 2007, implementation is judged Satisfactory As of July 2007 more than 90%, or approximately $562 million5, of the overall initial amount of the Credit and Grant and the first Additional Financing were committed, with some 63% disbursed (about $391 million). It is currently foreseen that by June 30, 2008, physical progress will reach 100% of project objectives for social and agriculture components and more than 90% for infrastructure components As of July 2007, the status of the main IDA-financed activities is as follows6: Component A: Infrastructure The rehabilitation and reconstruction of critical infrastructure component (electricity, transport, water supply and urban & sanitation) have been implemented by BCMI since May As of July percent of this component has been committed and over 60 percent of allocated amounts have been disbursed, or US$243 million. The component is estimated to be about twothirds physically completed: - In the electricity sector, all 22 contracts have been awarded, and works are ongoing. As of June , US$3 6 million had been disbursed. While budget constraints necessitated a reduction in scope, which in turn resulted in initial delays in the awarding of contracts, all contractors are now mobilized and work is ongoing on all the contracts. Tangible results on the ground include the delivery and installation of key breakers in the main transmission line from Inga to Kinshasa, which has helped avoid major outages in Kinshasa In the water sector, activities are overall 80% complete. Construction of a waterworks outside Kinshasa is almost completed, and the civil works for the distribution pipe network connecting with Kinshasa are 80% complete. Several of the road constructionhehabilitation lots have been completed and the others are underway. In the maritime transport sector, the rehabilitation of the hydrographic launches and the navigationsystem maintenance boats is almost complete, and various technical equipment including GPS systems and water depth measurement tools has been installed; Rehabilitation works at the port of Kinshasa have been finished, as well as the initial works at Matadi. In the urban sector, the erosion protection works on the earthworks at Selembao have been completed. 0 Component B: Social and Agriculture The agriculture, delivery of social services (education, health, social protection) and community development components have been implemented by BCECO since As of July 2007, almost 100 percent of this component has been committed and 87 percent of The principal transshipment point for goods procured under the Project Note that due to variations in SDR/US$ exchange rates, the US$ equivalent of the Project has exceeded the US $579mn equivalent IDA allocation total from the original financing and the first Additional Financing. Due to the emergency nature of the EMRRP Project, a thorough results baseline was not put in place; as a consequence, it is difticult precisely to quantify the outcomes achieved. 4

10 allocated amounts have been disbursed, or US$97 million. The sub-component is estimated to be over 90 percent physically completed. Results achieved include: 1,724 km of rural roads rehabilitated, with the third and final phase of an additional 400km nearly complete Production of over 1,000 tonnes of crop seeds 345 health centers built or rehabilitated and 900,000 doses of vaccines distributed 100 primary schools rehabilitated, with rehabilitation of an additional 30 currently underway 360 community development projects completed and an additional 321 underway 2.16 The first Additional Financing is also on-track, bearing in mind that it became effective in March 2006 and closes in December Overall, as of July 2007, nearly 46% (or US$54.5 million equivalent) of the allocated budget has been committed, of which 17% has been disbursed (or $19.8 million). Rationale for Second Additional Financing (i) Electricity Sector 2.17 The proposed Additional Financing is assessed as being an appropriate means of addressing a combination of financing gaps and cost overruns that have emerged during implementation of the electricity sector component of the Project. These stem from a number of factors: Financing gaps due to underestimation of costs. The estimates made at project appraisal for the cost of electricity sector activities were significantly below the actual bids that were received. As Table 1 below shows, the original bids totaled US$103 million, US$31 million more than the original IDA allocation. Original IDA Allocation 72 Original Initial IDA Allocation Proposed 2"d IDA Allocation Bids Financing Gap following 1st Additional following 2"d Received Additional Financing Financing Additional Financing While the first Additional Financing for PMURR reduced this financing gap by US$9 million, as noted in paragraph above, a significant financing gap has remained, resulting in reductions in the scope of the works undertaken compared to the activities originally appraised. For example, the number of distribution substations that the Project intended to supply for installation was reduced from 120 to only 30, reducing the scale of improvements to electricity distribution in Kinshasa. Following the proposed second Additional Financing, the overall IDA allocation for the electricity sector would equal US$89.2 million. The remaining electricity sector shortfall of US$13.8 million7 will continue to be managed by revising down the scope of the activities originally appraised in order to fit the available funding. Increased input costs. Input costs have climbed significantly during implementation of several of the contracts for the electricity sector. Additional financing will hence be required for the contracts to be completed as currently envisaged. For example: 7 Original bids received of US$103 million less IDA Allocation following 2nd Additional Financing of US$89.2 million. 5

11 Significant increases in the prices of inputs, including metals and spare parts, ranging from 5% to 37% Average increase in transport costs of 1 1% A significant devaluation of the US dollar over the Project im P lementation period, resulting in higher personnel and unit costs for items denominated in Euro. Deterioration of key electricity sector assets. Further engineering and survey work undertake during Project implementation has revealed that electricity sector assets are in worse repair than at first assessed, necessitating more resource input to achieve the outcomes envisaged in the original Project scope. For examp le : Generation: Engineering work at the Inga generation site undertaken as part of the Project has shown that damage is worse than expected, pushing up the cost of repairs. Transmission: The transmission network to and in Kinshasa is more fragile than originally anticipated, requiring more frequent emergency repairs to maintain service even at current levels. Distribution: The deterioration of the distribution network, particularly in the distribution substations in Kinshasa, has been more rapid than expected, with additional financing required to replace burnt-out feeders and breakers, and repair overloaded transformers. As noted above, this is partly a function of greater demand for electricity placing additional stress on an alreadyoverloaded network Put together, these financing gaps and cost overruns have meant that the original scope of refurbishment activities to be financed under the Project has had to be reduced. This has had the effect of reducing the benefits from the Project that have accrued to end-user beneficiaries, particularly to retail customers in Kinshasa, the main source of demand in DRC s electricity sector It is proposed that US$8.2 million equivalent of the Additional Financing (including contingencies) is used for activities, including contingencies, in the electricity sector (part of Component A of the Project). These are needed primarily to address the financing gaps and cost overruns in the distribution activities described above, and are described in the Procurement Plan in Annex 1 below. An additional benefit of this intervention is that it will build SNEL s capacity to undertake a program of distribution improvement activities. Given the need to effect urgent improvements on the ground, as well the Project completion deadline of end-december 2008, the items and activities to be financed can be completed rapidly, estimated to be within a 6-9 month window from the date of effectiveness. (ii) Project Execution 2.18 On the project execution side, the Project s budget constraints necessitated a comprehensive review of scope across all aspects of the infrastructure component. In addition, a range of delays were experienced in contractor mobilization, as noted above. This resulted in the extension of the contract of BCMI, the project management firm responsible for the infrastructure component. It also necessitated the extension of the contract of the specialist environmental and social safeguards firm responsible for the Project s Environmental and Social Management Plan and associated safeguards policies. In a similar fashion, the 8 While there have been gains fiom the depreciation of the US dollar against the SDR, as described in paragraph 2.11, the SDR has also depreciated significantly against the Euro over the same timefiame. While the Bank s financing is in SDR, the majority of electricity sector contracts were denominated in Euro, resulting in increased costs in SDR terms. The gains to the project from a weaker dollar have been more than exceeded by the appreciation of the Euro. The Additional Financing will be disbursed via amendments to existing contracts, which will not require prior feasibility studies or long procurement action lead times. 6

12 review of scope and the delays in contractor mobilization in the electricity sector resulted in an extension of the contract of the consultant-engineering firm responsible for preparation of the detailed design, the drafting of the tender documents and works supervision. The result has been unanticipated cost overruns in the contracts of the various project management and supervision firms It is proposed that US$3.8 million equivalent of the Additional Financing is used to ensure that the full range of Project activities can be successfully completed by the December 2008 closure date. This includes cost overruns in overall management of the infrastructure component of the Project, cost overruns in supervising electricity sector activities, and cost overruns in implementation of the Project s Environmental and Social Management Plan and associated safeguards policies The table in Annex 2 sets out the overall sector allocations for the original Project and the first and second Additional Financings Proposed Changes 3.1 No changes to the objectives or general design and implementation modalities of the Project are proposed. The Additional Financing will allow, insofar as possible given the budgetary envelope, the completion of the urgent electricity sector rehabilitation activities envisaged in the original conception of the Project. The DO for the Project remains the same. 3.2 The urgency of the emergency activities described in this concept memo is such that they would be completed within the same timeframe as the first Additional Financing - i.e. by December 31, Accordingly, the Additional Financing will not require an extension of the current Project closing date. Linkage with DRC Regional and Domestic Power Markets Development Project 3.3 The proposed Additional Financing for EMRRP complements the Regional and Domestic Power Markets Development Project ( RDPMDP, Southern African Power Market Program Phase, APL-1 b), approved by the Board on May 19,2007. The latter project has components in some of the same areas of the electricity sector as those described here, notably in distribution network activities in Kinshasa, but will also include institutional support to Socie te Nationale d Electricite (SNEL), DRC s national power utility. 3.4 The activities to be supported in the proposed Additional Financing are immediate, urgent interventions aimed at ensuring that SNEL manages to complete a program of grid rehabilitation activities that will maintain a minimum level of reliability and reach of electricity services, pending the more extensive overhaul and grid extension work to be supported under the RDPMDP. The activities to be supported by the proposed Additional Financing are scheduled to be completed within an estimated 6-9 months from the date of effectiveness, whereas the activities financed by RDPMDP will be implemented over a longer timeframe (1 8 months or longer) following further detailed engineering work and associated procurement actions. In this way, the two sets of interventions are fully aligned. IV. Consistency with the Country Assistance Strategy 4.1 Improving the quantity and quality of electricity services, both for domestic and export markets, is a priority activity for GoDRC. In November 2004, the Government prepared a document on a minimum program for partnership for transition and recovery (Programme Minimum de Partenariat pour la Transition et la Relance, PMPTR), which was aligned with the EMRRP Program and the associated IDA-financed Project. The Congolese authorities have since developed, in a consultative fashion, an ambitious vision for the country s development, articulated in the PRSP presented in July It emphasizes the need to break 7

13 with past practices and to ensure a significant improvement in living conditions throughout the country, as a condition for sustained peace and economic recovery. The PRSP articulates priorities around five strategic pillars: (i) promoting good governance and consolidating peace; (ii) consolidating macroeconomic stability and economic growth; (iii) improving access to social services and reducing vulnerability; (iv) combating HIV/AIDS; and (v) promoting community dynamics. These pillars are closely related and inter-dependent, and progress in one area is conditional on advances in others. Specifically with respect to electricity, the PRSP accords priority to rehabilitating energy infrastructure, including electrification of urban and rural areas, noting that such activities are important to sustain growth over the medium-term and generate employment in urban areas. 4.2 An updated Country Assistance Strategy (CAS) for DRC is being presented concurrently with this proposed Additional Financing. Derived from the PRSP and following on from the Bank Group's Transitional Support Strategy of January 2004 (report 27751), it sets out a road map for WBG support to DRC for the period, with a focus on infrastructure, institutions, and policies. The EMW Project and the Additional Financing proposed here remain fully consistent with this new CAS, which notes that electric power is both a prerequisite for a range of economic activities in DRC as well as a source of foreign exchange through exports, and that major improvements in generation, transmission and distribution facilities will be needed to that end, as well as significant reforms of SNEL. The CAS notes that the Bank is well-placed to lead and implement growth-related investments, including in the electricity sector. Such investments will make an important contribution to poverty reduction efforts, in that reliable access to electricity is a key input to a wide range of development outcomes. These include: (i) better health outcomes: access to electricity allows for sterilization, water supply and purification, refrigeration of essential medicines, and safe birth deliveries after dark; (ii) improved economic growth prospects: greater supply of power to Kinshasa in particular will allow businesses to avoid the use of expensive generators and a reduction in power outages will reduce production losses; and (iii) increasing the reliability of electricity in poor households in Kinshasa will facilitate reading and studying after dark and reduce usage of low quality, unsafe and relatively expensive kerosene lighting. V. Expected Outcomes 5.1 The outcome expected from the electricity sector element of the proposed Additional Financing remains as set out in the original Project: to rehabilitate and reconstruct the electricity supply networks serving major cities. More specifically, the Additional Financing will assist in restoring and improving electricity supply in Kinshasa, including reducing the risks of outages. 5.2 Key outcome indicators were defined for the electricity component of the project, namely the number of hours per day of electricity supply in selected urban areas. Due to the delays in contract signing and contractor mobilization, as discussed in paragraph 2.13 above, data has not yet been collected to track progress on this indicator. However, as part of the process of preparing this Additional Financing, an increased emphasis has been placed on results monitoring and SNEL will henceforth monitor and report on a quarterly basis the average number of hours of electricity supplied per day in key areas of Kinshasa. In addition, greater attention will be paid to monitoring project outputs, including (i) number of miles of cables and (ii) number of distribution substations ('cabines') supplied. 5.3 The project execution and supervision element of the proposed Additional Financing will allow for the smooth continuation of the overall management of the Project, including the safeguards aspects and associated policies. 8

14 VI. Benefits and Risks Benefts 6.1 As the proposed Additional Financing is for unanticipated cost over-runs and financing gaps encountered during the implementation of the Project, the benefits to be delivered remain the same as in the original Project presentation, as set out in the Expected Outcomes above. Risks Risk Further deterioration in key electricity sector assets not treated via the proposed Additional Financing. Significant systemic weaknesses will remain in the electricity sector even after the completion of the Project, particularly in the generation assets located at Inga. The risk of significant breakdowns in the generation and transmission infrastructure remains elevated, even with the Additional Financing proposed here. Time required for procurement and contract processing delay implementation beyond Project closing date. Given the Project closing date of end- December 2008, there are risks that the procurement and processing actions required for activities to be financed will not be completed in the time available. Activities to be financed may not be physically completed by Project closing date. While beyond the specific scope of the Project or this Additional Financing, broader country risk in DRC remains, specifically of disruption in ongoing political reconciliation processes that could undermine project implementation. M-Moderate L-Low S-Substantial Risk Rating M L Risk Mitigating Measures The new RDPMDP electricity sector project will undertake more fundamental overhaul and upgrade activities at the Inga site. In order to avoid extensive procurement delays, financing will be disbursed via amendments to existing contracts. In addition, the resources made available for the project execution agency will allow close attention to contract processing. The activities to be financed are not new activities, and represent completion of activities originally scoped out at appraisal. In addition, the resources made available for the project management agency will ensure timely follow-up on any delays in physical activities. The Bank will continue to work closely with the United Nations and other development partners to monitor the political situation. 6.2 The overall risk of the operation is assessed as Moderate. VII. Financial Terms and Conditions for Additional Financing 7.1 As with the first Additional Financing, the proposed second Additional Financing will be provided as a grant. 9

15 Procurement ANNEX 1 : PROCUREMENT, FINANCIAL MANAGEMENT & DISBURSEMENT ARRANGEMENTS A.l The Procurement Guidelines and Consultant Guidelines that were in force during preparation of the original Development Credit Agreement in August were retained for the first Additional Financing approved in The implementation procedures were assessed to be well established and functioning well overall. The government was informed of the option of changing to the Guidelines of May 2004, but preferred to continue with the existing arrangements to avoid any potential disruption. Given that the project activities to be supported via the first Additional Financing constituted a continuation of the original project rather than a new project, it was agreed with the Government that the confusion created by a migration to the new Guidelines would outweigh the advantages that they provided. A.2 During preparation of this second Additional Financing, a determination has been made that it would be appropriate again to use the original Procurement and Consultant Guidelines rather than the updated ones. This is because the funds are to be used exclusively to: (i) complete activities identified and appraised in the original project preparation, and not for new activities; and (ii) complete these activities via amendments to ongoing contracts that were signed under the old Guidelines. It is assessed that continued smooth implementation of the Project s contracts is best ensured by continuing with the old Guidelines, and that the costs of migrating to the new Guidelines will continue to outweigh their advantages. The government has been informed of the option of changing to the new Guidelines, but prefers to continue with the existing arrangements. A.3 It has also been determined that the most efficient means of completing the activities to be financed by the Additional Financing is via amendments to existing contracts. This is because the Additional Financing is exclusively for cost overruns and financing gaps in these existing contracts, and not for new activities. Amendments to these existing contracts will hence allow the completion by the contractors of the works and activities they are currently undertaking. New contracts would likely lead to an increase in transaction costs and delays associated with contractor mobilization. In addition, the imminence of the Project closing date of end- December 2008 is such that it would be unfeasible to undertake a new procurement process, award contracts and complete disbursement within the Project timeframe. A.4 A draft procurement plan is attached below. Financial Management & Disbursement AS Financial management of the Additional Financing will follow the same approach as the implementation arrangements in place for the ongoing Project and the first Additional Financing. These are considered appropriate by IDA, having been improved through the implementation of the action plans prepared by the government following the midterm review. The financial monitoring and audit reports are submitted to the Bank regularly in a form and substance that complies with IDA Financial Management requirements, and are current. An action plan to improve the management of the Special Accounts has recently been put in place and will be implemented by BCECO. Following a supervision mission of the Financial Management aspects of the Project that was carried out in October 2007, the current Financial Rating of the project is Moderately Satisfactory. Issues identified during the supervision mission are currently being addressed by both BCMI and BCECO, and a follow up of the implementation of the action plan will be carried by January A.6 External audits. BCECO has under contract external auditors acceptable to IDA, who carry out the audit of BCECO and BCMI accounts. Financial statements of BCECO and BCMI have been audited every six months since project effectiveness. The external audit reports are submitted to IDA within four months after the end of each semester, and are current and unqualified. lo Procurement Guidelines of 1995 (Revised January 1999) and the Consultant Guidelines of 1997 (Revised May 2002). 10

16 A.7 Taxes and government contribution. As with the ongoing IDA Credit and the first Additional Financing, the proposed second Additional Financing will finance 100 percent of: (a) foreign expenditures for goods and consultant services, (b) service contracts, and (c) operating costs. Although not relevant to the proposed second Additional Financing, the Project finances 85 percent of: (a) works, and (b) local expenditures for goods and consultant services. The 15 percent remaining is estimated to be taxes and duties and will be borne by the government. These amounts will be liquidated according to the ongoing procedures in place at the Ministry of Finance for the ongoing Credit and Grant, improved through implementation of the recommendations of the midterm review of the Project. A.8 Special Accounts. Under the ongoing Credit and Grant, Special Accounts have been opened in U S dollars in a commercial bank on terms and conditions acceptable to IDA, in order to facilitate project implementation and reduce the volume of withdrawal applications. The Special Accounts are as follows: Special Account A is managed by BCMI and is financing all eligible project expenditures under component A for the rehabilitation and reconstruction of critical infrastructure, and parts of components C and D. Special Account B is managed by BCECO and is financing all eligible expenditures under component B for agriculture and social services and community development, and parts of components C and D. Special Account D is managed by BCMI and is financing all eligible project expenditures under component A (for the first Additional Financing grant) for the rehabilitation and reconstruction of critical infrastructure, and parts of components C and D. Special Account E is managed by BCECO and is financing all eligible project expenditures under component B (for the first Additional Financing grant) for agriculture and social services and community development, and parts of components C and D. A.9 BCMI-Second Additional Grant Special Account (Special Account F) will be opened in U S dollars in a commercial bank on terms and conditions acceptable to IDA. It will be managed by BCMI and will finance all eligible project expenditures under component A (for the second Additional Financing grant) for the electricity sector and parts of component D. A. 10 Authorized Allocations. The authorized allocation is US$20 million for Special Account A, US$15 million for Special Account B, US$10 million for Special Account D, US$3 million for Special Account E, and US$l.5 million for Special Account F. Upon effectiveness of the second Additional Financing, an initial amount of up to US$500,000 will be available for withdrawal by the Recipient, to be deposited into the Special Account F. The remaining balance of the authorized allocation for Special Account F would be made available when the aggregate amount of withdrawals from the grant account plus the total amount of all outstanding special commitments entered into by the Association shall be equal to or exceed the equivalent of US$4 million. The Special Account would be used for payment of eligible project expenditures under the additional grant and replenishment applications would be submitted monthly. Further deposits by IDA into the Special Account would be made against withdrawal applications supported by appropriate documents. A.11 Use of Statement of Expenditures. No changes are proposed to arrangements in place for the ongoing Credit and Grant. As before, disbursements for all expenditures would be made against full documentation, except for items of expenditures for: (a) contracts for works in an amount less than US$500,000; (b) contracts for equipment and goods in an amount less than US$200,000; (c) contracts for consulting firms in an amount less than US$lOO,OOO and contracts for individual consultants in an amount less than US$50,000 equivalent, as well as all operating costs, which would be claimed on the basis of Statement of Expenditures. All supporting documentation for Statement of Expenditures would be retained at a suitable location at BCMI and be readily accessible for review by periodic IDA supervision missions and external auditors. A. 12 Disbursements. The disbursement schedule is as follows: 67% is expected to be disbursed during Bank fiscal year 2008 and 33% during fiscal year

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18 ANNEX 2 : SECTORAL ALLOCATIONS * Due to variations in SDRKJS$ exchange rates, the current US$ equivalent of the Project has exceeded the US$ equivalents at the time of the IDA allocations. This table shows the original US$ equivalents. 13

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