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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR MILLION (US$48 MILLION EQUIVALENT) TO THE REPUBLIC OF MALAWI AND A PROPOSED CREDIT IN THE AMOUNT OF SDR 29.6 MILLION (US$45 MILLION EQUIVALENT) TO THE REPUBLIC OF MOZAMBIQUE FOR A Report No: AFR MOZAMBIQUE - MALAWI TRANSMISSION INTERCONNECTION PROJECT Energy Team Infrastructure Group Africa Region IN SUPPORT OF THE SECOND PHASE OF THE SOUTHERN AFRICAN POWER MARKET PROGRAM (APL2) June 20,2007 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 CURRENCY EQUIVALENTS (Exchange Rate Effective April 30,2007) Currency Unit = Malawi Kwacha Mozambique Metical US$1 = 140.5Kwacha US$1 = 25.8 Metical US$1.525 = SDR 1 FISCAL YEAR Mozambique: January 1 - December 31 Malawi: July 1 - June 30 ACB APL BARREM CCPP CIDA DA DANIDA DDCM DEP DFID EA EDM EIA ERR ERAP ERS ESCOM Eskom FIMTAP FM FMR GEF GOP GWh HCB HIPC HRSG HVDC ICB ICT IDA IFAC IFMIS IFRS IFRs ABBREVIATIONS AND ACRONYMS Anti Corruption Bureau Adaptable Program Lending Barrier Removal to Renewable Energy Project Combined Cycle Power Plant Canadian International Development Agency Designated Account Danish International Development Agency Department of Debt and Contracts Management Electrification and Project Directorate U.K. Department for International Development Environmental Assessment Electricidade de Moqambique (Electricity Company of Mozambique) Environmental Impact Assessment Economic Internal Rate of Return Mozambique Energy Reform and Access Program Emergency Recovery System Electricity Supply Corporation of Malawi Electric Power Utility of Republic of South Africa Financial Management, Transparency and Accountability Project Financial Management Financial Monitoring Reports Global Environmental Facility Government of Portugal Gigawatt hours Hidroelectrica de Cahora Bassa, owner of the Cahora Bassa Hydropower Plant Heavily Indebted Poor Countries Heat Recovery Steam Generators High Voltage DC International Competitive Bidding Information and Communications Technologies International Development Association International Federation of Accountants Integrated Financial Management Information System International Financial Reporting Standards Interim Financial Reports

3 IPP IRR ISAs ISDS ISPS JICA km h2 kv kwh LRMC MAREP MDRI MEGS MFAAP MGDS MK MWh M&E MOMA MPRS Mt MW NAO NEPAD NPV ODPP O&M OPGW PARPA I1 PCB PCN PEFA PEG PFM PFMA PIC PID PMU PPF PVA ProBec PSA QCBS RETS RIAS RISDP ROR ROW RPF SAC Independent Power Producer Internal Rate of Return International Standards on Auditing Integrated Safeguards Datasheet Internet Service Providers Japan International Cooperation Agency Kilometers Square lulometers Kilovolt Kilowatt-hour Long Run Marginal Cost Malawi Rural Electrification Program Multilateral Debt Relief Initiative Malawi Economic Growth Strategy Malawi Financial Accountability Action Plan Malawi Growth Development Strategy Malawi Kwacha Megawatt hours Monitoring and Evaluation Heavy sand and mineral mine in Mozambique Malawi Poverty Reduction Strategy Meticais (Mozambican currency) Megawatt National Audit Office New Partnership for Africa s Development Net Present Value Office of Director of Public Procurement in Malawi Operations and Maintenance Optical Power Ground Wire Poverty Reduction Support Strategy of Mozambique Polychlorinated Biphenyls Project Concept Note Public Expenditure and Financial Accountability Project on Economic Governance Public Financial Management Public Finance Management Act Public Information Center Project Information Document Project Management Unit Project Preparation Facility Poverty and Vulnerability Assessment for Malawi Program for Biomass Energy Conservation Power Supply Agreement Quality-Cost Based Selection Renewable Energy Technologies Regional Integration Assistance Strategy Regional Indicative Strategic Development Plan of SADC Run-of-river Right of Way Resettlement Policy Frameworks Structural Adjustment Credit FOR OFFICIAL USE ONLY 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 SADC SAPM SAPMP SAPP SBD SCADA SIDA SFIA SMP SNAO SOE STEM T&D TOR UNDP WACC Southern African Development Community Southern African Power Market Southern African Power Market Program Southern African Power Pool, comprised of the following Operating and Non-Operating members: Democratic Republic of Congo (DRC), Botswana, South Africa, Namibia, Mozambique, Malawi, Lesotho, Swaziland, Angola, Zambia, Zimbabwe and Tanzania Standard Bidding Documents Supervisory Control and Data Acquisition Swedish International Development Cooperation Agency Strategic Framework for IDA'S Assistance to Africa Staff Monitored Program Swedish National Audit Office Statement of Expenses Short-Term Energy Market in SAPP Transmission and Distribution Terms of Reference United Nations Development Programme Weighted Average Cost of Capital Vice President: Director of Regional Integration: Country Director: Sector Manager: Task Team Leader: Obiageli K. Ezekwesili Mark D. Tomlinson Micheal Baxter Subramaniam V. Iyer Wendy E. Hughes 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.

5 MOZAMBIQUE - MALAWI TRANSMISSION INTERCONNECTION PROJECT (SOUTHERN AFRICAN POWER MARKET PROGRAM, APL-2) PROJECT APPRAISAL DOCUMENT AFRICA AFTEG Date: June 20, 2007 Director of Regional Integration: Mark D. Tomlinson Country Director: Michael Baxter Sector Manager: Subramaniam V. Iyer Project ID: PO84404 Lending Instrument: Adaptable Program Lending (Credits) Team Leader: Wendy E. Hughes Sectors: Power (100%) Themes: Regional integration (P); Export development and competitiveness (S) Environmental screening category: B Project Financing Data [ 3 Loan [XI Credit [ 3 Grant [ 3 Guarantee [ 3 Other: For Loans/Credits/Others: Total Bank financing (US$m): US$93 million Republic of Malawi: US$48 million; Republic of Mozambique: US$45 million BORROWEWRECIPIENT Electricity Supply Corporation of Malawi (ESCOM) Electricidade de Moqambique (EDM) International Development Association Credit to Republic of Malawi International Development Association Credit to Republic of Mozambique Total: Financing Plan (US$m) Source 1 Local I Foreign I Total Retroactive Financing: In accordance with OP 6.00, ESCOM will be able to charge up to $500,000 for consultant services and training for eligible expenditures occurring on or after May 1,2007, and up to the credit signing date; and EDM will be able to charge up to $500,000 for consultant services and training for eligible expenditures occurring on or after May 1, 2007, and up to the credit signing date. Borrowers: REPUBLIC OF MALAWI, REPUBLIC OF MOZAMBIQUE

6 Responsible Agencies: Electricity Supply Corporation Malawi Limited (ESCOM) 9 Haile Selassie Road, P.O.Box 2047, Blantyre, Malawi Tel: ; Fax: Electricidade de Moqambique, EP (EDM) Av. Agostinho Net0 70, 8* Floor; Maputo, Mozambique Tel: ; Fax: Does the project depart from the CAS in content or other significant respects? Ref: PADLC Does the project require any exceptions from Bank policies? Re$ PAD IK G Have these been approved by Bank management? Is approval for any policy exception sought from the Board? Does the project include any critical risks rated substantial or high? Re$ PAD III.E Does the project meet the Regional criteria for readiness for implementation? Ref: PAD IKG [ ]Yes [XINO [ ]Yes [XINO [ ]Yes [ IN0 [ ]Yes [XINO [XIYes [ ]No [XIYes [ ]No Project development objective Ref: PAD ILB, Technical Annex 3 The APL 2 development objective is to implement the Mozambique-Malawi transmission interconnection (i) to increase access to diversified, reliable, and affordable supplies of energy; and (ii) to expand Malawi and Mozambique s opportunities to benefit from bilateral and regional power trading on the Southern African Power Pool. Project description Ref: PAD ILD, Technical Annex 4 Component A: Construction of the transmission interconnection from the Malawi electricity grid to the Mozambique electricity grid, thereby interconnecting Malawi with the Southern Africa Power Pool network. On the Malawi side this would include construction of approximately 75 km of 220 kv transmission line, installation of a new 220 kv substation, development and implementation of a Resettlement Action Plan, as per the Resettlement Policy Framework, once the exact route is determined, and the studies, works, engineering and project management support required to complete the interconnection. On the Mozambique side this would include construction of approximately 135 km of

7 220 kv transmission line including carrying out required landmine clearing activities on limited portions of the transmission line route, the extension of the existing Matambo substation, development and implementation of a Resettlement Action Plan, as per the Resettlement Policy Framework, once the exact route is determined, and the studies, works, engineering, and project management support required to complete the interconnection. Component B: technical assistance, capacity building, training and equipment necessary for (i) ESCOM and EDM to strengthen and expand the networks to maximize the benefits of power trading; (ii) improve ESCOM s efficiency and quality of service as the foundation for financial sustainability of the company; (iii) strengthen the capacity of both utilties to achieve the project objectives. For Malawi the activities include: updating the power system development, system operation plan and identification of ESCOM s critical power system needs including rehabilitation studies for generation, transmission and distribution, and system operation and maintenance procedures; supporting ESCOM in the improvement and management of its financial performance including, design and implementation of a Financial Sustainability Plan, revenue stream diagnostic and implementation of a revenue management strategy; and provision of technical advisory service and training to ESCOM staff and relevant key stakeholders in the electricity sector for project management, electricity trading and system operation and other areas required for successful project implementation. For Mozambique the activities include: a feasibility study for extension of the Interconnector to the northern region of Mozambique; provision of technical advisory service and training to EDM staff and relevant key stakeholders in the electricity sector in the areas of environmental and social management, loss reduction, project management, electricity trading and system operation and other areas required for successful project implementation. Component C: investments to replace worn-out, inadequate or obsolete equipment to remove critical bottlenecks in the networks which could impede the flow of traded electricity. For Malawi, investments would include replacement of digital excitation equipment, circuit breakers and other switchgear, control and protection equipment, and some critical communication links between important load centers and generating stations and the national control centre for better system operation control. For Mozambique the project includes the provision of a new 220/66/33 kv power transformer at the existing Matambo substation in the Tete region; connecting the new transformer to the 66 kv and 33 kv systems, and associated civil works, control and protection work at the substation. Which safeguard policies are triggered, if any? Re$ PAD IV.D,E, Technical Annex 10 Environmental Assessment (OP/BP 4.01), Natural Habitats (OP/BP 4.04), Involuntary Resettlement (OP/BP 4.12). The environmental screening category is B. Significant, non-standard conditions, if any, for: Re$ PAD III. F The main conditions and covenants are: Effectiveness conditions for the Republic of Malawi: 0 ESCOM has established a financial management system, adequate to produce interim unaudited financial reports, in form and substance satisfactory to the Association, to ensure proper accounting and monitoring of project funds; 0 Key agreements have been signed by all parties. The key agreements are (i) Implementation Agreement between EDM and ESCOM; (ii) Maintenance Agreement between EDM and ESCOM, (iii) System Operating Agreement between EDM, ESCOM and Hidroelectrica Cahora Bassa; and (iv) Wheeling Agreement between EDM and ESCOM specifying payments by ESCOM to EDM for use of the Mozambique portion of the line. ESCOM has completed the company audit for FY05 and submitted it to IDA.

8 -_ Signing of Subsidiary Loan Agreement. Effectiveness conditions for the Republic of Mozambique: 0 EDM has established a financial management system, adequate to produce interim unaudited financial reports, in form and substance satisfactory to the Association, to ensure proper accounting and monitoring of project funds; 0 Key agreements (as defined above) have been signed by all parties. 0 Signing of Subsidiary Loan Agreement Disbursement Conditions: 0 There can be no disbursement of the Mozambique credit against Category la (Transmission and Substation Supply and Installation) until the Financing Agreement for Malawi has become effective. 0 There can be no disbursement of the Malawi credit against Category la (Transmission and Substation Supply and Installation) until the Financing Agreement for Mozambique has become effective. Covenants for ESCOM: 0 ESCOM will submit to IDA audited financial statements within six months after the year end; 0 ESCOM will submit to IDA unaudited interim financial statements within 45 days after each calendar quarter, to cover such calendar quarter; 0 ESCOM will ensure implementation of the Resettlement Policy Framework and recommendations of EIAs as per disclosed documents; 0 ESCOM will implement the Financial Sustainability Plan; 0 ESCOM will maintain a Cash Coverage ratio from 2008 onward greater than or equal to 1.O; 0 ESCOM will maintain a Collection-Generation ratio from 2008 onward greater than or equal to 75 percent. Covenants for EDM: 0 EDM will submit to IDA audited financial statements within six months after the year end; 0 EDM will submit to IDA unaudited interim financial statements within 45 days after each calendar quarter, to cover such calendar quarter; 0 EDM will ensure implementation of the Resettlement Policy Framework and recommendations oj EIAs as per disclosed documents; 0 EDM will maintain a Current Ratio (current assets over current liabilities) of at least 1.3 fror 2008 onward; EDM will maintain a Collection-Generation ratio (defined above) from 2008 onward of at leas1 71 percent; from 2009: 73 percent; from 2010: 74 percent.

9 I. I1 AFRICA MOZAMBIQUE. MALAWI TRANSMISSION INTERCONNECTION PROJECT (SOUTHERN AFRICAN POWER MARKET PROGRAM. APL-2) CONTENTS Page STRATEGIC CONTEXT AND RATIONALE... 1 A Regional. country and sector issues... 1 B. Rationale for Bank involvement... 4 C. Higher-level objectives to which the project contributes PROJECT DESCRIPTION... 5 A. Lending instrument... 5 B. APL Program Overall Objective and Phases... 6 C. Project development objective and key indicators... 7 D. Project components... 8 E. Lessons learned and reflected in the project design... 9 F. Alternatives considered and reasons for rejection I11. IMPLEMENTATION A. Partnership arrangements IV B. Institutional and implementation arrangements C Monitoring and evaluation of outcomeshesults D Sustainability E Critical risks and possible controversial aspects F Loadcredit conditions and covenants 15. APPRAISAL SUMMARY A Economic and financial analyses B. Technical C. Fiduciary D. Social E Environment 24 F Safeguard policies 25 G. Policy Exceptions and Readiness 25 Annex 1: Country And Sector Or Program Background Annex 2: Major Related Projects Financed By The Bank And/or Other Agencies. 34 Annex 3: Results Framework And Monitoring Annex 4: Detailed Project Description Annex 5: Project Costs Annex 6: Implementation Arrangements Annex 7: Financial Management And Disbursement Arrangements Annex 8: Procurement Arrangements Annex 9: Economic And Financial Analysis Annex 10: Safeguard Policy Issues Annex 11: Project Preparation And Supervision Annex 12: Documents In The Project File Annex 13: Statement Of Loans And Credits Annex 14: Country At A Glance Annex 15: Maps (Ibrd 35355; Ibrd 35356)

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11 A. Regional, country, and sector issues Regional context I. STRATEGIC CONTEXT AND RATIONALE 1. Southern Africa exhibits substantial variations in energy resource endowments, degrees of industrial development, levels and patterns of power consumption, and power costs. These differences present opportunities for coordinated development of the regional power sector to generate savings through aggregation of loads with different load profiles; efficient use of energy resources by exploiting largescale power generation schemes that are viable on the basis of large, multi-country markets; and managing the risks of climate-related power shortages in hydro-dependent countries. 2. The Southern Africa Region as a whole is entering a period of generation capacity shortage. At least 1,000 MW of additional capacity will be required each year to meet demand growth. Much of the new demand could be met through large, regional generation projects (see Annex 1). Regional trade in electricity is expected to increase, highlighting the need to address transmission-related constraints. 3. In August 1995, Southern African Development Community (SADC) member countries created the Southern Africa Power Pool (SAPP) by concluding an Intergovernmental Memorandum of Understanding (MOU) and related agreements. The utilities of 12 Southern African countries were the original members of the SAPP. The main grid systems of Botswana, the Democratic Republic of the Congo, Lesotho, Mozambique, Namibia, South Africa, Swaziland, Zambia, and Zimbabwe form the existing regional network (see Annex 15, Map No ). Angola, Malawi, and Tanzania are not yet connected. In February 2006, membership in the SAPP was expanded to include private generation and transmission companies. 4. SAPP started as a cooperative pool in which members seek to maximize economic and system reliability benefits through trade, while retaining maximum autonomy for individual members. In the longer term SAPP aims to facilitate the development of a competitive electricity market in the SADC region. Currently there are two market mechanisms used in SAPP energy exchanges: medium- to-long term, bilateral power purchase agreements; and the Short-Term Energy Market (STEM) where daily, weekly, and monthly contracts are actively traded. (See Annex 1 for further details on SAPP). 5. One of the immediate challenges is the need to strengthen and expand the network of regional transmission infrastructure as demand in the region grows. Three member countries are not yet connected to the regional power grid and several existing interconnections are overloaded or in need of rehabilitation. Connection to the regional grid of non-connected SAPP member power systems is a priority in terms of SAPP planning. In the 2006 SAPP Annual Report, the Mozambique-Malawi Transmission Interconnection is explicitly noted as a top priority for the regional pool. Malawi context 6. Malawi is one of sub-saharan Africa s most densely populated countries with about 109 persons/km2 (total population about 12.9 million). The recent Malawi Poverty and Vulnerability Assessment (PVA) shows that the percentage of the population living below the poverty line was around 52% in 2004/05. The per capita Gross National Income (GNI) was estimated at US$170 in Although the performance of the economy was unsatisfactory between 2001 and 2004, recent efforts by the Government have led to improved macroeconomic management and placed Malawi on a path for faster economic growth. The growth in real Gross Domestic Product (GDP) which averaged 1.5% between 2001 and 2004, increased to an average of around 5% between 2005 and As a result of the good

12 macroeconomic management and improved fiscal discipline, the country reached the HPC completion point and benefited from cancellation of most external debt, thereby releasing resources for pro-poor activities. 7. Malawi Electricitv Subsector. The Electricity Supply Corporation of Malawi (ESCOM) is a vertically integrated, government-owned electric utility with about 175,000 customers and an installed hydropower capacity of 284 MW. About 6 percent of the population has access to electricity. Peak demand in Malawi was about 250 MW in 2006 and demand is expected to grow at about 5 percent annually over the next decade. 8. Currently ESCOM electricity supply cannot meet demand. Plant availability and auxiliary consumption factors mean that, of the 284 MW installed, less than 260 MW of capacity is reliably available at peak times. Furthermore, ESCOM s Tedzani I & I1 hydropower plants, with combined installed capacity of 40MW, had to be taken out of service in December 2001 due to damage resulting from the flooding of the Shire River. As a result, depending on the season and plant availability, peak load-shedding of 30 or more MW is occurring. The situation will improve when the rehabilitation of Tedzani I and I1 hydropower plant is completed toward the end of 2007, but with peak demand forecast to reach approximately 275 MW in 2008, available hydropower capacity will remain below peak demand, with no reserve margin. Some peak load-shedding is likely to continue and any reduction in power output, for example due to routine maintenance, unplanned outages, or low flow rate on the Shire River, would result in an increased deficit. By 2010 new capacity will be needed to avoid off-peak shortages. By 2015 Malawi will need to have in place an estimated additional 140 MW of available capacity compared to current capacity to meet demand. 9. Malawi is vulnerable to drought-induced power crisis. Of the existing hydropower generation capacity in Malawi, 98 percent is from run-of-river (ROR) plant on the Shire River. The planned expansion of domestic generation capacity would further increase dependence on the Shire River. Of great concern for Malawi is a situation of below-average hydrology, since low flow on the Shire River translates directly into reduced power output. The average flow between 1994 and 2002 was less than half of the long-run average over the last 58 years for which data are available. Seven of the ten lowest flow years since detailed records began in 1948 have occurred in the past fifteen years. Futhermore, between 1917 and the mid-l93os, the Shire River actually stopped flowing altogether. The implications of this happening today are hard to overstate: Malawi would have a total operational hydropower output of 4MW against a demand of 250 MW. The only immediate solution would be emergency thermal generation, which would cost over 20 times ESCOM s current cost of generation. Low flows are currently being experienced in other parts of Africa such as the Nile Basin, with severe consequences on power supply and the economy due to the high unit cost of running emergency thermal power plants. 10. Also, there is growing scientific consensus that climate change will lead to increased drought stress in sub-saharan Afki~a.~ The transmission interconnector would contribute to reducing the potential risks associated with climate change, as set out in the World Bank Group s Clean Energy for Development Investment Framework, by providing an alternative power supply option, should climate change lead to a more volatile or reduced flow on the Shire River. In addition to the hydropower stations, ESCOM owns 20 MW of thermal generation. Due to the high cost of operation the thermal units are primarily used for emergency situations. Run-of-river means that there is little or no capacity to store and control the flow of water upstream of the power generation stations, so the amount of electricity that can be produced is dependent on the daily flow of the Shire River. Heavy siltation has reduced the already small capacity of the reservoirs intended for daily storage (see Annex 1). United Nations Intergovernmental Panel on Climate Change, April

13 11. Malawi has developed a power sector strategy that is designed to put in place measures to mitigate the consequences of a severe drought, while at the same time ensuring that the cost of power supply remains affordable, thereby supporting a focused effort to increase access to, reliability of, and quality of electricity supply. Key elements of Malawi s strategy include: (i) implementation of the interconnector with the SAPP network by 2010 as the least-cost option for mitigating the risk of drought-related power crisis, and to allow the option to import as needed and export any surplus electricity when available e.g. in off-peak periods; (ii) expansion of low cost domestic generation capacity by 2011 ;(iii) further addition to available capacity of 30 to 50 MW by The least-cost option for meeting this additional capacity is expected to be further imports via the transmission interconnection4 12. Malawi plans to increase domestic power generation capacity through expansion of the Kapichira Hydropower Station ( Kapichira II ) on the Shire River, which would add 64MW and is planned to be on line in 2011 (see Annex 1). However financing for Kapichira I1 is not yet in place so there is some uncertainty regarding the timing of commissioning. If Kapichira I1 is commissioned as planned, for a few years ESCOM would have excess, off-peak electricity to sell to Mozambique or other SAPP members via the interconnection. However, even with Kapichira 11in operation, peak deficits in Malawi will continue and would be met through imports via the interconnection. Having the interconnector operational as early as possible will help mitigate the risk of further power shortages associated with any delay in the Kapichira I1 project, as well as the risk of power shortages associated with drought. 13. The key challenge faced by Malawi s power utility is the current relatively weak financial situation and commercial performance in the power sector. The Government together with ESCOM is developing a Financial Sustainability Plan that will include elements of improved efficiency and tariff adjustments as needed. The objective of this plan is to ensure that ESCOM is in a position to implement the above strategy and meet its resulting financial commitments. Implementation of the ESCOM Financial Sustainability Plan will be a key factor in ESCOM s ability to raise financing for the planned investments and to meet Malawi s electric power requirements. Mozambique context 14. Between 1996 and 2005, following the end of the war in 1992, the Mozambique s economy grew at an average of 8 percent per year. The poverty headcount index fell from 69 percent in 1996/97 to 54 percent in 2002/03. GWcapita is US$389/cap. Economic expansion has been made possible by overall macroeconomic stability, sound policy reforms, and continuing strong support from development partners. 15. Mozambique Elech-icitv Subsector. Electricidade de Moqambique (EDM) is a vertically integrated, government-owned electric utility with an installed capacity of 140 MW hydropower (of which 86 MW is available) and 109 MW in thermal power stations (of which 82 MW is available). Peak demand in Mozambique is 350 MW. EDM buys most of its power supply (300 MW) from Hidroelectrica Cahora Bassa (HCB), owner and operator of the Cahora Bassa hydropower plant in Tete provincea6 Based on recent performance, Mozambique load growth is projected at 8 percent in 2007, 7 percent annually from 2008 to 2010, and 5 percent thereafter. The Mozambique transmission grid is currently interconnected with Zimbabwe, South Africa, and Swaziland. About 8 percent of the population has access to electricity. Based on the Integrated Resource Plan for the Malawi Power sector completed in Excluding Mozal Aluminum Smelter, which imports power from South Africa. Cahora Bassa on the Zambezi River, Tete Province, operates as an independent power producer. The installed capacity is 2,075 MW. The bulk of the generated electricity is exported to South Africa with a small amount to Zimbabwe. The Governments of 3

14 16. Mozambique has adopted a power sector s strategy that focuses on (i) rapid expansion of access to electricity though grid intensification, grid extension, and off-grid approaches; (ii) rehabilitation of existing hydropower plants; and (iii) development of new power generation through private sector and public-private partnerships. Mozambique is actively pursuing development of three large power generation projects for export to the SAPP (see Annex 1 for details of planned generation projects). 17. Because of the significant potential for developing competitive generation for export, Mozambique s strategy includes a focus on expanding opportunities for power trade. Key routes include the Mozambique-Malawi transmission interconnector, and a high-voltage, high-capacity transmission line from the Tete area to Beira and Maputo, and continuing to South Africa. In the future, the Mozambique- Malawi interconnector could be extended east across Southern Malawi into Northern Mozambique. This extension of the interconnection would significantly improve the quality, quantity, and reliability of supply to the North of Mozambique, where demand for power is growing rapidly (see Annex 1 for details). In 2004, the Governments of Mozambique, Tanzania, Malawi, and Zambia signed a MOU on the development of the Mtwara Corridor along Mozambique s northern border with Tanzania. One area intended to be facilitated by this cooperation is the trading of electricity between Mozambique and Tanzania. Extension of the interconnector back into Northern Mozambique is a high priority for Mozambique from a domestic supply perspective as well as further enhancing the prospects for regional electricity trade. 18. With projections for continued robust economic growth in Mozambique, a key challenge for Mozambique is to ensure that affordable electricity supply is available to meet the growing demand. In the near term this could involve EDM entering into expanded or new power purchase agreements, for example with HCB in Mozambique, Eskom South Africa andor ESCOM Malawi (for off-peak). In the medium and long term, a key challenge in Mozambique s energy sector will be realizing the potential for new power generation projects (described in Annex 1) to meet domestic demand and for export to SAPP. B. Rationale for Bank involvement 19. The Bank has committed to lend long-term support to both SADC and the New Partnership for Africa s Development (NEPAD) initiatives to promote electricity trade in the region, through the approval of the Southern African Power Market Program (SAPMP) Adaptable Program Lending (APL) in November In this context the Bank has been requested by the Governments of Malawi and Mozambique to finance the Mozambique - Malawi Transmission Interconnection through two credits to be on-lent to their respective national electric power utilities. The World Bank is in a position to take the lead on supporting the proposed project, due to its strategic position with respect to country and sector engagements with both Mozambique and Malawi and a history of support for the SAPP, together with the availability of regional IDA resources. 20. This project is a key element in Malawi s strategy for ensuring adequate, affordable electricity to support expanded access and economic growth. The project benefits Mozambique by providing a source of new revenues to Mozambique s power sector. It is also a key step in EDM s medium-term plans to improve the reliability of supply to Northern Mozambique. An additional benefit of the interconnector is that Malawi will be able to sell energy that would otherwise be spilled, either into the SAPP STEM or under short-term bilateral contracts with Mozambique or other SAPP members. Malawi would generate Mozambique and Portugal reached agreement in 2006 for transfer of the majority of the ownership of the company from Portugal to Mozambique. The Government of Mozambique has made the initial payment and will complete the payments by December

15 new revenues from such power export, and nearby countries in the SAPP would benefit from importing low-cost electricity from Malawi. C. Higher-level objectives to which the project contributes 21. The Regional Indicative Strategic Development Plan (RISDP), approved by SADC heads of state and government in 2001, reaffirms the policy goal established by the SADC Protocol on Energy and identifies the following specific objectives in the electricity sector: (i) promote power pooling through the extension of grid interconnections to cover all member states and upgradinghtrengthening existing grids; and (ii) consolidate the transformation of SAPP from a co-operative to a competitive pool and create a regional electricity market. 22. The proposed project is also in line with relevant broad-based regional strategies, including the revised Africa Action Plan (specifically, in relation to one of the 8 focus areas - improving access to and reliability of clean energy) : Regional Integration Assistance Strategy ( US) for Southern Africa (2003 and 2006), the Strategic Framework for IDA S Assistance to Africa (SFIA) (IDNSecM ) of 2003, and the Southern Africa Sub-Regional Strategy Paper (SecM98-272), which placed regional cooperation high on the policy agenda of the countries in Southern Africa. 23. The project complements ongoing and planned national-level support to the power sectors in Mozambique and Malawi (respectively). In Malawi, the proposed project is anchored in the Malawi Growth Development Strategy (MGDS). The MGDS identifies energy generation and supply as one of the six national priority areas to enable the country to meet the economic and social demand. In particular, the project addresses the MGDS objective of reducing the number and duration of blackouts in Malawi. In Mozambique, the project meets a key objective of Pillar 3 of the Poverty Reduction Support Strategy (PARPA 19, aiming to improve the integration of Mozambique into the regional and international economy by strengthening power trading in the SAPP. In particular this project makes possible further opportunities for electricity export from Mozambique which in turn will facilitate the development of new generation projects in Mozambique which could supply power to the SAPP. A. Lending instrument 11. PROJECT DESCRIPTION 24. The proposed Mozambique-Malawi Transmission Interconnection (SAPMP APL-2) project is the second phase of the Southern African Power Market Program (SAPMP) Adaptable Program Lending (APL) series. The program consists of a set of inter-linked interventions that would promote and manage electricity trade in the Southern Africa region. The SAPMP subset of interventions was adopted by NEPAD and SADC as priority areas in the energy sector. This horizontal APL instrument was selected to demonstrate long-term commitment to support this important and evolving regional initiative and because the set of interventions to be supported under the project, taken together, will yield regional benefits of reduced costs and improved energy security for the interconnected members. See Accelerating development outcomes in Africa. Progress and Change in the Africa Action Plan March 29,

16 25. The three-phase APL program including its first phase covering the Power Market Project in Zambia (Cr ZA) and the Democratic Republic of Congo (Cr DRC) was approved by the Board on November 11,2003, and the project became effective on May 17,2004. A new phase of the APL, labeled Regional and Domestic Power Markets Development in Support of the Southern African Power Market Program (Phase APL-Ib), was recently added to the SAPMP APL series because it provides important support to the success of the APL-1 and, prospectively, the APL-3. APL-lb was approved by the Board on May 29,2007. Since the project has a regional scope, regional IDA funding has been mobilized, with the country allocation covering one third of the project cost attributable. B. Overall APL program objective and phases 26. The overall program objective (set out in the APLl PAD8) is to increase the availability and reliability of low cost, environmentally friendly electric energy in the Southern Africa region, thereby increasing competitiveness of industry and fostering economic growth. It will help foster conditions that would be attractive to private developers seeking to invest in generation. The Program comprises the highest priority projects identified in the Southern African Power Pool Investment Plan prepared by the SAPP. 27. APL-1 (P069258): The first phase finances investments to strengthen and increase the capacity of DRC to export power to the SAPP countries, notably from the hydroelectric plants at the Inga site, primarily by rehabilitating and upgrading the high voltage direct current (HVDC) transmission line from Inga to Kolwezi in the Katanga region and the rehabilitation and upgrading of the network that extends from there to Zambia. The first phase is currently under implementation, but has faced significant delays. These were due in part to initial delays in finalizing the technical designs and in establishing familiarity with Bank processes; as a result of these delays, APL-1 is well behind schedule, resulting in a current overall Implementation Status rating of Moderately Unsatisfactory. In addition, there have been significant cost overruns as a result of various factors, such as the increase in the price of metals and other electrical materials, depreciation of the US dollar relative to the currencies in which the major contracts are expected to be denominated, and further deterioration of the assets. The design issues have recently been resolved and the procurement for major contractors is now well underway. 28. APL-lb (PO9720 1): SAPM APLl -b will, through rehabilitation activities, generate incremental power at the Inga hydroelectric site in DRC, a portion of which will be exported via the HVDC line being rehabilitated under SAPM APL-1. In addition to the regionally-oriented components, domesticallyoriented components are also being financed, including the rehabilitation and expansion of the distribution network in Kinshasa, a second transmission line from Inga to Kinshasa and significant capacity building activities. 29. The proposed project: SAPM APL-2 (P084404): Mozambiaue-Malawi Transmission Interconnection would finance the transmission interconnector between Malawi and Mozambique, as well as strengthen key elements of ESCOM and EDM systems to ensure that the power flows to, and from, Malawi via the interconnector are not interrupted due to weaknesses on the domestic grids. 30. Four triggers, listed below, for APL-2 were identified in the Project Appraisal Document (PAD) of APL-1. Trigger (iii) will not be met: Southem Afiica Power Market Project (Democratic Republic of Congo and Republic of Zambia) APL (Credits), Project Appraisal Document, IDAIR /1, dated October 1,

17 (i) Completion and disclosure to the public of an Environmental Assessment, resettlement action plan and any required mitigation plans, acceptable to the Bank, for both the facilities in Mozambique and those in Malawi. This trigger has been met. (ii) Completion of an implementation agreement between Electricidade de Moqambique (EDM) of Mozambique and Electricity Supply Corporation of Malawi Limited (ESCOM). The agreement has been substantially negotiated and signing of the agreement will be a condition of effectiveness. (iii) Completion of a Power Purchase Agreement between ESCOM and the supplier of power. This trigger will not be met. Negotiations between ESCOM and HCB regarding an agreement for HCB to supply power to ESCOM are on-going. The justification for proceeding with the interconnection project before finalizing an agreement is based on the recognition that even without an import agreement in place, the interconnector is Malawi s least cost strategy to reduce the risk of a drought-induced power crisis. Further, in the near-term Malawi has excess energy at off-peak times which could be sold on the SAPP Short-Term Energy Market (STEM). During peak imports will be the least cost option to meet demand. Studies indicate that the least-cost option for Malawi to meet medium-term power demand will also be through imports. Thus there exists a clear economic incentive for electricity trade, which is projected to continue in the medium term. Further discussion is presented in Section 2.F. (iv) Completion of bidding documents of major contracts. The prequalification process has been launched and preparation of tender documents is underway. 31. The proposed APL-2 will be financed by two IDA Credits, one to Malawi and one to Mozambique. These credits will be on-lent to the respective electric power utilities, ESCOM and EDM, which would be the implementing agencies. 32. APL-3 is planned to fund an interconnection between Zambia and Tanzania, which will facilitate the connection of Uganda and Kenya to the SAPP in the future, significantly expanding the breadth of potential trading partners and bringing new trading opportunities to members. C. Project development objective and key indicators 33. Proiect development obiective. The Mozambique-Malawi Transmission Interconnection Project (APL-2) development objective is to implement the Mozambique -Malawi Interconnection (i) to increase access to diversified, reliable, and affordable supplies of energy; and (ii) expand Malawi and Mozambique s opportunities to benefit from bilateral and regional power trading on SAPP. The primary beneficiaries of the proposed project would include businesses and citizens, who will have increased and more reliable access to electricity as a result of electricity trade between Mozambique and Malawi and the SAPP. 34. Key outcomes and indicators. The Final Outcome Indicators would be (i) the volume of trading via interconnector between Malawi, Mozambique and other SAPP members, (ii) for Malawi, decreased electricity deficit in case of drought, and (iii) incremental earnings for Mozambique from power trading with Malawi, and savings through importing electricity from Malawi at a lower cost than alternative sources of supply. The key intermediate outcome indicators are (i) Key trading agreements are signed and operational, (ii) the ESCOM Financial Sustainability plan is adopted and implemented, (iii) the increase in number of customers served out of Matambo substation and (iv) reduction in number of faults due to failure of obsolete network equipment. Further details on project outcomes by component as well as output indicators are presented in Annex 3. 7

18 D. Project components 35. The project will consist of three components: (A) Mozambique - Malawi Interconnection; (B) Capacity Building and Technical Support for Upgrade and Expansion to Support Power Trading; and (C) Improved Infrastructure to Support Power Trading. 36. Component A: (estimated total cost: US$47.1 million for Malawi, US$43.5 million for Mozambique) Construction of the transmission interconnection from the Malawi electricity grid to the Mozambique electricity grid, thereby interconnecting Malawi with the Southern Africa Power Pool network. On the Malawi side this would include construction of approximately 75 km of 220 kv transmission line, installation of a new 220 kv substation, development and implementation of a Resettlement Action Plan, as per the Resettlement Policy Framework, once the exact route is determined, and the studies, works, engineering and project management support required to complete the interconnection. On the Mozambique side this would include construction of approximately 135 km of 220 kv transmission line including carrying out required landmine clearing activities on limited portions of the transmission line route, the extension of the existing Matambo substation, development and implementation of a Resettlement Action Plan, as per the Resettlement Policy Framework, once the exact route is determined, and the studies, works, engineering, and project management support required to complete the interconnection. 37. Component B: (estimated total cost: US$2.9 million for Malawi, US$1.7 million for Mozambique) technical assistance, capacity building, training and equipment necessary for ESCOM and EDM to (i) to strengthen and expand the networks to maximize the benefits of power trading; (ii) to improve ESCOM s efficiency and quality of service as the foundation for financial sustainability of the company; (iii) strengthen capacity to achieve the project objectives. For Malawi the activities include: Updating the power system development, system operation plan and identification of ESCOM s critical power system needs including, inter alia, rehabilitation studies for generation, transmission and distribution, and system operation and maintenance procedures; supporting ESCOM in the improvement and management of its financial performance including, design and implementation of a Financial Sustainability Plan, revenue stream diagnostic and implementation of a revenue management strategy; and provision of technical advisory service and training to ESCOM staff and relevant key stakeholders in the electricity sector for project management, electricity trading and system operation and other areas required for successful project implementation. For Mozambique the activities include: a feasibility study for extension of the Interconnector to the northern region of Mozambique; provision of technical advisory service and training to EDM staff and relevant key stakeholders in the electricity sector in the areas of environmental and social management, loss reduction, project management, electricity trading and system operation and other areas required for successful project implementation. 38. Component C: (estimated total cost: US$9.9 million for Malawi, US$4.6 million for Mozambique) investments to replace worn-out, inadequate or obsolete equipment to remove critical bottlenecks in the networks which could impede the flow of traded electricity. For Malawi, investments include: replacement of digital excitation equipment, circuit breakers and other switchgear, control and protection equipment, and some critical communication links between important load centers and generating stations and the national control centre for better system operation control and assessing the flow. For Mozambique the project includes the provision of a new 220/66/33 kv power transformer at the existing Matambo substation in the Tete region; connecting the new transformer to the 66 kv and 33 kv systems, and associated civil works, control and protection work at the substation. 39. The following tables summarize costs and proposed sources of financing (figures include price and physical contingencies). Further details are provided in Annex 4 and Annex 5. 8

19 Table 1: ESCOM, Malawi Component B: Capacity Building and Technical Support for Upgrade and Expansion to Support Power Trading Component C: Improved Infrastructure to Support Power Trading I Total Table 2: EDM, Mozambique Component B: Capacity Building and Technical Support for Upgrade and Expansion to Support Power Trading Component C: Improved Infrastructure to Support Power Trading 1.7 Less 1.7 than Total Utility costs include taxes (excluding taxes on consultancies), 5 percent overhead, and specific items to be financed including licenses and compensation for resettlement. E. Lessons learned and reflected in the project design 40. Lesson 1: The design of APL programs which provide a regional framework for multi-country infrastructure projects should focus on achievement of regional program goals and not be diverted by national issues, as noted in the lessons learned highlighted in the PAD of a previous regional projectg. However, while progress on specific domestic policy items should not distract from the regional objectives, a certain level of performance will be required at the national levels to ensure sustainability. The proposed project includes financial covenants necessary to address key financial risks of this project and technical assistance to support development of a Financial Sustainability Plan to improve ESCOM s financial situation, both of which are required to ensure sustainability of this project. Project Appraisal Document for Coastal Transmission Backbone Project of the West Africa Power Pool APL Program. 9

20 41. Lesson 2: Experience in APL-1 demonstrates the importance of ensuring that technical design issues are resolved and major procurement packages have progressed to an advanced stage by the time the project is approved, to avoid long delays between project effectiveness and disbursements. In this project, preparation of prequalification and bidding documents for the major investment component is well underway. There are no outstanding design issues. 42. Lesson 3: The project design should assess the full chain of activities and investments required to achieve the project objectives, and ensure all critical constraints are addressed within the project. Components B and C would address potential bottlenecks in the Malawi and Mozambique transmission and distribution system, which might impede trade of electricity. 43. Lesson 4: A key lesson from experience in previous Bank-financed power sector credits in Malawi is that if the utility is to bear the foreign exchange risk of an on-lent credit, then the tariff that ESCOM is permitted to charge customers must adjust with respect to the exchange rate movements. The Government has taken actions to address this issue. An automatic tariff adjustment mechanism has now been adopted to allow for adjustments to compensate for exchange rate movements and inflation. Since 2004, this mechanism has been largely effective (albeit with some delays in implementing the required tariff adjustments). The ESCOM Financial Sustainability Plan (described in Section IV.A, paragraphs 70-71) will address the issue of exchange rate shocks and propose a mechanism such that if any limitations are imposed on the automatic adjustment mechanism to avoid tariff shocks, ESCOM would be financially compensated by the Government until the situation stabilizes and the end-use customer tariff has been adjusted to the appropriate level. F. Alternatives considered and reasons for rejection 44. No Interconnection or delayed interconnection, focusing only on expanding Malawi s domestic hydropower generation capacity. This option was rejected because it does not address the major risk of drought-induced power crisis, since the only domestic generation option that could be operational in the timeframe required would be additional capacity on the Shire River (i.e. the Kapichira I1 project). Imports via the interconnection will provide an alternative source of supply that is independent of the flow on the Shire River. This diversity of supply represents Malawi s best hedge against droughtinduced power crisis. Over the past 3 years ESCOM has explored the option of a long-term import contract. ESCOM is in the final stages of concluding an import agreement with Hidroelectrica Cahora Bassa (HCB) in Mozambique. However, even without a firm power import agreement in place, the interconnection still represents Malawi s least-cost mitigation measure against drought-induced power crisis. Although the availability and price of opportunistic and/or short-term supply would be uncertain, were Malawi to experience a severe power shortage, there is a high probability that Malawi would be able to secure electricity imports at a cost significantly lower than supplying the same electricity from emergency thermal units. 45. Including in the project scope extension of the transmission line into northern Mozambique. Extension of the interconnection from Phombeya in Malawi east into northern Mozambique is viewed by EDM and the Government of Mozambique as an important component of the strategy for improving electricity supply to the north of Mozambique. It also could open the potential for interconnection and electricity trading with Tanzania in the future. Inclusion of this extension of the line in the proposed project was rejected because assessment and preparation for the extension is still at an early stage. However, financing for the feasibility study for the transmission line extension is included in the proposed project. 10

21 46. Requiring that ESCOM have a Power Supply Agreement CPSA) in place before proceeding with the transmission line investment. There are some clear advantages to having a PSA in place, and ESCOM is in negotiations with HCB to provide up to 50MW of capacity to ESCOM." However, there are also strong justifications for proceeding with the investment even in the absence of a final import agreement, The transmission interconnection is Malawi's least-cost strategy to reduce the risk of drought-induced power crisis, as explained in paragraph 44. This is true with or without an import agreement in place. In addition, there is a clear economic incentive for electricity trade. Malawi currently spills power during off-peak periods which could otherwise potentially be sold on the SAPP. The opportunity for sale of offpeak electricity, that would otherwise be spilled, will increase when Kapichira I1 is operational planned for 2011 (see Annex 1). At the same time, Malawi is projecting a peak deficit in all years except Importing electricity will be less expensive than running thermal generation to meet peak demand. In the medium term (by 2015), Malawi's low cost domestic options will be largely utilized, and increased imports is projected to be the option with the lowest cost and greatest benefit from the point of view of increasing diversity of supply, Also by 2015, a significant amount of new generation capacity is expected to be on-line in SAPP, including in Mozambique near the Malawi border (see Annex 1, paragraphs 2 and 36-41). With the interconnector in place, Malawi will be in a position to secure additional capacity through future import agreements. A. Partnership arrangements 111. IMPLEMENTATION 47. The Norwegian Embassy in Maputo on behalf of the Norwegian Ministry of Foreign Affairs has indicated interest in contributing to finance studies which have been identified as being important for developing power trade via the interconnector, but for which financing under this project is not available (see Annex 4). Financing arrangements with Norway could be agreed to under the existing general Co- Financing and Technical Assistance Framework Agreement signed between the World Bank and the Government of Norway. Arrangements are made under this agreement for Norway to co-finance a project for which a Bank loan has already been approved. In addition, opportunities for carbon financing are being explored. B. Institutional and implementation arrangements 48. Imdementing Institutions. ESCOM and EDM will be responsible for the implementation of the Malawi and Mozambique portions of the project respectively. In order to manage the coordination and address any issues that arise as a result of the regional nature of the project, a three-level structure has been put in place and is fully operational: A Joint Project Steering Committee, comprised of senior staff from the Ministry of Energy, Mines & Natural Resources, Ministry of Finance, Ministry of Economic Planning, National Electricity Council (or successor entity) and ESCOM in Malawi, and the Ministry of Energy, Ministry of Planning and Development, Ministry of Finance and EDM in Mozambique, provides oversight to address any issues that need to be resolved at Government level. A Joint Project Coordination Committee, comprised of senior management from the two utilities, reports to the Project Steering Committee. This Committee is responsible for high level project coordination and for referring any critical issues to the Steering Committee. By October 3 1 each lo Starting in 2003, ESCOM conducted an international competitive bidding process to identify a supply source for electricity imports via the proposed interconnector. The bid from Hidroelectrica Cahora Bassa (HCB) was ranked top in the evaluation process. 11

22 year, the Joint Project Coordination Committee will submit an overall project progress report to the Project Steering Committee. The report will describe the status of implementation of the Procurement Plans, physical progress, and financial reports for the twelve months ending in July of the same year. ESCOM and EDM each have a Project Management Unit (PMU). For the two utilities, the PMUs include a Project Manager, Project Engineer, Social and Environmental Specialist, Financial Management Specialist and technical specialists including transmission line and substation engineers and a staff member familiar with World Bank procurement guidelines. EDM and ESCOM have jointly hired a Design and Supervision Consultant under a single contract. ESCOM and EDM each pay fifty percent of the Consultant costs. The ESCOM and EDM PMUs and the Consultant are in regular contact. The ESCOM and EDM Project Managers, with input from the Financial Management Specialists in the respective PMUs, will be responsible for financial reporting the ESCOM and EDM parts of the project respectively. Training and capacity building for the ESCOM and EDM PMUs will be included in the project. The implementation arrangements are discussed further in Annex There are four key agreements governing implementation and operation of the transmission interconnection. These agreements have already been substantially negotiated and signature of these agreements is a condition of effectiveness. The key agreements are: (i) the Implementation Agreement between EDM and ESCOM; (ii) the Maintenance Agreement between EDM and ESCOM, (iii) the System Operating Agreement between EDM, ESCOM, and HCB; and (iv) the Wheeling Areement between EDM and ESCOM specifying payments by ESCOM to EDM for use of the Mozambique portion of the line. The Wheeling Agreement will specify a monthly payment rate from ESCOM to EDM which will be set to cover: (i) the full cost of EDM debt service to the Government of Mozambique for this investment, (ii) a guaranteed return on EDM s investment for the interconnection and (iii) EDM s operation and maintenance costs for the interconnection. Details are included in Annex Financing for the project will be provided as two separate credits: one to the Government of Malawi and one to the Government of Mozambique. The funds will be on-lent to ESCOM and EDM respectively on terms as shown in Section IV. A: Financial Analysis (paragraphs 73 and 77). Both utilities already operate special accounts for project preparation facilities for this project. C. Monitoring and evaluation of outcomes/results 51. The respective PMUs will be responsible for collecting and consolidating the data. The primary sources of data will include for ESCOM - ESCOM annual reports, ESCOM annual audit reports, ESCOM PMU quarterly Financial Monitoring Reports (FMR), information provided from ESCOM s Dispatch and Control Center, and quarterly reports from the Supervision Consultant. For EDM - EDM annual reports, EDM annual audit reports, EDM PMU quarterly FMRs, and quarterly reports from the Supervision Consultant. All information required to meet the reporting requirements for this project is either information that ESCOM and EDM would already be collecting for internal reporting and auditing, or can be derived from this information through simple analysis. Annex 3 presents the detailed Results Framework and Arrangements for Results Monitoring. 52. Regular reporting on the implementation progress of the interconnector component will make it possible for the PMUs to alert management promptly if problems arise. This will be a critical factor in ensuring that prompt decisions and actions can be taken to avoid delays. The proposed monitoring and reporting on ESCOM s financial performance will allow a timely update of the ESCOM financial projections and indication of any adjustments required to achieve financial sustainability and meet the 12

23 financial covenants for this project. Monitoring and reporting of the electricity trading following the completion of the interconnection will provide an important input for ESCOM s planning to reliably meet Malawi s future electricity demand at lowest cost. For Mozambique, monitoring of the effectiveness after the project is completed will provide an indicator of sustainability and the basis of fbture financial assumptions with respect to planning expansion of Mozambique s northern grid. The information reported will also be an important input to the overall World Bank engagement in preparing for subsequent support in the energy sector as well as at the country dialog level. D. Sustainability 53. Sustainability of this project rests on (i) the availability of surplus energy at a lower cost than domestic alternatives; (ii) the technical capacity; (iii) correct economic and financial incentives to achieve efficient electricity trading between Malawi and Mozambique and between Malawi and other SAPP entities; (iv) opportunities for increased use of the line in the medium term. With respect to the first point, HCB has already ear-marked up to 50MW of capacity to supply Malawi as the basis for the current discussions on the Power Supply Agreement. Malawi currently has off-peak energy available to sell to EDM or on the STEM. With respect to technical capacity requirements, EDM is already one of the largest traders on the STEM. Technical assistance will be provided under the project to assist ESCOM as the company embarks upon electricity trading. Regarding the third consideration, the energy sector policies of both Malawi and Mozambique indicate that the respective utilities are to operate on a commercial basis, and this is reinforced through the financial covenants of this project. Finally, there is significant potential for increased use of the line in the future. New generation is expected to be commissioned in Mozambique (and elsewhere in the SAPP) by 2015 when Malawi is expected to again be facing an off-peak capacity deficit. EDM intends to extend the transmission interconnector east to improve electricity supply to northern Mozambique. 54. Strong evidence of commitment and ownership of this project at both the utility and the government level has been demonstrated through actions already taken, including: 0 A Government-to-Government Agreement between the Governments of Malawi and Mozambique was signed in The Agreement s main purpose was to enable Malawi to trade electricity with Mozambique or any signatory of the SAPP through a high-voltage transmission line and associated equipment. 0 A Joint Project Steering Committee was established between the Government of Malawi and the Government of Mozambique and has been effective in addressing major issues to allow the project to reach the current point where all major agreements have been substantially negotiated. 0 Both ESCOM and EDM have already invested significant resources in the preparation of this project including preparation of the feasibility study, Environmental Impact Assessments (EIAs), Resettlement Policy Frameworks, preliminary aerial survey of the route, and multiple rounds of negotiations on the key agreements. 0 Both countries and utilities are signatories to the respective SAPP inter-governmental and interutility MOUs. Countries and utilities are also members on the SAPP sub-committees. 55. Other factors critical to the sustainability of the project s objectives include the following: ESCOM and EDM should meet their commitments, both financial and operational, as laid out in the Wheeling, Implementation and Maintenance agreements. HCB, ESCOM, and EDM should reach agreement on the System Operating Agreement and fulfill their specified roles. 13

24 E. Critical risks and possible controversial aspects 56. Critical risks and the proposed mitigation measures are shown in the table below. There are no notable controversial aspects to this project. Table 3: Principal Risks, Ratings and Mitigation Measures Risk Rating: H-High; S-Substantial; M-Moderate; L-Low )bligations under the Wheeling 9greement. This would have a iegative impact on EDM 'mances and could lead to ntermption of service on the nterconnector. M B B Support for TA and equipment would be provided under the project to ensure ESCOM achieves a financially sustainable position by when payments under the Wheeling Agreement will commence; Appropriate safeguards are included in the Wheeling Agreement, i.e. a first class bank guarantee in favor of EDM, or letter of credit or other similar credit support in respect of the payment obligations. B Incentive to trade and to maintain use of the line through payments under the Wheeling Agreement. 3DM fails to meet operational :ommitments to maintain the ransmission line as laid out in he Wheeling Agreement. L B Under the project, EDM would benefit from training and equipment for hot-wire maintenance. EDM currently has a good track record of operation and maintenance of transmission infrastructure. 'ower trading does not naterialize as anticipated. M B Technical Assistance for ESCOM, and training in power trading for ESCOM and staff in relevant Government agencies will be included in the project. D Malawi faces growing capacity deficit which can best be met via imports. Even after the next increment of Malawi domestic generation expansion comes on line (planned 201 1) Malawi will almost immediately face a shortfall at peak. Current studies indicate that imports will be the least cost option. Malawi will continue to generate excess energq at off-peak, much of which could be sold on the SAPP Short-term Energy Market (STEM). EDM is already one of the major traders on the SAPP STEM. 3SCOM fails to service its debt In the loan on-lent by Sovernment o f Malawi as a for :his proiect. S ESCOM and the Government o f Malawi are committed to the development and implementation of a Financial Sustainability Plan which will be designed so that ESCOM is in a position to cover cash operating costs as well as all debt service. 14

25 Expected improvements in ESCOM performance fail to materialize. M 0 An ESCOM Financial Sustainability Plan will be in place in September The plan will be monitored by Ministry of Finance at least through If planned performance improvements do not occur (or performance deteriorates) the plan will be adjusted and appropriate action taken to Components A and C: Delays in contractor selection and implementation of the contracts. Overall Risk Rating: Moderate L 0 Consultants to assist in the bidding preparation and process are on-board and the preparation of the bidding documents is well-advanced. Pre-qualification for major contracts is underway. F. Credit conditions and covenants 57. Effectiveness conditions for Malawi: ESCOM has established a FM system, adequate to produce interim unaudited financial reports, in form and substance satisfactory to IDA, to ensure proper accounting and monitoring of project funds. Key agreements (as defined in paragraph 49) have been signed by all parties. The Subsidiary Loan agreement between the Government of Malawi and ESCOM has been signed. ESCOM has completed the ESCOM Company audit for FY05 and submitted this to IDA. 58. Effectiveness conditions for Mozambiaue: EDM has established a FM system, adequate to produce interim unaudited financial reports, in form and substance satisfactory to IDA, to ensure proper accounting and monitoring of project funds; a Key agreements (as defined in paragraph 49) have been signed by all parties; The Subsidiary Loan agreement between the Government of Mozambique and EDM has been signed. 59. Disbursement condition There can be no disbursement of the Mozambique credit against Category la (Transmission and Substation Supply and Installation) until the Financing Agreement for Malawi has become effective; There can be no disbursement of the Malawi credit against Category la (Transmission and Substation Supply and Installation) until the Financing Agreement for Mozambique has become effective. 60. Covenants for ESCOM: a ESCOM will submit to IDA audited financial statements within six months after the year end; a ESCOM will submit to IDA unaudited interim financial statements within 45 days after each calendar quarter, to cover such calendar quarter; 0 ESCOM will ensure implementation of the Resettlement Policy Framework and recommendations of EIAs as per disclosed documents; 0 ESCOM will implement the Financial Sustainability Plan; 15

26 0 ESCOM will maintain a Cash Coverage ratio from 2008 onward greater than or equal to 1.O; ESCOM will maintain a Collection-Generation ratio from 2008 onward greater than or equal to 75 percent. 61. Covenants for EDM: EDM will submit to IDA audited financial statements within six months after the year end; EDM will submit to IDA unaudited interim financial statements within 45 days after each calendar quarter, to cover such calendar quarter; EDM will ensure implementation of the Resettlement Policy Framework and recommendations of EMS as per disclosed documents; EDM will maintain a Current Ratio (current assets over current liabilities) of at least 1.3 from 2008 onward; EDM will maintain a Collection-Generation ratio (defined above) from 2008 onward of at least 71 percent; from 2009: 73 percent; from 2010: 74 percent. IV. APPRAISAL SUMMARY A. Economic and financial analyses Project economic analysis 62. The economic case for the proposed project has been analyzed for the period A range of economic benefits will accrue from the project for both Mozambique and Malawi. The economic case for the project is predicated on two-way flows of energy via the transmission interconnection: imports into Malawi from Mozambique during peak hours and limited off-peak exports from Malawi to Mozambique and the SAPP during off-peak hours. It is estimated that net economic benefits from the project will amount to approximately US$361 million (in NPV terms), and that the economic internal rate of return will be approximately 28 percent. These results are robust in a range of scenarios. The project is the leastcost means of delivering these benefits. The principal assumptions underlying the base case of the economic cost-benefit analysis of the project are set out in Annex 9. The cash coverage ratio is defined as operating and other income (adjusted for net working capital and non-cash expenses) plus consumer deposits divided by the sum of debt service liabilities, internal funds required for capital investment, and contribution required for staff retirement funds. A cash coverage ratio of 1.O will ensure that ESCOM has sufficient cash revenues to cover its cash operating costs, debt service requirements, and internal funds required for capital investment. The collection-generation ratio measures how much of energy generated was actually collected in cash from customers. It captures T&D losses, billing and collection performance. The term collection-generation ratio means: energy collected by ESCOM divided by energy sent out by ESCOM; energy collected by ESCOM is equal to (energy sent out to ESCOM less transmission and distribution losses in ESCOM s system) multiplied by ESCOM s billing collection ratio; energy sent out from ESCOM s generation systems, and energy entering ESCOM s systems through purchases; and ESCOM billing collection ratio means energy collected divided by energy billed. 16

27 Table 4: Project Net Present Value (NPV) and Economic Internal Rate of Return (EIRR): Base Case NPV / EIRR Total project NPV Total project EIRR Mozambique NPV Mozambique EIRR Malawi NPV Malawi EIRR Values US$36 1 million 28.2% US$69 million 26.1% US$292 million 29.3% 63. Principal benefits: Malawi. Malawi is projected to face relatively large and growing capacity deficits in the forecast period which could lead to high costs of unserved energy to businesses and consumers. Hence the principal economic benefit of the project is that Malawi will be able to import power from Mozambique to cover its deficits. It is expected that Malawi will have a PSA in place for a net 30 MW from to 2015, rising to a net 50 MW from 2015 to 2019 and a net 120 MW from 2019 onward. At the same time, however, Malawi is currently spilling surplus off-peak energy generated from its run-ofriver system. This energy could be sold via the interconnector on the SAPP Short-term Energy Market (STEM). For the base case, it is assumed that 40 percent of Malawi s excess off-peak energy will be sold on the STEM. The gross economic benefits for Malawi are set out below. When the investment costs are factored in, it is estimated that net economic benefits for Malawi will amount to approximately US292 million (in NPV terms), and that the economic internal rate of return will be approximately 29 percent. Table 5: Summary of Gross Economic Benefits: Malawi Base Case Economic Benefit Imports from Mozambique to cover deficits Exports of surplus off-peak energy to SAPP Net present value (US$ million) Principal benefits: Mozambiaue. Mozambique will benefit from the project in four principal ways. First, because Malawi faces growing peak capacity deficits, Hidroelectrica de Cahora Bassa, SAM (HCB), the owner of the 2,075MW Cahora Bassa hydropower generation plant in Tete province in Mozambique, is expected to have the opportunity to export power to Malawi. It is assumed that ESCOM will buy a net 30 MW of power from HCB. It is assumed that exports from Mozambique to Malawi will increase, either from HCB or from planned new generation capacity, as Malawi s demand grows. Second, under the terms of the wheeling agreement, EDM in Mozambique will realize a revenue stream from Malawi for the use of the line. Third, EDM could benefit from substituting cheaper off-peak energy from ESCOM that would otherwise be spilled, for more expensive domestic alternatives during the period Fourth, there are additional potential economic benefits for Mozambique from extending the interconnector across Malawi and into northern Mozambique to improve the reliability of power supply to Mozambique s northern region^.'^ The gross economic benefits for Malawi are set out below. When the investment costs are factored in, it is estimated that net economic benefits for Malawi will amount to approximately US$69 million (in NPV terms), and that the economic internal rate of return will be approximately 26 percent. l3 While this economic benefit to Mozambique could be substantial, it is not actually realized by the project itself, and so has not been factored into the economic analysis. 17

28 Table 6: Summary of Gross Economic Benefits: Mozambique Base Case Economic Benefit Exports to Malawi Wheeling agreement Off-peak imports from Malawi, Net present value (US$ million) Sensitivity analysis. Three main scenarios were analyzed in order to test the robustness of the base case analysis to changes in the values of the main variables. The most significant exogenous variable in the economic analysis is that of variations in hydrological conditions in Malawi. The first sensitivity scenario is the impact of a drought in Malawi. The principal effect would be reducing the water flow through the turbines of the hydro plants. The drought scenario used was that of the worst continuous three-year drought period for which there is data, which was in the period The drought scenario results in incremental economic benefits for Malawi from the import of power via the interconnector to cover energy shortfalls. At the same time, these are somewhat offset by reduced off-peak exports to the SAPP. The balance of benefits also changes for Mozambique, although net economic benefits remain strongly positive. Overall, the three-year drought scenario reinforces the economic case for the interconnector project, increasing net economic benefits by over US$40 million, and increasing the economic internal rate of return (EIRR) from 28 percent to 34 percent. A longer or more severe period of drought would increase the benefits further. Table 7: Sensitivity Analysis: Impact of Drought I Basecase 1 Drought I Mozambique NPV (US$ million) Mozambique IRR I 26.1% I 24.4% Malawi NPV (US$ million) Malawi IRR Total project NPV (US$ million) Total project IRR % 40.4% % 33.6% 66. A second scenario considered was that of a constrained aggregate energy situation in the SAPPthat is, a combination of relatively greater demand for energy and relatively lower supply in the region. In this scenario, it is likely that Malawi would be able to export a higher percentage of its surplus off-peak energy. But at the same time, the unit cost of imports would likely increase, driving down overall economic benefits of the project. The third scenario considered was one of a plentiful aggregate energy situation in the SAPP-that is, a combination of relatively high supply of energy and relatively lower demand. In this scenario, it is likely that Malawi would export a lower percentage of its surplus off-peak energy, but that the unit cost of imports would likely decrease, hence increasing the overall economic benefits of the project. These results are reversed for Mozambique in each scenario. However, the net economic benefits of undertaking the project remain positive for both countries in both second and third 18

29 scenarios. The results of the sensitivity analysis show that the overall impact on project NPV and ERR is almost neutral, with overall project NPV remaining at approximately US$360 million. Mozambique NPV (US$ million) Mozambique IRR Malawi NPV (US$ million) Malawi IRR Total project NPV (US$ million) Total project IRR Base case Constrained energy Plentiful energy situation in SAPP situation in SAPP % 28.5% 23.2% % 28.6% 29.9% % 28.6% 27.7% 67. Least-cost alternative. The final step of the economic analysis is to ascertain if the proposed project is the least-cost option for providing the benefits discussed above. As part of project preparation, a detailed feasibility study was commissioned, which analyzes alternatives to the proposed interconnector and assesses whether the cost for each unit of energy generated is lower. The principal alternative which could address the requirement for a source of energy independent of the flow Shire River (i.e which could provide mitigation against the risk of drought) was a combined cycle power plant (CCPP). The benefit of the project is equivalent to the avoided operating costs associated with the alternate supply option, plus the difference in investment costs (if any). Given that the least-cost alternative is thermal, annual fuel costs in particular provide a considerable comparative advantage for the interconnection, as the marginal cost of a unit of hydropower generation is a fraction of the cost of a unit from thermal generation. Furthermore, the investment costs for the interconnector are estimated to be somewhat lower than that of the least-cost alternative supply option and the construction time for the CCPP would be longer than the interconnector alternative. Financial analysis: ESCOM, Malawi ESCOM historical financial situation 68. During the period FY03 to FY07 ESCOM has been able to cover all operating costs (including depreciation and bad debts) and interest costs from the tariff it charges to consumers (currently about US cents 4.3kWh). However, poor collection performance in the past coupled with rapid devaluation of the Malawi Kwacha especially during the 1990s resulted in inadequate cash flows to meet increasing debt service obligations. In FY06 ESCOM paid 79% of its debt service obligations to lenders that have extended direct loans to the company, but has been unable to meet its debt service obligations on the remainder of direct loans and to the Government for on-lent loans. The Government has recently taken steps to restructure ESCOM s debt through a combination of debt-equity conversion and conversion of some foreign currency-denominated loans which have been included in the HIPC arrangements or MDRI debt relief initiatives, into Kwacha-denominated loans. 69. Table 9 shows ESCOM s past cash flow situation. Further details of the current financial situation are discussed in Annex 9. 19

30 ESCOMjnancial outlook 70. ESCOM Financial Sustainability Plan. ESCOM and the Government are committed to achieving ESCOM financial sustainability through a combination of ESCOM efficiency improvements and tariff adjustments. ESCOM s principal target is to be in a position to cover all cash requirements, particularly once the new outflows related to payments to EDM for use of the transmission line and import contracts take effect in FY 11. Thus ESCOM s immediate goal is to achieve a Cash Coverage ratio (defined in paragraph 60) of 1.0 or greater in FY08 and onwards, which will ensure that ESCOM has sufficient cash revenues to cover its cash operating costs, debt service requirements, payments to EDM under the Wheeling Agreement (once it becomes effective), electricity import costs and internal funds required for capital investment. In May 2007, the Government of Malawi wrote to the World Bank stating its intention to put in place an ESCOM Financial Sustainability Plan by September 2007 with the objective of achieving this cash coverage target, and to implement and monitor the plan through 2010 through a regular monitoring and reporting system. 71. The plan will include (i) review of ESCOM s current and recent past performance, (ii) identification of areas for performance and efficiency improvement, (iii) the setting of realistic targets for improvement, and development of a monitoring and reporting mechanism, (iv) analysis to determine the recoverability of outstanding arrears and identification of steps to recover arrears where possible, (v) if necessary, prepare a plan for rescheduling the payment of overdue debt service on direct loans to ESCOM, (vi) indicate the extent to which tariffs must be adjusted annually, taking into account the planned efficiency improvements and planned ESCOM investment program, (vii) analyze the issue of exchange rate shocks and propose a mechanism such that if any limitations are imposed on the automatic adjustment mechanism to avoid tariff shocks, ESCOM would be financially compensated by the Government. Implementation of the plan will be critical in raising finance for the proposed next major power sector investment-the Kapichira I1 Hydropower station. Technical assistance is planned under the project for support in (i) developing the Financial Sustainability Plan, (ii) implementing recovery of the arrears to the extent possible, (iii) performing a diagnostic study of ESCOM s revenue stream and (iv) implementing the recommendations of the revenue diagnostic study. 20

31 ~ ~~ 72. Financial projections. Taking into account ESCOM s investment plan (including investment related to the proposed project) as well as payments associated with the Wheeling Agreement, electricity import costs and electricity export revenues, the base case financial projections show that ESCOM meets or exceeds the cash coverage target of 1.0 based on a 5% actual tariff increase annually from 2008 through Details of the assumptions for these projections and sensitivity analysis are presented in Annex 9. Table 10 provides a summary of ESCOM s annual cash flows for years FY08 to FY12 under this base case. Table 10: ESCOM Summary of Cash Flows in US$ million (FYOS - FY12) 73. On-lending; Terms and Financial Covenants. The terms of the on-lending from Government of Malawi to ESCOM are a 5 year grace period, a 5 percent interest rate, and a 20 year repayment period. ESCOM will bear the foreign exchange risk. A key lesson from the experience with previous IDA onlent credits is that the tariff that ESCOM is permitted to charge to customers must adjust with respect to the exchange rate movements. The automatic adjustment mechanism now in place addresses this requirement. ESCOM Financial Covenants are shown in Section 1II.F above. Financial analysis: EDM, Mozambique EDM historical financial situation 74. EDM s revenues are approximately equal to its operating expenses, including depreciation and provision for bad debts. EDM has always met its debt service obligations in full to lending institutions that have extended direct loans to the company. However, EDM s collected revenues have been inadequate to meet all of its revenue requirements. The shortfalls, largely due to heavy capital investments related to the access expansion program funded from internal resources in the last two years, have been bridged through nonpayment of debt service owed to the Government of Mozambique. EDM has accumulated large unpaid debt service liabilities to the Government for on-lent loans. EDM and the Government have agreed on a debt restructuring plan that it is expected to be formally approved by September Electricity tariffs were increased on average by 10.9 percent effective February 1,2006. The present Mozambique weighted average electricity revenue is estimated at 2,112 MtkWh (us$o.os 16kWh). An indexation mechanism has been established to adjust tariffs for inflation, changes in the MmS$ exchange rate, and changes in power purchase and generation fuel costs. EDM aims to increase tariffs gradually so that the weighted average revenue reaches the long-run marginal cost l4 This forecast is based on estimated figures for FY05 through FY07. During preparation of the Financial Sustainability Plan, these estimates will be reviewed and the projected tariff increases could change accordingly. Weighted average revenue is defined as total electricity revenue, excluding sales tax of percent, divided by kwh of electricity billed to end-use customers in Mozambique. 21

32 (LRMC) level of US#9.l kwh by April Overall, the financial performance of EDM has improved over the past three years. 75. Table 11 shows EDM s past cash flow situation. Table 11: EDM Summary of Cash Flows in US$ million (FY04 - FY07) EDMJinancial outlook 76. Interconnection with Malawi (the DroDosed Droiect). The financial impact of the interconnection on EDM will be positive since, under the Wheeling Agreement, EDM will recover the full investment cost plus operation and maintenance costs and as well as a specified retum on the investment. The Wheeling Agreement has been substantially negotiated and will be signed as a condition of effectiveness. 77. On-lending Terms and ring-fencing Pavments from ESCOM. EDM will receive payments from ESCOM in a separate bank account. Amounts due to the Government of Mozambique for debt servicing associated with this project will be paid from these proceeds. The remainder of the monthly payments will be used by EDM for operation and maintenance of the transmission interconnection and other uses as appropriate. The terms of the on-lending from Government of Mozambique to EDM are a 5 year grace period, a 5 percent interest rate, and a 20 year repayment period. EDM will bear the foreign exchange risk. EDM Financial Performance Covenants are show in Section III-F above. 78. Table 12 provides a summary of EDM s overall annual forecast cash flows for years 2008 to Table 12: EDM Summary of Cash Flows in US$ million (FYOS - FY12) l6 Assuming Government or other grant financing is available to cover a portion of the planned new connections. 22

33 B. Technical 79. The proposed 220 kv interconnector was selected through a feasibility study conducted by an international consultant, which considered the design and operational aspects of the interconnector in the SAPP grid. The study was reviewed by EDM, ESCOM, and the Bank teams. While several alternatives were studied, a double circuit 220 kv link was considered most suitable to cater to the expected power flows through the interconnector as well as the existing grid conditions of the EDM and ESCOM. The double circuit line with appropriate compensation would allow easy operation and bidirectional power flow between the two systems. Operational procedures of the SAPP grid would be followed while operating the line. EDM is already using 220 kv voltage, but this would be the first such line for Malawi. The required training in maintenance of the link and adequate spares and operational tools/tackles have been included under the financing. C. Fiduciary 80. Malawi/ESCOM financial management (see Annex 7). ESCOM is currently controlling all of its projects through its computerized FM system, with a dedicated and well-qualified personnel complement for project FM. The project FM staff has received training and has experience in World Bank FM and disbursement requirements. In summary, it is concluded that the basic capability to control and monitor the financial performance on projects is in place. Overall FM risk rating is Moderate. Use of ESCOM s existing project FM staff and FM system is a significant strength to the project. 81. MozambiaueEDM financial management (see Annex 7). The FM issues of the project will be handled by the Department of Debt and Contracts Management (DDCM) under Finance Directorate. A financial manager has been appointed to handle the FM issues of the proposed project. She is currently the managing the Project Preparation Faciliy (PPF) funds of this proposed project. In view of the general country FM issues and the issues specific to the project, the overall FM risk rating for the Mozambique component of this project is Moderate. 82. Malawi/ESCOM procurement (see Annex 8). Procurement activities will be carried out by the PMU under the ESCOM Transmission Business Unit. The PMU is staffed by a Project Manager supported by a Project Engineer, an Environmental and Social Specialist, and a Financial Management Specialist, and the procurement function will be under the responsibility of the Project Manager, who is familiar with World Bank procedures and guidelines. During the pre-appraisal mission, a procurement assessment of ESCOM was undertaken. Overall, the assessment revealed an Average procurement risk rating. 83. MozambiaueEDM urocurement (see Annex 8). Procurement activities will be carried out by the PMU which comprises the Electrification and Project Directorate (DEP) of EDM. The PMU is staffed by a Project Manager supported by a Project Engineer, an Environmental and Social Specialist, a Transmission and Substation Engineer, and a Financial Management Specialist, and the procurement function will be under the responsibility of the Project Manager, who is familiar with World Bank procedures and guidelines and is also currently managing the EDM component under the World Bankfinanced Energy Reform and Access Project. An assessment has been carried out of the capacity of the implementing agency to implement procurement actions for the project. The assessment reviewed the organizational structure for implementing the project and the interaction between the project s staff responsible for procurement and FM; these are found to be satisfactory. EDM is at present implementing satisfactorily its component under the Energy Reform and Access Project, with contracts with similar size and complexity to those envisaged under this project. Overall, the procurement risk rating is Average. 23

34 D. Social 84. Displacement and dispossession is very limited. Based on a thorough social analysis in each country along the entire wider transmission line corridor and the areas of the two substations, a corridor with limited human activities has been retained for the construction of the transmission line, to avoid the hardship of displacement. The data of the social analysis have been represented in two Resettlement Policy Frameworks (RPF) - one for Mozambique, one for Malawi. It was determined that RPFs, rather than Resettlement Action Plans, would be appropriate since the exact location of the towers and line route within the broader corridor was not known at the time of disclosure. At an early stage of implementation a technical study and a survey will be conducted to determine the exact location of the transmission line and towers within the corridor, and a record of the people and assets that will be affected will be developed. Based on the results, and if needed, a Resettlement Action Plan (RAP) or an Abbreviated RAP will be prepared, approved, disclosed in-country and in the Infoshop, and implemented before the start of any investment and construction work. Environmental Impact Assessments and Resettlement Policy Frameworks have been completed and disclosed in Malawi, Mozambique and the World Bank Infoshop (all disclosure was completed by February 14,2007). E. Environment 85. The project is located in northwest Mozambique near Tete and southern Malawi. The selected project corridor in Mozambique and Malawi passes mostly through agricultural land or bushland of low biodiversity value. This corridor was selected after a comparison of two alternative corridors. In Malawi an important forest reserve was avoided by selecting another route outside the Thambani Forest Reserve, one of the few remaining forest areas in the country. The project will not cause any major or irreversible environmental impacts in Mozambique or Malawi. 86. Some very limited spots along the transmission line route may need to be cleared of landmines. Clearing of landmines is only intended in one or two spots along the transmission line and not along the entire route in Mozambique as was initially considered during project identification. The clearing of landmines that will be required along a portion of the right-of-way in Mozambique is fully in compliance with World Bank Operational Memorandum February 7, In Malawi, a high-biodiversity forest reserve was avoided by changing the corridor. For these reasons the project environmental assessment (EA) category is B. 87. The urgent rehabilitation and reinforcement activities under Component C were defined only after disclosure of the above EAs. None of these activities to be included in Component C would have any environmental or social issues implications, beyond those which can be addressed in contractor specifications (for example, low-noise equipment, material free of polychlorinated biphenyls (PCBs), and better construction techniques). The environmental management aspects will be handled according to the same standards as described in both EA studies. In particular, the disposal of any hazardous wastes will be handled according to international standards. 88. The two RPFs and the two EAs will be implemented by ESCOMs and EDM s existing environmental and social units, respectively. These units will be strengthened under the project through technical assistance in Component B. 24

35 F. Safeguard policies Table 13: Safeguard Policies Triggered by the Project Policy Yes No Environmental assessment (OP/BP 4.01) [XI [I Natural habitats (OPBP 4.04) [XI [I Pest management (OP 4.09) [I [XI Physical cultural resources (OPBP 4.1 1) [I [XI Involuntary resettlement (OP/BP 4.12) [XI [I Indigenous peoples (OP/BP 4.10) [I [XI Forests (OP/BP 4.36) [I [XI Safety of dams (OPBP 4.37) [I [XI Projects in disputed areas (OP/BP 7.60) [I [XI Projects on international waterways (OPBP 7.50) [XI G. Policy exceptions and readiness 89. All the key agreements have been substantially negotiated. The pre-qualification process has begun and preparation of tender documents for major investment components (transmission line and substation works) is underway. Project implementation arrangements, including Project Management Units in both ESCOM and EDM, Design and Supervision Consultant, the Joint Government Project Steering Committee and the Joint EDM-ESCOM Project Coordination Committee are in place and operational. 25

36 Annex 1: Country and Sector or Program Background AFRICA Mozambique - Malawi Transmission Interconnection (Southern African Power Market Program APL-2) Regional Context 1. Southern Africa exhibits substantial variations in energy resource endowments, degrees of industrial development, levels and patterns of power consumption and power costs. These differences present opportunities for coordinated development of the regional power sector to generate savings through aggregation of loads with different load profiles, efficient use of energy resources by exploiting large scale power generation schemes that are viable on the basis of large, multi-country markets, and managing the risks of climate-related power shortages in hydro-dependent countries. 2. The Southern Africa Region as a whole is entering a period of generation capacity shortage. At least 1,OOOMW of additional capacity will be required each year to meet demand growth. Much of the new demand could be met through large, regional generation projects. Generation expansion plans in Mozambique are described in paragraphs below. The Government of South Africa and Eskom, South Africa have already taken steps to increase generation capacity in South Africa by launching a tender for 1,OOOMW of gas-fired generation, beginning the process of bringing back into service a 3,500MW coal-fired power plant that was previously moth-balled and initiating the study of other generation expansion options. In Botswana, plans are at an advanced stage for expanding the existing Morupule coal-fired power station by 400MW, and sponsors have been selected for development of a greenfield 3,600MW coal-fired power plant at Mmamabule, planned to be on-line in Rehabilitation of the Inga hydropower station in Democratic Republic of Congo (financed under APL-lb of the SAPMP APL series) will add an additional 500MW of generation capacity in SAPP. Zambia is in the process of identifying financing for several hydropower projects (including Itezhi-Tezhi, Kafue Lower and expansion of Kariba North Bank) which could add an additional 1,000MW over the next decade. There is also the possibility of development of an 800MW gas-fired power plant in Namibia. Regional trade in electricity is expected to increase, highlighting the need to address transmission-related constraints. 3. Regional stratem. In August 1995, SADC member countries created the Southern Africa Power Pool (SAPP) by concluding an Intergovernmental Memorandum of Understanding and related agreements. The utilities of 12 Southern African countries were the original members of the SAPP. The main grid systems of Botswana, DRC, Lesotho, Mozambique, Namibia, South Africa, Swaziland, Zambia, and Zimbabwe form the existing regional network. Angola, Malawi and Tanzania are not yet connected. In February 2006, membership in the SAPP was expanded to include private generation and transmission companies. 4. The SADC Protocol on Energy of 1996 commits member states to develop and use energy to support economic growth and development, poverty alleviation and improvement of the standard and quality of life throughout the sub-region. The Protocol further commits member states to the main objectives, which include co-operation in the development and utilization of energy and energy pooling to ensure security and reliability of energy supply in the most efficient and cost-effective manner. The SADC Energy Sector Action Plan of 1997 recommends that the SADC energy program concentrates on priority activities which could be implemented efficiently on a regional basis for the benefit of the entire region. 5. The Regional Indicative Strategic Development Plan (RISDP), approved by SADC Heads of State and Government in 2001, reaffirms the policy goal established by the SADC Protocol on Energy and identifies the following specific objectives in the electricity sector: (i) promote power pooling through the 26

37 extension of grid interconnections to cover all member states and upgradinghtrengthening existing grids; and (ii) consolidate the transformation of the Southern African Power Pool (SAPP) from a co-operative to a competitive pool and create a regional electricity market. 6. SAPP started as a cooperative pool in which members seek to maximize economic and system reliability benefits through trade, while retaining maximum autonomy for individual members. Currently there are two market mechanisms used in SAPP energy exchanges: medium-to-long term, bi-lateral power purchase agreements and the Short Term Energy Market (STEM) where daily, weekly and monthly contracts are actively traded. Evolution of trading on the STEM since its inception in 2001 is shown in the table Demand (GWh) Supply (GWh) Traded (GWh) Average price (USCkWh) % increase In the longer term SAPP aims to facilitate the development of a competitive electricity market in the SADC region and is now preparing to move to a competitive pool arrangement. A key step was taken in February 2006 when membership was expanded to include private Generation and Transmission Companies. A study on the Development of Transmission Pricing Policy for SAPP and Ancillary Services Market was completed in early A new SAPP Day-ahead Market (DAM) Trading Platform has been installed at the SAPP Coordination Center in Harare and market trials began in March An update of the long-term Indicative Least-Cost Generation and Transmission Expansion Study for the Southern Africa Power Pool started in September 2006, and is on track to be completed in October This will provide an update on the Southern African Power Pool Investment Plan. 8. Kev challenges. One of the immediate obstacles to expanding trade is the inadequate network of regional transmission infrastructure: three member countries are not yet connected to the regional power grid and several existing interconnections are overloaded or in need of rehabilitation. Connection to the regional grid of non-connected SAPP member power systems is a priority in terms of SAPP planning. In the 2006 SAPP Annual Report, the Mozambique-Malawi Inter-connector is explicitly noted as a top priority for the Pool. Malawi 9. Malawi is one of sub-saharan Africa s most densely populated countries with about 109 personsh (total population about 12.9 million). The recent Malawi Poverty and Vulnerability Assessment (PVA) shows that the percentage of the population living below the poverty line was around 52% in 2004/05. The per capita Gross National Income (GNI) was estimated at US$170 in Although the performance of the economy was unsatisfactory between 2001 and 2004, recent efforts by the Government have led to improved macroeconomic management and placed Malawi on a path for faster economic growth. The growth in real Gross Domestic Product (GDP) which averaged 1.5% between 2001 and 2004, increased to an average of around 5% between 2005 and As a result of the good macroeconomic management and improved fiscal discipline, the country reached the HIPC completion This study is ESMAP-funded and jointly managed by the World Bank and SAPP Coordination Center. 27

38 point and benefited from cancellation of most external debt, thereby releasing resources for pro-poor activities. 10. Malawi power sector context. The Electricity Supply Corporation of Malawi (ESCOM) is a vertically-integrated, government-owned electric utility with about 175,000 customers and an installed hydropower capacity of 284MW18. About 6% of the population has access to electricity. Peak demand in Malawi is 250MW and demand is expected to grow at about 5% annually over the next decade. 11. Currently ESCOM electricity supply cannot meet demand. This is in part due to the fact that the Tedzani I and I1 plant with installed capacity of 40MW had to be taken out of service in December 2001 due to damage as a result of flooding on the Shire River. In late-2005 ESCOM obtained contractor financing from Hydel Engineering and Construction Ltd to rehabilitate the plant. Completion of the rehabilitation of Tedzani I is scheduled for late 2007 and for Tedzani I1 for early The load shedding situation will improve when the rehabilitation of Tedzani I and I1 is completed, but installed hydropower capacity will remain below peak demand. By 2010 new capacity will be needed to avoid off-peak shortages. By 2015 Malawi will need to have in place an estimated additional 140MW of available capacity compared to the current installed capacity to meet demand. 12. The Mozambique-Malawi Transmission Interconnector will make possible the import of electricity to fill part of the shortfall. Malawi also plans to increase domestic power generation capacity through expansion of the Kapichira Hydropower Station ( Kapichira 11 ) on the Shire River. Kapichira I1 would involve the installation of two additional units of 32MW each, and is planned to be on line in However finan~ing ~ for this investment is not yet in place, so the timing of commissioning remains uncertain. Having the interconnector operational as early as possible will help mitigate the risk of further power shortages associated with any delay in the Kapichira I1 project. 13. Kapichira hydroelectric Dower scheme. The Kapichira hydroelectric power plant is located about 70km south-west of Blantyre and is the most recent and lowermost addition to the Shire River cascade group of hydroelectric power plants. Commissioned in mid-2000 under phase I of the Kapichira Hydroelectric Power Scheme and with World Bank support under the Malawi Power V Project, the existing power plant has a current total installed capacity of 64MW from two 32MW units. All civil works for Phase I1 associated with the headrace tunnel, intake structure, powerhouse and the tailrace were included under Phase I. 14. The proposed Phase I1 o f Kapichira Hydroelectric Power Scheme comprises the installation of two Francis turbines coupled to two generators, each 32MW capacity (for a total new capacity of 64MW), step up transformers (each 36 MVA) for the generating units, auxiliary power station electromechanical equipment including PLC, SCADA and control equipment, GIS switchyard and approximately 30km of 132kV transmission line to Blantyre West substation, with the relevant substation equipment. 15. Phase I1 works will be largely electromechanical in nature, with minimal civil works, since most of the civil works for the remaining two units were already undertaken in phase I. Works and facilities for Phase I1 would include access roads, camps and other support facilities, civil works (in the power house spaces for units 3 and 4 since the primary concrete structure has already been provided under Phase I), turbines, governors and anciliary equipment, generators and auxiliary equipment, transformers, l8 In addition to the hydropower stations, ESCOM owns 20MW of thermal generation. Due to the high cost of operation the thermal units are primarily used for emergency situations. l9 It is likely that development of Kapichira I1 will be supported under a new World Bank-supported Malawi Energy Sector Project planned for FY09. 28

39 switchgear and protection, power and control cables, and transmission line. ESCOM estimates that Phase I would cost US$47 million (excluding engineering and supervision costs) and that the implementation period could be about 3 years. 16. Vulnerabilitv to drought-induced power crisis. Of the existing hydropower generation capacity in Malawi, 98% is run-of-river (ROR) plant on the Shire Rive?. Of great concern for Malawi is a situation of below-average hydrology, since low flow on the Shire River translates directly into reduced power output. The average flow between 1994 and 2002 was less than half of the long-run average over the last 58 years for which data are available. Seven of the ten lowest flow years since detailed records began in 1948 have occurred in the past fifteen years. Futhermore, between 1917 and the mid-l930s, the Shire River actually stopped flowing altogether. The implications of this happening today are hard to overstate: Malawi would have a total operational hydropower output of 4MW against a demand of 250MW. The only immediate solution would be emergency thermal generation, which would cost over 20 times ESCOM s current cost of generation. 17. There is growing scientific consensus that climate change will lead to increased drought stress in sub- Saharan Africa. The transmission interconnector would contribute to reducing the potential risks associated with climate change, as set out in the World Bank Group s Clean Energy for Development Investment Framework, by providing an alternative power supply option, should climate change lead to a more volatile or reduced flow on the Shire River. 18. Impact of drought-induced power crisis in the rekon. Low flows are currently being experienced elsewhere in Afkica such as the White Nile, with severe consequences on power supply and the economy arising from both load-shedding the high cost of short-term mitigation measures such as temporary thermal power plants, For example in Uganda shortages due to drought and reduced hydropower output have adversely affected the Ugandan economy and the power sector: e Reduced industrial production, The cost of unserved energy has been estimated to be about US# 40 per kwh, and the value of the output lost is estimated to be about US$ 1.40kWh. High cost of stop-gap power and impact on tariffs and Government subsidy. Short-term thermal capacity running on Automotive Diesel Oil, is costing about US625kWh. In 2006, tariffs were increased by 94% and further increases may be necessary depending on future oil prices and hydrology. Despite these increases, tariffs are significantly below the average cost of production, which now exceeds US# 20kWh. Thus, the Government s subsidy burden has increased. 19. Shire watershed management and flow control. Management of Malawi s water resources has important consequences for the sustainable production of domestic hydropower. Two issues are of particular significance: the management of the Shire River catchment area and control of the level of Lake Malawi. From an energy perspective, ineffective watershed or catchment management for the Shire River would have a range of negative impacts, including silting, flooding and drylng up of the main water course. Land use and management patterns put most areas of Malawi at a high risk of soil erosion, which would result in increased degradation of the watershed. Efforts are ongoing to improve water resource management, notably via the Government of Malawi s national water sector development program which, inter alia, aims to develop an integrated Water Resources Investment Strategy, improve water resources management in selected sub-basins (including through water source development, water conservation, Run-of-river means that there is little or no capacity to store and control the flow of water upstream of the power generation stations, so the amount of electricity that can be produced is dependent on the daily flow of the Shire River. Heavy siltation has reduced the already small capacity of the reservoirs intended for daily storage. At the Wovwe mini-hydropower station in the north of the country. 2 United Nations Intergovernmental Panel on Climate Change, April

40 and erosion control) and enhance the relevant institutional and management mechanisms. The government s program is supported by the Second National Water Development Project (P096336, scheduled for presentation to the Board in mid-2007) 20. As noted earlier and in the economic analysis (see Annex 9), hydropower output is highly dependent on the levels of Lake Malawi. To enable active management of the level of the lake, a feasibility study was undertaken in 2003 to consider the utility of a lake level control structure at Liwonde on the Shire River and a low-flow pumping scheme at the mouth of the Shire River. The conclusion was that better lake level control can eliminate the risk of the river going dry in all but the most severe drought sequences (less than once in a hundred years). The Second National Water Development Project will finance the engineering design for the level control structure at Liwonde, and a preliminary design for a low-flow pumping scheme at the mouth of the Shire River, as well as associated independent environmental assessments. Additional financing for the level control structure may then be a possibility, after the necessary comprehensive design and environmental assessment and consultation processes have been completed. 21. Malawi ~ower sector strategv. The essence of Malawi s strategy going forward is to put in place measures to mitigate the consequences of a severe drought, while at the same time ensuring that the cost of power supply remains affordable to support a focused effort to increase access to, reliability and quality of electricity supply. 22. Imports via the interconnector will provide an alternative source of supply that is independent of the flow on the Shire River. This diversity of supply represents Malawi s best hedge against droughtinduced power crisis. Accordingly, over the past three years ESCOM has explored the option of a long term import contract. ESCOM is in the final stages of concluding an import agreement with Hidroelectrica Cahora Bassa in Mozambiquez3, 23. Even without a firm Power Import Agreement in place, the interconnector still represents Malawi s least-cost mitigation measure against drought-induced power crisis. Although the availability and price of opportunistic andor short-term supply are uncertain, were Malawi to experience a severe power shortage, there is a high probability that Malawi would be able to secure imports at a cost significantly lower than supplying the same electricity from emergency thermal units. 24. ProPosed seauencing of investments to meet demand, address drought risk and maximize benefits from generation assets. Key elements of Malawi s strategy include (i) implementation of the interconnection with SAPP by 2010 as the least-cost option for mitigating the risk of drought-related power crisis, and to allow the option to import as needed and export electricity when availablez4, (ii) implementation of the Kapichira I1 project by 2011; (iii) by 2015, Malawi would need to have another increment of 30 to 50MW on-line. Based on the Integrated Resource Plan for the Malawi Power sector completed in 2005, further imports are expected to be the least-cost option for this next increment of supply. 23 Starting in 2003, ESCOM conducted an international, competitive bidding process to identify a supply source for electricity imports via the proposed interconnector. The bid from Hidroelectrica Cahora Bassa (HCB) was ranked top in the evaluation process. 24 In years of average or good rainfall, during certain seasons and certain times of day not all the electricity that could be generated from installed capacity is needed in Malawi. This leads to spilling, i.e. energy that could be generated is not produced as there is no use for it. Interconnection with the SAPP would allow Malawi the opportunity to sell energy that would otherwise be spilled, into the SAPP Short Term Energy Market. 30

41 25. An additional benefit from early implementation of the nterconnection is that Malawi will be able to sell energy that would otherwise be spilled, either into the SAPP Short Term Energy Market or under short term bilateral contracts with Mozambique or other SAPP members. Malawi would generate revenues from power export, and near-by countries in the SAPP (several of which, including Mozambique, are projecting energy shortfalls in the period) would benefit from importing from Malawi. 26. Malawi kev challenges in the Dower sector. A key challenge facing Malawi in implementing this plan is the current relatively weak financial situation and commercial performance in the power sector. The Government together with ESCOM is developing a Financial Sustainability Plan which will include elements of improved efficiency and tariff adjustments as needed. The objective of this plan is to ensure that ESCOM is in a position to implement the above strategy and meet its resulting financial commitments. Implementation of the Financial Sustainability Plan will be a key factor in ESCOM s ability to raise financing for the planned investments and to meet Malawi s electric power requirements. Mozambique 27. Between 1996 and 2005, following the end of the war in 1992, the Mozambican economy grew at an annual rate of 8 percent. The poverty headcount index has fallen from 69 percent in 1996/97 to 54 percent in 2002/03. GWcapita is US%3lO/cap. Economic expansion has been made possible by overall macroeconomic stability, sound policy reforms, and continuing strong support from development partners. 28. Mozambiaue Dower sector context. Electricidade de Moqambique (EDM) is a vertically-integrated, government-owned electric utility with an installed capacity of 140MW hydropower (of which 86MW is available) and 109MW in thermal power stations (of which 82MW is available). Peak demand in Mozambique25 is 350MW. EDM buys most of its power supply (300MW) from Hidroelectrica Cahora Bassa, owner and operator of the Cahora Bassa hydropower plant in Tete province26. Based on recent performance, Mozambique load growth is projected at 8% in 2007, 7% annually from 2008 to 2010, and 5% thereafter. The Mozambique transmission grid is currently interconnected with Zimbabwe, South Africa and Swaziland. About 8% of the population has access to electricity. 29. Mozambiaue background on sector reform strategy. The approach to reform in the energy sector rests on two cornerstones: (i) Operationalizing a Strong, Independent Advisory Regulatory body, CNELEC, and (ii) an effective Performance Contract for EDM, publicly monitored by CNELEC. The Government has completed key steps in implementing the new reform program, demonstrating strong commitment: (i) In November 2005, the Board and Senior Management of EDM was replaced, (ii) in August 2006 Minister of Energy publicly issued instructions to CNELEC giving CNELEC the responsibility to monitor the EDM Performance Contract; (iii) In January 2007 the Government advertised for Expressions of Interest for the CNELEC Commissioner positions. EDM, the Ministry of Energy and the Ministry of Finance have completed a final round of discussions regarding the 3-year 25 Excluding Mozal Aluminum Smelter which imports power from South Africa. 26 Cahora Bassa on the Zambezi River, Tete Province operates as an Independent Power Producer. The installed capacity is 2,075 MW. The bulk of the generated electricity is exported to RSA with a small amount to Zimbabwe. The Governments of Mozambique and Portugal reached agreement in 2006 for transfer of the majority of the ownership of the company from Government of Portugal to Government of Mozambique. The initial payment and will complete the payments by December

42 EDM Performance Contract with monitorable results, and signature by these three parties is anticipated by June Mozambiaue Dower sector stratem. Mozambique s strategy focuses on (i) rapid expansion of access to electricity though grid intensification, grid extension and off-grid approaches, (ii) rehabilitation of existing hydropower plants, and (iii) development of new power generation through private sector and public-private partnerships. Mozambique is actively pursuing development of three large power generation projects for export to the SAPP (see below). 31. Because of the significant potential for competitive generation for export, Mozambique s strategy includes a focus on expanding opportunities for power trade. Key routes include the Mozambique- Malawi transmission interconnection, and a high voltage, high capacity transmission line from the Tete area, to Beira and Maputo, and continuing to South Africa. In the fiture, the Mozambique-Malawi interconnection could be extended east across southern Malawi back into northern Mozambique. This further interconnection would significantly improve the quality, quantity and reliability of supply to the north of Mozambique, where demand for power is growing rapidly. In 2004, the Governments of Mozambique, Tanzania, Malawi and Zambia signed a MOU on the development of the Mtwara Corridor along Mozambique s northern border with Tanzania. One area intended to be facilitated by this cooperation is the trading of electricity between Mozambique and Tanzania. Extension of the interconnector back into northern Mozambique is a high priority for Mozambique from a domestic supply perspective as well as further enhancing the prospects for regional electricity trade. 32. Projected growth in Dower demand in Northern Mozambique. The recently-completed Electricity Master Plan indicates an annual growth in domestic demand (medium growth scenario) for northern region of Mozambique of 9%. This high growth rate is based on the opportunities for development of the region including development of the port at Nacala and development of a variety of mineral resources. For example, the Irish-based mining company, Kenmare Resources, has announced that mining and heavy mineral concentrate production has started at its Moma Titanium Minerals Mine in the northern Mozambican province of Nampula. The mine contains one of the largest deposits of titanium-bearing mineral sands in the world. Power demand for this project alone is projected at 50MW. 33. Mozambiaue kev challenges in the power sector. With projections for continued robust economic growth, a key challenge is to ensure that affordable electricity supply is available to meet the growing demand. In the near term this could involve EDM entering into expanded or new power purchase agreements, for example with HCB in Mozambique, Eskom South Afiica andor ESCOM, Malawi (for off-peak). In the medium and long term, a key challenge in Mozambique s energy sector will be realizing the potential for new power generation projects to meet domestic demand and for export to SAPP. Opportunities for Mega-Power Generation projects in Mozambique. 34. Hydropower Potential in Mozambiaue. The hydropower potential in Mozambique has been recognized for many years and the Government has taken steps to assess the most promising options. The technical hydroelectric potential of Mozambique is estimated at 12,500MW corresponding to an average annual output of 60,000GWh. The largest portion of the potential is located in the Zambezi River at sites such as Cahora Bassa, Mphanda Nkuwa, Cambwe Foz, Boroma and Lupata. So far, the only development of this potential is the Cahora Bassa South Bank Hydropower Project. This power station, owned and operated by Hidroelectrica de Cahora Bassa (HCB) was commissioned in 1975 with an installed capacity of 2,075MW of which at least 1,455MW (equivalent to 12,746 GWyr) are firm. The majority of this energy is exported to South Africa via two +/-533kV DC transmission lines between Songo in Mozambique and Apollo in South Africa. The other buyers are Mozambique and Zimbabwe. 32

43 35. In 1999 Unidade Tecnica de Implementacao dos Projects Hidroelectricos (UTIP) commissioned a comprehensive study of hydropower development in the Zambezi River downstream of Cahora Bassa. The study was executed in two phases. In the first phase (March July 2000) the most economically attractive sequence of new developments in the Lower Zambezi was defined. Based on the resulting Project Definition Report (October 2000) the Government decided to proceed with a detailed study of the top-ranking projects: Mphanda Nkuwa and Cahora Bassa North. During Phase 2 (October March 2002) all the main aspects of the two projects were addressed in detail: hydrology, geology, environmental and social impacts, civil engineering, mechanical and electrical equipment, and economic and financial viability. 36. Mphanda Nkuwa (MN) Proiect. This project ranks as one of the first projects to be implemented according to the least cost expansion plan of SAPP. The installed capacity of the Mphanda Nkuwa Hydropower Project (MN) in the first phase would be 1,300MW for mid-merit supply, with potential for an additional 1,000MW under a second phase. Upstream dams such as Cahora Bassa, Kariba (Zimbabwe/Zambia) and Kafue Gorge (Zambia) already regulate the flow of the Zambezi River, so the MN project could be developed as a run-of-river project with only limited environmental impacts compared to its size. The feasibility study indicated that Mphanda Nkuwa and Cahora Bassa North projects are the two top-ranking options on the Zambezi River, and that from both an economic and financial point of view, these projects are very attractive for Mozambique. The Government has established discussions with a group of companies that intend to fom a project company for the development of Mphanda Nkuwa. 37. Moatize Coal Power Generation Proiect. A Brazilian company, CVRD, is currently preparing a development plan for the Moatize mine based on export of coking coal. As part of the development plan a feasibility study was prepared to make use of lower (non-export) grade coal for mine-mouth power generation. The feasibility study indicated a 1,OOOMW capacity initially, with the potential to expand to 1,500MW as production from the mine grows. 38. In February 2007, the Ministry of Energy, EDM and CVRD presented the project to potential sponsors at a roadshow in Europe. The Government is in the process of selecting a project sponsor and it is anticipated that a sponsor will be in place before end Mining operations are planned to start in It is planned that the power generation project would be operational as soon as possible after mining commences. 39. Gas-Fired Power Generation Proiect at Temane. The Government intends to utilize domestic supplies of natural gas for power generation. A feasibility study for a 400MW to 750MW power plant near the gas production facility in Temane has been prepared. The Government is in the process of selecting a project sponsor. It is envisaged that this power plant would be operational by UTIP is a governmental body established in 1996 to safeguard the country s interests in the Zambezi River hydropower potential and to manage its development. 33

44 Regional World Bank Proiects Annex 2: Major Related Projects Financed by the Bank and/or Other Agencies AFRICA Mozambique - Malawi Transmission Interconnection (Southern African Power Market Program APL-2) Regional Communications Infrastructure Project (RCIP). Currently under preparation and including both Malawi and Mozambique. The Development Objective is to lower the cost of international communications and extend the geographical reach of broadband networks. Proiects suuported bv other develoument finance institutions 0 Norway, through support to SADC and development cooperation in the energy sector in southern Africa, is providing support for harmonization of national and regional energy policies, promoting the development of physical infrastructure, and supporting integrated management of trans-boundary energy resources for regional integration and development. A main goal is to improve the infrastructure and management of the energy sector to promote a positive social and economic development. Malawi World Bank projects 0 Malawi Infrastructure Service Project (US$40 million). Approved in 2006, closing in 2011, current rating: Satisfactory. The development objective of the project is to improve household welfare and strengthen economic growth in market centers and surrounding rural areas through the provision of core infrastructure services. The project includes support for electrification and ICT services in selected market centers. Malawi Privatization and Utilities Reform Project (US$28.9 million). Approved in 2000, closing in December 2007, current rating: Satisfactory. The revised Project Development Objective (PDO) is to enhance the climate for private investment by reducing the state s direct participation in the business sector. The project supports establishment of a new Malawi Energy Regulatory Agency. Projects supported by other develoument finance institutions 0 Malawi Rural Electrification Program (MAREPeJapan International Cooperation Agency (JICA). MAREP aims at increasing access to electricity in rural areas for rural transformation and development. The project covers the entire country and the Japanese Government is providing technical assistance and procurement of materials. 0 Barrier Removal to Renewable Energy Project (BARREMCUnited Nations Development Programme (UNDP)/Global Environmental Facility (GEF). BARREM aims at providing alternative energy supplies for the power requirements for rural areas. BARREM involves the following activities across Malawi: (i) institutional strengthening and capacity-building, (ii) creation of an enabling environment for the promotion of renewable energy technologies (RETS) in the country; and (iii) establishment of RET demonstration centers. UNDP is providing MK 69 million (US$96,000) to support activities of the project during FY 2006/07. Program for Biomass Energy Conservation (ProBec)-EU grant as part of the SADC Portfolio. ProBEC works within the framework of alternative energies aimed at managing energy-related environmental impacts. 34

45 0 Lilongwe-Salima Transmission Line-Nordic Development Fund Loan to ESCOM. The project financed the construction of a 132 kv line between Lilongwe and Salima. The construction of the line was completed in Nkula B to Lilongwe B Transmission line-development Bank of South Africa co-financed this project with ESCOM. The project, completed late 2006, funded the installation of a second circuit between the two sub-stations. Mozambique World Bank projects 0 Energy Reform and Access Project (FY04). Closing in December Rating: Unsatisfactory. Currently under restructuring, which will include extension of the closing date by 24 months. 0 0 Communications Sector Reform Project. Closing in December Rating: Satisfactory. The project objective is to improve access and quality of efficient and affordable communications services by creating an enabling environment for competition and private participation in key sectors deemed critical to facilitate national and regional market integration, i.e. telecommunications, postal and air transport infrastructure and services. Economic and Sector Work on Rural Communications. Closed. A study to do an assessment of Communications Infrastructure and services in the districts: current status and potential for development. The study is entitled: Connecting the Districts, Connecting the Nation Proiects supported by other development finance institutions 0 Mozambique Energy Sector Program Support-Danish International Development Agency (DANIDA). The project focuses on rural electrification. 0 0 African Development Bank support in Mozambique. Mozambique Rural Electrification Project (ELECT 111), Mozambique Energy Reform and Access Program (ERAP), Mozambique Electricity IV Project, Mozambique Electricity V Project. These projects provide support to EDM for investment and training and to the Ministry of Energy for capacity building and studies. Swedish and Norwegian Support to EDM. Sweden provides support to EDM through SIDA. SIDA s current support to EDM includes: (i) a Rural Electrification project in Sofala, Manica, and Tete (co-financed with Norway), to be completed end-2008; (ii) Rural Electrification, Niassa province, preparation of the tender documents is underway. The development objective of these investment projects is to stimulate economic development and to improve the conditions in schools and health facilities; (iii) Technical Assistance to EDM ( ) to improve the capacity of EDM staff within the areas of business development, power economics, network system planning and legal services. Future SIDA support is expected to include a rural electrification package of 10 projects, to be co-financed with Norway, and firther technical assistance to EDM. 35

46 Results Framework Annex 3: Results Framework and Monitoring AFRICA Mozambique - Malawi Transmission Interconnection (Southern African Power Market Program APL-2) The objectives of the Southern Africa Power Market Program are set out in Section I B. Project Development Objective To implement the Mozambique- Malawi transmission interconnection (i) to increase access to diversified, reliable, and affordable supplies of energy; and (ii) to expand Malawi and Mozambique s opportunities to benefit from bilateral and regional power trading on the Southern African Power Pool. Final Outcomes (i) Malawi becomes an operating member of SAPP and the interconnection provides an alternative electricity supply option that (a) makes possible two-way electricity trade between Malawi, Mozambique and other SAPP members and (b) reduces vulnerability to power supply shocks in Malawi. (ii) Mozambique achieves incremental benefits from power trade with Malawi Intermediate Outcomes Component A: Mozambique-Malawi In, Final Outcome Indicators Volume of trading via interconnector between Malawi and Mozambique and Malawi and other SAPP members Decreased deficit in Malawi in case of drought Incremental earnings for Mozambique from power trading with Malawi and I or savings through importing electricity from Malawi at a lower cost than alternative sources of supply Intermediate Outcome Indicators connection Use of Project Final Outcome Information An input into Malawi medium-term planning to reliably meet future electricity demand at lowest cost An input into EDM s monitoring of earnings from exports Use of Intermediate Outcome Monitoring In Malawi and Mozambique: Interconnection constructed between Malawi and Mozambique On the transmission line: Completion of detailed survey % of towers installed against planned installation % Project expenditures against planned expenditures To monitor progress of transmission line construction and identify problem arising so that appropriate action can be taken promptly Substations constructed (Malawi: Phombeya) and upgraded Site mobilization completed % Project expenditures against To monitor progress of substation installation and identify problems so 36

47 (Mozambique: Matambo) planned expenditures prompt action can be taken 0 Key agreements operational between ESCOM and EDM (Wheeling, Maintenance and Implementation Agreements) and among ESCOM, EDM and HCB (System Operating Agreement) 0 Agreements signed and adhered to To facilitate trading flows Component B: Capacity Building, Technical Support and Equipment for Upgrade and Expansion to Support Power Trade In Malawi Improved Financial performance of ESCOM Financial Sustainability plan adopted and implemented 0 Keyratios: - Collection-Generation ratio - Cash coverage ratio To address deficiencies of ESCOM s cash flows To monitor ESCOM s financial position in order to allow ESCOM management to make any adjustments required to achieve financial viability Rehabilitation, studies for Generation, Transmission and Distribution and System Operation and Maintenance Procedures in place Key staff trained with respect to power trading 0 % completion of studies against planned timelines; revised procedures in place 0 Number of staff trained To monitor ESCOM progress in implementing studies and training To monitor EDM progress in implementing the feasibility study In Mozambique 0 Feasibility study for extending interconnection to Northern Mozambique completed 0 % completion of feasibility study against planned timeline Component C: Improved Infiastructure to Support Electricity Trading In Malawi 0 Critical national grid components upgraded to reduce outages due to failure of obsolete equipment 0 Reduction in number of faults in 132kV substations due to failure of obsolete equipment Reduction in number of excitation trips at generation stations To allow Malawi system managers to assess capacity of Malawi grid to support power trading In Mozambique 0 New 80 MVA transformer installed and functioning at Matambo substation 0 Number of customers served 0 % expenditures against planned expenditures for building Matambo transformer To monitor progress of substation installation and identify problems arising so that appropriate action can be taken promptly 37

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51 Annex 4: Detailed Project Description AFRICA Mozambique - Malawi Transmission Interconnection (Southern African Power Market Program APL-2) 1. APL-2, will be financed by two IDA Credits, one to the Government of Malawi and one to the Government of Mozambique. These credits will be on-lent to the respective electric power utilities: ESCOM and EDM, which would be the implementing agencies. 2. The project will consist of three components: (A) Mozambique- Malawi Interconnection; (B) Capacity Building and Technical Support for Upgrade and Expansion to Support Power Trading; and (C) Improved Infrastructure to support Electricity Trading. COMPONENT A: Mozambiaue-Malawi Interconnection 3. For this component the estimated costs for Malawi and Mozambique shares are respectively US$47.1 million and US$43.5 million. 4. This component will cover an approximately 210 km-long transmission interconnection between the electricity grid systems of Malawi and Mozambique. This link would also join Malawi to the Southern Africa Power Pool (SAPP) and help it reap the benefits of being part of a large, interconnected grid. Based on the detailed feasibility analysis by the consultants, it has been established that the interconnection would be through a double circuit 220 kv twin bundle conductor line emanating from existing Matambo substation in Mozambique, which receives energy from the Hidroelectrica de Cahora Bassa (HCB). Extension of the existing Matambo substation in Tete Province would be included. A new 220 kv substation would be built at Phombeya, in Balaka District in Malawi, to connect this transmission link with the ESCOM, Malawi grid. The component also covers development and implementation of a Resettlement Action Plan, as per the Resettlement Policy Framework, once the exact route is determined, associated studies, works, engineering and project management support to complete the interconnection, and investments for better operation and maintenance of this critical link. 5. Alternatives Studied: The feasibility for this interconnection was studied by an international consultant in The study was reviewed by EDM, ESCOM and subsequently by the World Bank team. Considering the length for interconnection, three main alternatives were considered for this interconnection - i) Single Circuit 400 kv; ii) Single circuit 220 kv; and iii) double circuit 220 kv. Though the alternative with double circuit 220 kv line was more expensive, it was the only alternative which could meet the network stability requirement for such long interconnection between the grid systems of Malawi and northern Mozambique which are both relatively vulnerable to system-wide blackout. The other alternatives would have caused instability and black-outs in the two systems, in case of sudden tripping of the line due to faults. The cost of black-outs would have been much higher than the savings in capital cost with other alternatives. 6. Subsequently, several optimization options were analyzed for the selected alternative of double circuit 220 kv line, such as conductor configuration of single conductor vs. twin bundle, type of tower supports and building the line initially with single circuit and subsequently stinging the second circuit, when the power flow on the line reaches higher level. However, the final selection - stringing the double circuit immediately - was done considering the possible role of this line as part of SAPP system and the likely use of this link as an import and export link for both countries. The selected configuration of the line, as detailed below also provides the advantage of maximizing the utilization the right of way corridor. 41

52 7. The selected configuration of the line is a double circuit 220 kv line to transfer about 300 MW of power through a double circuit line with twin bundle (2*431 mm2 BISON ) conductor in each phase. Self supporting steel lattice towers are proposed. The line would carry in one of its conductors an optical fiber (OPGW) link for the control and protection of the transmission interconnection. The OPGW would have spare capacity, which could be used for voice and data transfer between the two countries. The line would pass through a distance of about 134 km in Mozambique, as per the initial survey, including the river crossing at Zambezi River and then about 76 km in Malawi territory. 8. The associated works for the line included in the project are environment and social studies and environmental management plans, preliminary and detailed survey for the route and alignment, engineering, support for procurement, contracting and supervision and the project management during implementation. The costs of resettlement and compensation, license costs, Right of Way costs and normal operations of the Project Management units will be borne by the utilities. 9. The associated work for the substations comprise of: i) Extension of the existing 220 kv Matambo substation, in Tete region of Mozambique, to provide for connecting the two circuits of the 220 kv line and associated compensation equipment, as well as the work to provide necessary SCADA interconnection and other necessary activities. ii) A new 220 kv substation at Phombeya, in Balaka District of Malawi, to receive and transform the electrical power to 132 kv Voltage for connecting to ESCOM, Malawi s grid. 10. The component envisages hnding of hotline maintenance equipment for both the utilities and procurement of emergency restoration system3 for Malawi, to handle any tower outage contingency. The procurement of this equipment and training for the utilities staff would help to ensure a high availability of the critical link and reduce the down time of the link in case of a fault. 11. Fiber-optic link to be managed on an open access basis. The Malawi-Mozambique interconnector would include a fiber-optic links to be used for data transmission (Le. telecommunication) purposes. This fiber is primarily planned to cover ESCOM s and EDM s needs, but the spare capacity would also be used for commercial telecommunication services: i.e. the fiber link would be used to carry cross-border telecommunication traffic and operators and ISPs in both countries would be able to buy capacity on it. Arrangements would be needed for capacity to be accessible on an open access basis to operators and ISPs in both countries (Le. any operator should be able to access capacity at reasonable and nondiscriminatory terms). Assistance in this area would be provided under the planned World Banksupported Regional Communications Infrastructure Project. This would also ensure that capacity prices are kept at a reasonable level, and that profitability would be maximized following a high volume, low margin strategy3. Specific Activities Under the Proiect 30 Emergency Restoration System consists of light weight structures, which can be assembled quickly at site to temporarily restore power supply during failure of one or more support towers of transmission lines, during natural calamities ( earth quake, storm, etc.) or due to vandalism. 3 ESCOM and EDM s core business is not telecommunications, and therefore fiber-optic rollout is a byproduct of the buildout of transmission lines. Experience from other countries shows that management of a fiber optic network will likely require an understanding of the business models and practices in the Telecommunications sector. For example, unless properly structured and priced, there is a risk that the fiber infrastructure remains underutilized. The World Bank would work with both companies and potentially with other telecommunication operators in each country to provide technical assistance to determine an efficient arrangement to ensure open access to capacity. Funding for these activities would be provided through ongoing dialogue and activities under the ICT sector policy dialogue. 42

53 12. Under Component A for the Malawi part of the project, the following activities will be included: Construction of approximately 75 km of 220 kv double circuit transmission interconnection line from Phombeya substation near Blantyre within the territory of the Republic of Malawi to the border of Republic of Malawi and the Republic of Mozambique, to connect the electricity systems of these two states. A new 220 kv substation at Phombeya, in Balaka District of Malawi, to receive and transform the electrical power to 132 kv Voltage for connecting to ESCOM, Malawi s grid. Carrying out for ESCOM engineering, technical, environmental, social studies, preparation of resettlement action plan associated with the interconnection, and provision of technical assistance including, inter alia, surveys, preparation of feasibility study and tender documents associated with the interconnection, engineering and supervision of the transmission line and Phombeya substation. Supporting the safe and efficient operation of the Malawi portion of the interconnector through the acquisition of hotwire maintenance and emergency restoration equipment and provision of training for ESCOM. Implementing the Malawi Resettlement Action Plan, including compensation to affected persons as may be necessary, land acquisition for Right of Way, and licensing fees in Malawi, project management costs associated with the staff and normal operations of the ESCOM PMU. This activity would be entirely financed by ESCOM. 13. Under Component A for the Mozambique part of the project, the following activities will be included: Construction of approximately 135 km of 220 kv double circuit transmission interconnection line from Matambo substation in Tete region within the territory of the Republic of Mozambique to the border of Republic of Mozambique and the Republic of Malawi to connect the electricity systems of these two states. The contract to construction of the transmission line will include carrying out required landmine clearing activities on limited portions of the transmission line route. Extension of the 220kV Matambo substation in Tete region in Mozambique. Carrying out for EDM engineering, technical, environmental, social studies, preparation of resettlement action plan associated with the interconnection, and provision of technical assistance including, inter alia, surveys, preparation of feasibility study and tender documents associated with the interconnection, engineering and supervision of the transmission line and Matambo substation. Supporting the safe and efficient operation of the Mozambique portion of the interconnector through the acquisition of hotwire maintenance equipment and provision of training for EDM. Implementing the Mozambique Resettlement Action Plan, including compensation to affected persons as may be necessary, land acquisition for Right of Way, and licensing fees in Mozambique, project management costs associated with the staff and normal operations of the EDM PMU. This activity would be entirely financed by EDM. 43

54 COMPONENT B - Capacitv Building and Technical Support for Upprade and Expansion to Support Power Trading 14. This component (estimated total cost: US$2.9 million for Malawi, US$1.7 million for Mozambique) comprises the planning, technical assistance and training necessary (i) to strengthen and expand the networks to maximize the benefits of power trading, and to prepare for the expansion of both the EDM and ESCOM networks that will be feasible following the completion of the interconnection; (ii) to improve ESCOM s efficiency and quality of service as the foundation for financial sustainability of the company, necessary to meet financial obligations related to the interconnector project; (iii) strengthen capacity to achieve the project objectives, including in the areas of financial and commercial performance, power trading, social and environmental issues. It is envisaged that this component would also accommodate any small requests for technical support for the two utilities, identified during the project implementation period. 15. For the Malawi part of component By activities include: Rehabilitation and reinforcement studies for generation, transmission and distribution, and system operating and maintenance procedures and practices, to be financed under the project. In addition, a number of other activities were identified as being important in preparing for full utilization of the new interconnection and would be priorities should additional development partner financing become available. These include an update of power system development master plan for the Malawi Power System, ESCOM SCADA and communication system review and design of its upgrade, with bidding documents and technical specifications; and assessment of rehabilitation needs of ESCOM hydro power facilities and preparation studies for new hydropower expansion and watershed management, respective EMS, and preparation of designs, specifications and bidding documents. 0 Consultant services, technical assistance and training for ESCOM in improving and managing ESCOM s financial performance including: design and implementation of a Financial Sustainability Plan, revenue stream diagnostic study and equipment and technical assistance in implementation of a revenue management strategy based on study s recommendations; 0 Other studies, technical assistance and training for staff at ESCOM and other key stakeholders in the electricity sector in Malawi, including in the areas of inter alia: environmental and social management; project management; power trading and system operation and other areas required for successful project implementation. 16. For the Mozambique part of Component By activities include: Carrying out system planning and operation studies for EDM including, inter alia, a feasibility study for extension of the Interconnector to the northern region of Mozambique, as the basis for EDM to raise financing for implementation of the project, and updating the electricity master plan, through the provision of technical advisory services and training., Other studies, technical assistance and training for staff at EDM and other key stakeholders in the electricity sector in Mozambique, including in the areas of inter alia: environmental and social management; loss reduction, project management; Power trading and system operation and other areas required for successful project implementation. 44

55 COMPONENT C - Imuroved Infrastructure to Suuuort Electricity Trading 17. This component (estimated total cost: US$9.9 million for Malawi, US4.6 million for Mozambique) comprises investments necessary to address critical bottlenecks in the transmission and distribution systems which could impede the flow of traded electricity. This component will fund limited, urgent rehabilitation and reinforcement of the Malawi and northern Mozambique grids, required to support electricity trading. 18. For Component C of the Malawi part of the project, activities include: Supporting urgent rehabilitation and reinforcement of ESCOM s power generation, transmission and distribution network to facilitate electricity trading, including inter alia: replacement of worn-out or obsolete digital excitation equipment, worn-out circuit breakers and other switchgear, control and protection equipment, and some critical communication links between important load centers and generating stations and the national control centre for better system operation control and assessing the flow. Further urgent rehabilitation activities to facilitate power exchange through the interconnector may be identified as a result of the studies to be undertaken in Component B activities, for example completion of critical missing overhead optical fibre links on existing transmission lines to get data for critical generating stations and load centers at control centers; associated communication equipment and OPGW splitters etc.; telephone exchanges; replacement of overloaded distribution transformers with larger capacity at the same location, replacement of small-sized conductor with bigger conductor on same the poles. This component would also finance key investment in support of the revenue improvement activities, as per recommendations in the revenue diagnostic study, such as provision of meters. 19. For Component C of the Mozambique part of the project, activites include: Supporting rehabilitation and reinforcement of power transmission to facilitate electricity trading, including the provision of a new 220/66/33 kv power transformer at the existing Matambo substation in the Tete region; connecting the new transformer to the 66 kv and 33 kv systems, and associated civil works, control and protection work at the substation. The power supply to the industrially-growing area of Tete is of poor quality and reliability. The supply problem was aggravated with the damage due to fire of the 220/66/33 kv power transformer at Matambo substation, which had been the main source of power supply to these areas. In a situation where EDM imports power from Malawi, this strengthening of the Matambo transformer capacity will be critical in ensuring that the traded electricity reaches customers in northern Mozambique. 45

56 Annex 5: Project Costs AFRICA Mozambique - Malawi Transmission Interconnection (Southern African Power Market Program APL-2) Project Cost By Component and/or Activity COMPONENT A: Mozambique-Malawi Interconnection a. Double circuit transmission line b. Phombeya substation and associated work c. Engineering and supervision of transmission line and substation d. Surveys and other studies e. Equipment for better maintenance and operation (ERS, Hotline maintenance etc.) e. Resettlement and compensation, licensing, ROW etc. Local* US$ million Foreign US$ million Total US$ million Component A sub-total Component B - Capacity Building and Technical Support for Upgrade and Expansion to support Power Trading a. Update of power system development and system operation plan and identification of critical needs for power system b. Financial sustainability and revenue enhancement c. Training & Other studies & TA d. Capacity building and strengthening of the project implementation unit. Component B sub-total Component C - Improved Infrastructure to Support Electricity Trading a. Replacement of obsolete and worn out critical equipment for 132 kv substations; b. Replacement of obsolete and worn out critical communication equipment and missing communication links with NCC: c. Other urgent rehabilitation of Generation, Transmission & Distribution svstem: d. Investment support for revenue improvement measures e.e. meters I 1.60 I I =E *Includes ESCOM contribution of 5% overhead. ESCOM will fund all resettlement and compensation and taxes. If taxes are waived, ESCOM contribution is reduced accordingly. Note: Identifiable taxes and duties are US$8.69 million, and the total project cost, net of taxes, is US$ million. Therefore, the share of project cost net of taxes is 85%. 46

57 EDM, Mozambique Project Cost By Component and/or Activity COMPONENT A: Mozambique-Malawi Interconnection a. Double circuit transmission line b. Matambo substation exdansion c. Engineering and supervision of transmission line and substation d. Surveys and other studies e. Equipment for better maintenance and operation (Hotline maintenance etc.) e. Resettlement and compensation, licensing, ROW etc. Component A sub-total Component B - Capacity Building and Technical Support for Upgrade and Expansion to support Power Trading a. Feasibility study for extension of Matambo-Phombeya line to Nampula and update of Power system development plan b Capacity building and strengthening of the project implementation unit c. Training & Other TA & studies (Environmental, loss reduction study, project audit, etc.) Component B sub-total Component C - Improved Infrastructure to Support Electricity Trading a. New kv Power Transformer at Matambo substation. Comvonent C sub-total Local* Foreign Total lf I I 0.41 I I Total Baseline Cost Physical Contingencies Price Contingencies (6% local & 3% foreign) Total Project Cost I I *Includes EDM contribution of 5% overhead. EDM will fund all resettlement and compensation. Note: Identifiable taxes and duties are US$6.27 million, and the total project cost, net of taxes, is US$43.55 million. Therefore, the share of project cost net of taxes is 87%. Note that in accordance with the Mozambique Country Financing Parameters, IDA financing is covering a portion of the taxes for this project. Hence, the total IDA financing amount slightly exceeds the total project cost net of taxes. 47

58 Annex 6: Implementation Arrangements AFRICA Mozambique - Malawi Transmission Interconnection (Southern African Power Market Program APL-2) Implementing Institutions and Mechanisms 1. The two national power utilities, ESCOM and EDM, will be responsible for the implementation of the Malawi and Mozambique portions of the project respectively. In order to coordinate the project implementation process and address any issues that arise as a result of the regional nature of the project, a three-level structure has been put in place and is fully operational. 2. The first, at governmental level, is a Joint Project Steering Committee, comprised of senior staff from, on the Malawi side, Ministry of Energy, Mines & Natural Resources, Ministry of Finance, Ministry of Economic Planning, National Electricity Council (or successor entity) and ESCOM and, on the Mozambique side, the Ministry of Energy, the Ministry of Planning and Development, the Ministry of Finance and EDM. The Project Steering Committee provides oversight and meets to address any issues that need to be resolved at Government level, including facilitating any authorizations or approvals required for project implementation and evaluating the overall progress of the project. The committee will meet at least every six months during the first two years of the project, and at least once a year subsequently until project completion. 3. The second, at utility management level, is a Joint Project Coordination Committee, comprised of senior management from the two utilities, reports to the Joint Project Steering Committee. This Committee is responsible for high level project coordination, including drafting procurement documents for works and services (including terms of reference, pre-qualification, tender and supervision, working with consultants as necessary). This committee can also refer any critical issues to the Steering Committee. 4. The third level is operational. ESCOM, EDM and the Design and Supervision consultant each have a Project Management Unit (PMU). For the two utilities, the PMUs include Project Manager, Project Engineer, Social and Environmental Specialist, Financial Management Specialist and technical specialists including transmission line and substation engineers and a staff member familiar with World Bank procurement guidelines. The Design and Supervision Consultant s project team is headed by a Project Manager and includes a range of technical specialists covering all aspects of the project. The Consultant is hired by ESCOM and EDM under a single contract. ESCOM and EDM each pay 50% of the Consultant costs. The PMUs are in regular contact. Training and capacity building for the ESCOM and EDM PMUs will be included in the project. ESCOM and EDM both have functioning Management Units in charge of special projects. The Monitoring and Evaluation (M&E) function is fully embedded in these Project Management Units. Indicators for results monitoring have been designed so as to be managed by the Utility Project Managers 5. The diagram below illustrates these three levels of institutional management structure. 48

59 Project Management Structure Joint Mozambique-Malawi Mozambique Project Steering Committee Joint EDM-ESCOM Project Coordination Committee Project Management Unit. Manager Management Engineer Management Soecialist Environment Specialists Environment Soecialist Specialists Kev Agreements 6. A series of agreements will set out the terms under which (i) the project will be financed and implemented, and (ii) the transmission interconnection will be operated, once the project itself has been completed. 7. The key agreements are (i) the Wheeling Agreement, (ii) the Implementation Agreement, (iii) the Maintenance Agreement, and (iv) the System Operating Agreement. 8. The Wheeling Agreement will be concluded between the two implementing and operating utilities, EDM and ESCOM. The agreement lays out the intention that the line will be used for both import and export from Malawi. It specifies the charges to be paid by ESCOM to EDM for use of the Mozambique portion of the line. The payments made by ESCOM to EDM will be a fixed monthly amount, to be paid over 20 years, that represents repayment of the investment for EDM s part of the line. The payments under the Wheeling Agreement will be made by ESCOM regardless of any actual import or export of power over the line. The annual payment under the Wheeling Agreement is calculated according to a formula that includes (i) the overall investment costs related to the interconnection on the Mozambique side of the border (to be based on actual cost), (ii) interest accrued during construction, and (iii) an Annual Cost Recovery Factor, which factors in the cost of capital for EDM and a mark-up for EDM to cover the costs and risk of undertaking the project. In addition, there will be an annual Operation and Maintenance charge, calculated as a fixed percentage of the overall investment costs (including interest and contingency). The payments made by ESCOM to EDM under the Wheeling Agreement will not result in any ownership of assets financed by the project on the Mozambique side of the border. 49

60 9. The Implementation Agreement will similarly be concluded between EDM and ESCOM. It describes the means by which the physical implementation of the line shall occur, focusing particularly on management and accountability for project delivery. It sets out the project management structure, including the roles of the Joint Project Steering Committee and the Joint Project Coordination Committee, as summarized above. It sets out the project reporting structure, by which information on project implementation will flow from the two PMUs up to the Joint Project Steering Committee. It also describes the physical properties of the interconnection transmission line (including the principal lots for contracting works, goods and services that will need to be procured), and the activities that have already been undertaken as part of the interconnection project (including feasibility and environmental studies). 10. The Maintenance Agreement will also be agreed between EDM and ESCOM sets out the specific responsibilities of EDM and ESCOM with repect to the quality and schedule of maintenance of the line, including planned and unplanned maintenance, costs and liability in the case of failure to implement the maintenance agreement. Under the agreement, the parties will exchange schedules of maintenance before the end of each year for the succeeding year. 11. The System Operating Agreement will be agreed between EDM, ESCOM and HCB. HCB is the system operator for the Matambo substation. This agreement specifies the basis for operating and maintaining the transmission line and the interconnection systems. Under this agreement, a Joint Operating Committee with equal representation from EDM, ESCOM and HCB will be set up to establish the operating procedures required to obtain the maximum benefits from operation of the interconnection with Malawi, establish interchange procedures (e.g. meter reading, energy recording and accounting), ensure spinning reserve requirements are maintained by the parties, establish operating procedures for carrying reactive loads by one system to another to ensure adequate service conditions and economical use of the facilities, and to determine or decide upon other related matters. The Joint Operating Committee will make recommendations to the Parties concerning coordination of maintenance schedules, coordination of power and energy interchange procedures, installation of any relaying or control equipment, and any amendments and revisions to this agreement. The Chairmanship of the Joint Operating Committee shall revolve among the parties on an annual basis. 12. In addition to these key agreements, a Memorandum of Understanding has been signed between the Governments of Mozambique and Malawi, which sets out in broad terms the aims and objectives of the transmission interconnection project. The diagram below summarizes all the agreements relevant to project implementation. 50

61 MoU (Ministries of Energy) Implementation Agreement Maintenance Agreement System Operating Agreement (incl. with HCB) Power Sumlv Aaeement 13. While not a specific condition for this project, it is envisaged that ESCOM will sign a power supply agreement with HCB. The Power Supply Agreement (PSA) will be negotiated between HCB, as the supplier of power for Malawian imports, and ESCOM, as the net import purchaser. It is likely to set out (i) the quantity of supply of electricity that ESCOM undertakes to purchase from HCB (that is, the MW of generation capacity earmarked for ESCOM), (ii) the mechanism by which the capacity purchased can vary on a monthly basis, (iii) the plant load factor that dictates the minimal amount of energy that ESCOM must purchase given the agreed capacity, (iv) the unit prices for both the generation capacity and actual energy flows, and (v) the mechanism for payment and procedures in case of arrears. 51

62 Annex 7: Financial Management and Disbursement Arrangements AFRICA Mozambique - Malawi Transmission Interconnection (Southern African Power Market Program APL-2) Malawi 1. Introduction. The financial management assessment was done in line with the Financial Management Practice Manual (November 2005) of the FM Board. The objective of the assessment is to determine whether the implementing entities have acceptable financial management arrangements, which will ensure (i) that funds are used only for the intended purposes in an efficient and economical way; (ii) the preparation of accurate, reliable and timely periodic financial reports; and (iii) the safeguarding of the entities assets. 2. Countw Public Financial Management Issues. There are several ongoing or recently completed initiatives3 contributing to the improvement of the PFM system: International Monetary Fund (IMF) StaflMonitored Program (SMP) and the World Bank Structural Adjustment Credit (SAC): Both of these have performance criteria tied to fiscal discipline. They both refer to the need for an effective public expenditure management system, including through adoption of the MTEF. FIMTAP (Financial Management, Transparency and Accountability Project): This is a World Bank funded project aimed at strengthening financial accountability and reporting. A key component is support for the development of IFMIS (Integrated Financial Management information System). PFEM (Public Financial and Economic Management Action Plan): This is designed to be an umbrella framework for addressing fundamental weaknesses in the budget management and accounting system. Some key legislation under the MFAAP has already been enacted in the reform of the Public Finance Management, the Public Audit and the Public Procurement Acts. The PEG (Project on Economic Governance) (completed): This is a CIDA supported initiative aimed at building the capacity of external stakeholders to engage in economic issues and the budget process. MTEF Phase 11Program: Designed to improve budget credibility and make better linkages between the Malawi Poverty Reduction Strategy and the budget. The programme is financed by DFID and other donors. Macro-economic Advisory Services Project: A GTZ supported project, to strengthen macroeconomic planning and budgeting. Tikambirane -Support for Voice, Accountability and Rights: A DFID funded project, to enhance the voice and influence of Malawi citizens within accountable and responsive systems of governance. Institutional Support Project for Aid-Debt Management and Governance (completed): A project supported by the African Development Bank, to build capacity of all ministries and agencies engaged in aid and debt management. Institutional Cooperation with the Swedish National Audit Ofice (SNAO): A project supported by Norway and Sweden to produce high quality audits and increase the efficiency of the National Audit Office (NAO). Support to the Anti Corruption Bureau: Supported by the DFID, to enable the ACB strengthen its competence and credibility as an effective anti corruption agency. 32 Capacity Building Programme For Economic Management And Policy Coordination: Technical Report NO. 32, Government of Malawi and European union, February

63 3. Clear commitment and action by the Government is visible. The restoration of fiscal control is the cornerstone of its economic reform program and good progress has been made with the implementation of the principles of transparency and accountability enshrined in the new Public Finance Management Act (PFMA). The implementation of the new IFMIS has shown commendable progress since August However, the problem33 identified is that these individual components are yet to be sufficiently integrated into a functioning whole. The systems are therefore still operating sub-optimally because of missing or weak linkages between the component parts. Stakeholders have assessed this to have serious consequences for the Government s ability to implement its plans. This is a focus of on-going Government s efforts. 5. For the project, the implication at this time is that full utilization of the Malawi PFM system is not yet possible. However, the National Audit Office will provide or oversee the external audit service as explained in more detail below. Risk Assessment and Mitigation 6. The project financial management will essentially fall under the control of ESCOM. ESCOM is currently controlling all of its projects through its computerized FM system (Impact Encore), with a dedicated and well qualified personnel complement for project FM (a Chief and Project Accountant). The project FM staff has received training and has experience in World Bank FM and disbursement requirements. In summary, it is concluded that the basic capability to control and monitor the financial performance on projects is in place. 7. The FM risk rating summary from the assessment done is represented in the table below: Table A7.1: Malawi FM Risk Ratings udit is enhanced by the use of private government, private sector and civil society. 33 Capacity Building Programme For Economic Management And Policy Coordination: Technical Report No. 32, Government Of Malawi And European Union, February

64 The project will be fully integrated into the activities and FM system of ESCOM. An overall framework and system for budget development exists. FM services are managed by a professionally qualified accountant. The project will use a computerized FM system, supported by a Financial Procedures Manual. Internal Control Internal control is strengthened by using trained staff, proper FM procedure manuals, processes and systems and also by deployment of independent internal audit services to test the effectiveness of the control system. Funds I M Flow I Project finding will be advanced through a US$ Designated Account held in a commercial bank, as agreed by IDA. Quarterly monitoring of this arrangement will be done via IFRs. Financial Reporting L M Auditing A computerized FM system, supported by a Financial Procedures Manual and compliant to generally accepted accounting practice, is in use to support project implementation in ESCOM. Monthly, quarterly and annual reports will be prepared to allow monitoring of project implementation. Internal audit services are to be provided under the auspices of the ESCOM Audit Committee. An external auditor will be engaged by the Auditor-general to carry out an annual independent audit of the project financial statements. Overall The overall FM risk is considered moderate; the inherent risks are offset by (a) professional FM staff experienced with projects; (b) a robust internal control system, which allows for segregation of functions; and independent internal and external audit; and (c) sound financial procedures and systems. H-High S hbstantial M-Moderate L-Low 8. Strengths. The use of ESCOM s existing project FM staff and FM system is a significant strength to the project. ESCOM and the Bank have agreed on the format of interim unaudited financial reports. 9. Standard financial covenants included in the Financing Agreement are the following: Submission of audited project financial statements within six months after the year end Submission of un-audited interim project financial statements within 45 days after each calendar quarter, to cover such calendar quarter Submission of any other information relative to the project as required by IDA 9. Budgeting. Cash budget preparation for the project work plan will follow ESCOM s budget standards and timetable. At a minimum an annual cash budget for the life of the project at each level of implementation will be prepared, by the responsible implementing unit. The annual cash budget will be 54

65 broken down quarterly and monthly, in support of project activities as reflected in the approved work plan and procurement plan. 10. Internal Control and Internal Auditing. Internal control comprises the whole system of control, financial or otherwise, established by ESCOM in order to -(i) carry out the project activities in an orderly and efficient manner; (ii) ensure adherence to policies and procedures; (iii) to safeguard the assets of the project; and (iv) secure as far as possible the completeness and accuracy of the financial and other records. 11. The key elements to ensure a sound internal control system will include: Segregation of duties, Physical control of assets, Authorization and approval, Clear channels of command, Arithmetic and accounting accuracy, Integrity and performance of staff at all levels, Supervision. 12. Project activities will also be periodically reviewed by the Internal Audit Department of ESCOM. The Chief Internal Auditor and staff in this unit are qualified, an audit approach has been established and they regularly prepare internal audit reports under their mandate that are submitted to ESCOM s Audit Committee. Copies of the internal audit reports are also to be submitted to the Central Internal Audit Department of the Ministry of Finance. 13. Accounting. Project accounts will be maintained on an accrual basis, based on IAS GAAP applicable to ESCOM. Accounting records will be maintained in Kwacha, using ESCOM s normal computerized accounting system, but with transactions of the project separately identifiable through appropriate changes to ESCOM s Chart of Accounts. Currently, due to two outstanding lapsed loans, ESCOM will not be able to open a DA until the Government has cleared the outstanding balances with IDA. When this issue has been resolved, ESCOM will open a Designated Account (DA). The opening and closing balances of the US$ DA and of any other bank accounts relating to the project that are held in a currency different from the books of account, should be translated at the rate ruling on the opening and closing dates, respectively. Expenditures made out of the DA (and other bank accounts as mentioned above) should be stated at the rate ruling on the transaction dates. The actual exchange rates used should be disclosed in a note to the financial reports. 14. The Chart of Accounts will facilitate the preparation of relevant monthly, quarterly and annual financial statements, including information on the following: Total project expenditures, Total financial contribution from each financier, Total expenditure on each project component/activity, Analysis of that total expenditure into the disbursement categories of the project, which would include goods, works, consultants services and operating costs. All accounting and control procedures will be documented in a FPM and regularly updated by the Project Accountant. Financial Reporting and Monitoring 15. Minimum requirements for Interim Financial Reports (quarterly) and Annual Financial Statements are outlined below. (9 Statement of Sources and Uses of Funds, showing by funding source for the period and cumulatively (project life or year to date) inflows and outflows by project component and disbursement category, as well as opening and closing cash balances of the project; (ii) Bank Reconciliation Statement for each bank account, including copies of the respective bank (iii) statements Statement of Expenditure, an itemized statement summarizing eligible expenditures incurred during a stated period based on individual transactions. The expenditures are normally grouped by 55

66 project components and disbursement categories, comparing actual and budgeted expenditures. The report will also include a cash flow forecast for the following two quarters. Payments made during the reporting period against contracts subject to the Bank s prior review, summarizing contract payments Designated Account Reconciliation, showing deposits and replenishments received, payments supported by withdrawal applications, interest earned on the account and the balance at the end of the reporting period. Procurement Reports, which provide information on the procurement of goods, works, and consultants and on compliance with agreed procurement methods. The reports will compare procurement performance against the plan agreed at negotiations or subsequently updated, and highlight key procurement issues such as staffing and building borrower capacity. Physical Progress Reports, which include narrative information and output indicators (agreed during project preparation), linking financial information with physical progress and highlighting issues that require attention. 16. Indicative formats for the reports are available in a Bank guideline General formats of FMRs are contained in: Financial Monitoring Reports for World Bank Financed projects: Guidelines for borrower^"^^. In addition Annual Financial Statements would need to comply with relevant International Accounting Standards (IFRS) applicable to ESCOM. 17. Quarterly and annual reports are to be submitted respectively to -(i) the Accountant-general; (ii) the Auditor-general; (iii) IDA - for the purpose of monitoring project implementation; (iv) the Project Steering Committee to ensure transparency in project activities and implementation to all stakeholders. 18. External Audit. The IDA Financing Agreement will require the submission of audited Annual Financial Statements for the project, within six months after year-end. Relevantly qualified, experienced and independent external auditors will be appointed by the Auditor-general, based on TORS acceptable to IDA. Besides expressing an opinion on the Annual Financial Statements in compliance with International Standards on Auditing (ISAs), the auditors will be required to form an opinion on the degree of compliance with IDA procedures for the Designated Account and the balance therein at the year-end. In addition to the audit report, the external auditors will be expected to prepare a Management Letter giving observations and comments, and providing recommendations for improvements in accounting records, systems, controls and compliance with financial covenants in the IDA agreement. 19. PPF Audit. The audit of the Project Preparation Advance (PPF) is overdue. The audit report for the PPF was due December 3 1,2006. ESCOM committed to accelerate the process of auditing the PPF and will submit the report by June 30, FM Supervision. The first FM review will be carried out after 6 months of project effectiveness. This detailed review will cover all aspects of FM, internal control systems, reviewing the overall fiduciary control environment and tracing transactions from the bidding process to disbursements as well as SOE review. Thereafter, given that the FM risk rating for the project is moderate, subsequent reviews will be as follows: review of quarterly FMRs; annual SOE review as part of the TOR of the external auditors; review of audited Annual Financial Statements and management letter as well as timely follow up of issues arising; participation in project supervision missions as appropriate; and updating the financial management rating in the Implementation Status report (ISR). The FM staff at the Pretoria Country Office will play a key role in monitoring the timely implementation of any action plans pdf 56

67 35 K: theSitePK:40941.OO.html Funds Flow and Disbursement Arrangements 2 1. The Government of Malawi will authorize ESCOM to open the following bank accounts: (i) (ii) One US$ Designated Accounts (DA) at a commercial bank under terms and conditions acceptable to IDA, as agreed with IDA, into which project funds will be advanced in terms of normal IDA disbursement guidelines3. Any interest on DA balances will be transferred to the Kwacha operating account in (ii) below. Normal ESCOM bank account signatory arrangements will apply to the project bank accounts. One SAPM APL-2 IDA General Operating Bank Account in Kwacha, opened at any commercial bank at the choice of the ESCOM, into which draw-downs from the DA will be credited to fund eligible expenditures except those paid via the accounts mentioned above. This account will be funded from the USD DA, strictly in advance for 30 days on the basis of realistic cash forecast derived from the approved work plan, keeping balances as close as possible to zero after payments. Normal ESCOM bank account signatory arrangements will apply to the project bank accounts. 22. Pettv Cash Svstems. As needed, ESCOM s implementing units will be given petty cash advances for cash payment of small administrative expenses and such petty cash records will be centrally recorded, controlled and reconciled by the PMU. 23, Disbursement Arrangements. By effectiveness, the Project will use the Transaction-based disbursement procedures, i.e., direct payment, reimbursement, and special commitments as described in the World Bank Disbursement Handbook. As project implementation proceed, the quarterly Interim Financial Reports (IFRs) produced by the Project will be reviewed. Where the reports are adequate and produced on a timely basis, and the borrower requests conversion to Report-based disbursements, a review will be undertaken by the Project Task Team to determine if the Project is eligible for report-based disbursement. The adoption of report-based disbursements by the Project will enable it to move away from time-consuming voucher-by-voucher (transaction-based) disbursement methods to quarterly advances to the Project s Designated Account based on IFRs. Detailed disbursement procedures will be documented in the FPM. 24. Minimum Value of Auulications. The Minimum Value of Applications for reimbursement, direct payment and special commitment is indicated in the Disbursement Letter. 25. Reporting on Use of Credit Proceeds. IDA would require withdrawals from the grant accounts to be made on the basis of Statements of Expenditure for: (a) services of individual consultants costing less than US$50,000 equivalent per contract; (b) services of consulting firms costing less than US$lOO,OOO per contract; (c) all training; and (d) goods not costing more than US$250,000 and (e) works not costing more than US$500,000. All requests for withdrawal of expenditures under contracts subject to IDA S prior review would be fully documented. All supporting documentation will be retained by the ESCOM and must be made available for review by periodic World Bank review missions, internal and external auditors, 26. Designated Account (DA). The ceiling for the maximum amount of credit proceeds that may be deposited in the DA, will be agreed at negotiations and reflected in the disbursement letter. 57

68 27. Withdrawal of credit woceeds. Withdrawal of grant proceeds to the DA will be in accordance with the World Bank Disbursement Guidelines and the disbursement letter that the Bank may issue from timeto-time. 28. Taxes. The project will incur all appropriate taxes in terms of Government of Malawi legislation. Equally, the project will deduct on behalf of the Government of Malawi Withholding Taxes from payments to foreign consultants, but provision will be made during the procurement process to notify consultants of this arrangement. 29. Disbursements Categories. The table below sets out the expenditure categories and percentages to be financed out of the credit proceeds Table A 7.2: Malawi Disbursement Categories Preparation Advance (4) unallocated TOTAL AMOUNT Retroactive Financing. In accordance with OP6.00, for expenditures occurring on or after May 1, 2007, and up to the date of credit signing, an amount of up to US$500,000 for consultant services and training under category 2 can be retroactively-financed. Mozambique 3 1. Introduction. The financial management assessment was carried out in accordance with the Financial Management Practices Manual issued by the Financial Management Board on 3 November The objective o f the assessment was to determine whether the implementing entities have acceptable financial management arrangements, which will ensure: (1) the funds are used only for the intended purposes in an efficient and economical way, (2) the preparation of accurate, reliable and timely periodic financial reports, and (3) safeguard the entities assets. 58

69 32. Countrv Public Financial Management Issues. A Public Financial Management Assessment conducted in September 2004 (as follow-on to the 2001 Country Financial Accountability Assessment (CFAA) concluded that the overall public sector financial management risk in Mozambique remained high. Management of the economy was quite satisfactory, but comprehensiveness and transparency of the budget was poor, the medium-term planning and budgeting was weak, while budget execution and accounting and reporting presented quite serious weaknesses. 33. At the same time, a number of reforms were moving ahead in a very structured and comprehensive manner. The government has completed a number of key preparatory reforms and has: (i) issued regulations for the Financial Management law; (ii) initiated the introduction of a new and more-detailed functional classifier into the budget; (iii) started to formulate the budget in current prices; (iv) introduced restrictions on bank accounts held by public institutions; (v) started to incorporate off-budget revenues as well as donor-funded expenditures into the budget; (vi) initiated training for budget staff in double-entry accounting; and (vii) established a consolidated electronic treasury account to improve control of treasury operations and cash management. 34. One key reform has been the introduction and implementation of a computerized integrated financial management information system, e-sistafe. This has been rolled out initially in selected ministries at central government. It is planned to roll out this system to all government agencies including sub-national entities. The World Bank is part of a group of donors which has financed selected components of the system, and is also part of a Quality Assurance Group established to provide an independent view of the management, progress, and achievements of the SISTAFE project. A report by this group, issued in November 2005, noted the satisfactory production of budget execution reports for the period January to August 2005, 35. A report on the Assessment of Financial Management for 2004/05 using the Public Expenditure and Financial Accountability (PEFA) methodology concluded that there have been improvements in a number of important areas. The report showed that final out-turns were reasonably close to initial approvals; and a steady improvement in revenue collection and administration. Fundamental weaknesses remained in the quality of the public financial management systems (PFM) especially in internal control systems, limited coverage of the external audit, and the high-level of off-budget spending mainly from external project finance. The report noted that the quality of the PFM was expected to continue improving as a natural consequence of ongoing reforms such as e-sistafe. Risk Assessment and Mitigation Table A7.3: Mozambique FM Risk Ratings ment letter for FY05 59

70 Internal Control Accounting policies/procedures 7 Funds Flow Auditing S M raised some matters of deficiencies in accounting and internal control system of EDM. The following is an effectiveness condition: The EDM has established an adequate financial management system, adequate to produce interim unaudited financial reports, in form and substance satisfactory to the Association, to ensure proper accounting and monitoring of project funds. are documented in the Financial Procedures Manual. However, the audit report and management letter for FY05 raised some matters of deficiencies in accounting and internal control system of EDM, and the Internal Audit Department is weak. The Internal Audit DeDartment should strengthened bv hiring additional staff. Funds flow arrangements are simple with centralized procurement and payments for the project activities. Financial reports are generally prepared on a timely basis. EDM will produce interim unaudited financial reports on quarterly basis. EDM and the Bank have agreed on the format of interim unaudited financial reports. EDM is audited by independent audit fm annually. EDM will appoint independent audit fm for the project. TOR for employment of the independent external auditor has been agreed. No later than 3 months after effectiveness EDM will have selected the independent external I H-High auditor to undertake audit of the project. S-Substantial M-Moderate L-Low 36. Effectiveness Condition and FM Covenants. The following effectiveness condition has been agreed: The EDM has established an adequate financial management system, adequate to produce interim unaudited financial reports, in form and substance satisfactory to the Association, to ensure proper accounting and monitoring of project funds. The financial management covenants are the standard to be stated in the Financing and Project Agreements 37. In view of the general country financial management issues and the issues peculiar to the project, the overall financial management risk rating for the Mozambique component of this project is moderate 38. Staffing. The financial management issues of the project will be handled by the Department of Debt and Contracts Management (DDCM) under Finance Directorate. A financial manager has been appointed to handle the financial management issues of the proposed project. She is currently the managing the PPF funds of this proposed project. 39. Budgeting. Budgeting preparation at EDM is well defined and there is regular monitoring on the uses of funds. The budget for the project will be prepared within the budget fkamework of EDM. EDM prepares an annual budget, which includes the activities of projects financed by donors and financial institutions. 40. Accounting. The EDM accounting system is base on double entry, accrual accounting software called Agresso. In addition, the DDCM uses excel spreadsheets to account for funds of projects financed by donors and financial intuitions. For the purposed of the additional reporting for this project, this department will use excel spreadsheets to produce required financial reports to manage and to monitor the project. 41. Internal Control and Internal Audit. EDM has a financial procedures manual that describes the accounting system, internal control procedures, basis of accounting, and policies and procedures that guide operations of the company. EDM has an internal audit department that reports to the chairman of board of directors. However, the internal audit department should be strengthened to provide adequate 60

71 coverage of all cost centers of the company. The proposed project will use existing structures of EDM, including those of the internal audit function. Financial Reporting and Monitoring 42. The EDM will rely on excel spreadsheets to produce required financial reports to manage and to monitor the project. Interim unaudited financial reports will be produced on a quarterly basis. The content and format of these reports has been agreed with the World Bank and will include: (i) financial reports, including a statement of sources and uses of funds, and a statement of uses of funds by project components and activities, (ii) procurement, and physical progress reports. 43. The EDM will also produce an annual project financial statement, which will consist of: a. A Statement of Sources and Uses of Funds / Cash Receipts and Payments which recognizes all cash receipts, cash payments and cash balances controlled by the entity for this project; and separately identifies payments by third parties on behalf of the entity. b. The Accounting Policies Adopted and Explanatory Notes. The explanatory notes should be presented in a systematic manner with items on Statement of Cash Receipts and Payments being cross referenced to any related information in the notes. Examples of this information include: 0 a summary of fixed assets by category of assets; 0 a summary of SOE Withdrawal Schedule, listing individual withdrawal applications; c. A Management Assertion that World Bank funds have been expended in accordance with the intended purposes as specified in the relevant World Bank legal agreement. 44. External Audit. The entity financial statements will be audited by independent auditors in accordance with International Standards on Auditing as promulgated by the International Federation of Accountants (IFAC) and the audit report will be submitted to IDA within 6 months after the financial year-end. 45. The external audit on the project financial statements will be carried out by an independent auditor under TOR which have been agreed with the World Bank. It has been agreed that the existing EDM external auditor will cover this additional project audit. 46. The auditors will be required to express a single opinion on the project financial statements, as per the guidelines Financial Management Practices in World bank-financed Investment Operations, of November 3, 2005 and the audit report will be submitted to IDA within 6 months after the financial yearend. In addition, a detailed management letter containing the auditor s assessment of the internal controls, accounting system and compliance with financial covenants in the IDA Financing Agreement, and suggestions for improvement will be prepared and submitted to management for follow-up. 47. The audit of the Project Preparation Advance (PPF) to EDM is overdue. The first audit report for the PPF was due by June 30, 2006 since there were a few disbursements in 2005, and the audit report for 2006 is due on June 30,2007. EDM has committed to accelerate the process of auditing the PPF and will submit the report for 2005 and 2006 by June 30, Suuervision. Financial management supervision will be carried out by the Financial Management Specialist (FMS) at least once a year in line with the moderate risk rating. The FMS will also conduct an FM supervision before effectivenesddisbursement; review the financial component of the quarterly interim unaudited reports; and review the Audit Reports and Management Letters from the external auditors and follow-up on material accountability issues by engaging with the TTL, Client, and/or Auditors. 61

72 Funds Flow and Disbursement Arrangements 49. Disbursement arrangements. Disbursements from IDA would be made on the basis of incurred eligible expenditures (transaction based disbursements). It is estimated that about US$20 million will follow special commitment procedures, where IDA special commitments cover a commercial bank s Letter of Credit. For the remainder, IDA would make advance disbursement from the proceeds of the Credit by depositing into an EDM-operated Designated Account (DA) to expedite project implementation. The advance to a DA would be used by EDM to finance project expenditures under the proposed Credit. Another acceptable method of withdrawing funds from the Credit is the direct payment method, which could be used in cases where the DA was exhausted, involving direct payments from the Credit to a third party for works, goods and services upon the EDM s request. The Disbursement Letter stipulates the minimum value of applications is 20% of the amount advanced to the DA. 50. Upon credit effectiveness, EDM would be required to submit a withdrawal application for an initial deposit to the DA, drawn from the IDA Credit, as stated in the Disbursement Letter. Replenishment of funds from IDA to the DA will be made upon evidence of satisfactory utilization of the advance, reflected in SOEs and/or on full documentation for payments above SOE thresholds. Replenishment applications would be required to be submitted regularly Disbursements Categories. The table below sets out the expenditure categories and percentages to be financed out of the credit proceeds. Table A 7.4: Mozambique Disbursement Categories I (4) unallocated 4.69 I TOTALAMOUNT I 52. Retroactive Financing. In accordance with OP6.00, for expenditures occurring on or after May 1, 2007, and up to the date of credit signing, an amount of up to US$500,000 for consultant services and training under category 2 can be retroactively-financed. 62

73 53. Banking arrangements. EDM will open and maintain a Designated Account in United States dollars at commercial bank acceptable to IDA which will be used to deposit advances fiom IDA Credit Account; make payment in foreign and local currency to providers of goods and services. 54. Conclusion. The overall conclusion of the financial management assessment is that the project s financial management arrangements have an overall rating of moderate which satisfies the Bank s minimum requirements under OPBP

74 Annex 8: Procurement Arrangements AFRICA Mozambique - Malawi Transmission Interconnection (Southern African Power Market Program APL-2) Malawi General 1. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004, revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, revised October 2006, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 2. Procurement of Works. Works procured under this project would include in Malawi: 76 km 220 kv Double circuit transmission line; construction of a new 220 kv substation at Phombeya, near Blanty-re and associated works, among others; The procurement will be done using the Bank's Standard Bidding Documents (SBD) for all ICB and National SBD agreed with or satisfactory to the Bank. 3. Procurement of Goods. Goods procured under this project in Malawi would include Project vehicles; equipment for hot wire maintenance, upgrades to transmission and distribution and revenue management and enhancement systems, etc. The procurement will be done using the Bank's SBD for all ICB and National SBD agreed with or satisfactory to the Bank. 4. Procurement of non-consulting services. Services in Malawi to be procured under the program will include Aerial Line Survey. The procurement will be done using the Bank's SBD for all ICB and National SBD agreed with or satisfactory to the Bank. 5. Selection of Consultants. Consultants' services required in Malawi would cover consultancies for Engineering and supervision of transmission line and substation; Update of master plans and feasibility studies for the transmission line; other planning and rehabilitation assessment studies, technical assistance, studies and training for preparation of a Financial Sustainability Plan and ESCOM Revenue Diagnostic study; preparation of RAP; hot wire maintenance, project management, finance and commercial practices, environment and social issues and power trading, among others. Short lists of consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 6. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the OperationsProcurement Manual prepared by ESCOM. 64

75 Assessment of the Agency s Capacity to Implement Procurement 7. Procurement activities will be carried by ESCOM, a public sector company wholly owned by the Government of Malawi. ESCOM has established a project management team made up of engineers and other technical staff who will be responsible for the implementation of the SAPM APL-2. The PMU comprises a Project Manager as well as other key engineering staff from the ESCOM departments. ESCOM has limited experience with Bank procurement procedures however the engineering staff have the requisite background to quickly update their knowledge on Bank procurement policies and procedures. The project team has had some experience with Bank procedures through the project PPF. Moreover, the engineering consultant for the design of the transmission lines and the substations will be responsible for the preparation of the bidding documents and preparation of the evaluation reports for bids received for the major supply and installation contracts. The consultants have adequate knowledge of the Bank s procurement guidelines. 8. An assessment of the ESCOM capacity to implement procurement actions for the project has been carried out by Kofi Awanyo, Senior Procurement Specialist, on November The assessment identified some deficiencies, which include: Limited exposure to Bank procedures (ii) lack of procurement planning and monitoring; (iii) opening bids at later time than stated in bidding documents; (iv) use of merit point system for determining responsiveness, in bid evaluation and determining qualifications (v) inadequate record keeping and; (vi) lack of vendor ratindperformance system. Procurement training will have to be provided for key procurement staff in ESCOM. ESCOM should also obtain from ODPP the Malawi Standard Bidding Documents and the Standard Request for proposals which will be used under the project for NCB contracts and competitions for consultants involving only national consultants. 9. For the implementation of the project ESCOM has already hired a private sector consultant who is already finalizing the design of the major supply and installation contracts, and will be preparing bidding documents and will assist in opening bids, preparing the bid evaluation reports and supervise construction and supply and installation. The major procurement function of ESCOM under the project will therefore be to (i) prepare procurement plans and (ii) supervise the consultants for the design and supervision of the works for supply and installation. 10. The key issues and risks concerning procurement for implementation of the project have been identified and include procurement planning and monitoring, preparation of bidding documents, bid evaluation, procurement records management and contract management. A program of intensified and continuous procurement training is required, It is essential that key procurement staff in ESCOM update their skills in procurement by attending appropriate Bank Standard Procurement Courses. The corrective measures which have been agreed are shown in the table below. The overall project risk for procurement is average. Risk 1.Inadequate procurement planning MitigatiodAction Prepare procurement plan for at least initial 18 months of project. Agree on service standards for processing procurement. This has been completed by negotiations. 2. National competitive Agreed Procurement plan should be published locally in addition to I publication on Bank s website soon after Board approval. I Obtain and use ODPP SBDs for non ICB procurement and ODPP SRFP for I bidding not done as per 1 consulting assignments which does not involve international consultants 65

76 ODPP procedures 3. Weak capacity to carry out procurement efficiently 4. Procurement documentation not filed systematically Train key project staff in World Bank Procurement Policy and Procedures (e.g. in ESAMI or GIMPA) Improve Procurement Records Management in ESCOM in general and specifically for the project by ensuring that complete procurement records are filed separately for each contract. The documents should enable an auditor to follow the complete paper trail of procurement. IDA will provide training in procurement records management. This would take place by project launch. Procurement Plan 11. ESCOM has developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on May 10, 2007 and is available at ESCOM Offices in Blantyre. It will also be available in the project s database and in the Bank s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Frequency of Procurement Supervision 12. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended semi-annual supervision missions to visit the field to carry out post review of procurement actions. Details of the Procurement Arrangements Involving International Competition Table A8.2: ESCOM Goods, Works, and Non-Consulting Services Ref. No. Contract (Description) Estimated Cost (USD) Procurement Method P-Q (yesho) Domestic Preference (yesho) Review by Bank (Prior I Expected Bid-Opening Date kV double 17,752,000 No circuit line, and Reinforcement of Critical Communications Equipment 02 Construction of 13,938,000 ICB Yes No Prior NOV-07 Phombeya Substation and Replacement of obsolete equipment for 132kV Maintenance equipment and 3,500,000 ICB No No Prior July

77 emergency restoration equipment and training Equipment for 1,100,000 ICB No No Prior Jw-08 revenue Improvement Measures Urgent 1,200,000 ICB No No Prior NOV-08 Transmission rehabilitation Urgent Distribution 1,000,000 ICB No No Prior NOV-08 rehabilitation Digital excitation 2,000,000 ICB No No Prior NOV-08 equipment at generation stations Ref. No. Description of Estimated Selection Review Expected Assignment Method by Bank Proposals Submission Cost (USD) (Prior / Post) Date Studies on G, T and D 1,000,000 QCBS Prior Dec-07 rehabilitation including system operation and maintenance practices and procedures Preparation and 200,000 QCBS Prior Mar-08 Supervision of RAP Revenue Diagnostic 500,000 QCBS Prior Dec-07 Study and assistance with Implementation Design of ESCOM Prior June-07 (a) Consultancy services estimated to cost above US$lOO,OOO per contract for firms and US$50,000 equivalent per contract for individuals and single source selection of consultants will be subject to prior review by the Bank. (b) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$lOO,OOO equivalent per contract, may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Mozambique General 13. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004, revised October 2006; 67

78 and Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated May 2004, revised October 2006, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 14. Procurement of Works. Works procured under this project would include in Mozambique: 131 km 220 kv Double circuit transmission line; refurbishment and expansion of Matambo substation and associated equipment and works. The procurement will be done using the Bank s Standard Bidding Documents (SBD) for all ICB and National SBD agreed with or satisfactory to the Bank. 15. Procurement of Goods. Goods procured under this project would include in Mozambique Project vehicles; equipment for hot wire maintenance. The procurement will be done using the Bank s SBD for all ICB and National SBD agreed with or satisfactory to the Bank. 16. Procurement of non-consulting services. Services in Mozambique (other than consultants services) to be procured under the program will include Aerial Line Survey. The procurement will be done using the Bank s SBD for all ICB and National SBD agreed with or satisfactory to the Bank. 17. Selection of Consultants. Consultants services required in Mozambique would cover consultancies for Engineering and supervision of transmission line and substation; update of master plans and feasibility study of extension of the Matambo - Phombeya line to Nampula in Mozambique; technical assistance, studies and training in Environmental and Social aspects; audit of project accounts, power trading; preparation of RAP; hot wire maintenance, project management. Short lists of consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 18. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the Project Implementation Manual prepared by EDM. Assessment of the Agency s Capacity to Implement Procurement 19. Procurement activities will be carried out by the Project Management Unit which comprises the Electrification and Project Directorate (DEP) of Electricidade de Mopambique (EDM). The agency is staffed by a Project Manager supported by a Project Engineer, an Environmental and Social Specialist, a Transmission and Substation Engineer and a Financial Management Specialist, and the procurement function will be under the responsibility of the Project Manager, who is familiar with World Bank procedures and Guidelines and is also currently managing the EDM component under the Energy Reform and Access Project. 20. An assessment of the capacity of the Implementing Agency to implement procurement actions for the project has been carried out by Antbnio Chamupo on April 3, The assessment reviewed the organizational structure for implementing the project and the interaction between the project s staff responsible for procurement and financial management which are found to be satisfactory. EDM is at present implementing satisfactorily its component under the Energy Reform and Access Project, with contracts with similar size and complexity to the envisaged under APL-2. However it was noted that record keeping needs some improvements. 68

79 ~ 21. To mitigate the risks the measures to be undertaken include: (a) drafting of an OperationsProcurement Manual satisfactory to IDA; (b) improvement of the record keeping system. It is also recommended that the Project Manager and the Engineer attend training on Bank Procurement to improve their lmowledge. 22. Since all the envisaged major contracts will be managed by external Consultants no additional relevant work load imposed by the project will be born for EDM to manage this project, particularly in procurement processing. Recommended actions to be completed as early as possible are listed in the table below. The overall project risk for procurement is average. Risk 1. Procurement documentation not filed systematically 2. Procurement procedures not properly established 3. Limited capacity to carry out procurement efficiently MitigationIAction Establish and acceptable procurement filing and record keeping system. Produce an Procurement Manual, acceptable to the Bank EDM staff to Attend training in the region organized by (ESAMVGIMPA) on Bank procurement procedures. Procurement Plan 23. Each Implementing Agency, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on May 3, 2007 and is available at EDM Offices, Electrification and Project Directorate, in Maputo. It will also be available in the project s database and in the Bank s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Frequency of Procurement Supervision 24. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended semi-annual supervision missions to visit the field to carry out post review of procurement actions. Details of the Procurement Arrangements Involving International Competition in Mozambique Table A8.5: EDM Goods, Works, and Non Consulting Services Ref. No. Contract (Description) Estimated Cost (USD) Procurement Method P-Q (yesho) Domestic Preference (yeslno) Review by Bank (Prior I Expected Bid-Opening Date I 220kV double I 25,000,000 I ICB circuit line Extension of I 6,300,000 I ICB Matambo Substation and new transformer I Yes Yes No No 69

80 03 Supplyof 1,500,000 ICB NO No Prior July- 08 equipment and training for Hot Line Maintenance Table A8.6: EDM List of Consulting Assignments with Short-list of International Firms 01 Ref. No. Description of Estimated Selection Review Expected Assignment Cost (USD) Method by Bank Proposals (Prior / Post) Submission Date Feasibility Study for 1,000,000 QCBS Prior Dec-07 Pombeya-Nampula 02 I Preparation and I 200,000 I QCBS I Prior Oct-07 I Supervision of RAP (a) Consultancy services estimated to cost above US$lOO,OOO per contract for firms and US$50,000 equivalent per contract for individuals and single source selection of consultants will be subject to prior review by the Bank. (b) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$100,000 equivalent per contract, may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 70

81 Annex 9: Economic and Financial Analysis AFRICA Mozambique - Malawi Transmission Interconnection (Southern African Power Market Program APL-2) A. Economic analysis 1. The proposed project has been analyzed over the period A range of economic benefits will accrue from the Project for both Mozambique and Malawi. The economic case for the project is predicated on two-way flows of energy via the transmission interconnection: imports into Malawi from Mozambique during peak hours and limited off-peak exports from Malawi to Mozambique and the SAPP during off-peak hours. It is estimated that net economic benefits from the Project will amount to approximately US$360 million in net present value (NPV) terms, and that the economic internal rate of return (IRR) will be approximately 28 percent. The Project is the least-cost means of delivering these benefits. 2. This section sets out the underlying assumptions of the base case of the economic cost-benefit analysis of the Project. It then details the various economic benefits that will accrue to Mozambique and Malawi, as well as summarizing the sensitivity analysis for these results. The section concludes with an analysis of least-cost alternatives. Cost-benefit Analysis Base case assumptions 3. Peak load demand. Peak load demand growth in Malawi is assumed to grow at a compounded annual rate of 4.5 percent from 2007 to 2020, moderating to 4.0 percent between 2020 and This assumed growth rate in the initial period is less than Malawi s projected annual economic growth rate of 6.1 percent in the period (comprised of two years historical growth data plus the current four year forward economic forecast window, as taken from the Country Assistance Strategy (CAS). Furthermore, to maintain the conservativeness of the load demand forecasts, no increase in energy intensity for existing customers (KWh consumption per connection) is assumed. Increase in demand is driven entirely by the 15,000 new connections ESCOM plans to make annually going forward (including 50 new low-voltage commercial customers and 1-2 new large commercial loads). This is slightly less than the average pace of connections over the past three years. 4. Installed cadacity. The analysis assumes that planned rehabilitation of ESCOM s installed capacity will proceed as planned: that is, repairs to the 40 MW Tedzani plant will be finalized by 2008; there will only be a two-year outage for rehabilitation at the 24 MW Nkula A plant in 201 l-12;36 and the 64 MW expansion of the Kapichira I1 plant will go ahead as anticipated in It is also assumed that technical loss rates associated with the transmission and distribution of power in Malawi in 2006 were 16.0 percent, or three-quarters of ESCOM s recorded total T&D losses in 2006 of per~ent.~ It is assumed further that, as a result of efficiency gains in ESCOM s operations, technical losses will be reduced by one-half percentage point annually, bottoming out at 11.O percent in In other words, Nkula A will be taken offline for rehabilitation as soon as the interconnector is commissioned. It is assumed further that Nkula B will not be refurbished in the period being analyzed. Nontechnical and collection losses are not considered in the economic analysis, because although the consumers do not pay for the energy consumed, the economic benefits still accrue to the users. 71

82 6. Cost of unserved enerm. The economic cost of each hour where energy is not available is composed of two principal elements: (a) the cost of replacing electric power with alternative supplies, and (b) where alternatives are not available, the cost o f economic output lost as a result. 7. Component (a) can be further broke down into two parts: (i) The cost to business of using alternative energy supplies to maintain output. Most enterprises resort to backup diesel generators. (ii) For domestic consumers, a willingness-to-pay approach can be used which looks at various alternatives to grid electricity, and which also factors in estimates of elasticity of demand. 8. A weighted average estimate of the unit cost of replacement electric power of US$16.0KWh is used.38 Further, it is assumed that 95 percent of firms have some form of access to backup power.39 Component (b) captures the costs of lost production for those businesses without generators. An estimated value of US$1.4l/KWh is used.40 However, it is also assumed that only 5 percent of formal firms have no access to backup power. Combining these various components gives an average cost of unserved energy of US$22.2/KWh. Given that this figure is derived in part from the willingness-to-pay of private sector enterprises, it is also assumed that this refers to off-peak energy (that is, during daytime business hours), when the economic cost o f unserved energy is highest. To be conservative, it is assumed that the cost of unserved energy during peak hours is US$l l.l/kwh, when a large share of demand is from residential customers. 9. Proiect costs. The investment costs of the Project are assumed to be incurred over three years, from 2008 to 2010, with one-third of costs incurred in each year. Full project investment costs are set out in Annex 5.41 Ongoing operational and maintenance (O&M) costs are assumed to equal 2.5 percent of total investment costs ann~ally.~ Under the terms of the new wheeling agreement 43 - effectively a use of system charge - Mozambique s O&M costs will be paid for in full by Malawi. 10. Discount rate. A discount rate of 10 percent is used for the economic analysis. Based on PPA Associates, Assessment of Short-Term Capacity Requirements in Uganda, March The figures in the study have been adjusted to take account of falls in oil prices; diesel fuel is assumed to cost US$65 a barrel. In addition, note that this is a variable cost only (that is, the cost of fuel + fuel transport, multiplied by a generator fuel consumption factor), and does not include capital investment, which keeps the cost of unserved energy figure conservative. 39 Data from World Bank Investment Climate Assessments suggests that in many countries a lower percentage of firms have access to backup power sources, so this estimate is conservative. 40 PPA Associates, Assessment of Short-Tern Capacity Requirements in Uganda, March This value is derived from an analysis of the value of lost production, based on estimates of the economic value-added of the productive sectors of the Ugandan economy that have the greatest reliance on electricity. We assume that Uganda and Malawi, as relatively small, land-locked economies, are broadly comparable in this respect. 4 Note that investment costs considered exclude subcomponents B and C on both the Malawi and Mozambique side, which relate to institutional strengthening and other capacity-building and technical assistance measures, on the basis that the economic benefits of these other components are not estimated in the analysis. 42 Estimate provided by EDM and set out in the wheeling agreement 43 Given that this agreement is only to cover the cost to Mozambique of financing and maintaining the Mozambique portion of the interconnector, this is not strictly a wheeling agreement in a technical sense. 72

83 Overall results 1 1. The Project is estimated to deliver the following economic benefits: NPV I EIRR Mozambique NPV Mozambique EIRR Malawi NPV Malawi economic EIRR Total project NPV Total project economic EIRR Values US$69 million 26.1% US$292 million 29.3% US$36lmillion 28.2% Table A9.2: Summary of Gross Economic Benefits: Base Case Net present value Mozambique Exports to Malawi Wheeling agreement Off-peak imports from Malawi, Malawi Imports from Mozambique to cover deficits Exports of surplus off-peak energy to SAPP US$ million Economic benejts: Mozambique 12. Exports to Malawi. Given Malawi s projected peak capacity deficits, it is expected that Malawi will start importing power via the interconnector as soon as it is commissioned in In the period , Malawi will face primarily deficits during peak load hours, which run from 6:OOam to 8:OOam and from 6:OOpm to 10:OOpm. As discussed in earlier sections, it is assumed that a PSA will be signed between HCB and ESCOM for a net 30 MW of power on a firm basis. 13, As demand growth in Malawi results in further increases in the peak capacity deficit, it is assumed that the PSA will be adjusted to a net 50 MW firm capacity from 2015 to 2019, and to a net 120 MW from 2020 onward.* It is likely that, from 2015 on, not all of this additional capacity will be available from HCB and some will be supplied from incremental sources of production in Mozambique, including new gas- and coal-fired plants. 14. The economic benefit to Mozambique of each unit of energy exported to Malawi is the unit price of sales to Malawi (as set out in the PSA)45 less the cost of power production in Mozambique. In the initial 44 Even at these levels of net capacity imports, Malawi will still face sizeable peak deficits, that will need to be managed through a combination of load shedding, demand-side management and, potentially, emergency thermal. Imports are assumed to be relatively small, however, to keep the analysis conservative. 4s For the purposes of the analysis, an effective all-in energy charge is used that consolidates both the capacity and energy charges set out in the PSA. This is equivalent to US$3.7/KWh for 50 MW gross of firm power supplied. 73

84 period from 2011 to 2015, it is assumed that the PSA will be with HCB for low-cost hydropower (at a estimated marginal production cost of US#l.O/KWh), and that from 2015 onward, Mozambique s exports to Malawi will be a mix of low-cost hydropower power and higher cost gas or coal-fired power (estimated at US~~SKW~).~~ 15. Wheeling; Aaeement. Under the terms of the proposed Wheeling Agreement, the effective financial borrowing rate would be 11 percent (5.0 percent cost of on-lent capital + a 6.0 percent EDM mark-up ). Mozambique s investment costs for the specified items plus the 10 percent contingency stipulated in the draft Wheeling Agreement come to US$39 million. The non-escalating annual payment from ESCOM to EDM that pays off the full amount plus interest accrued is US$4 million, generating an IRR of 11.7 percent for this sub~omponent.~ 16. Off-peak imdorts from Malawi, , EDM does not face a capacity deficit in the forecast period. It can, however, substitute gas or coal-fired energy production, estimated at the hlly loaded cost of US#3.5/KWh, for cheaper Malawian hydro production in the period * From Malawi s side, while there are systemic peak deficits at all points of the projection period, there will be limited surplus off-peak energy that can be exported to M~zambique.~ It is assumed that Malawi will sell energy at the forecasted off-peak price of the SAPP STEM. 17. From Mozambique s perspective, the economic value of each unit of off-peak energy imported is the fully loaded cost of domestic gas power production less the forecasted off-peak STEM price for that year. 18. Connection to northern Mozambiaue. While harder to quantify, there are additional potential economic benefits for Mozambique from the interconnector. In particular, Mozambique has identified a need to improve the supply of power to the northern regions of the country, centered on the Nampula area, which are currently served via a very long and relatively low-voltage radial line. Extension of the interconnector from the Phombeya substation across Malawi and back into northern Mozambique would provide greater reliability of supply to the north by providing an alternative route to the current line. A new high-voltage line would also allow greater loads to be supplied to northern Mozambique in the future, as demand grows, as well as reducing technical losses. The economic benefits to Mozambique of this connection could be substantial, but they are both difficult to calculate and are not actually realized by the Project itself, and thus have not been factored into the economic analysis. 46 The unit costs from the new gas and coal plants factor in the cost of the original fixed investment and ongoing variable costs (cost of operations, including fuel, and maintenance). Estimate provided by EDM. 47 This aligns with the 12% return on investment stipulated in the new draft wheeling agreement. 48 After 2015, it is assumed that EDM will sign a firm PSA with an IPP in Mozambique in order to meet growing peak demand; as such, there will be no further economic incentive to import off-peak incentive from Malawi. 49 In the scenario with Kapichira I1 commissioned by 201 1, off-peak energy surpluses persist until 2021; without Kapichira I1 commissioned, all off-peak surpluses are exhausted by

85 ~~ ~ Economic benejts: Malawi 19. General assumptions. While Malawi will continue to face peak capacity deficits in the forecast period, off-peak power is currently being spilled and could be sold via the interconnector into the STEM. The average daily load curve for Malawi indicates that approximately six hours a day are at or near peak; it is assumed that excess energy can be sold during the other 18 hours where available. Load demand is not constant during off-peak hours; the average daily load curve is summarized in Table A9.3, giving an overall system load factor of 64 percent. Given the run-of-river nature of Malawi s generation capacity, different amounts of excess off-peak energy will be available for sale at different times of day. Table A9.3: Average Daily Load Cuwe Time 23h00-05h00 05hOO-06hOO 08h00-13 hoo 13h00-18h00 22hOO-23hOO 06h00-08h00 18h00-22h00 Level of demand compared to # Hours peak load (%) ImPorts from Mozambiaue to cover deficits. As described above, it is expected that Malawi will have a firm PSA in place for a net 30 MW from to 2015, rising to a net 50 MW from 2015 to 2019 and a net 120 MW from 2019 onward. The economic value of each unit imported by Malawi is equal to the weighted average cost of unserved energy in Malawi (peak or off-peak respectively) less the cost of imports from Mozambique (peak or off-peak respectively), as set out above. Given the combination of the high cost of unserved energy and the significant capacity constraints that Malawi faces over the forecast period (even with the Kapichira 11 extension), these imports are the major source of Project economic benefits for Malawi 21. Exports of sumlus off-peak enerm from 2011 onward. As set out in the summary of Mozambique benefits above, Malawi will be able to export limited amounts of off-peak energy to the SAPP. The most likely buyer in the period up to 2015 will be Mozambique, as a substitute for its relatively high unit-cost gas or coal production. Beyond 2015, Malawi will likely sell to bilateral buyers in the STEMSs2 In both cases, the price charged is likely to be the prevailing off-peak market price. However, it is unlikely that all of Malawi s off-peak energy will be purchased (particularly at periods of lowest nighttime demand), so it is assumed for the base case economic analysis that 40 percent of exportable surplus will be sold. In practice, it is likely that it would be a STEM bilateral contract with Mozambique at the prevailing market off-peak price, but the effect on the economic benefits is neutral. Note that the economic unit benefit of reducing off-peak energy deficits is higher than for peak deficits, because off-peak loadshedding will tend to close down high economic value-added activities, such as manufacturing, whereas peak load-shedding will tend to disrupt only lower value-added residential/ domestic activities. * Or its likely successor, the SAPP Day Ahead Market. 75

86 22. The economic benefit to Malawi of each unit of energy exported to Malawi is the forecasted unit price of sales to Mozambique or the STEM less the marginal cost of each Malawian hydropower energy unit generated, estimated at approximately US$ 1.O/KWh. Sensitivity analysis 23. While any of the assumptions used in the analysis, as detailed above, will have an impact on the economic cost-benefit ratio of the Project, three main scenarios were analyzed in order to test the robustness of the base case analysis to changes in the values of the main variables. 24. Changes in hvdroloaical conditions. Perhaps the most significant exogenous variable in the economic analysis is that of variations in hydrological conditions in Malawi. Diversifying Malawi s sources of energy supply in order to mitigate the impact of changing hydrological conditions on Malawi s domestic energy production is a major development objective of this Project. With the exception of the small 4 MW hydro plant at Wowve, all of Malawi s hydro capacity is derived from three sets of plants on the Shire River, which is fed primarily by Lake Malawi. 25. The base case scenario presented above takes a long-run mean of flow rates on the Shire River 53 recorded between 1954 and Years with incomplete data, and when flow rates are artificially altered due to human intervention (such as in , when the Liwonde barrage was under construction) are excluded from the dataset. 26. Two scenarios were analyzed, to assess the robustness of the results to different flows of the River Shire. The first scenario identified the ten-year period of highest flows recorded. However, using the flows of this ten-year period has no impact on the results. This is because the rate at which energy can be generated by the hydropower plants on the Shire is constrained the lower of two factors: a turbine capacity factor (that is, the maximum energy that can be generated by the turbines themselves, no matter the volume of water flow) and a water flow factor (that is, the volume of water flowing through the turbines). In the average scenario, the turbine capacity factor is already the constraint on energy production-and hence the higher water flows of this scenario do not generate additional energy. In other words, the Project does not face any risk of lower economic returns as a result of higher water flows in the Shire. 27. The second scenario is a more important analysis, which looks at the impact of a drought in Malawi. The principal effect would be to lower the level of Lake Malawi, which in turn would reduce the water flow through the turbines of the hydro plants, which becomes the constraint on energy production. From the perspective of the economic analysis for this stand-alone Project, this is a high-case scenario, because it implies a greater economic need for the interconnector. For the purposes of the analysis, the drought scenario used was that of the worst continuous three year drought period for which there is data. This is in the period , in which water flow fell to a monthly average of 161 cubic meters per second, 41 percent of the long-run monthly average flow of 393 cubic meters per second. The assumption is that this low river flow scenario would be repeated from ; that is, one year after the interconnector is commissioned. More extreme drought scenarios could be envisaged, particularly given that the Shire River dried up entirely in the 1930s. For more severe drought conditions, the economic benefits of the interconnection increase. 28. In a drought scenario, Malawi would be faced with an energy shortfall incremental to those already being experienced in the base case scenario. Peak energy shortages would more than double and there 53 As measured at the Liwonde barrage. 76

87 would also be off-peak energy shortages for certain hours of the day. However, it is unlikely that Malawi would be able to negotiate firm PSAs to cover these incremental deficits, given the capacity shortfalls forecasted for the SAPP region and the unpredictable nature of drought. It is therefore assumed that only 50 percent of the peak and 70 percent of the off-peak incremental energy deficits will be filled, at conservative (that is, relatively expensive) unit costs of US#4.0/KWh for off-peak and US#7.0/KWh for peak. 29. It should be noted that while the drought scenario results in incremental economic benefits for Malawi from the import of power via the interconnector to cover energy shortfalls, this is somewhat offset by reduced off-peak exports to the SAPP. This is shown in the table of sensitivity analysis results below. The balance of benefits also changes for Mozambique: drought in Malawi means that Mozambican exports will increase, while there will be less possibility for substituting Mozambican gas-fired production for Malawian off-peak hydro production in the period. Overall, the three-year drought scenario reinforces the economic case for the interconnector project, increasing net economic benefits by over US$40 million, and increasing the ERR from 28 percent to 34 percent. A longer or more severe period of drought would increase the benefits fiwther. 30. Changes in sumlv and demand for enerm in the SAPP. The projected economic benefits of Malawi s imports and exports of energy are not independent variables, but are both a function of the aggregate energy situation in the SAPP In this context, a second scenario considered was that of a constrained aggregate energy situation in the SAPP-that is, a combination of relatively greater demand for energy and relatively lower supply. In this scenario, it is likely that Malawi would be able to export a higher percentage of its surplus off-peak energy. But at the same time, the unit cost of imports would likely increase. To model this scenario, it is assumed that Malawi exports 50 percent of off-peak energy surplus into the STEM, up from 40 percent in the base case, and that, from 2015, the effective energy unit price in the PSA negotiated between Malawi and Mozambique will increase by 20 percent. The analysis shows that the increased costs of imports for Malawi would exceed the benefits of greater off-peak exports, driving down overall economic benefits of the project. Conversely, Mozambique s net benefits would increase somewhat. 32. The third scenario considered was the alternative situation where there is a plentiful aggregate energy situation in the SAPP-that is, a combination of relatively high supply for energy and relatively lower demand. In this scenario, it is likely that Malawi would export a lower percentage of its surplus offpeak energy, but that the unit cost of imports would likely decrease. To model this scenario, it is assumed that Malawi exports 30 percent of off-peak energy surplus into the STEM and that, from 2015, the effective energy unit price in the PSA negotiated between Malawi and Mozambique will decrease by 20 percent. The analysis shows that while off-peak energy exports would decline, this would be more than offset by lower costs of imports for Malawi, increasing the overall economic benefits of the project. Conversely, Mozambique s net benefits would decrease somewhat. 33. The results below show that, while these two scenarios produce a different distribution of net economic benefits for Malawi and Mozambique, the net economic benefits of undertaking the project remain positive for both countries in both scenarios. The overall impact of these two scenarios on project NPV and EIRR is almost precisely neutral, with overall project NPV remaining at approximately US$360 million. 77

88 Table A9.4: Sensitivity Analysis Results: Project NPV and I. Least-cost alternative 34. The final step of the economic analysis is to ascertain if the proposed Project is the least-cost option for providing the benefits discussed above. As part of Project preparation, a detailed feasibility study was commi~sioned,~~ which analyses alternatives to the proposed interconnector and assesses whether the cost for each unit of energy generated is lower. The starting point for the least-cost analysis is that the capacity and energy deficits identified in the sections above would need to be covered by constructing and commissioning additional thermal power plants if power is not imported via the interconnector. The supply options investigated for covering the power demand are a CCPP and a thermal power plant. The capacity requirements of the alternative-and hence benefits-are calculated such that the outputs are equivalent to those derived from the Project presented here-that is, the respective gross outputs at the assumed load factors, providing approximately the same energy. 35. Technical mecifications. For redundancy reasons, the plants assessed consist of at least two main generation units. It was assumed that the main fuel for the gas turbines of the CCPP is imported diesel oil. The CCPP is a combined cycle power plant consisting of five gas turbines, five heat recovery steam generators (HRSG) and two condensing steam turbines. The steam turbine is of condensing type with river water cooling condenser. The gas turbines are designed with a single fuel combustion system for diesel oil operation. Each of these two options demonstrates different fuel use intensities. In two fuel price scenarios, the CCPP produced the lower unit cost and was thus considered the least-cost alternative for comparison to the proposed Project components. 36. Analysis results. The methodology of the least-cost alternative analysis was to derive the incremental unit costs of production, so as to compare the CCPP alternative with the proposed Projects.55 The benefit of the Projects is hence equivalent to the avoided operating costs associated with the alternate supply option, plus the difference in investment costs, if any. Avoided costs comprise the avoided fuel and variable O&M costs associated with the CCPP. Given that the least-cost alternative is a thermal unit, annual fuel costs in particular provide a considerable comparative advantage for the interconnector, as the marginal cost of a unit of hydro production (whether in Mozambique or Malawi) is a small fraction of the equivalent thermally generated unit. 54 Mozambique-Malawi Interconnection Report, July 2005, Lahmeyer International GmbH. The consultant s report uses the dynamic unit cost concept, defined as the cost increase per kwh used by Malawi due to the Project components, compared to the least-cost alternative. 78

89 37. The NPV of the avoided operational cost (fuel and variable O&M) compared to the alternative CCPP was calculated in the study at approximately US$457 million using a discount rate of 10 percent. This represents a considerable benefit stream for the interconnector, especially in light of potential fuel price movements. While the precise energy volume on which this calculation is likely to have changed since the estimates were made in mid-2005, the analysis confirms that on a per-unit basis, operational costs of the CCPP alternative are considerably higher than for the interconnector option. Furthermore, the investment costs for the interconnector are estimated to be somewhat lower than that of the least-cost alternative supply option. The analysis also assumed that the alternate plant will go into operation at the same time as the interconnector project-that is, late Given that construction time for the CCPP least-cost alternate option is greater than for the interconnector Project, capital expenditures would be incurred earlier, increasing the investment costs of the least-cost alternative in NPV terms. 38. Conclusion. The study established that implementation of the interconnection is the more economic option. The unit cost of energy provided by the interconnector is calculated to be US943.16KWh versus an equivalent unit cost for the CCPP alternative supply of US@.34KWh. B. ESCOM, Malawi Financial Analysis ESCOM s historical financial situation 39. During the period FY03 to FY07 ESCOM has been able to cover all operating costs (including depreciation and bad debts) and interest costs from the tariff it charges to consumers (currently about UScents 4.3kWh). However, very poor collection performance in the past coupled with rapid devaluation of Malawi Kwacha especially during the 1990s resulted in inadequate cash flows to meet increasing debt service obligations. In FY06 ESCOM was able to pay 79% of its debt service obligations to lenders that have extended direct loans to the company, but it has been unable to meet its debt service obligations on the remainder of direct loans and to the Government for on-lent loans. The Government has recently taken steps to restructure ESCOM s debt (described in Annex 9) through a combination of debt-equity conversion and conversion of some foreign currency-denominated loans which have been included in the HIPC arrangements, into Kwacha-denominated loans. 40. Debt Restructuring. The Government has recently taken steps to restructure ESCOM s debt through a combination of debt-equity conversion and conversion of some dollar-denominated loans, which have been included in the HIPC arrangements, into Kwacha-denominated loans. In 2004 Ministry of Finance and ESCOM reached agreement on a debt-equity swap to convert two on-lent IDA credits, totalling US$138 million (12.76 billion Kwacha) from debt to equity on the basis that (i) that both these credits have been treated under HIPC so that the Government has no further budgetary outflows related to these projects, and (ii) ESCOM has not been able to service these debts. The credits in question are (i) Fifth Power Project, Credit Number 2386 which closed in June 2000 and (ii) Energy 1 Project, Credit Number 1990 MAI, which closed in February As per the Development Credit Agreements for these two projects, the Government needs to seek approval from IDA for this restructuring before it is concluded. The Government will make the appropriate request to IDA as a matter of urgency. 41. The World Bank Implementation Completion Reports (ICR s) for each project clearly indicate that the rapid devaluation of the Kwacha relative to the USD which occurred in the 1990 s was the key factor underlying ESCOM s inability to service these debts, since as per the legal agreements ESCOM bears the exchange rate risk. From the ICR for IDA2386, Dec, 2000: The Kwacha depreciated from about 2.9 to 56 This is a conservative assumption for the sake of the economic analysis. 79

90 the dollar at appraisal to about 55 to the dollar at project closing. ESCOM has applied the adjustment formula twice since its inception, but these adjustments have not been sufjicient in keeping the taririn parity with the sharply depreciating currency... The inadequate adjustment of electricity tarifs to cost recovery compromised ESCOM's financial performance and prevented it from meeting the project's Jinancial covenants and its debt service obligations". 42. A key lesson from the above is that if ESCOM is to bear the foreign exchange risk of an on-lent credit, then the tariff that ESCOM is permitted to charge to customers must adjust with respect to the exchange rate movements. The Government has already taken actions to address this issue. An automatic tariff adjustment mechanism is in place to allow for adjustments to compensate for exchange rate movements and inflation. Since 2004, this mechanism has been largely effective (albeit with some delays in implementing the required tariff adjustments) and has prevented significant erosion of the tariff in USD terms5'. 43. Another consideration from the experience of the previous projects is that in the case of an exchange rate shock (i.e. a rapid devaluation over a short period of time) when it is unrealistic to pass on the full effect of devaluation to customers immediately, there could be a mechanism by which Government absorbs some of the impact of such an exchange rate shock until the situation stabilizes and the end-use customer tariff has been adjusted to the appropriate level. The Financial Sustainability Plan will address the issue of exchange rate shocks and propose a mechanism such that if any limitations are imposed on the automatic adjustment mechanism to avoid tariff shocks, ESCOM would be financially compensated by the Government. 44. In addition, the Government has converted US$23 million equivalent of foreign currencydenominated loans covered under HIPC, to Kwacha-denominated loans. ESCOM no longer bears the foreign exchange risk for these loans. The effect of these measures has been to reduce future debt service obligations of ESCOM from US$23 million equivalent per year in FY04 to US$14 million equivalent in FY07, and to significantly reduce ESCOM's exposure to foreign exchange risk. 45. Table A9.5 summarizes the operating and financial performance of ESCOM during FY '' Average revenue rate was USc 4.47 kwh in FY04 and is estimated at USc 4.33 kwh in FY07. 80

91 Table A9.5: Past Financial Performance of ESCOM (FY ) Audited Audited Prov. Estimates Estimates Net generation (GWh) 1,160 1,270 1,368 1,390 1,444 T&D losses ( h) Total energy sold (GWh) ,055 1,117 1,167 Average revenue rate (kwacha/kwh)-nominal a % Increase in nominal rate Revenue from electricity sales (US$ million) Operating costs (US$ million) Operating income after interest (US$ million) 2.6 (3.7) Foreign exchange gains/losses (US$ million) (41.5) (35.4) (3.0) (6.8) (34 Earnings before tax (US$ million) (39.0) (39.0) Gross accounts receivable (US$ million) Accounts receivable (months of sales equivalent) a. Average revenue rate is defined as revenues from selling electricity divided by the kwh of energy billed to end consumers in Malawi. Major issues from ESCOM s past financial peflormance 46. Poor Financial Reporting. The ESCOM audit report for FY05 has only recently been completed and is scheduled for presentation to the ESCOM Board in May The FY06 audit report is also overdue. This situation means that financial assessment of the current state of the company is based to a large extent on unaudited figures. This introduces some uncertainty in the financial projections, although there have been no material adjustments on the audit in recent years. ESCOM is working to improve its accounting. It is planned that the FY06 audit report would be ready in December 2007, and work would start immediately on the FY07 audit. 47. Poor collection of customer arrears. Collection performance remains far from satisfactory. Accounts receivable stood at more than 8 months of sales equivalent in FY04. Most recent (February 2007) numbers show some improvement with accounts receivable at 6.17 months of sales equivalent, in part due to an active program of disconnecting non-paying customers. In FY05, the amount collected was 92% of amount billed. Estimates for FY06 and FY07 indicate that recently there has been further improvement in the collection performance. However, despite the recent improvement, poor collection performance in earlier years has resulted in accumulation of arrears. Assessment of the recoverability of these arrears will be included in the development of the Financial Sustainability Plan described below. 48. Rapid devaluation of local currency. Between 1991 and 2001, the local currency fell from 2.9 Kwacha/US$ to 55 Kwacha/US$. By April 2007, the exchange rate stood at 138 Kwacha/US$. The Kwacha value of ESCOM s long term debt obligations rose accordingly. These increases in the outstanding amount of long term debts were reported in the income statement as foreign exchange losses5*. These foreign exchange losses have been a major cause of the negative earnings reported in ESCOM s recent audited accounts, particularly FY03 and FY04. The increasing obligations due to currency devaluations contributed to ESCOM s inability to fully service debts, and by FY03, the debt to total capital ratio had risen to 90%. The debt restructuring described above was undertaken in part to address this situation. 58 According to International Accounting Standard (IAS) 21, differences in obligations arising from changes in exchange rate should be dealt with as income/expense in the period in which they arise. 81

92 49. The following table shows ESCOMs recent performance in servicing debt. The impact of the debt restructuring can be seen as a reduction in dues in FY05 (Government loans) and FY06 (direct loans). Table A9.6: ESCOM Debt Service Dues and Payments Debt Service Due on Direct Loans to ESCOM Debt Service Paid on Direct Loans to ESCOM Debt Service Due on FY03 FY04 FY05 FY o Debt Service Paid on Government Loans to ESCOM I 50. High losses. Transmission and Distribution losses stood at 23% in FY05 increasing from 17.4% in FYOl. However, system losses have shown improvement in recent years, with most recent un-audited overall losses (March 2007) at about 19%. This trend in decreasing losses can be attributed to a number of initiatives that ESCOM has undertaken over the past several years, some of which are on-going. Most notable are, on the technical side: investments in "debottlenecking" the transmission network (including stringing a second circuit of the 132kV double circuit transmission line from Nkula "B'l hydropower station to Lilongwe "B" station; Installation of a third Interbus Transformer at Lilongwe "B'l (Kanengo) substation; and uprating of various power transformers around the main load centres in Lilongwe and Blantyre) and extensive distribution network rehabilitation in the major cities of Blantyre and Lilongwe as well as the uprating of distribution transformers and conductors in various areas. Non-technical losses have been reduced through extensive campaigns to reduce meter tampering and by-passing. ESCOMjnancial outlook 51. The key factors affecting the financial projections for ESCOM include (i) large investment requirements to increase and diversify sources of supply and strengthen and expand the existing network, (ii) potential for improvement in ESCOM's efficiency, especially with respect to recovering arrears, (iii) continuing the improvements in losses and collections indicated by the FY07 estimates in the future, and (iv) implementation of timely tariff adjustments as needed to address exchange rate movements and to address increasing obligations in terms of electricity trading and investments. 52. ESCOM Financial Sustainabilitv Plan. ESCOM and the Government are committed to achieving ESCOM financial sustainability through a combination of completion of the debt-equity conversion noted above, ESCOM efficiency improvements and tariff adjustments. ESCOM's principal target is to be in a position to cover all cash requirements, particularly once the new outflows related to payments to EDM for use of the transmission line and import contracts take effect in Thus ESCOM's immediate goal is to achieve a "Cash Coverage ratio59" of 1.0 or greater by FY08 and onwards, which will ensure that ESCOM has sufficient cash revenues to cover its cash operating costs, debt service requirements, payments to EDM under the Wheeling Agreement (once it becomes effective), any electricity import costs and internal funds required for capital investment. 59 Cash Coverage ratio is defined as operating and other income (after covering operating costs including payments to EDM and adjusted for net working capital and non-cash expenses, i.e. depreciation and bad debts, plus consumer deposits) divided by the sum of debt service liabilities, internal funds required for capital investment, and contribution required for staff retirement funds. 82

93 53. In May 2007, the Government of Malawi wrote to the World Bank stating its intention to put in place an ESCOM Financial Sustainability Plan by September 2007, and to implement and monitor the plan through 2010 through a regular monitoring and reporting system. The objective of the plan is to ensure that ESCOM has adequate cash flow to meet its requirements every year. Development of the plan will be led by Ministry of Finance, with technical assistance as necessary provided under this project. The plan will be developed with the participation of all key stakeholders. 54. The plan will include (i) review of ESCOM s current and recent past performance, (ii) identification of areas for performance and efficiency improvement, (iii) the setting of realistic targets for improvement, and development of a monitoring and reporting mechanism, (iv) analysis to determine the recoverability of outstanding arrears, which contribute to the very high accounts receivables figure and identification of steps to recover arrears where possible and write-off bad debts, (v) if necessary, prepare a plan for rescheduling the payment of overdue debt service on direct loans to ESCOM, (vi) indicate the extent to which tariffs must be adjusted annually, taking into account the planned efficiency improvements and planned ESCOM investment program, (vii) analyze the issue of exchange rate shocks and propose a mechanism such that if any limitations are imposed on the automatic adjustment mechanism to avoid tariff shocks, ESCOM would be financially compensated by the Government. Implementation of the plan will be critical in raising finance for the proposed next major power sector investment-the Kapichira I1 Hydropower station. Technical assistance is planned under the project for support in (i) developing the Financial Sustainability Plan, (ii) implementing recovery of the arrears to the extent possible, (iii) performing a diagnostic study of ESCOM s revenue stream and (iv) implementing the recommendations of the revenue diagnostic study. 55. Base case financial proiections. The cash coverage ratio achieved under the base case will be as follows: The base case financial projection assumes: Gradual annual incremental tariff adjustments (as opposed to a single large adjustment)60; Total losses falling from 19% in FY08 to 18% in FY12; Accounts receivable coming down to 4.0 months in FY08 and to 3.0 months by FY09; A write-off of 910 million Kwacha in accounts receivable in FY08 (this figure has been estimated for modeling purposes and will be refined during the revenue diagnostic study); 35 GWh of thermal generation (about 16MW 6 hours/day)61 each year during FY08-10; Investment program of US$248 million during FY About 74% of this investment is assumed to come from lenders, about 2% from consumer contribution, and the rest is assumed to come from ESCOM internal funds. The following table summarizes the investment program as well as the financing sources assumed during FY Table A9.7: Capital Investment and Funding Sources (US$ Million- Nominal) Capital Investment I 2010 I 2011 I I 50.5 I 22.4 I o ESCOM has an annual tariff adjustment mechanism through which ESCOM applies to the energy regulator for tariff adjustment on an annual basis to cover the shortfall in revenues to pay for its budgeted operating costs, capital expenditure, and debt service liabilities for the year. There is also a separate quarterly tariff adjustment to cover changes in exchange rate and inflation rate. This would mean 50MW increasing to 70MW peak deficit between FY08 through FY 10. a3

94 Financed by: Long Term Debt I 51.6 I 62.0 I 38.6 I 11.2 I 19.7 Consumer Contribution ESCOM Internal Funds The base case shows that the break-even cash coverage target would be achieved or exceeded in all years through 2012 with an actual tariff increase of 5% annually fiom 2008 through *. Table A9.8 provides a summary of ESCOM's actual and projected (assuming the base case) yearly cash flows for years 2004 to Table A9.8: Summary Base Case Cash Flow (in US$ Million) Avg. Revenue Rate (Avg. Tariff) (KwachakWh) YO Increase Net CashFlows fromoperations Cash Flows from External I 09 I 10 I 11 I Actual Est. Est. Est forecast Avg (2.6) Cash Coverage Ratio Debt Service Coverage Ratio Collection-Generation Ratio (0.61) % 71% 75% 78% 83% 85% 80% 80% 81% 82% 57. Financial moiections for alternative scenarios and sensitivity analysis. The following scenarios were also considered. In all cases the assumptions are the same as for the base case, with the exception of the assumption specified in the scenario. (a) Slow Efficiency Improvement, - Total Losses: 2008:19.2%, 2009:19.0%, 2010:18.9%, 2011: 18.75%, 2012 : 18.5% - Accounts receivable (months): 2008:6.0,2009:5.5,2010:5.0,2011: 4.0,2012: 3.5 (b) Fast Efficiency Improvement. - Total Losses: 2008:19.0%, 2009:18.5%, 2010:18.0%, 2011: 18.0%, 2012 : 18.0% - Accounts receivable (months): 3.5 months in 2008 and 3 months thereafter (c) The price of imported electricity increases by 20% (d) The price of imported electricity decreases by 20% (e) The price for exported electricity increases by 20% (f) The price for exported electricity decreases by 20% '* The base case assumes that peak load shedding will continue until the interconnection is operational. The alternative would be for ESCOM to make greater use of its existing thermal generation during peak times. However the cost of generation from the thermal units is relatively high and greater use would imply a higher, earlier tariff increase. 84

95 58. The results are shown in the table: Table A9.9: Percent Tariff Increase Under Various Scenarios 59. Financial Covenants 0 Implementation of agreed ESCOM Sustainable Financial Plan 0 Cash coverage ratio63 from 2008 onward: greater than or equal to 1.O 0 Collection-generation ratio64 from 2008 onward: > 75 percent. Assumptions used in the model 66. The financial projections are based on available generation and sales data, and financial information from ESCOM s audited accounts from FYOl through FY04 65, provisional accounts for FY05, estimates for FY06 and budget for FY0766. Financial projections are based in part on trends reflected in the historical accounts and in part on technical and financial performance targets and indicators agreed upon between ESCOM and IDA for the period FY008-12, especially for improved system management and decreased arrears in accounts receivable. The projections are expressed in current terms, using costs calculated in mid-2007, and is based on the local inflation assumptions and exchange rate assumptions in the following table. The cash coverage ratio is defined as operating and other income (adjusted for net working capital and non-cash expenses) plus consumer deposits divided by the sum of debt service liabilities, internal funds required for capital investment, and contribution required for staff retirement funds. A cash coverage ratio of 1.O will ensure that ESCOM has sufficient cash revenues to cover its cash operating costs, debt service requirements, and internal funds required for capital investment. 64 The collection-generation ratio measures how much of energy generated was actually collected in cash from customers. It captures T&D losses, billing and collection performance. The term collection-generation ratio means: energy collected by ESCOM divided by energy sent out by ESCOM; energy collected by ESCOM is equal to energy sent out to ESCOM less transmission and distribution losses in ESCOM s system multiplied by ESCOM s billing collection ratio; energy sent out means energy from ESCOM s generation systems and energy entering ESCOM s systems through purchases; and ESCOM billing collection ratio means energy collected divided by energy billed..5 The audited accounts were unqualified with the exception in FYOO when the auditor expressed qualification related to nonrecognition of an estimated K158.9 million in unhnded defined benefits obligation. 66 Until FY04, ESCOM had fiscal year ending March 31. Starting from FY06, ESCOM switched to fiscal year ending June 30. As a transitional phase, FY05 covered the period from April 1,2004 to June 30,

96 Table A9.10: Injlation and Exchange Rate Assumptions 67 Inflation Exchange Rate (Kwacha/US$) % 7.4% 7.0% 7.0% 7.0% Income Statement i. Demand growth - Peak load demand growth in Malawi is assumed to grow at a compounded annual rate of 4.5 percent from 2007 to 2020, moderating to 4.0 percent between 2020 and This assumed growth rate in the initial period is less than Malawi's projected annual economic growth rate of 6.1 percent in the period (comprised of two years' historical growth data plus the current four year forward economic forecast window, as taken from the Country Assistance Strategy (CAS). Furthermore, to maintain the conservativeness of the load demand forecasts, no increase in energy intensity for existing customers (KWh consumption per connection) is assumed. Increase in demand is driven entirely by the 15,000 new connections ESCOM plans to make annually going forward (including 50 new low-voltage commercial customers and 1-2 new large commercial loads). This is slightly less than the average pace of connections over the past three years. ii Tariff increases - The tariff adjustments required reflect both the automatic tariff adjustment that ESCOM currently has in place and any additional increase required to meet the covenant for cash coverage ratio. The automatic adjustment provides for partial coverage for inflation and exchange rate movements. iii. Generation forecast-is provided by ESCOM planning department and is based on least cost generation expansion plan of ESCOM. System losses-are defined to include transmission and distribution losses and for the base case are targeted to gradually go down from 19% in FY08 to 18% in FY12. ii. Revenues are based on projected average revenue rate that will meet the agreed financial covenants of a cash coverage ratio of at least 1.O throughout the forecast period. iv. Revenues are based on projected average revenue rate that will meet the agreed financial covenants of a cash coverage ratio of at least 1.O throughout the forecast period. v. Cost of power purchase includes costs of purchase of electricity from HCB (both capacity and energy charges) as well as payments to EDM for cost recovery and O&M costs. A 30 MW net import (50 MW import minus 20 MW off-peak export) via the inter-connector starting from FY2011 was assumed. vi. Other major assumptions for the interconnector were as follows: Estimated project cost in the Mozambique side of the border to be recovered from ESCOM was US$3 1 million. A 3-year construction period and a 5% IDC was assumed. The project cost is to be recovered from ESCOM through monthly capacity payments for 30 years. The cost recovery part is assumed to involve an annual interest of 11% (5% EDM WACC plus 6% plus mark-up)68. The actual interest rate will be determined only after ESCOM and EDM complete their negotiations and finalize the agreement. Actual costs incurred will be used. 67 Inflation assumption for FY08-09 were IMF forecasts, and for FY10-12 were staff estimates. The exchange rate assumption was based on purchasing power parity assuming the local inflation as stated and an international inflation of 3%. As per the draft agreement, payments are to be made monthly. No monthly compounding of interest is assumed, i.e. monthly payment is assumed to be annual payment due divided by

97 It is assumed that an additional 2.5% of the total project cost of the Mozambique side would be paid by ESCOM to EDM every year (paid monthly) to cover the annual operations and maintenance costs. The cost will be increasing with US inflation. Payments to HCB for energy purchase were assumed as follows: i) a capacity payment of US$16.57 per kw per month; and ii) energy charge of US$O.0011 per kwh purchased. The export price was assumed to be 1.28 UScentskWh in FY2011 and was expected to increase by 4% a year thereafter. 0 The Malawi part of the project is estimated to be US$48 million to be financed by the proposed IDA credit. A construction period of 3 years and a 5% IDC was assumed. ESCOM will repay to the Government of Malawi the on-lent IDA credit on the following terms: 5 year grace period, 5% annual interest and 20 years repayment period. vii. Operating costs: Salary and operations costs were assumed to grow with inflation starting from FY09. Supplies and other costs were assumed to be a moving average of three years. Repair and maintenance costs were assumed to be 3% of average net fixed assets, consistent with the level of costs in recent years. These operating costs were apportioned to generation, transmission, and distribution functions based on their relative proportion in recent years. Depreciation was assumed to be 3% of average gross fixed assets, consistent with the level of depreciation charged in recent years. Bad debt provisions are estimated at 5% of gross accounts receivable, and are estimated to be sufficient to cover losses from bad debts. viii. Interest charges were based on the debt service schedule of ESCOM for the existing loans and new debts planned to be undertaken for financing future investment program. ix. No corporate tax was assumed. 68. Balance Sheet x. Accounts receivable from trade is assumed to be 4.0 months of sales equivalent in FY08 before writeoff. A write-off of 910 million Kwacha (25% of accounts receivable of FY07) in FY08 was assumed. In the base case, the accounts receivable was assumed to go down to 3 months by FY09. xi. Inventories were assumed to be 4% of gross fixed assets, consistent with the level of inventory in recent years. xii. Additions to fixed assets and work in progress were derived from the ESCOM investment program for FY The level of investment is significantly higher in than the past trend because of the Tzedzani, the Malawi-Mozambique transmission line and Kapachira investments. xiii. Accounts payable was assumed to go down to 4 months of costs equivalent in FY08 and to 3 months of costs equivalent thereafter. xiv. Current portion of long term debts (including HIPC loans) included the principal and interest obligations of the year and was based on the debt service schedule for existing and new loans. xv. Consumer deposits were assumed to include 750 Kwacha per domestic connection against security deposits and 6,300 Kwacha per domestic connection against customer contribution of capital costs. Pension provision is maintained so that the balance at the year end is equivalent to 10% of annual salary cost. 87

98 xvi. Long-term debt schedule for existing loans was obtained fiom ESCOM and included the repayment schedule for the old loans. HPC loans are shown as debts as ESCOM is still responsible for their repayment to GOM in local currency. Debt service schedule for the new loans was based on the investment program with different interests and repayment terms depending on the potential source of financing. For loans for which no financier was identified, an interest rate of 10% including an IDC of 5% and a repayment of 25 years was assumed. xvii. Nordic development fund included some 530 million Kwacha expected to be drawn as loan from Nordic by FY08. As per an agreement between ESCOM and GOM, this is expected to be converted to preferred shares of Kwacha 1 each. xviii. Cash Coverage Ratio has been set at 1.O to ensure that ESCOM generates sufficient cash revenues to cover all its cash operating costs, debt service obligations and internal funds required for capital investment. 88

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102

103 C: EDM Mozambique financial analysis EDM historical financial situation 69. EDM s revenues are approximately equal to its operating expenses, including depreciation and provision for bad debts. However, EDM s collected revenues have been inadequate to meet all of its revenue requirements (operating expenses excluding depreciation, debt service, and investments funded from internal resources). The shortfalls - largely due to heavy capital investments related to the access expansion program fimded from internal resources in the last 2 years - have been bridged through nonpayment of debt service owed to the Government. 70. Electricity tariffs were increased on average by 10.9 percent effective February 1, The present Mozambique weighted average electricity revenue6 is estimated at 2,112 MtikWh (US$O.O816/kWh). An indexation mechanism has been established to adjust tariffs for inflation, changes in the Mt/US$ exchange rate, and changes in power purchase and generation fuel costs. EDM aims to increase tariffs gradually so that the weighted average revenue reaches the long-run marginal cost (LFWC) level of USg9.l /kwh by April Average operating revenue, costs, and profits over the past three years are given in Table A9.14. EDM s revenues are approximately equal to its operating expenses, including depreciation and provision for bad debts. Table A9.14: EDM Operating Performance a. I Actual Actual Estimates Avg. electricity revenue (US$/kWh): Mozambique Exports Overall Avg. other operating revenue (US$/kWh) Avg. operating expenses (US$/kWh) Avg. operating profit a (US$/kWh) , Operating margin -0.6% 0.3% -0.1% Return on equity -3.5% -6.6% -0.3% led as operating revenues divided by operating costs, including depreciation. 72. However EDM s collected revenues have been inadequate to meet all of its revenue requirements (operating expenses excluding depreciation, debt service, and investments funded from internal resources). The shortfalls have been bridged through nonpayment of debt service owed to the Government. The significant shortfalls in 2005 and 2006 are largely due to heavy capital investments of US$70 million funded from internal resources over the two years. In the previous two years (2003/04), the comparable investments amounted to US$40 million. The large increase in capital investments is mainly due to higher customer connections. 73. Overall, the financial performance of EDM has improved over the past three years. The Mozambique peak demand and energy sent out registered annual growth rates of 7.4 percent and 6.8 percent, respectively, during this period. In 2006, peak demand grew by 12.4 percent to reach 320 MW and energy 69 Weighted average revenue is defined as total electricity revenue, excluding sales tax of percent, divided by kwh of electricity billed to end-use customers in Mozambique. 93

104 sent out grew by 8.5 percent to 1,881 GWh. Exports increased by 79 percent in the last two years; total exports in 2006 were 500 GWh. The contracted power supply from HCB is 300 MW at present. The balance of requirements is met from EDM s power plants, mostly hydro, and from ESKOM, South Africa. 74. Transmission and distribution (T&D) losses within the EDM network (that is, excluding exports that are transmitted through HCB-owned lines) are still at a high level of around 26.5 percent. Approximately 95 percent of billing is collected from Mozambique customers. In 2006, the company connected 85,000 new customers (compared with 39,000 in 2004), and it expects to connect 80,000 in As of December 3 1,2006, EDM had 4 16,000 customers. 75. Debt restructuring. EDM has always met its debt service obligations in full to lending institutions that have extended direct loans to the company. However, EDM has accumulated large unpaid debt service liabilities to the Government for on-lent loans. It is unlikely that EDM would be able to service these debts while at the same time investing heavily in expanding access. Taking into account the Government s goals for rapid access expansion, the Ministry of Finance has agreed to a debt restructuring plan that it is expected to be formally approved by September EDMfinancial outlook 76. Table A9.15 provides a summary of EDM s yearly cash flows for years 2004 to 2012, assuming Government or other grant financing is available to cover a portion of the new connections. Table A9.15: EDMSummary Cash Flows in US$ million (FYOI-FY12) Actual Actual Est1 Forecast Cash flow from operations Debt senice (7) (7) (8) (23) (23) (27) (31) (38) (49) (191) Capital inveshnent (103) (49) (73) (126) (138) (130) (105) (83) (71) (653) External financing of investments Government contribution for rural connections IO 59 Net cash inflows/(outflows) 10 (6) (5) (6) (1) (2) (2) Opening cash balance Closing cash balance Interconnection with Malawi (the proposed proiect). EDM s share of the capital costs, including financing costs, of the proposed interconnector with Malawi is projected at US$43 million (including overhead and contingencies), with assumed project commissioning end As per the draft wheeling agreement, EDM will recover from ESCOM payments the cost of servicing EDM debt to the Government for this investment, and will derive a specified return on its investment. EDM will also be paid a monthly fee to cover in full the operation and maintenance costs of the line. 78. Ring-fencing pavments from ESCOM. EDM will receive payments from ESCOM in a separate bank account. Amounts due to the Government for debt servicing associated with this project will be paid from these proceeds. The remainder of the monthly payments will be used by EDM for operation and maintenance of the transmission interconnector and other uses as appropriate. The terms of the on-lending from Government of Mozambique to EDM are a 5 year grace period, a 5 percent interest rate, and a 20 year repayment period. EDM will bear the foreign exchange risk. 94

105 Key assumptions 79. The key assumptions made in the preparation of these projections are summarized below. The financial forecasts are presented in nominal prices. I I m I I I Mozambique load growth is assumed at 8 percent in 2007,7 percent annually from 2008 to 2010, and 6 percent annually thereafter. The actual growth in sent-out energy in 2006 was 8.5 percent and the forecast 8 percent growth in the current year takes account of 20 MW demand added in January 2007 by MOMA (heavy sand and mineral company). Demand over the past two years has grown annually by 6.85 percent. In view of this growth rate and the accelerated program of new customer connections (considering EDM s own program and the program funded under the ERAP project), EDM is of the view that 7 percent annual growth rate to 2010 is realistic. According to the last master plan of May 2004, annual growth in and was forecast at 5.6 percent and 4.5 percent respectively under the low scenario and 9.1 percent and 5.3 percent respectively under the medium scenario. It is assumed HCB supply will meet the balance of requirements for Mozambique demand, after EDM s own generation, Eskom supply at 0.5 percent of total energy requirements, and minor imports for border villages. Peak demand is forecast to grow from 320 MW in 2006 to 496 MW by It is assumed that surplus energy during off-peak periods will be exported. This represents 17.2 percent of total energy supply to EDM. Transmission losses are assumed at 5 percent throughout, and distribution losses are forecast to decline by 0.5 percentage point in 2007 and by 1.0 percentage point each year thereafter. On this basis, overall transmission and distribution losses in Mozambique will reduce from 26.7 percent in 2006 to 21.5 percent in The forecast reductions in losses are in line with the company s strategic plan. Collection rate in Mozambique is assumed to increase by 0.5 percentage point each year, starting with 95.0 percent collection rate in 2007 and ending with 97.5 percent in Accounts receivable from Mozambique electricity customers are assumed 55 days annual billing at end 2007 and 50 days annual billing thereafter. In accordance with EDM s submissions to the Government, electricity tariffs are assumed to increase by 6.3 percent effective April 1, 2007, raising the present weighted average revenue from US$8.16/kWh to US$8.68/kWh. Tariffs are assumed to increase again in April 2008 to a level of US$9.lkWh, and maintained at that level through to Power purchase tariffs are assumed at the present contracted rates of 0.14ZAWkWh (US#2/kWh) for Eskom, escalated in line with the assumed South African annual inflation rate of 4.0 percent, and HCB tariff is assumed to remain at 55 percent of Eskom tariff. In addition, a standby charge of 7.01ZAR/kW, escalated for inflation, is assumed for Eskom supply. Customer connections funded from EDM resources are assumed at 80,000 in 2007 and 75,000 annually thereafter. In addition, 79,214 new customers are to be connected during under the ongoing ERAP project. Investments and financing plan (see Table A9.15). The financial projections are prepared in nominal Metical, using the inflation and exchange rate forecasts below. Exchange rate of the Metical against the US. dollar has been projected forward on the basis of inflation differential. 95

106 Table A9.16: Inflation and Exchange Rates, Inflation: Mozambique 5.9% 5.7% 5.4% 5.1% 5.0% 5.0% International 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Exchange rate (Mt/US$l): Average in year At December The forecast investment plan of EDM is summarized in Table A9.17. Table A9.17: Forecast Investment Plan Investments: Generation Transmission Distribution Support investments Total Finanacine alan: Own resources Borrowing 2006 Actual I ::I % % % % % 81. The investment plan of EDM is quite ambitious, requiring US$653 million over six years to The investments will be funded through 65 percent (US$424 million) borrowing, 5 percent (US$34 million) grants, and the remaining 30 percent (US$195 million) from internal resources. 96

107 Table A9.18: Development of EDM s End-Use Customer Electricity Tarijjfs, lmestic momen on conventional mem Energy charge (MTikWh) >so0 Fixed charge (MTimonth) Customm on Drwawnent metm Energy charge (MTikWh) 856 1,863 2,483 2,608 60,000 2, ,919 2,557 2,686 61,800 2, ,982 2,641 2,775 63,839 2, % 3.0% 3.0% 3.0% 3.0% -3.9% 3.3% 3.3% 3.3% 3 3% 3.3% 3 3% giicultural -n\mtional metm Energy charge (MTkWh) >so0 Fixed charge (MTImonth) mwawnent meten Energy charge (MTikWh) 1,877 2,682 2, ,808 1,933 2,162 3,022 61,800 2,691 1,997 2,853 3,122 63,839 2, % 3 0% 3 0% 3.0% -4.2% 3.3% 3.3% 3.3% 3 3% 3.3% onunmial &somen on conventional meten Energy charge (MTikWh) >so0 Fixed charge i.mt/month) Customers on orwawnwtetos Energy charge (MTkWh) 2,086 2,980 3,260 60,000 3,120 2,149 3,069 3,358 61,800 3,083 2,220 3,170 3,469 63,839 3, % 3.0% 3.0% 3 0% -I 2% 3.3% 3 3% 3.3% 3.3% 3 3% V Large Customers Energy charge (MTikWh) Fixed charge (MTlmonth) Capacity charge (MTkW) 1, ,689 89,810 1, ,960 92,504 1, ,932 95, % 3 0% 3 0% 3.3% 3 3% 3.3% IV Customm Energy charge (MTkWh) Fixed charge (MTlmonth) Capacity charge (MTkW) , , , ,540 1, , , % 3.0% 3 0% 3 3% 3.3% 3 3% N Customen Energy charge (MTikWh) Fixed charee (MTimonth) , , , % 3.3% 97

108 Table A9.19: EDM Income Statements in Nominal US$ Million 1,443 1,564 1,696 1,838 1,973 2, ,923 2,016 2,179 2,355 2,521 2,699 2,212 2,414 2,544 2,612 2,677 2, ,749 1, ,137 2,199 2, I2 I Non-operahng income - net rofitj(l0ss) before taxation % 44% 45% 66% 8 3% O 9 Oo71 1% 98

109 Table A9.20 EDM: Balance Sheets in Nominal US$ Million Tangible assets at coshaluation Less: Accumulated depreciation Net book value of fined assets Project fun& Investments Tow long-term assets ment ass& stocks Customer accounts receivable Other debtors &prepayments lnvesbnents Cash at bank and in hand Total current assets rediton (amounts falling due within one year) Creditors Corporate tax payable Debt service due Current Portion oflong-term Loans Total current liabilities I et current assetsi(liabi1ities) otal assets less current liabilities reditors (amounts falling due after more than one year) Long-term loans Less: Current portion Long-term portion Project liabilities Pension provisions Deferred charges Customer deposits Total creditors (amounts falling due after more than one year) :El let assets employed :vital and reserves Paid up capital Grants for inveshnents Reserves hareholden'

110 Table A9.21: EDM Cash Flows in Nominal US$ Million operating progti(loss) Depreciation (Increase)/decrease in working capital Pension provisions 8: deferred charges Other let cash inflow/(outnow) from operating activities. e m from investnmts and senicing of finance. Interest received Interest paid let cash outflow for r e m on invesmmts and servicing of finance (3 2) (5 7) (93) (8 7) (105) (4 2) (41 7) 'axation paid westing activities: Payments to acquire tangible fixed assets Recebb from disposals of w i l e fned assets let cash outflow from investing activities hidends paid let cash inflow/(oumow) before hancin3 inancing activities: Grants for invesmats Government eonhibuuan far mi connectiom (off-xt agalnsl dab1 sentee due) Customer deposits Borrowing Borrowing repaid Project funds and liabilities RacipW@ayments) for inveshllents let cash inflow from financing activities I (155) (150) (04) I1 930 (163) (04) I1 68 I (189) (04) (207) (03) (03) (1137) 151 ncreasd(decrease) in cash and cash equivalents 'ash and cash equivalents at beguuung of year h

111 Annex 10: Safeguard Policy Issues AFRICA Mozambique - Malawi Transmission Interconnection (Southern African Power Market Program APL-2) A. Project location, potential environmental and social impacts, and how they are addressed 1. The project is located in northwest Mozambique near Tete and southern Malawi. Impact on displacement and dispossession is very limited. Based on a thorough social analysis in each country along the entire wider transmission line corridor and the areas of the two substations, a corridor with very limited human activities has been retained for the construction of the transmission line, to avoid the hardship of displacement. The data of the social analysis have been represented in two Resettlement Policy Frameworks (RPF)-one for Mozambique, one for Malawi. It was determined that RPFs, rather than RAPS, would be appropriate, since the exact location of the towers and line route within the broader corridor was not known at the time of disclosure. At the early stage of implementation a technical study and a survey will be conducted to determine the exact location of the transmission line and towers within the corridor, and a record of the people and assets that will be affected will be developed. Based on the results, and if needed, a RAP or an Abbreviated RAP will be prepared, approved, disclosed in-country and in the InfoShop, and implemented before the start of any investment and construction work. 2. For both countries also a satisfactory EA was prepared, cleared by the Bank, and disclosed in-country and in the InfoShop prior to appraisal. The project corridor in Mozambique and Malawi passes mostly through agricultural land or bushland of low biodiversity value. In Malawi an important forest reserve has been avoided by selecting another corridor outside the Thambani Forest Reserve, one of the few remaining forest areas in the country. The project will not cause any major or irreversible environmental impacts in Mozambique or Malawi. 3. Some very limited spots along the transmission line route may need to be cleared of landmines. A World Bank field visit revealed that the environmental impacts on natural habitat and the demining activities to be financed under the project were less severe than formerly anticipated. Clearing of landmines is only intended in one or two spots along the transmission line and not along the entire route in Mozambique as was formerly considered. In Malawi, a high-biodiversity forest reserve has been avoided by changing the corridor. For these reasons the project EA category was changed from A into B. 4. The urgent rehabilitation and reinforcement activities under Component C were defined only after disclosure of the above EAs. None of these activities to be included in Component C would have any environmental or social issues implications, beyond those which can be addressed in contractor specifications (for example, low-noise equipment, PCB-free material, and better erection techniques). The environmental management aspects will be handled according to the same standards as described in both EA studies. In particular, the disposal of any hazardous wastes will be handled according to international standards. 5. Because of the existence of high electrical voltage, the right-of-way areas will be protected and public access may be restricted. Loss of land and other assets will be addressed through the RAP. Passageways will be provided for the public. There will be no potential indirect and/or long-term environmental impacts in either country. 101

112 B. Analysis of alternatives 6. During preparation, for each country two possible corridors were considered. The corridor that represents the least adverse impacts has been selected. The transmission line routing in Malawi has been changed in order to avoid the Thambani Forest Reserve, an important high-biodiversity area in Malawi. There are no other feasible alternative routing options. C. Implementation arrangements 7. During preparation, both EDM in Mozambique and ESCOM in Malawi prepared an EA and a RPF. Both EAs contain an environmental and social management plan and an environmental capacity-building plan. 8. ESCOM and EDM both have existing environmental and social units, which have been supported by former or ongoing World Bank-financed projects. Within these units, Resettlement Officers have been identified and designated. 9. Both units will need strengthening during implementation. Technical assistance and training is included in Component B. The resettlement and environmental officers of both environmental and social units will be trained (beginning at the launch of the project) in the area of World Bank safeguards, according to a training program designed with input from World Bank specialists (ASPEN). The safeguard officers will be in charge of the implementation and monitoring of the RAPS and the EAs with technical assistance as required. EDM and ESCOM will hire international technical assistance for environmental management during the construction of the interconnector in order to strengthen the existing environmental management capacity within EDM and ESCOM. World Bank specialists (ASPEN) will closely monitor the implementation of the safeguard mitigation measures. D. Disclosure 10. ESCOM and EDM conducted a social assessment respectively in Malawi and Mozambique to assess the impact of the project on the country at large and the local population where the transmission lines will be implemented. The local population, local authorities, technicians, and representatives of civil society at large were consulted and their views were used in the project design and the choice of the corridors for the transmission lines. Interviews and focus groups were used among other consultation techniques. The two RPFs have been disclosed and debated in areas accessible to the public. Disclosure of the RAPS, still to be prepared, will follow the same procedures. The EAs in Mozambique and Malawi have been discussed in public meetings in the project area and have been disclosed in-country and in the InfoShop prior to appraisal. E. Places and dates of public consultation and issues raised by people 1 1. For each country, a participatory public consultation process took place during the preparation of the EAs and RPFs. In each project area, the concerned communities, their leaders, and the public authorities were both consulted and informed regarding the project s objectives, scope, and implications. The consultation took place in the villages and in the offices of the local government representatives. In general, the objectives of the project were well received and the communities contributed to the choice of the corridors that offer the minimum disturbances in terms of displacement and land acquisition. Issues raised by the communities and their representatives included security and adequate compensation where applicable; both issues were taken into consideration in the RPFs. In each country, the RPF has been disclosed as follows: 102

113 Environmental Assessment: Date of "in-country" disclosure Date of submission to InfoShop Resettlement Policy Framework Date of "in-country'' disclosure Date of submission to InfoShop Mozambique: 1 1/24/04 Malawi: 02/08/07 For both Mozambique and Malawi: 02/13/07 Mozambique: /07 Malawi: 02/08/07 For both Mozambique and Malawi: 02/12/07 103

114 Annex 11: Project Preparation and Supervision AFRICA Mozambique - Malawi Transmission Interconnection (Southern African Power Market Program APL-2) Planned Actual PCN review* November 13,2006 November 13,2006 Initial PKD to PIC November 13,2006 November 27,2006 Initial ISDS to PIC November 13,2006 December 21,2006 Appraisal April 3,2007 April 9,2007 Negotiations April 30,2006 May 3,2007 Board approval July 17,2007 Planned date of effectiveness Planned date of mid-term review November 2007 December 2009 Planned closing date June 30,2013 * Although the PCN review only took place in November 2006, project preparation began in Key institutions responsible for preparation of the project: 0 EDM; Ministry of Energy, Government of Mozambique ESCOM; Ministry of Energy, Mines and Mineral Resources, Government of Malawi Bank staff and consultants who worked on the project included: Name Wendy Hughes Fanny Missfeldt-Ringius Rob Mills Cecile Niang Edith Mwenda Suzanne Morris Modupe Adebowale Robert Robelus Mohamed Arbi Ben-Achour Husam Beides Sunil Khosla Kofi Awanyo Antonio Chamuco Slah Ben-Halima Gert van Der Linde Brighton Musungwa Joao Tinga Somin Mukherj i Judith Plummer Zubair Sadeque Gulam Dhalla Augustine Wright Esther Lozo Rene Mendonca Diep Nguyen-Van Houtte Joel Maweni Title Sr. Energy Specialist and Team Leader Energy Economist Economist Infiastructure Specialist Sr. Counsel Sr. Finance Officer Sr. Finance Officer Sr. Environmental Assessment Specialist Sr. Social Scientist Sr. Power Engineer Sr. Energy Specialist Procurement Specialist Procurement Specialist Sr. Procurement Specialist Lead Financial Management Specialist Sr. Financial Management Specialist Financial Management Analyst Sr. Financial Analyst Sr. Financial Analyst Financial Analyst, Consultant Financial Analyst, Consultant Program Assistant Program Assistant Power Engineer, Consultant Monitoring Specialist, Consultant Operations Advisor and initial Team Leader Unit AFTEG AFTEG AFTEG AFCRI LEGAF LOAG2 LOAG2 AFTS 1 AFTS 1 ECSSD SASEI AFTPC AFTPC AFTPC AFTFM AFTFM AFTFM MNSIF SASEI AFTEG AFTEG AFTEG AFCMZ MNSSD AFTRZ, LCSQE 104

115 Bank funds expended to date on project preparation: 1. Bank resources: US$582, Trust funds: N/A 3. Total: US$582,943 Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$80, Estimated annual supervision cost: US$150,

116 Annex 12: Documents in the Project File AFRICA Mozambique - Malawi Transmission Interconnection (Southern African Power Market Program APL-2) 1. Regional Documents Southern Africa Power Pool Inter-Governmental Memorandum of Understanding 0 Southern Africa Power Pool Inter-utility Memorandum of Understanding Southern Africa Power Pool Agreement Between Operating Members Southern Africa Power Pool Operating Guidelines 2. Government Documents 0 Government of Malawi Energy Sector Policy Government of Mozambique Energy Sector Policy 0 Agreement between the Government of the Republic of Mozambique and the Government of the Republic of Malawi on the Interconnection of the Power Systems of Mozambique and Malawi, ESCOM and EDM Documents Draft Wheeling Agreement Draft System Operating Agreement 0 Draft Maintenance Agreement Draft Implementation Agreement 4. Preparation Study Reports Malawi power sector reform consultancy reports Feasibility study for transmission interconnection 0 Environmental Impact Assessments for Transmission Interconnection (Mozambique and Malawi reports) 0 Malawi Resettlement Policy framework Mozambique Resettlement Policy framework Agreed format for ESCOM Financial Management Reporting Agreed format for EDM Financial Management Reporting 0 ESCOM Procurement Plan EDM Procurement Plan 5. Bank Staff Assessments 0 Project concept note, quality enhancement review minutes, decision meeting minutes Aide memoires 106

117 Annex 13: Statement of Loans and Credits AFRICA Mozambique - Malawi Transmission Interconnection (Southern African Power Market Program APL-2) MALAWI PI PO PO PO PO PO PO PO PO PO PO PO Original Amount in US$ Millions Difference between expected and actual disbursements Project FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. ID Rev d MW-Bus. Env. Strenahenine - - SIL 0.00 (FY07) MW-Sec Natl Water Dev Project SIL (FY07) MW-Irrig, Rural Lvlihds & Agr SIL (FY06) MW-Infrastr Srvcs SJM MW-Health Sec Supt SIM (FY05) MW-Edu Sec Supt SIL 1 (FY05) MW-Com Based Rural Land Dev (FY04) MW-Multi-sectoral AIDS - MAP (FY04) MW-Fin Mgmt, Transpar & Account (FY03) MW-MASAF APL 3 (FY03) Regional Trade Fac. Proj. - Malawi MW-Priv & Utility Reform (FYOO) Total: MALAWI STATEMENT OF IFC s Held and Disbursed Portfolio In Millions of US Dollars Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic NICO Total portfolio: FY Approval Company Approvals Pending Commitment ~~ ~ Loan Equity Quasi Partic. Total pending commitment:

118 MOZAMBIQUE Project ID PO83325 PO96332 Original Amount in US$ Millions Difference between expected and actual disbursements FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev d 2007 MZ-APL2 Roads & Bridges Maputo Municipal Development Program PO MZ-Market Led Smallholder Dev (FY06) PO MZ Tech & Voc Fdu & Training (FY06) PO MZ-Financial Sector TA Project PO MZ-TFCA & Tourism Dev (FY06) PO MZ-GEF TFCA & Tourism Dev PO (FY06) MZ-Beira Railway SIL (FY05) PO MZ - Energy Reform and Access PO SiL (FY04) MZ-Decentr Planning &Fin SIL PO (FY04) MZ-HIVIAIDS Response SIL PO (FY03) MZ: Pub Sec Reform (FY03) PO MZ-Com Sec Reform PO MZ Higher Education SIM (FY02) PO MZ-Roads & Bridges MMP PO (FY02) MZ-Mineral NRMCP (FYOl) PO MZ-Coastal & Marine Biodiv PO Mgmt (FYOO) GEF Coastal & Marine SIL (FYOO) PO MZ-Natl Water 2 (FY99) Total: MOZAMBIQUE STATEMENT OF IFC s Held and Disbursed Portfolio In Millions of US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic ENH GTFP BDC MOZAL MOZAL

119 2000 SEF Ausmoz SEF CPZ 1.oo oo SEF Cab0 Caju SEF Grand Prix SEF Merec I Total portfolio: Approvals Pending Commitment ~~ FY Approval Company Loan Equity Quasi Partic. Total uending commitment:

120 Annex 14: Country at a Glance AFRICA Mozambique - Malawi Transmission Interconnection (Southern African Power Market Program APL-2) Key Development Indlcators (2006) Population, mid-year (millions) Surface area (thousand sq. km) Population growth (%) Urban population (% of total population) GNI (Atlas method, US$ billions) GNI per capita (Atlas method, US$) GNi per capita (PPP, international $) GDP growth (%) GDP per capita growth (%) (moat recent estimate, 200&2006) Poverty headwunt ratio at $1 a day (PPP, %) Poverty headwunt ratio at $2 a day (PPP, %) Life expectancyat birh (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5) Adult literacy, male (% of ages 15 and older) Adult literacy. female (% of ages 15 and older) Gross primary enrollment, male (% of age group) Gmss primary enrollment, female (% of age group) Access to an improved water source (% of population) Access to improved sanitation facilities (%of population) Net Aid Flows (US$ millions) Net ODA and offcial aid Top 3 donors (in 2005): I Mozambique Malawi e , Sub- Saharan Africa , , LOW inwme 2,353 29, , ' I Age distribution, 2005 Male Female 7074 e m c w c percent Jnder-5 mortality rate (per 1,000) 2w 1xI 1w 50 0 n m Mozambique SubSaharan Afrlca I I Growth of GDP and GDP per caplta (Oh) I I I Aid (% of GNI) Aid per capita (US$) Long-Term Economic Trends Consumer prices (annual % change) GDP implicit deflator (annual % change) Exchange rate (annual average, local per US$) Terns of trade index ( ) Population, mid-year (millions) GDP (US$ millions) Agriculture Industry Manufacturing Services , , , ,463 3,778 7,608 (% of GDP) (average annual growth %) Household final consumption expenditure General gogt final consumotion exoenditure Gross capital formation ,8 Exportsofgwdsandservices Imports of goods and sewices Gross savings Note: Figures in italics are for years other than hose specified data are preliminary. Group data are for indicates data are not available. a. Aid data are fw Development Economics, Development Data Group (DECDG). 110

121 I Balance of Payments and Trade (US$ mi/lions) Total merchandise exports (fob) Total merchandise imports (&I Net trade in goods and services Workers' remittances and compensation of employees (receipts) Sovernance indicators, 2000 and 2004 Voice and accountability Polttlcal stability Regulatory quality Current account balance as a % of GDP Rule of law Control of corruption Reserves, including goid w Central Government Finance (% of GDP) Revenue Tax revenue Expense Cash surpiusldeficit Highest marginal tax rate (46) Individual Corporate External Debt and Resource Flows (US$ mi//ions) Total debt outstanding and disbursed Total debt service HIPC and MDRi debt relief (expected; flow) , , u20w Technology and Infrastructure Paved roads (% of total) Fixed line and mobile phone subscribers (per 1,000 people) High technology exports (% of manufactured exports) Environment Agricultural land (Oh of land area) Forest area (% of land area, 2000 and 2005) Nationally protected areas (% of land area) Country's percentlle rank (0-103) hghw vdue.9 mpy Me, mtmx Total debt (% of GDP) Total debt service (% of exports) Freshwater resources per capita (cu. meters) Freshwater withdrawal (% of internal resources) 1, Foreign direct investment (net inflows) Portfolio equity (net inflows) Composition of total external debt, C02 emissions per capita (mt) GDP per unit of energy use (2000 PPP $ per kg of oil equivalent) Energy use per capita (kg of oil equivalent) PrlVBlC 8 Short 28 IDA IMF. 83 US$ millions Private Sector Development IBRD Total debt outstanding and disbursed Disbursements Principal repayments interest payments IDA Total debt outstanding and disbursed Disbursements Total debt service , Time required to start a business (days) - 35 Cost to start a business (% of GNi per capita) Time required to register properly (days) Ranked as a major constraint to business (% of managers SuNeyed who agreed) n.a. n.a. Stock market capitalization (% of GDP) Bank branches (per 100,000 people) 7.2 ifc (fiscal year) Total disbursed and outstanding portfolio of which IFC Own account Disbursements for IFC own account Portfolio sales, prepayments and repayments for IFC own account MlGA Gross exmure New guarantees I - Note: Figures in italics are for years other than those specified data are preliminary estimates... indicates data are not available. -indicates ObSeNatiOn is not applicable. 8/13/06 Development Economics, Development Data Group (DECDG) 113

122 Mozambique Key Development Indicators (2005) Population, mid-year (millions) Surface area (thousand sq. km) Population growth (%) Urban population (% of total population) Malawi Sub- Saharan Africa , LOW income 2,353 29, &e dlstrlbutlon, 2005 Male I Z ) Female GNi (Atias method, US$ billions) GNi per capita (Atias method, US$) GNi per capita (PPP, international $) GDP growth (%) GDP per capita growth (%) , , , m IO o IO 20 percent (most recent estimate, ZOOO-2005) Poverty headcount ratio at $1 a day (PPP, %) Poverty headcount ratio at $2 a day (PPP, %) Life expectancy at birth (years) infant mortality (per 1,000 live births) Child malnutrition (% of children under 5) ' LlnderS mortallty rate (per 1,000) '"1-2W Adult literacy, male (% of ages 15 and older) Adult literacy, female (% of ages 15 and older) Gross primaryenrollment, male (% of age group) Gross prirnaryenrollment. female (% of age group) IW 0 ISM wo 2 m Am% to an improved water source (X of population) Amss to improved sanitation facilities (% of population) Malawi Bl SubSaharan Ahica Net Aid Flows ' Srowth of GDP and GDP per capita (%) (USS millions) Net ODA and Mdal aid Top 3 donors (in 2004): Aid (% of GNi) Aid per capita (US$) Long-Term Economic Trends Consumer prices (annual % change) GDP implicit deflator (annual % change) W +GDP - GDP per capita Exchange rate (annual average, local per US$) Terms of trade index (2000 = 100) Population, mid-year (millions) GDP (US$ millions) Agriculture industry Manufacturing Services , ,881 1,744 (% of GDP) , (average annual growth %) I Household final consumption expenditure General gob4 final consumption expenditure Gross capital formation Exports of goods and services Imports of goods and services Gross savings Note: Figures in italics are for years other than those spedfied data are preliminary estimates... indicates data are not available a. Country poverty estimate is for b. Aid data are for Development Economics, Development Data Group (DECDG). 112

123 Balance of Payments and Trade (US$ millions) Total merchandise exports (Fob) Total merchandise imports (cif) Net trade in goods and services Workers' remittances and compensation of employees (receipts) overnance Indlcators, 2000 and 2004 Volce and acmuntability Political stability Regulatory quallty Current account balance as a % of GDP Rule of IBW Contmi of mrmption Reserves, including gold W Central Government Finance (%of GDP) Revenue Tax revenue Expense Cash surpius/deflcit Highest marginal tax rate (%) In d i vi d u a i corporate External Debt and Resource Flows (US$ millions) Total debt outstanding and disbursed Total debt service HlPC and MDRl debt relief (expected; flow) , ,000 3, Sou Kau(rnann.KraayMasbuzzi World Bank Technology and Infrastructure Paved roads (% of total) Fixed line and mobile phone subscribers (per 1,000 people) High technology exports (% of manufactured exports) Environment Agricultural land (% of land area) Forest area (% of land area, 2000 and 2005) Nationally protected areas (% of land area) Counby's percenble rank (0100) hmer vdm imm Mar reuw Total debt (% OF GDP) Total debt service (% of exports) Freshwater resources per capita (cu. meters) Freshwater withdrawal (% of internal resources) 1, Foreign direct investment (net inflows) Portfolio equity (net inflows) Composition of total external debt, C02 emissions per capita (mt) GDP per unit of energy use (2000 PPP $ per kg of oil equivalent) Energy use per capita (kg of oil equivalent) (US$ millions) US$ nilll0ns IMF. 93 Private Sector Development IBRD Total debt outstanding and disbursed Disbursements Prinapal repayments Interest payments IDA Total debt outstanding and disbursed Disbursements Total debt servlce , , Time required to start a business (days) 35 Cost to start a business (% of GNI per capita) Time required to register properly (days) 118 Ranked as a major constraint to business (% of managers surveyed who agreed) n.a. n.a. Stock market capitalization (% of GDP) Bank branches (per 100,000 people) 7.2 ifc (fiscal year) Total disbursed and Outstanding portfolio ofwhlch IFC own account Disbursements For IFC own account Podfolio sales, prepayments and repayments For IFC own account MlGA Gross exposure New guarantees Note: Figures In italics are for years other than those specifled data are preliminary estimates... indicates data are not available. -indicates observation is not applicable /06 Development Economics, Development Data Group (DECDG) 113

124

125 Annex 15: Maps AFRICA Mozambique - Malawi Transmission Interconnection (Southern African Power Market Program APL-2)