Document of The World Bank FOR OFFICIAL USE ONLY Report No: PAD553 INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT IN THE AMOUNT OF SDR 3.40 MILLION (US$5.00 MILLION EQUIVALENT) TO THE UNION OF THE COMOROS FOR AN ELECTRICITY SECTOR RECOVERY PROJECT August 7, 2013 Energy Practice 1 (East and Southern Africa) Sustainable Development Department Africa Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made available in accordance with the Bank’s policy on Access to Information. CURRENCY EQUIVALENTS (Exchange Rate Effective May 31, 2013) Currency Unit = Comorian Franc CF 378.26 = US$1 US$1.4988 = SDR 1 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS ABGE Appui à la Bonne Gouvernance Economique (Economic Governance Technical Assistance Project) AFD Agence Française de Développement (French Development Agency) AfDB African Development Bank ARMP Autorité de Régulation des Marchés Publics (Public Procurement Oversight Authority) CAO Commission d´Appel d´Offres (Tender Committee) CF Comorian Francs CFEOI Call for Expressions of Interest CFL Compact Fluorescent Lamp CGMP Cellule de Gestion des Marchés Publics (Procurement Unit) CQS Consultant’s Qualification Selection DA Designated Account DL Disbursement Letter DNCMP Direction Nationale de Contrôle des Marchés Publics (National Tender Board Directorate) DPO Development Policy Operation EDA Electricité d´Anjouan (Power Utility in Anjouan) EOI Expression of Interest EU European Union FM Financial Management FMS Financial Management Specialist GDP Gross Domestic Product GoC Government of Comoros GPN General Procurement Notice GPOBA Global Partnership for Output Based Aid HFO Heavy Fuel Oil HR Human Resources IDA International Development Association IBRD International Bank for Reconstruction and Development IC Individual Consultant ICB International Competitive Bidding IFR Interim Financial Report ii ISN Interim Strategy Note LC Letter of Credit LCS Least Cost Selection LIB Limited International Bidding MA-MWE Gestion de l´Eau et l´Electricité aux Comores (Water and Power Utility in Comoros) MIS Management Information System MW Megawatt M&E Monitoring and Evaluation ORAF Operational Risk Assessment Framework PA Project Advance PDO Project Development Objective PIU Project Implementation Unit PPR Post Procurement Review PPA Project Preparation Advance PSIA Poverty and Social Impact Analysis PRMP Personne Responsable des Marchés Publics (Official responsible for public procurement) QCBS Quality and Cost Based Selection RDP Recovery and Development Plan RFP Request for Proposal SC Steering Committee SCH Société Comorienne des Hydrocarbures (Petroleum Company in Comoros) SDR Special Drawing Right SOE Statement of Expenditures SPN Specific Procurement Notice SSS Single Source Selection ToRs Terms of Reference Regional Vice President: Makhtar Diop Country Director: Haleh Bridi Sector Director: Jamal Saghir Sector Manager: Lucio Monari Task Team Leader: Mustafa Zakir Hussain iii COMOROS Electricity Sector Recovery Project TABLE OF CONTENTS Page I. STRATEGIC CONTEXT .................................................................................................1 A. Country Context ............................................................................................................ 1 B. Sectoral and Institutional Context................................................................................. 2 C. Higher Level Objectives to which the Project Contributes .......................................... 8 II. PROJECT DEVELOPMENT OBJECTIVES ................................................................9 A. PDO............................................................................................................................... 9 Project Beneficiaries ........................................................................................................... 9 PDO Level Results Indicators ............................................................................................. 9 III. PROJECT DESCRIPTION ..............................................................................................9 A. Project Components ...................................................................................................... 9 B. Project Financing ........................................................................................................ 12 Lending Instrument ........................................................................................................... 12 Project Cost and Financing ............................................................................................... 12 C. Lessons Learned and Reflected in the Project Design ................................................ 12 IV. IMPLEMENTATION .....................................................................................................13 A. Institutional and Implementation Arrangements ........................................................ 13 B. Results Monitoring and Evaluation ............................................................................ 15 C. Sustainability............................................................................................................... 15 V. KEY RISKS AND MITIGATION MEASURES ..........................................................16 A. Risk Ratings Summary Table ..................................................................................... 16 B. Overall Risk Rating Explanation ................................................................................ 16 VI. APPRAISAL SUMMARY ..............................................................................................18 A. Economic and Financial Analyses .............................................................................. 18 B. Technical ..................................................................................................................... 19 C. Financial Management ................................................................................................ 19 D. Procurement ................................................................................................................ 20 iv E. Social (including Safeguards) ..................................................................................... 20 F. Environment (including Safeguards) .......................................................................... 20 Annex 1: Results Framework and Monitoring .........................................................................22 Annex 2: Detailed Project Description .......................................................................................25 Annex 3: Implementation Arrangements ..................................................................................29 Annex 4: Operational Risk Assessment Framework (ORAF) .................................................42 Annex 5: Implementation Support Plan ....................................................................................46 Annex 6: Electricity sector background and performance ......................................................49 Annex 7: Recovery and Development Plan and Role of Senior managers .............................53 Annex 8: Signed Letter of Policy Development .........................................................................55 Map IBRD 33389..........................................................................................................................59 v PAD DATA SHEET Union of the Comoros Electricity Sector Recovery Project PROJECT APPRAISAL DOCUMENT . Africa AFTG1 . Basic Information Date: August 7, 2013 Sectors: General Energy Sector (100%) Country Director: Haleh Bridi Themes: Infrastructure services for private sector development (65%); State-owned enterprise restructuring and privatization (35%) Sector Lucio Monari / Jamal EA C Manager/Director: Saghir Category: Project ID: P131659 Lending Investment Project Instrument: Financing Team Leader: Mustafa Zakir Hussain Joint IFC: . Borrower: Union of the Comoros Responsible Agency: MA-MWE Contact: M. Oumara Mgomri Title: Managing Director Telephone No.: 2697737981 Email: Mamwe_dg@comorestelecom.km Oumara.mgomri@comorestelecom.km . Project Implementation Start Sept. 5, 2013 End Oct. 31, 2016 Period: Date: Date: Expected Effectiveness December 1, 2013 Date: Expected Closing Date: April 30, 2017 . Project Financing Data (US$M) [ ] Loan [X] Grant [ ] Other vi [ ] Credit [ ] Guarantee For Loans/Credits/Others Total Project 5.00 Total Bank 5.00 Cost : Financing : Total 0.00 Financing Gap : 0.00 Cofinancing : . Financing Source Amount (US$M) BORROWER/RECIPIENT 0.00 IDA: New 5.00 Financing Gap 0.00 Total 5.00 . Expected Disbursements (in USD Million) Fiscal FY14 FY15 FY16 FY17 Year Annual 0.60 1.50 2.90 0.00 Cumulati 0.60 2.10 5.00 5.00 ve . Project Development Objective(s) The Project Development Objective (PDO) is to contribute to the improvement in the electricity sector's commercial and financial performance. . Components Component Name Cost (USD Millions) Assistance to the Electricity SOE´s Commercial and Financial Performance Recovery 3.50 Electricity Sector Governance 0.90 Project Management 0.60 . Compliance Policy Does the Project depart from the CAS in content or in other significant respects? Yes [ ] No [ X ] vii . Does the Project require any waivers of Bank policies? Yes [ ] No [ X ] Have these been approved by Bank management? Yes [ ] No [ ] Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ] Does the Project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ] . Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X . Legal Covenants Name Recurrent Due Date Frequency Subsidiary Agreement No By effectiveness Description of Covenant The Subsidiary Agreement has been executed on behalf of the Recipient and the Project Implementing Entity. Name Recurrent Due Date Frequency Project Implementation Manual No By effectiveness Description of Covenant The Project Implementing Entity has developed for the Project and adopted the Project Implementation Manual, in form and substance satisfactory to the Association. Name Recurrent Due Date Frequency Project Staff No By effectiveness Description of Covenant The Fiduciary Team has been established within the Project Implementing Entity and the Project Implementing Entity has recruited the following consultants, each with terms of reference, qualifications and experience satisfactory to the Association to be posted in the Fiduciary Team: (i) a procurement viii specialist; and (ii) a financial management specialist. Name Recurrent Due Date Frequency Auditor No 6 months after effectiveness Description of Covenant: The Project Implementing Entity shall recruit an internal auditor, no later than six (6) months after the Effective Date. Name Recurrent Due Date Frequency Installation of accounting software No Within (4) months after effectiveness Description of Covenant: The Project Implementing Entity shall purchase and install accounting software acceptable to the Association no later than four (4) months after the Effective Date. . Team Composition Bank Staff Name Title Specialization Unit UPI Mustafa Zakir Hussain Senior Energy Specialist Task Team Leader AFTG1 280099 Fabrice Bertholet Senior Financial Analyst Energy Specialist AFTG2 245317 Alexandra Planas Senior Energy Energy Specialist AFTG1 193918 Consultant Arnaud Braud Junior Professional Energy Finance Specialist AFTG2 383527 Officer Helene Bertaud Senior Legal Counsel Lawyer LEGAM 231602 Wolfgang M.T. Chadab Senior Finance Officer Disbursement CTRLA 15321 Joseph Byamugisha Financial Management Financial Management AFTME 352814 Specialist Sylvain Rambeloson Senior Procurement Procurement AFTPE 181839 Specialist Tamou Mohamed Energy Consultant Comoros Energy Specialist AFTG1 417185 Moussa Antoissi Said Ali Said Consultant Comoros Coordinator AFTP1 410252 Lu T. Ha Senior Program Assistant Senior Program Assistant AFTG2 204394 Non Bank Staff Name Title Office Phone City . Locations Country First Location Planned Actual Comments ix Administrative Division Comoros Island of Grande Comore, Island of Moheli, Island of Anjouan x I. STRATEGIC CONTEXT A. Country Context 1. Comoros is one of the smallest and poorest countries in Africa. It has an estimated population of 760,000 and is spread among three islands. Gross Domestic Product (GDP) per capita is estimated at US$785 and, based on 2004 estimates, about 45 percent of the population lived below the poverty line, an incidence that has probably increased since then 1. Poverty incidence varies considerably across regions and is typically higher in rural areas and on the island of Anjouan. The primary sectors of the economy are agriculture (mainly subsistence agriculture, a few cash crops, and fisheries) and retail services, representing about one-half and one-fifth of the country's GDP, respectively. The third largest sector is Government services, representing about 10 percent of GDP. With longstanding outmigration, the country benefits from large and growing remittances (close to 20 percent of GDP) from the Comorian diaspora that are mainly based in France. 2. Comoros has yet to emerge from a protracted fragility trap. The country’s history presents the main characteristics of a low-growth/poor-governance fragility trap. In the three decades since independence, it has experienced several coups, demands for more autonomy with a separatist movement in Anjouan, and frequent changes in governments. Regular changes in the management of parastatals, weak institutional capacity and poor governance combined with the political instability have taken a severe toll on the Government’s ability to deliver high quality basic services. 3. While in the past political instability has plagued the country, tensions have eased somewhat in recent years. After more than a decade of elevated tensions, a negotiated resolution between the separatist island of Anjouan and the Union in 2001 was followed in May 2009 by the popular approval of a constitutional revision, paving the way towards gradual political normalization. The presidential elections of late 2010 were considered broadly fair and transparent, and, after a five-month transition, the new president took office in May 2011. The elections entailed a power rotation among islands at the presidency of the Union. Dr. Ikililou Dhoinine is the current President of the Union, having taken power in May 2011. The Cabinet, which took office in mid-2011, has rekindled reforms and demonstrated a willingness to accelerate the transformation of the country. With no new major elections expected for the next three years, the observed relative political stability could set a basis for a new focus on the continuous reform program in the Comoros. 4. However, the challenges ahead are enormous. Economic growth is edging up, albeit at still much too low a level for an impact on poverty reduction. Economic growth in 2012 came out at 2.5 percent, from 2.2 percent the previous year, driven by a favorable performance of the agricultural sector, robust remittances and associated housing construction, and a modest recovery in foreign direct investment. While positive aggregate growth is a welcome break from the past, it is still too low: with population growth estimated at 2.4 percent a year, much faster economic growth, sustained over a long period, will be needed to considerably reduce poverty levels. In such a situation, efforts are needed to gradually restore confidence in the 1 A household survey/poverty assessment survey, expected to be completed in 2013, should provide an update on poverty trends. 1 Government’s ability to manage the complex political and economic transition from fragility to resilience. 5. The Government is making headway in addressing structural problems that have long constrained growth. Beyond decades of political and macro-policy instability, a range of untreated structural ailments has affected the scope for rapid growth, ranging from a difficult business environment of red tape to deficient infrastructure. In the case of the energy sector, the Government is developing a power sector reform program focused on improving the power company's management and operational performance, amongst others. B. Sectoral and Institutional Context 6. In terms of energy use, it is estimated that biomass (wood and charcoal) currently makes up 70% of energy use in Comoros. The remainder comes almost entirely from imported oil products of which 21% is used directly and 8% is used to generate electricity. As a small archipelago country, Comoros faces inherent difficulties in fuel transport and lacks economies of scale for power generation. However, this structural issue cannot fully explain the poor situation of the country with regard to electricity supply, especially in the Island of Grande Comore. 7. Though the rate of urbanization in Comoros remains low (30%), the population density in the country is relatively high and does not constitute an insurmountable obstacle to electrification. Access to the electricity grid in Comoros is currently above 50% (~60% in Grande Comore, ~20% in Moheli and ~50% in Anjouan) with around 60,000 households connected. This is in line with the rest of the sub-Saharan Africa. However, electricity supply is only available approximately 6 hours per day in most of Grande Comore; users located in the country capital (Moroni) and its immediate surroundings get unreliable electricity supply for most of the day, however, with recent improvements in the service, Moroni has started to receive electricity service for approximately 20 hours per day. In the rest of the Island, electricity is supplied for only a few hours a week, if at all. This situation constitutes a severe constraint on socio-economic progress and poverty eradication. 8. Electricity service provision is divided between two state owned enterprises, MA-MWE (Gestion de l’Eau et de l’Electricité aux Comores) – which provides electricity supply services to the islands of Grande Comore and Moheli – and Electricité d’Anjouan (EDA) – which serves the island of Anjouan. MA-MWE was founded in 2002, emerging out of a failed privatization effort with the French company Vivendi. The two companies are vertically integrated, with responsibility for generation, transmission and distribution in their respective service areas. There are no electric interconnections between the islands. 9. Within the sector - authority to appoint senior staff in the two utilities, as well as reporting structures - are complex. For MA-MWE, the President appoints the Managing Director and Secretary General. The Minister in charge of energy appoints MA-MWE’s Commercial Director and Technical Director whilst the Vice-President with responsibility for finance appoints MA-MWE’s Finance Director. In terms of reporting, these three functional directors report to the Managing Director. The Managing Director technically reports to the Board of MA-MWE. The Board includes representation from the President, Prime Minister, Ministry of Finance, Ministry of Energy, staff representatives and consumer representatives. This Board reports to an inter-ministerial committee which oversees all public enterprises. In practice, this inter-ministerial committee meets infrequently and the Managing Director and 2 Board appear to effectively report directly to the Minister in charge of energy. The fragmentation in power to appoint and the difference in the appointing and reporting structures appear to dilute some of the authority and responsibilities of the senior staff – as there is a question as to whether senior staff have the full confidence of the politician they are reporting to. The reporting structure itself is somewhat complex – with multiple parties potentially having a role in governance of the sector. See Figure 1 in Annex 6 for further details. Power sector reforms will need to address streamlining/consistency of appointment and reporting lines within the sector. 10. MA-MWE´s Managing Director is supported by a number of technical staff. In particular, he has technical, commercial and financial directors directly reporting to him. MA- MWE is a large employer, with approximately 775 employees, compared to approximately 13,500 in the Government as a whole, and just over 3,000 in the Union Government. It is likely that there is significant scope to improve effectiveness of existing staff through clearer roles and responsibilities. 11. Electricity generation in Grande Comore is made up of diesel fuel generators, with an installed capacity of 18 MW (plus 6 MW of Chinese-donated generators that have yet to be made operational) with peak demand around 11 MW (and un-constrained peak demand estimated around 17 MW). This implies that installed generation capacity is adequate. However, the condition of the generation equipment is very poor requiring significant maintenance and/or rehabilitation efforts. Available generation is significantly less than peak demand. EDA in comparison is smaller (generation capacity of 6 MW). Available generation and peak demand are fairly closely matched. Table 1 Peak demand and generation capacity in Comoros Grande Comore Moheli Anjouan (MA-MWE) (MA-MWE) (EDA) Peak demand 10.6-12.3 MW 3.3-3.8 MW (2011-13) Installed generation 18.62 MW 2 MW 6 MW (2012) Available generation 8.05 MW < 1 MW 3-4 MW (2012) 12. MA-MWE’s total distribution losses are around 45%. Conservatively, 27% of these losses are estimated to be commercial, and the balance of 18% is technical losses. MA-MWE’s billing rate is 55% and it then collects only 58% of the amount billed, with no collection from the public sector, as the Government pays for about 60% of fuel purchases and offsets their power consumption against fuel bills. Such statistics demonstrate the significant under performance of the sector both in terms of overall governance and day-to-day management by MA-MWE. EDA performs significantly better on these measures, with billing rates at 60% and collection rates above 90%. EDA was not able to rely on the Government of Comoros (GoC) 3 support when Anjouan was de facto governed independently. This might explain why EDA has maintained payment discipline more effectively than MA-MWE and still offers more reliable electricity supply. 13. The average electricity tariff (around US$33 cents/kWh) is high compared to most Sub-Saharan countries, but reflects the economics of a small system with generation based almost exclusively on expensive imported diesel oil. By comparison, the current average electricity tariff for Haiti (also a fragile state) is US$31 cents/kWh. However, the size of the system is significantly larger in terms of generation capacity (220 MW installed capacity of which 85% is based on petroleum products and 15% hydropower). A better comparator may be Tonga, a small island in the South Pacific which is also dependent on diesel imports and with an installed capacity of 23 MW (mostly diesel generators). Its electricity tariff is US$50 cents/kWh (at par with other islands in the South Pacific). For Comoros, whilst high electricity tariffs may be in line with those in other islands with similar resource-import conditions, their high level underscores the need to reduce the cost of supply by improving MA-MWE’s performance (reducing distribution losses, enforcing bill collections, reducing fuel purchases costs and improving the efficiency of generation). In the medium term, for the sector to become self-sustaining financially, adequate pricing mechanisms transferring fuel cost variations to consumers will need to be designed and implemented. 14. The two Comorian power utilities (MA-MWE and EDA) are in a structural situation of ongoing negative cash-flow from current operations due to their poor performance in terms of billing and collection. As a result, they are only able to pay for a portion of their fuel consumption for generation. The corresponding collection losses are borne by Société Comorienne des Hydrocarbures (SCH) which in turn finds itself unable to fully pay the State taxes on fuel. Overall, the energy sector represents a high burden on public finances. MA- MWE’s revenues surpassed Comorian Francs (CF) 5 billion in 2011, or approximately US$13.3 million equivalent, while GDP of Comoros in 2010 was US$541.1 million. However, in 2011, the sector benefited from direct subsidies of CF 360 million (US$797,000 equivalent), and indirect subsidies in the form of non-payment of petroleum product taxes of CF 2.7 billion 2011 (US$7.2 million equivalent). It is estimated that total de facto subsidies to the energy sector reached approximately 10% of the operating budget of the State in 2011. A significant increase is expected by the end of 2012, since the GoC had to recapitalize SCH in order to secure fuel imports. 15. An energy sector diagnostic prepared in 2011-12 with World Bank support 2 is a major driver for prioritization of activities. It has concluded that the energy sector issues in Comoros stem from a combination of short and long term issues, namely: (a) In the short run, (i) management performance issues in MA-MWE (billing, collection, financial management, etc) which led to financial distress, resulting in a lack of maintenance of installations and inability to purchase the fuel necessary for the reliable supply of electricity; (ii) financial difficulties in SCH resulting from MA-MWE’s inability to pay for its fuel off-take and from inadequate petroleum price setting mechanisms; and (iii) insufficient and unsafe storage of petroleum products, requiring deliveries in small quantities at an additional cost, and occasional fuel shortages. 2 Diagnostic summarized in the Sector Policy Note adopted by the GoC (“Document de politique de l’énergie électrique et des produits pétroliers de l’Union des Comores" July 2012) 4 (b) In the long term, inability to reduce the share of thermal power in the energy mix due to weak sector planning, with adverse consequences on cost of production, and lack of funds for developing alternative lower cost renewable energy based production capacities. 16. Based on the sector diagnosis, the Government has adopted in August 2012 a sector policy note for the energy sector (“document de politique de l’énergie électrique et des produits pétroliers de l’Union des Comores�). The document lays out a comprehensive approach for sector reform and recovery, which addresses long term as well as short-term issues. The four identified priority areas are: • A comprehensive reform of corporate governance and commercial and technical management of MA-MWE to ensure sustainability of operations and reduced budgetary burden combined with rehabilitation of the existing facilities (generation, transmission and distribution systems) to improve reliability of supply; • Preparation of future investments in renewable generation (micro-hydro), possibly wind power, and geothermal so as to reduce the reliance on imported oil products for power generation; • Institutional sector reform including governance of sector enterprises, and energy pricing; and • Improvement and extension of the petroleum storage capacities to improve safety and security of supply. 17. The four priority areas laid out in the energy sector policy note by the Government (as described above) represent a convincing and comprehensive strategy. The Comorian authorities have recognized that the acute power supply situation is due to a number of linked factors: poor billing and collection practices, difficulties with the purchase of fuel and inability to carry out periodic and appropriate maintenance on generators. These factors are all linked to MA-MWE’s operational and technical performance. Without addressing these factors, sustained sector recovery would be impossible. The four priority areas are interdependent and would need to be supported simultaneously, in order to achieve a sustained recovery of the sector. Donors and the authorities have agreed on a holistic approach combining support to improve the operational performance of the utilities with support for physical investments. 18. The African Development Bank (AfDB) has taken a lead role in the sector and is looking after overall coordination. The World Bank, the European Union (EU) and the Agence Française de Développement (AFD) have agreed on specific areas of focus within the overall engagement in the sector. Qatar is also coordinating with the AfDB to provide significant funding. 19. The AfDB has initiated the preparation of a US$23 million project that is scheduled to be approved by the end of 2013. It has a number of components including: rehabilitation of generation in Grand Comore, Anjouan and Moheli, rehabilitation of distribution and reduction in losses (aimed at supporting the upgrading of the transmission system including system protections and rehabilitation of selected sub-stations and distribution lines), rehabilitation of fuel storage, preparation of renewable energy studies to enable diversification of generation mix and technical assistance for both MA-MWE and EDA. AfDB is also considering distributing CFLs to households to lower their electricity bills and at the same time, reduce the electricity generation requirements and thus fuel purchases. The Qatari funds (US$10 million) 5 would likely co-finance the AfDB´s rehabilitation of generation and distribution project. This co-financing will be confirmed in the coming months. 20. The EU is supporting Solar Photovoltaic Generation in the Island of Mohéli through a Euro 2 million grant from the EU Energy Facility. The objective of this project is to install 6 grid-connected micro power stations with storage (for a total capacity of 300 kW). This project could potentially reduce fuel cost by 30% in the Island of Mohéli. Project implementation, under MA-MWE’s responsibility, has recently started. 21. The Export-Import Bank of India (Exim Bank) is discussing providing a US$41.6 million line of credit to Comoros specifically to finance investment in an 18 MW heavy-fuel oil (HFO) plant to be located in Moroni. 22. The World Bank has agreed to focus its engagement on supporting the development of MA-MWE’s commercial and financial performance.. To successfully implement the country´s strategy for the energy sector, continuous support to MA-MWE management will be needed. In particular, a stronger management structure is required to be in place to give the utility sufficient capacity to improve the utility’s technical, commercial, financial and operational performance and to implement the proposed program of investments. Its management team needs to focus on service quality improvement, loss reduction, increased commercial and financial performance, transparency, and accountability. 23. The Vice President in charge of energy endorsed, in September, 2012, a commercial performance action plan for MA-MWE. This includes the concept of a performance contract for the management of MA-MWE focused on improving quality of electricity supply to customers. Subsequently, MA-MWE implemented a number of actions to improve revenue collection. Under the new Managing Director of MA-MWE, closer ties have been established with the Gendarmerie and the Moroni legal prosecutor’s office to fight electricity theft. This has led to a significant increase in actions against electricity theft. 24. The Government is also now seriously considering how to boost the availability of external support and technical expertise to MA-MWE. It initially explored the possibility of hiring an external firm as a full management contractor to manage MA-MWE. A call for expressions of interest for the management of MA-MWE (over a four year period) was published in international financial and regional publications in September, 2012. Several potential firms were also informally approached. However, only one expression of interest was eventually received and this was from a consulting firm rather than from a firm with direct experience in utility management. 25. The lack of interest from the market to take over management of MA-MWE under a management contract has led the Government to consider a different approach. This involves recruiting experienced technical experts (“senior managers�) on a full-time basis to form part of the current management of the utility and support and improve management performance. 26. The current Managing Director of MA-MWE comes with a track record of restructuring public enterprises, particularly with respect to billing. He previously held the position of Managing Director of Comore Telecom and is judged to have had some success in this role. It therefore appears appropriate that support to the sector should seek to work with and support this Managing Director rather than replace/bypass him – as would be the case under a Management Contract. 6 27. Under this model, World Bank funds would be used support the improvement management capacity by financing the hiring of senior managers who would operate under the overall authority of the Managing Director of MA-MWE, but with clearly defined objectives and responsibilities as part of the management of MA-MWE. Experience in other countries shows that, when external experts are introduced to an institution with only advisory responsibilities, their recommendations are less likely to be implemented. The senior managers will therefore need to be given decision-making authority in their domain of responsibility in order to be able to effectively meet pre-agreed objectives. 28. A “Recovery and Development Plan� (RDP) will be prepared during the preparation phase of this Project by an expert or team of experts with funds from the Project Preparation Advance. It will establish clear objectives for results to be attained by the senior managers working with MA-MWE management. The Minister in charge of energy will approve the RDP. As part of the RDP, performance targets that clearly state what is expected from MA- MWE (Board of Directors, the Managing Director and his management team including the senior managers) will be drafted to ensure a full alignment of responsibilities and accountability of all the key players in the recovery program. These performance targets will need to be adopted by MA-MWE´s Board of Directors. The Managing Director will work with his management team to deliver on these performance targets. 29. Whilst setting objectives and suggesting modalities for reaching the objectives, the Plan will leave a large degree of discretion with regards to specific decision making regarding the best approach to address the commercial and financial recovery and on the purchase and use of software and equipment. Further description of the Plan and the specific areas where expertise is required from the senior managers to be hired as part of this Project is set out in Annex 7. Description of specific expertise required by MA-MWE is based on findings of the analytical work carried out by the World Bank during 2011-12 and documented in the report: “République des Comores: Diagnostique du Secteur de l’énergie�. This work also led to the 2012 sector policy note for the energy sector adopted by the GoC (“Document de politique de l’énergie électrique et des produits pétroliers de l’Union des Comores�, July 2012). 30. Efforts to improve MA-MWE’s capacity for commercial and financial management would seek to build on the ongoing efforts to increase collection. The terms of reference for the senior manager responsible for commercial activities would include: building on and institutionalizing efforts to increase collection, improving billing information and issuance; and adding modern forms of commercial management (including through purchase and implementation of software for client management and billing, metering technology and re- organization of commercial functions) within the sector, initially focusing on MA-MWE. The terms of reference for the senior manager with responsibility for financial performance would include putting in place systems for financial management that are modern and auditable and represent current best practice in public sector financial management. The senior managers would also consider how human resources and internal training need to be managed to improve commercial and financial management. Further details of terms of reference for the senior managers can be found in Annex 7. 31. More broadly, there are fundamental problems with governance in the sector. Prices for hydrocarbon fuels and electricity are significantly lower than cost. They are set by the Government and there is no methodology for setting tariffs or process for adjusting them. Consequently, there are significant direct and indirect subsidies in the sector. If the sector is to 7 be put on a sustainable footing, pricing and subsidies will need to be addressed. Major investment decisions in the sector – including investment in new generation – are taken by Government with little consultation with technical and commercial management within the sector. Institutions in the sector have limited capacity – especially regarding commercial operation, financial management and investment planning. There is therefore need for significant support to improve governance in the sector. 32. Whilst the World Bank’s support to the sector is relatively small compared with other support currently being discussed (US$5 million compared with US$23 million from the African Development Bank, US$10 million from Qatar and potentially a line of credit of US$41.6 million being discussed with India Exim Bank), the Bank’s support is targeted at important decision making and policy making institutions of the sector – and is expected to have significant broad positive impact on the sector as a whole in the short to medium term. The senior managers hired by MA-MWE will significantly improve commercial management and processes in the sector as a whole. The support to sector governance will enable drafting of important energy sector policy, legal and regulatory arrangements, improvement in existing subsidy and pricing arrangements in the sector and decision making around planning and investment. 33. It is worth noting that in addition to World Bank financing for improving management capacity and electricity sector governance, the Project’s overall success will depend on: i) unequivocal support for sector reforms, focusing on improving governance and transparency, strengthening Government oversight capacity, reforming existing subsidies and pricing in the sector and enforcing performance contracts with MA-MWE’s management regarding its performance; ii) development of new institutional and legal frameworks; and iii) efficient donor coordination and availability of committed funds (including those mentioned above). C. Higher Level Objectives to which the Project Contributes 34. The proposed Project will help alleviate the electricity sector´s financial burden on the State and will allow the use of those budgetary resources for other key poverty reduction areas such as health, education, infrastructure development, etc. The proposed Project will contribute to the improvement of the quality of electricity supply and will contribute to the generation of urgently needed electricity by supporting the improvement of the power sector enterprises. Additional power will promote greater competitiveness and job creation in Comoros. The Project will also contribute to creating an enabling environment for enhanced private sector activity by reducing the high costs of opening a business (by reducing the need to purchase expensive diesel generators) and supporting infrastructure improvements in the energy sector necessary to support growth. 35. The Project is consistent with the Bank´s Interim Strategy Note for Comoros (No. 52522-KM) of April, 2010. The ISN prioritizes two strategic objectives: reduce social vulnerability, and strengthening state capacity and accountability. The proposed Project supports both of these objectives. It will aim to contribute to a reduction in social vulnerability by improving access to electricity services by the poor through improving the availability and reliability of the power supply. By improving the efficiency of the utilities and increasing public sector governance and accountability of the utilities, the proposed Project will contribute to the second strategic objective of the ISN. A Country Assistance Strategy is under preparation and is expected to be presented to the Board during the second part of 2013. 8 36. This operation is a key component of a broader package of World Bank assistance. The proposed Project is closely associated with the Economic Reform Grant DPO approved in October 2012 that supports reforms structured around two broad policy pillars: (i) fostering public transparency and accountability, civil service management, anti-corruption and fisheries; and (ii) addressing economic and social vulnerability emanating from weak performance in the energy sector and weak natural disaster risk management. II. PROJECT DEVELOPMENT OBJECTIVES A. PDO 37. The Project Development Objective (PDO) is to contribute to the improvement in the electricity sector's commercial and financial performance. Project Beneficiaries 38. The main Project beneficiaries are current and prospective electricity consumers that for the most part suffer from the limited availability and reliability of power supply. The GoC is also a key beneficiary since the proposed Project will reduce the budgetary burden of the State that currently allocates a significant portion of its operating budget (estimated at 10%) to pay for fuel for power generation, enabling more funds to be deployed for poverty alleviation and other social needs or for other investments needed in the power sector. PDO Level Results Indicators 39. Key outcome indicators to be used to measure progress on the Project objective over its life-time would be: • Indicator 1: Collection rate of MA-MWE improved • Indicator 2: Total losses reduced • Indicator 3: Adoption of new governance arrangements for the sector • Indicator 4: Direct Project beneficiaries (% of which female). III. PROJECT DESCRIPTION A. Project Components 40. The Project design takes into account: (a) limited available IDA resources, (b) agreements amongst development partners and Government on the scope for support in the sector and allocation of areas of particular focus amongst the different development partners, (c) low level of national capacity for implementation, and (d) the need to have flexibility in Project design. The proposed Project with an estimated cost of about US$5 million will include the following three components: 41. Component 1: Assistance to the Electricity State-owned Enterprises´ Commercial and Financial Performance Recovery. (Total Cost: US$3.50 million - IDA US$3.50 million). This component will include two related sub-components: 42. Sub-component 1.a: Commercial and Financial Technical Assistance. (IDA US$1.60 million) The Project will finance senior managers that will lead the commercial and financial restructuring of the utilities. Considering the small size of the Comorian system, the permanent presence of a relatively small number of senior managers is expected to go a long way towards 9 reinstating the basics of sound power utility management. The senior managers will be recruited once the RDP is finalized and approved by the Minister in charge of energy; MA- MWE´s Board of Directors and the World Bank (see timeline in Section IV below and Annex 3). Based on the RDP recommendations, the Minister in charge of energy will define performance targets to be reached in the next three years and will include them in a performance contract to be signed with MA-MWE. The Ministry in charge of energy will supervise and evaluate the achievement of targets by MA-MWE based on the objectives and performance targets agreed under the performance contract. The focus of the contracts between MA-MWE and the senior managers would be on administrative and financial functions (financial, HR functions, internal and external reporting) and on commercial performance and include clear objectives and targets in line with the targets set by the RDP. The contract of the senior managers will include bonuses for reaching the agreed objectives and targets. The senior managers will be in place for at least two years (preferably three years) with the possibility of extension - and will report directly to MA-MWE´s Managing Director and will contribute to progress reports being prepared by the Project implementation specialist that could be sent to the Ministry in charge of energy. The frequency and contents of the reports will be defined in the performance contract to be signed between the Ministry in charge of energy and MA-MWE and will be reflected in the contracts with the senior managers. 43. Once the plan for the recovery of MA-MWE is under implementation, and learning from that experience, the senior managers will also review the situation at EDA and propose solutions for improving the commercial and financial performance of the smaller utility (though EDA´s collection rate is over 90%). EDA will benefit from significant support for rehabilitation of its distribution to be financed by AfDB. 44. Sub-component 1.b: Commercial and Financial Performance Enhancement. (IDA US$1.90 million). This sub-component will provide the required resources for the implementation of the state-owned enterprises’ commercial recovery. One of the key functions of the senior managers procured under Component 1a will be to analyze the specific needs in terms of management systems for billing, accounting, customer management, etc. and equipment and recommend the most appropriate ones for the utility. This sub-component will complement the first by financing the acquisition of the recommended systems and raising public awareness of the GoC’s reform plan. It will include four main activities: • Purchase and installation of management information systems (MIS) and hardware. (IDA US$1.20 million). This activity will include the purchase and installation of “state of the art� management information systems (MIS) and associated hardware that will allow proper execution and monitoring of the commercial and financial activities in the utility. Proper use of the MIS will have a strong positive impact on transparency in operations and corporate governance within the utilities. This sub-component also includes funds (US$0.10 million) for MIS systems for EDA to be administered by MA- MWE´s Project implementation team. • Purchase of Network Metering Equipment, Boxes and Fuel Metering Equipment. (IDA US$0.40 million). This activity will include the purchase of approximately 80 units of network metering equipment to be installed at the transformer level, 4000 boxes to protect the meters and fuel metering equipment for MA-MWE´s fuel tanks. This equipment will allow the utility to better monitor the electricity delivered at that point 10 and ensure that service is paid for, and account for all fuel delivered to the generating plants, thereby reducing the non-technical losses. • Poverty and Social Impact Analysis (PSIA). (IDA US$0.10). A PSIA will be undertaken to assess the impact on the poor of the state owned enterprise’s commercial recovery. This analysis will identify the potential impacts of the enforcement of payment of electricity and how those policies could be modified to achieve the expected results and limit the impacts on the poor. • Communications and Awareness Campaign. (IDA US$0.20 million). This campaign will promote awareness to address negative practices both within MA-MWE and among customers that might hinder the Project’s success. It will include outreach activities and public dissemination campaigns to familiarize consumers and civil society with Government’s and MA-MWE´s electricity sector program and increase awareness of energy sector issues, particularly the impact of fraud and nonpayment on service quality and the financial sustainability of the utility. 45. Component 2: Electricity Sector Governance. (IDA US$0.90 million). This component will finance technical assistance, capacity building activities and studies related to key aspects of sector governance. Specifically, this component would provide support to the energy sector institutions (Ministry in charge of energy, department of energy, etc.) through the hiring of external experts and the provision of training (including workshops) to perform key functions from the following: i) definition of an energy policy including review of sector governance arrangements (including the appointment of MA-MWE Board and management to make the accountability framework clearer) and its implementation (estimated cost US$0.20 million); ii) definition of a legal and regulatory framework and its implementation (estimated cost US$0.30 million); and iii) development of planning capacity (through, among others, the preparation of a generation expansion plan) and to provide the tools – training, capacity building, software, etc. for its implementation (estimated cost US$0.20 million). 46. This component will also finance a study to review the energy subsidies in the sector and the existing tariff arrangements and propose, as needed, a new subsidy/tariff structure for electricity (taking account of willingness to pay from various customer categories) and the design of an effective and simple tariff framework for price and tariff adjustments (estimated cost US$0.20 million). 47. Component 3: Project Management. (IDA US$0.60 million including US$0.25 million of PPA). This component would support the overall coordination, management and monitoring functions of the Project carried out by the Project implementation specialists (a Fiduciary Team consisting of at least key staff of a procurement specialist and a financial management specialist – further specialists may be hired as required). The detailed activities under this component are provided in Annex 3. The component will finance Project implementation costs, including technical assistance (individuals or firms), staff fees (including a financial management specialist and a procurement specialist as well as administrative support and further specialists as required), production of reports and other documentation or materials, studies, workshops, training, limited goods and equipment, as well as incremental operating costs for such items as vehicle fuel and maintenance, stationery, internet and telephone communication and administrative costs. 11 48. The Project Preparation Advance (PPA) will be used to hire key staff for Project implementation (a financial management specialist and a procurement specialist), provide training on Bank fiduciary issues and support the preparation of a “Recovery and Development Plan� to set the contractual objectives and put in place well-defined accountability mechanisms related to Component 1, and to support the sector’s improvement its planning capacity. All the above activities will be conducted by Project effectiveness. B. Project Financing Lending Instrument 49. The proposed Project will be an Investment Project Financing in the form of an IDA Grant in the amount of US$ 5 million equivalent. Project Cost and Financing Project Components Project cost IDA Financing % Financing 1. Assistance to Electricity State Owned 3.50 3.50 100 Enterprise´s management and commercial performance recovery 2. Electricity Sector Governance 0.90 0.90 100 3. Project Management 0.60 0.60 100 Total Project Costs 5.00 5.00 100 Total Financing Required 5.00 5.00 100 C. Lessons Learned and Reflected in the Project Design 50. The Project design has benefited from the Bank’s experience in implementing other projects in Comoros and other infrastructure projects in other fragile countries, such as Haiti. The following lessons learned have been incorporated in the Project design: • Operations should be tailored to in the particular circumstances of fragile environments. Fragile environments are characterized by uncertain roles and responsibilities, weak accountability arrangements, and significant opportunities for corruption. The design and sectoral dialogue seek to address this in three ways: i) with respect to Project-specific activities, the design is simple and flexible including the hiring of staff trained in various Project implementation tasks and the hiring of full time senior managers responsible for the restructuring of the commercial and financial functions of the state-owned enterprises; ii) the Project activities themselves, focused on management of the sector and utilities, are designed in part to address some key elements of fragility although the Project in isolation cannot fully address these issues, and iii) there is buy-in from a breadth of decision makers in the Country, including two Vice Presidents and various senior parties representing both the national budget and the energy sector. • Specific measures should be taken to address/mitigate slow implementation performance. Slow implementation in the past may be attributed to a different and 12 difficult political environment, where incentives for reform were few and funding for implementation was not available. Nevertheless, it may also be attributed to capacity and Project design issues. To help address this last issue, the Project’s design features many of the Bank’s best practice lessons, such as: (a) a limited and modest set of initial objectives to create momentum; (b) a deliberately lean program with only three core development components closely tied to existing policy commitments by the Government of Comoros; and (c) close attention to implementation arrangements, including the Project’s readiness to implement from day one. • DPOs implemented alongside sector operations are mutually reinforcing, contributing positively to both program and country objectives. The proposed Project will finance implementation of those energy sector reforms that are being supported by the existing Economic Governance Reform Support DPO. • An adequate policy and regulatory framework is essential to carrying out a comprehensive reform of the sector. This also includes the definition by the Government of clear roles and responsibilities for each institution, and accountability. The approval by the Government in August 2012 of a sector policy note for the energy sector is a first step in that direction. The proposed Project will complement the Government´s efforts to establish such a transparent and efficient policy and regulatory framework • Strong donor coordination is needed particularly where institutional capacity is low and the sector issues complex and far reaching. Effective donor coordination has proven a key element of successful reform in other fragile States. Before preparation, the main donors in the sector laid out a common strategy for the sector. During preparation, frequent informal and formal meetings have taken place to agree on the detailed investment program. Development partners have agreed on allocation of areas of focus under the common strategy for the sector. During implementation, donors will focus on maintaining a continuous dialogue amongst themselves and with the Government. • Public awareness is a essential ingredient for successful reforms. Public awareness of energy sector issues (for instance, the incidence of electricity theft on the quality of service) can contribute to strengthening ‘checks and balances’ for the management of the sector. The Project will finance the launching and implementation of external communication campaigns on the energy sector policy and energy related issues, to familiarize the public with the challenges and objectives of energy policy and help build a constituency with a stake in an efficient and transparent electricity sector. IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 51. The Project will be implemented by MA-MWE based on the objectives and performance targets defined in the performance contract between the Minister in charge of energy and MA-MWE and recommended by the RDP. The Project implementation specialists financed under the Project, will support MA-MWE in Project implementation. These specialists will not be hired as MA-MWE staff; they will be hired as consultants responsible for Project implementation (see indicative timeline below). The Project implementation specialists 13 will be responsible for all procurement, fiduciary and monitoring and reporting activities related to the Project. Given the lack of corporate capacity in this area, the Project implementation specialists will effectively be MA-MWE’s initial corporate capacity in the areas of procurement, financial management and broader Project management and will support further development of this important capability within MA-MWE. The Project implementation specialists will report directly to MA-MWE´s management. The Project implementation specialists will also provide progress reports to the Ministry in charge of energy. The frequency and contents of the reports will be defined in the performance contract to be signed between the Ministry in charge of energy and MA-MWE and will be reflected in the contracts with the Project implementation specialists. 52. For practical reasons (small Project with emphasis on MA-MWE´s commercial recovery and the size of funds) the Project implementation specialists will be based in MA- MWE. Whilst they will be based at MA-MWE, the Government’s sector institutions, especially the Ministry for energy, will still very much be accountable for Component 2 including the preparation of Terms of Reference, quality control and ownership of the outputs. The Project implementation specialists will carry out procurement and financial management of all Project funds but will liaise with the Director of Energy at the Ministry in charge of energy for all activities related to Component 2. 53. The Project implementation specialists will eventually work with the implementation unit of AfDB´s Project activities related to MA-MWE. This arrangement to overlap on implementation resources (key staff) could reduce costs, make the most use of scarce local capacity, and facilitate significant coordination of activities. It would also support buildup of specific capability within the sector. Detailed modalities of this cooperation will be defined at a later stage with the GoC and the AfDB. 54. The Project implementation specialists will be hired before Project effectiveness with funds from the Project Preparation Advance (PPA). The Project implementation specialists will then undergo significant training in financial management and procurement. The PPA funds can be implemented rapidly as they will be administered by the Economic Governance Project´s PIU (le Projet d’Appui à la Bonne Gouvernance Economique or ABGE) that has been established since 2011 under the Vice-Presidency for finance and has been working satisfactorily with a number of World Bank projects. 55. At a later stage, in order to ensure complementarities and coordination among donors in the sector, the Government will create a high-level Steering Committee (SC) for the donor- funded energy sector projects. The Steering Committee will be composed of delegates of the Ministry in charge of energy, the Vice presidency in charge of finance, and delegates from MA-MWE and EDA. 14 Indicative timeline of PPA and Project Activities Milestone/Duration Ef Y1 Y1 Y2 Y2 Y3 Y3 Y4 f. S1 S2 S1 S2 S1 S2 S1 Project Preparation Advance Hire Project Implementation Specialists Prepare Res. & Dev. Plan Prepare Planning study Establish Steering Committee Project activities Component 1 Hire senior managers Purchase and install MIS Purchase and install metering equipment PSIA Communications and awareness campaign Component 2 Design and implement energy policy Draft and implement legal and reg. framework Develop planning capacity Conduct subsidies and tariff study B. Results Monitoring and Evaluation 56. Overall monitoring and coordination of Project activities will be performed by the Project implementation specialists which will have an overall responsibility for monitoring and evaluating the different components/activities in accordance with the indicators included in the results framework (Annex 1). No later than 45 days after each quarter, the Project implementation specialists will submit to the Bank and the Ministry in charge of energy the quarterly progress reports covering all Project´s activities, including procurement and financial summary report. Bi-annual reviews, the first one to take place six months after effectiveness, should provide detailed analysis of implementation progress toward achieving the Project development objectives and include evaluation of the financial management and a post-review of procurement aspects. C. Sustainability 57. The Government has demonstrated strong commitment and ownership of the proposed operation. The Project has been formally requested by the Ministry in charge of energy. Key parameters for sustainability of the Project include the Government’s commitment to implementing its reform agenda for the sector, as demonstrated by the adoption in August 2012 of the sector policy note that lays out a comprehensive approach for sector reform and recovery and a Policy Development Letter signed by the Vice-presidents in charge on energy and finance 15 on June 7, 2013 (Attached as Annex 8) detailing the commitments of the GoC regarding the sector. Moreover, the Vice President in charge of energy has endorsed in September 2012 a commercial performance action plan for MA-MWE followed by implementation by MA-MWE of actions to improve revenue collection. These actions are directly in line with and act as forerunners to the Project. The recently appointed Managing Director of MA-MWE comes with a track record of success at Comore Telecom. 58. Activities to strengthen MA-MWE’s commercial and financial management should help improve the utility’s operational performance in the long term, enabling it to carry out adequate maintenance of its infrastructure and ultimately providing more reliable services to consumers. Public information campaigns will focus on building up support for the objectives of the Project, including campaigns against theft and non-payment of electricity. 59. The proposed operation, as well as the support from other donors, is focused, in the short term, on improving management capacity in the sector which should restore an acceptable level of services to already connected users as well as ensuring adequate utility management practices (maintenance, billing, collection, HR). In addition, the Project will support work on tariffs that will include a new tariff structure (if needed) that will increase the sustainability of the sector. V. KEY RISKS AND MITIGATION MEASURES A. Risk Ratings Summary Table Risk Rating Stakeholder Risk H Implementing Agency Risk 1. Capacity H 2. Governance H Project Risk 3. Design S 4. Social and Environmental M 5. Program and Donor M 6. Delivery Monitoring and Sustainability S 7. Political S Overall Implementation Risk H Low (L), Moderate (M), Substantial (S), High (H) B. Overall Risk Rating Explanation 60. The overall risk rating during implementation is High given especially the limited capacity of the country and their lack of experience in implementing Bank projects, the fragile political situation and the potential lack of support to the Project by various key stakeholders. A detailed description of the main Project risks is included in the ORAF (see Annex 4). The main risks identified are: 16 61. Stakeholder risk. Unavoidably, the recovery of the electricity sector (and especially implementation of measures to improve financial sustainability of the sector) will entail some risks and losses on the part of some stakeholder groups. • Consumers: One critical condition for the sustainable recovery of the utilities is to enforce revenue collection for electricity, which could trigger resistance on the part of users who currently benefit from a lack of strong penalties for not paying. The Vice President in charge of energy has recently approved a commercial action plan for MA-MWE and some well-publicized actions (campaign to remove illegal connections) have already been implemented. One key objective of the senior managers will be to put in place a more systematic approach to reduce and prevent collusive practices between employees and customers. The risk of widespread popular opposition to stepped-up enforcement of payment discipline appears low. Electricity supply in Grande Comore has considerably deteriorated during the last decade. It is at best very unreliable (Moroni and close surroundings) or extremely sporadic (rest of the Island). For a vast majority of users, the choice is therefore not between “free� electricity and paying for the service, but rather between paying for an improving service or not getting electricity. Moreover, there is evidence that the willingness to pay of the population is relatively high. Complaints are mostly related to the poor quality of service rather than the tariff. In fact, a significant portion of the distribution network in rural areas has been financed directly by local communities. Nonetheless, the issue of ability to pay by the poorest households would be examined as part of the work supporting tariffs. A Poverty and Social Impact Analysis (PSIA) is planned to assess impact of improving billing and collection on the poor. • MA-MWE’s employees: Another group that may fear reform is MA-MWE’s employees. The state-owned enterprise has for quite some time been a vehicle for patronage. Its workforce (around 775 including permanent employees and term contracts) is excessive compared to the size of the utility. One mission of the management support will be the professionalization of human resources (e.g. hiring to be justified by business necessity and skills). However, explicit downsizing of the workforce will not be a primary objective of the management support financed by the Bank. The prospect of a downsizing would risk alienating MA-MWE’s workforce whose support to reform will be critical for successful Project implementation. The overstaffing of MA-MWE is part of a much larger issue affecting all public institutions, and which probably cannot be addressed frontally without a significant risk of social and political backlash. In the case of MA-MWE, it is a minor financial issue compared to other levers (improving revenue collection, reducing fuel costs). The most practical approach is therefore to limit new recruitments to the strict business necessity (critical skills not available within the existing staff), professionalize HR management, and rely on natural attrition to gradually reduce unwarranted personnel costs. 62. Implementation risk. There is a high implementation risk related to the limited capacity of the utilities (MA-MWE and EDA). There is a consensus among donors and the authorities on the need to provide significant technical assistance to the utilities to implement the planned performance recovery activities and rehabilitation investments. The Project will finance senior managers that will closely work with the Managing Director and key directors in advising and 17 carrying out key reforms and plans for the recovery. In addition three Project implementation specialists that will be recruited as consultants for MA-MWE and will be provided with extensive training in the Bank´s fiduciary processes. 63. Political risk. For the last couple of years, Comoros has enjoyed political stability. The 2009 constitutional revision seems to have achieved a workable compromise with regard to power sharing between the islands, and suppressed the demands for secession in Anjouan, which played a large part in political instability. Although the next presidential election (which will replace the president of the Union, as well as the three Vice-Presidents, who come each from a different island) is scheduled for 2016, the fragility in the political environment remains a challenge. VI. APPRAISAL SUMMARY A. Economic and Financial Analyses 64. The main objective of the Project is to improve the sector’s commercial and financial performance, which is a critical precondition for the sustainable expansion of electricity supply. Financial Analysis: • Financial benefits: The major direct financial benefit expected from the Project is an increase in revenue collection through a combination of reduced non-technical distribution losses, and improved bill collection. It is assumed in the financial forecast that MA-MWE total distribution losses, which are for the most part non-technical, would over a three year period be reduced by 7.5%, from 45% to 37.5% as a result of the reorganization of the commercial function (new commercial management information systems, network metering, antifraud campaigns…). Over the same timeframe, MA-MWE’s revenue collection ratio would also improve from 55% to 70%. Achieving the above targets would have a very significant impact on MA-MWE’s cash revenue but does not appear unrealistic in case of a successful reorganization of commercial functions. In the Island of Anjouan, EDA has already achieved a collection rate above 90%. • Financial costs: Incremental costs associated with the Project are the totality of Project costs. In addition, it is assumed that during Project implementation, the reorganization of MA-MWE’s commercial and financial functions would require additional expenses equivalent to 50% of Project costs. • Results: On this basis, the Project financial Net Present Value (with a 12% discount rate) is US$12.9 million and the Internal Rate of Return 69%. The actual full Project costs required to achieve these results are not fully clear – and therefore this figure is somewhat indicative. Economic Analysis: • Economic benefits: Restoring payment discipline for electricity supply will result in an incremental transfer of revenue from electricity users to MA-MWE (which in turn will be less dependent on Government subsidies). There is significant evidence that the current situation of widespread fraud and non-payment for electricity supply is resulting in very inefficient use of electricity given the limited incentives to conserve (this is for instance clearly the case for public lighting and private lighting which constitutes a significant share of total demand and which is very inefficient). The current sector situation combines widespread load-shedding and suppressed demand for a large proportion of users, with 18 wasteful use by others. The indicative economic analysis assumes conservatively that out of the total extra revenue collected by MA-MWE, two-thirds would consist of a pure financial transfer from existing consumers to MA-MWE, and one-third would correspond to more efficient use of energy (thereby freeing supply for users which would not have been served otherwise). • Economic costs: Same as what was used for the financial analysis. • Results: On this basis, the indicative Project economic Net Present Value (with a 12% discount rate) is US$0.8 million and the Internal Rate of Return 16%. The actual full economic costs required to achieve these results are not fully clear – and therefore this figure is somewhat indicative. 65. Other expected benefits from the Project not included in the above analysis include: improved utility management, financial transparency, and improved sector governance. Given the currently very poor commercial performance of the utility, incremental benefits due to the Project are potentially very high. B. Technical 66. The Project presents no unusual technical or operational challenges. The Project will provide extensive support for consulting services and technical studies that will be procured under international competitive bidding. Terms of Reference (ToRs) for the consultancies and studies will be reviewed by Bank experts to ensure that they comply with Bank and international quality standards. The Project will finance management information systems and its installation as well as the related hardware equipment in the commercial and technical areas. The equipment and the technologies involved are well known and proven in developing and developed countries. Training on the operation of the equipment and software/hardware will be provided under the Project, as needed. It is also proposed that the Project finances the acquisition of network meters. MA-MWE has already installed approximately 30 of those meters with positive results. C. Financial Management 67. As part of the Project appraisal, a financial management assessment of the implementing agency (MA-MWE) was undertaken. MA-MWE will be responsible for the financial management of the proposed financing. The objective of the financial management assessment was to determine whether the financial management arrangements: (a) enable the correct and complete recording of all transactions and balances relating to the Project; (b) facilitate the preparation of regular, accurate, reliable and timely financial statements; (c) safeguard the Project’s assets; and (d) are subject to auditing arrangements acceptable to the Bank. An experienced PIU (ABGE), that has met OP 10 financial management requirements, will be managing the funds of the PPA until the Project is declared effective. 68. The financial management residual risk rating for the Project is Moderate. Details on the Financial Management arrangements for this Project are included under Annex 3. 69. In order to ensure adequate capacity to handle the IDA financing, MA-MWE will hire a financial management specialist, specifically responsible for the Project’s financial management aspects. The recruited staff will possess the relevant qualifications and the requisite experience 19 with regard to the financial management procedures and requirements of the Bank and similar development partners. D. Procurement 70. Procurement for the Project will be carried out in accordance with the World Bank’s "Guidelines: Procurement of Goods, Works and Non Consulting Services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers" dated January 2011 (Procurement Guidelines); "Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers" dated January 2011 (Consultant Guidelines); “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants�, dated October 15, 2006 and revised in January 2011 and the provisions stipulated in the Financing Agreement. 71. A procurement capacity assessment for MA-MWE´s newly created procurement Unit called Cellule de Gestion des Marchés Publics (CGMP) was carried out during Project preparation and found that the CGMP is not ready to manage the Electricity Sector Recovery Project. A set of recommendations, including the recruitment of a procurement specialist that will handle all procurement aspects related to the Project is proposed under Annex 3. The preparation phase of the Project financed through a Project Preparation Advance will be the responsibility of an existing PIU under the ABGE project and which has two years of experience with on-going projects financed by the Bank. 72. The procurement risk is assessed as Substantial. The procurement plan for the Project was received by the Bank and found to be acceptable on June 4, 2013. It will be updated at least annually (or as required) to reflect Project implementation needs. E. Social (including Safeguards) 73. The Project is intended to have positive impacts for the overall development and growth of the country. The financial and commercial recovery of the electricity state-owned enterprises will allow the utility to devote more funds for maintenance of generation and distribution facilities, and to purchase the necessary fuel for generation. In that context, the following socially positive Project impacts can be highlighted: (i) increasing quantity and quality of electricity services available in Comoros not only for residential consumers but also for small businesses who cannot afford very costly individual generators; (ii) improving the quality of social services, particularly health services supplied by small health facilities outside of Moroni which cannot afford individual generators; and (iii) improving the quality and quantity of electricity services for vulnerable social groups in rural and semi-rural areas which are in the lower income brackets and receive electricity only a few hours a week, if at all; and (iv) improving consumers’ and civil society’s understanding of the electricity sector. 74. On the other side, the utilities´ commercial recovery (that includes billing and collection of all the electricity generated and the work to reduce fraud and non-payment of electricity) could have negative impacts on the poor. A PSIA analysis to be undertaken under component 1 will identify the potential impacts of the enforcement of payment of electricity and how those efforts could be modified to achieve the expected results and limit the impacts on the poor. F. Environment (including Safeguards) 75. The Project will not finance construction of new infrastructure and it will not lead to land acquisition nor will it deprive people of access to their usual means of livelihood. The Project 20 will fund consultancies, studies and the acquisition of electricity meters, management information systems, hardware and software equipment in the commercial and technical areas, thus, no significant adverse environmental or social impacts are anticipated. 21 Annex 1: Results Framework and Monitoring COMOROS: Electricity Sector Recovery Project Project Development Objective (PDO): Project Development Objective is to contribute to improvement in the electricity sector's commercial and financial performance. Cumulative Target Values** Descriptio Responsibility n PDO Level Results Core Unit of Baseline Frequency Data Source/ for Data (indicator Indicators* Measure YR 1 YR 2 YR3 Methodology Collection definition etc.) Indicator One: Collection Percentage 55 60 65 70 Quarterly, MA-MWE´s Project rate of MA-MWE improved Annual annual reports Implementation and audits. Specialists Quarterly Project reports Indicator Two: Total losses Percentage 45 42.5 40 37.5 Quarterly, MA-MWE´s Project reduced Annual reports and Implementation audits Specialists Quarterly Project reports Indicator Three: Adoption Document Old Adoption of Quarterly, MA-MWE´s Project of new Governance s Governance the new Annual reports and Implementation arrangements for the sector arrangement governance audits Specialists s in place arrangements Quarterly Project and tariff and reports subsidy framework Indicator Four: Direct Number 0 200,000 of 200,000 of 200,000 of Quarterly, MA-MWE Project Core Project beneficiaries (% of which 50% which 50% which 50% Annual reports Implementation energy which female). female) female) female) Quarterly Project Specialists indicator. reports Estimated as the number of household connection s INTERMEDIATE RESULTS 22 Intermediate Result (Component One): Assistance to State-owned Enterprises commercial and financial performance recovery Intermediate Result indicator Document 0 Commercial Commercial Commercial Quarterly Project Project One: Commercial and and Financial and and Financial Implementation Implementation Financial recovery plan Recovery Financial Recovery Specialists Specialists implemented Plan designed Recovery Plan reports and Plan under implemented consultants implementat reports ion Intermediate Result indicator Document 0 Initiate Software Software and Quarterly Project Project Commerci Two: Commercial and procurement and hardware Implementation Implementation al and Financial Software procured, for software hardware operational Specialists´ and Specialists financial installed and operational and hardware installed and MA-MWE´s software operational reports and hardware purchased and in operation Number 0 80 network Quarterly Project Project meters and Implementation Implementation Intermediate Result indicator 4000 Specialists´ and Specialists Three: Metering equipment, protection MA-MWE´s protection boxes and fuel boxes reports metering installed 1 fuel metering equipment Intermediate Result (Component Two): Electricity Sector Governance Document 0 Energy Energy Quarterly Project Project Intermediate Result indicator sector policy Sector Policy Implementation Implementation One: Energy sector policy drafted adopted Specialists Specialists drafted and adopted reports Document 0 Planning Planning and Quarterly Project Project and decision decision Implementation Implementation Intermediate Result indicator making making Specialists´ Specialists Two: New Planning and framework framework reports decision making process for drafted for investments investment adopted and under 23 implementati on Document No subsidy/ Subsidies and Quarterly Project Project Intermediate Result indicator tariff study tariff study Implementation Implementation Three: subsidies and Tariff delivered Specialists´ Specialists study delivered reports 24 Annex 2: Detailed Project Description COMOROS: Electricity Sector Recovery Project 1. The Project design takes into account: (a) limited available IDA resources, (b) agreements amongst development partners and Government on the scope for support in the sector and allocation of areas of particular focus amongst the different development partners, (c) low level of national capacity for implementation, and (d) the need to have flexibility in Project design. The number of core components has been limited to three, which focus respectively on improving the commercial and financial performance of the SOE´s; key studies and technical support that will focus on sector policy, governance and utility management performance; and planning; and the recruitment of Project implementation specialists to facilitate Project implementation. Specifically, the proposed Project with an estimated cost of about US$5 million will include the following three components: 2. Component 1: Assistance to the Electricity State-owned Enterprises´ Commercial and Financial Performance Recovery. (Total Cost: IDA US$3.50 million). The two Comorian power utilities (MA-MWE and EDA) are in a structural situation of negative cash flow from current operations, due to, among other things, the high price of imported fuel and the level of tariffs (which don’t recover costs), and in the case of MA-MWE also its very poor performance in terms of billing and collection. As a result, they are only able to pay for a portion of their fuel consumption for generation (as explained in Section 1 and Annex 6). The situation is more difficult for MA-MWE with losses estimated around 45% and a collection rate of around 32% of all the generated electricity. A preliminary study conducted by a World Bank consultant in 2011 regarding the reorganization of the commercial function of MA-MWE proposed a restructuring of the commercial function that in the short to medium term ensures better client satisfaction and improved quality of service; generating bills to all clients; working to reduce theft in order to minimize non-technical losses; and improving the accounting system and internalizing associated costs. 3. A ’Recovery and Development Plan’ is to be prepared with Project Preparation Advance funds and is expected to be completed before Project effectiveness. It will help operationalize the concept of a performance contract for the management of MA-MWE – focused on improving the quality of electricity supply to Comoros. It will include benchmarks for the utility performance improvement; will guide the work of the senior managers to ensure accountability for their services (plays the role of a performance accountability framework); and will create a results-driven focus during decisions on purchase of software, hardware and other equipment. It is intended that whilst clear and achievable objectives are set with regards to outcomes, the means by which the outcomes are to be achieved are not prescribed – ensuring significant room for discretion on the part of the hired senior managers and MA-MWE management. This study will also formulate models for allocating roles and responsibilities between MA-MWE staff, and also the role and responsibility of the hired experts and their direct decision making roles. Final decisions could be made based on the profiles of the senior managers that are hired. See Annex 7 for more details. 4. This component will focus initially on MA-MWE, considering:(i) the size of the utility (MA-MWE serves a much larger number of customers in Grande Comore and Moheli); (ii) the poor commercial and financial situation of the utility; and (iii) the interest of the Managing 25 Director to work with and receive Bank support; and iv) the expressed priority of the GoC to address the situation in MA-MWE. Once the plan for the recovery of MA-MWE is under implementation, and learning from that experience the senior managers will also review the situation at EDA and propose solutions for improving the commercial and financial performance of the smaller utility. EDA will also be benefiting from the support to be provided by AfDB´s project – including distribution rehabilitation. 5. Sub-component 1.a: Commercial and Financial Technical Assistance. (Total cost US$1.60 million) This sub-component will finance senior managers that will implement the restructuring of the commercial and financial functions of the utility. Considering the small size of the Comorian system, the permanent presence of a relatively small number of senior managers could go a long way towards reinstating the basics of sound power utility management. The initial ToRs for the senior managers have been prepared and agreed with the Managing Director of MA-MWE. The procurement process will be initiated by the Project´s procurement specialist being recruited with the Project Preparation Advance during the preparatory phase of the Project. 6. Based on the RDP recommendations, the Minister in charge of energy will define performance targets to be reached in the next three years and will include them in a performance contract to be signed with MA-MWE. The Ministry in charge of energy will supervise and evaluate the achievement of targets by MA-MWE based on the objectives and performance targets agreed under the performance contract. The focus of the contracts between MA-MWE and the senior managers would be on administrative and financial functions (financial, HR functions, internal and external reporting) and on commercial performance and include clear objectives and targets in line with the targets set by the RDP. The contract of the senior managers will include bonuses for reaching the agreed objectives and targets. The senior managers will be in place for at least two years (preferably three years) with the possibility of extension - and will report directly to MA-MWE´s Managing Director and will contribute to progress reports to the Ministry in charge of energy. The frequency and contents of the reports will be defined in the performance contract to be signed between the Ministry in charge of energy and MA-MWE and will be reflected in the contracts with the senior managers. 7. Sub-component 1.b: Commercial and Financial Performance Enhancement. (Total Cost US$1.90 million) This sub-component will provide the required resources for the implementation of the State Owned Enterprises´ commercial recovery. It will include four main activities: • Purchase and installation of management information systems (MIS) and hardware equipment. (IDA US$1.20 million). The objective of this activity is to improve the financial and commercial performance of the SOE´s in a sustainable manner, by giving the company the information tools for a modern and efficient management of the services that it provides. One of the key functions of the senior managers procured under Component 1 will be to analyze the specific needs in terms of management systems for billing, accounting, customer management, etc. and recommend the most appropriate ones for the utility in order to deliver on the objectives set out in the RDP. This activity will include the purchase and installation of “state of the art� management information system(s) (MIS) that will allow proper execution and monitoring of the commercial and financial activities in the utility. This will strengthen the commercial division of MA-MWE, which now suffers from inadequate operational procedures and 26 poor information on commercial customers. New operational procedures for a more customer oriented approach on the execution of activities using these new system(s) will also be developed, and MA-MWE’s employees will be trained in the use of the system and in the utilization of these new procedures. Since these are highly specialized systems, the senior managers will assist MA-MWE in the procurement of the system(s) and in the supervision of the work of the selected providers. This sub- component also includes funds (US$0.10 million) for MIS systems for EDA to be administered by MA-MWE´s Project implementation specialists. • Purchase of Network Metering Equipment and Boxes to Protect the Equipment and Fuel Metering Equipment. (IDA US$0.40 million). This activity will include the purchase of approximately 80 units of network metering equipment to be installed at the transformer level, 4000 boxes to protect the meters and fuel metering equipment for MA-MWE´s fuel tanks. This equipment will allow the utility to better monitor the electricity delivered at that point and ensure that service is paid for, and account for all fuel delivered to the generating plants, thereby reducing the non-technical losses. • Poverty and Social Impact Analysis (PSIA). (IDA US$0.10). A PSIA that will assess the impact of the state owned enterprises’ commercial recovery on the poor will be undertaken (that includes billing and collection of all the electricity generated and improvements to reduce fraud and non-payment of electricity). This analysis will identify the potential impacts of the enforcement of payment of electricity (i.e. the study could show that households cut their consumption and switch to wood or other alternatives as a result of the payment enforcement therefore showing that the reform would produce only a modest improvement in revenue from that population segment) and how those practices could be modified to achieve the expected results and limit the impacts on the poor. • Communications and Awareness Campaign. (IDA US$0.20 million). This activity would provide resources for outreach activities and public dissemination campaigns to familiarize consumers and civil society with Government’s and MA-MWE´s commercial recovery program and increase awareness of electricity sector issues, particularly the incidence of fraud and nonpayment on service quality and the financial sustainability of the utility. The communications and awareness campaign will promote cultural changes to address negative practices both within MA-MWE and among customers. 8. Component 2: Electricity Sector Governance. (IDA US$0.90 million). At present, the country´s policy, legal and regulatory framework is inadequate in several respects. This activity will support the development of an energy sector policy as well as guidance on the associated legal and regulatory aspects; and will make recommendations on key corporate governance issues for the sector electricity sector State Owned Enterprises (SOEs) such as how to improve the supervision of the utilities performance, and clarify institutional responsibilities and authorities (including roles, appointment and reporting relationships within the sector). 9. Specifically, this component would provide support to the sector institutions (Ministry in charge of energy, etc.) through the hiring of external experts and the provision of training (including workshops) to perform the following key functions: (i) definition of an energy policy including review of sector governance arrangements (including appointment of MA- 27 MWE Board and management to make the accountability framework clearer) and its implementation (estimated cost US$0.20 million); (ii) definition of legal and regulatory framework that among others, clarifies the institutional responsibilities and authorities and streamlines appointment and reporting structures (estimated cost US$0.30 million); and (iii) development of planning capacity and decision making (through, among others, the preparation of a generation expansion plan and to provide the tools – training, capacity building, software, etc. for its implementation) (estimated cost US$0.20 million). 10. This component will also finance a study to review the energy subsidies in the sector and the existing tariff arrangements and propose, as needed, a new subsidy/tariff structure for electricity (taking account of willingness to pay from various customer categories) and the design of an effective and simple tariff framework for price and tariff adjustments (estimated cost US$0.20 million). 11. Component 3: Project Management. (IDA US$0.6 million including the PPA of US$0.25). This component would support the overall coordination, management and monitoring functions of the Project carried out by the Project implementation specialists. The detailed activities under this component are provided in Annex 3. The component will finance Project implementation costs, including technical assistance (individuals or firms), staff fees (including a financial management specialist and a procurement specialist as well as administrative support and further specialists as required), production of reports and other documentation or materials, studies, workshops, training, limited goods and equipment, as well as incremental operating costs for such items as vehicle fuel and maintenance, stationery, internet and telephone communication and administrative costs. This component will also finance the external annual Project financial audits. 12. During Project preparation, the component will support the preparation of a ‘Recovery and Development Plan’ to develop a performance contract for MA-MWE management and to set the contractual objectives for the senior managers and put in place well defined accountability mechanisms related to Component 1a. (as described in paragraph 3 above and in Annex 7); and will also support advisory work for the planning capacity and investment decision making by the sector institutions. 13. The PPA will also be used to hire the key staff for Project implementation (otherwise known as the Project implementation Specialists), provide training on Bank fiduciary issues and support the preparation of a “Recovery and Development Plan�, and to support the sector improve its planning capacity. The above activities will be underway before Project effectiveness. 28 Annex 3: Implementation Arrangements COMOROS: Electricity Sector Recovery Project Project Institutional and Implementation Arrangements 1. The Project will be implemented by MA-MWE based on the objectives and performance targets defined in the performance contract between the Ministry in charge of energy and MA-MWE and recommended by the RDP. The Project implementation specialists, financed under the Project, will support MA-MWE in Project implementation. These specialists will not be hired as MA-MWE staff; they will be hired as consultants responsible for Project implementation (see indicative timeline below). 2. The role of the Project implementation specialists will be to coordinate Project implementation and to monitor and report on results achieved by activities financed under the Project components. A Project Implementation Manual describing the arrangements and procedures for the implementation of the Project, including: (i) institutional arrangements and day to day execution of the Project; (ii) procurement plan and the procurement arrangements; (iii) budgeting, disbursement and financial management and (iv) monitoring, reporting and evaluation of the Project, will be prepared by the Project implementation specialists and agreed by the Bank by Project effectiveness. Project staff will assist their Government counterparts to prepare TORs, specifications, work plans, budgets, M&E plans and reports. The Project implementation specialists will also be responsible for financial management and reporting, including the designated account, disbursements and regular external audits. They will manage all procurement functions and ensure effective and sustained communication, information sharing and coordination with the institutions supported and with other donors. Given the lack of corporate capacity in this area, the Project implementation specialists will effectively be MA-MWE’s initial corporate capacity in the areas of procurement, financial management and broader Project implementation and will support further development of this important capability within MA-MWE. 3. The Project implementation specialists will report directly to MA-MWE´s management and prepare and provide progress reports to the Ministry in charge of energy. The frequency and contents of the reports will be defined in the performance contract to be signed between the Ministry in charge of energy and MA-MWE and will be reflected in the contracts with the Project implementation specialists. 4. For practical reasons (small Project with emphasis on MA-MWE´s commercial recovery and the size of funds) the Project implementation specialists will be based in MA- MWE. Whilst they will be based at MA-MWE, the Government’s sector institutions, especially the Ministry for energy, will still very much be accountable for Component 2 including the preparation of Terms of Reference, quality control and ownership of the outputs. The Project implementation specialists will carry out procurement and financial management of all Project funds but will liaise with the Director of Energy at the Ministry in charge of energy for all activities related to Component 2. 29 5. For the activities related to EDA, there will be an agreement between MA-MWE and EDA to cover the specific instances where funds from the Project will also benefit the latter. The Project implementation specialists at MA-MWE will be responsible for procurement and financial management of activities benefiting EDA as no IDA funds will flow directly to EDA. 6. The Project implementation specialists will eventually work with the implementation unit of AfDB´s Project activities related to MA-MWE. This arrangement to overlap on implementation resources (key staff) could reduce costs, make the most use of scarce local capacity, and facilitate significant coordination of activities. It would also support buildup of specific capability within the sector. The detailed roles and responsibilities will be defined at a later stage with the GoC and the AfDB, and be acceptable to the Bank. 7. The Project staff will be hired before Project effectiveness with funds from the Project Preparation Advance (PPA). The Project implementation specialists will then undergo significant training in financial management and procurement. The PPA funds can be implemented rapidly as they will be administered by the Economic Governance Project´s PIU (le Projet d’Appui à la Bonne Gouvernance Economique or ABGE) that has been established since 2011 under the Vice-Presidency for finance and has been working satisfactorily with a number of World Bank projects. 8. The responsibilities of the Project Implementation Specialist include, among other tasks: (i) supporting Project planning (e.g. implementation work-plans, budget estimates, M&E implementation plans, etc.) and assisting the institutions supported to deliver the same; (ii) actively overseeing Project implementation to ensure quality and timely progress; (iii) ensuring satisfactory coordination among the institutions supported, especially the Ministry in charge of energy regarding Component 2, and with other donors involved; (iv) implementing the M&E arrangements for the Project, including its reporting requirements; (v) ensuring compliance with agreed procurement, disbursements and financial management policies and procedures; and (vi) ensuring regular reports to MA-MWE´s Managing Director and the Minister in charge of Energy, the Steering Committee and to the World Bank, including prompt feedback on areas that need their attention or support. 9. In order to ensure complementarities and coordination among the donors in the sector, the Government will create a high-level Steering Committee for the donor funded energy sector projects. The Steering Committee (SC) will be composed of delegates of the Ministry in charge of energy, the Vice presidency in charge of finance, and delegates from MA-MWE and EDA. The Steering Committee is an essential component of the Project implementation architecture in that it ensures: (i) buy-in by the national authorities (Union and Island) and (ii) coordination of activities between the key players of the energy sector. 30 Indicative timeline of PPA and Project Activities Milestone/Duration Ef Y1 Y1 Y2 Y2 Y3 Y3 Y4 f. S1 S2 S1 S2 S1 S2 S1 Project Preparation Advance Hire Project Implementation Specialists Prepare Res. & Dev. Plan Prepare Planning study Establish Steering Committee Project activities Component 1 Hire senior managers Purchase and install MIS Purchase and install metering equipment PSIA Communications and awareness campaign Component 2 Design and implement energy policy Draft and implement legal and reg. framework Develop planning capacity Conduct subsidies and tariff study Financial Management, Disbursements and Procurement Financial Management Introduction 10. The Bank’s financial management team conducted a financial management assessment of MA-MWE which will be the implementing entity of the Project. The objective of the financial management assessment was to determine whether the financial management arrangements (a) enable the correct and complete recording of all transactions and balances relating to the Project; (b) facilitate the preparation of regular, accurate, reliable and timely financial statements; (c) safeguard the Project’s assets; and (d) are subject to auditing arrangements acceptable to the Bank. The assessment complied with the Financial Management Manual for World Bank- Financed Investment Operations that became effective on March 1, 2010 and AFTFM Financial Management Assessment and Risk Rating Principles. 11. At present MA-MWE does not meet O.P.10 requirements, however MA-MWE is expected to meet all requirements once a Project Implementation Manual has been prepared and adopted, the accounting software has been installed and a qualified Financial Management Specialist has been hired. An experienced PIU (ABGE), that has met O.P.10 financial management requirements, will be managing the funds of the PPA until the Project is declared effective. 31 Financial Management Arrangements for the Project 12. The Project implementation specialists will be responsible for the financial management arrangements of the Project relating to budgeting, accounting, internal controls, funds flow, financial reporting and auditing. (a) Budgeting and planning: The financial management specialist will prepare an annual budget for the Project, and will be responsible for producing variance analysis reports comparing planned to actual expenditures on monthly and quarterly bases. The Project Steering Committee will be responsible for budget approval and monitoring of budget execution. The periodic variance analysis will enable the timely identification of deviations from the budget. These reports will be part of the interim unaudited financial reports (IFRs) that will be submitted to the Bank and the Ministry in charge of energy on a quarterly basis. (b) Accounting software: The Project will procure accounting software in conformity with the applicable Bank procurement guidelines. The Project implementation specialists will use the accounting software as a basis for preparation and consolidation of the quarterly interim financial reports and the annual financial statements. (c) Internal controls/FM procedures manual: The Project will put in place an internal control system so as to ensure the preparation of accounting records, the approval of transactions and the orderly management of financial resources and assets. The Project will prepare a Financial Procedures Manual, which will spell out the key internal controls. The Project implementation specialists will periodically review the manual over the Project life to ensure its continued adequacy and ensure compliance with the requirements set out therein. (d) Internal audit: MA-MWE will establish an internal audit function and employ an Internal Auditor with appropriate qualifications and experience. The Internal Auditor will provide objective assurance over the Project operations and prepare quarterly internal audit reports for submission to the high-level Steering Committee. The internal audit function will not be involved in performing operational tasks to ensure its independence in executing its duties. (e) Financial reporting: The Project implementation specialists will prepare quarterly un-audited Interim Financial Reports (IFRs) for the Project in form and content satisfactory to the Bank, which will be submitted to the Bank within 45 days after the end of the quarter to which they relate. The Project will prepare and agree with the Bank on the format of the IFRs during the negotiations and the annual financial statements will be prepared using International Public Sector Accounting Standards. (f) External Audit: The Project’s accounts will be audited annually and the audit report submitted to the World Bank no later than 6 months after the end of each year. The Terms of Reference of the Project external auditor will be prepared and approved as soon as the Project is declared effective. At the time of approval of this project, there is no overdue audit report for the sector. The Project will comply with the Bank disclosure policy on audit reports (e.g., make publicly available, promptly after receipt of all final financial audit reports (including qualified audit reports) and place the information provided on the official website within one month of the report being accepted as final by the Bank. (g) Staffing: In order to ensure adequate capacity to manage the Project, the Project will recruit a Financial Management Specialist. The recruited staff will possess the relevant qualifications and 32 the requisite experience with regard to the Bank Financial Management requirements or those of similar development partners. Disbursement arrangements and flows of funds 13. Flows of Funds - Designated Account. MA-MWE will open a Designated Account (DA) denominated in Comorian Francs (CF) to enable payment of eligible Project expenditure. Additional advances to the DA will be made on a monthly basis against withdrawal applications supported by Statements of Expenditures (SOE) or other documents as specified in the Disbursement Letter (DL). 14. Disbursement arrangements. Upon the effectiveness of the Project, transaction-based disbursements will be used. An initial advance up to the ceiling of the DA and representing four months forecasted Project expenditures payable through the DA will be made into the designated account and subsequent disbursements will be made on a monthly basis against submission of SOE or other documents as specified in the DL. 15. In addition to the advance and replenishment methods, the Project has the option to submit direct payment request so that funds may be disbursed directly to the supplier of goods, works and services, for invoices above the minimum application amounts specified in the disbursement letter. Another acceptable method of withdrawing proceeds from the IDA Grant is the special commitment method whereby IDA may issue a Special Commitment letter to a negotiating bank for irrevocable Letters of Credit (LC) and reimburse the commercial bank once goods have been delivered according to the specifications stipulated in the LC. 16. The Grant will disburse 100 percent of eligible expenditures (inclusive of taxes). The proceeds of the grant have been allocated as follows: Equivalent Amount of the Percentage of amount of the Financing Expenditures Category Financing Allocated (in to be Financed Allocated (in SDR) (inclusive of US$) Taxes) (1) Goods, non-consulting services, and 3,100,000 4,650,000 100% consultants’ services including Operating Costs and Training for the Project Implementing Entity (2) Goods, non-consulting services, and 70,000 100,000 100% consultants’ services including Training for EDA under Part 1.A and Part 1.B(a) of the Project (3) Refund of Preparation Advance 230,000 375,000 Amount payable pursuant to Section 2.07 of the General Conditions TOTAL AMOUNT 3,400,000 5,000,000 17. Disbursement of Funds to Service Providers, Contractors and Suppliers. MA-MWE, supported by the financial management specialist will make disbursements to service providers’, 33 contractors and suppliers of goods and services for specified activities under the Project. Payments will be made on the basis of the terms and conditions of each contract. Figure 1: Funds Flow Diagram World Bank MA-MWE PIU Direct payment Special Commitment Letter Designated Account Contractors and suppliers of goods and services 18. FM Risk assessment and mitigation. The Bank’s principal concern is to ensure that Project funds are used economically and efficiently for the intended purpose. The assessment of the risks that the Project funds will not be appropriately used is a critical part of the appraisal process. The risk features comprise two elements: (i) the risk associated to the Project as a whole (inherent risk), and (ii) the risk linked to a weak control environment with regard to the Project implementation (control risk). The content of these risks is described below: Conditions Resi- Risk Risk Mitigating Measures Incorporated for Risk dual Rating into Project Design Effectiveness Risk (Y/N) Inherent risk S M Country level: Comoros is The Government is currently implementing characterized by a fragile its Financial Management Strategy with a political environment and weak focus on improving the regulatory governance capacity. There are framework, strengthening institutional critical challenges in public capacity, rationalizing budget preparation H N S financial management relating and reinforcing the external audit function. to inadequate information The implementation of the Project systems, weaknesses in external supported by the Project implementation audit and a lack of legislative specialists will mitigate the impact of oversight. existing weaknesses. A Financial Management Specialist that Entity level: The implementing will support Project implementation will be entity may not be able to meet recruited with the requisite qualifications the financial management S N M and experience in Project financial requirements due to lack of management, to specifically manage the financial management capacity Project funding. 34 Conditions Resi- Risk Risk Mitigating Measures Incorporated for Risk dual Rating into Project Design Effectiveness Risk (Y/N) MA-MWE will comply with the internal control processes as set out in the FM Project level: The resources of procedures manual. The Internal Auditor the Project may not be used for M will also continuously review the adequacy N M the intended purposes. of internal controls as well as compliance with procedures and make recommendations. Control Risk M M The FM procedures manual will spell out Budgeting: the budgeting and budgetary control Weak budgetary execution and arrangements. The Project implementation control leading to budgetary M specialists will be responsible for ensuring N L overruns or inappropriate use of strict budgetary control and the FM Project funds. Specialist will prepare monthly budget variance reports. The recruitment of a Financial Management Accounting: The accounting Specialist specifically responsible for the function might not be able to Project will reinforce the accounting execute its duties and to S N M function. The financial reporting processes generate financial information will also be facilitated by the existing in a timely manner. information system. Internal Control: Risk of The FM procedures manual will set out the inadequate approval and internal control arrangements. The Project authorization controls, Implementation Specialists including the inaccurate recording of M Financial Management Specialist will be Y L transactions and inadequate responsible for ensuring compliance with reconciliation procedures. the guidelines in the Manual. The rigorous review of all transactions prior to final payment will be performed by the Project Implementation Specialists Funds Flow: Risk of misused S including the Financial Management N M and inefficient use of funds; Specialist. The segregation of incompatible tasks will also mitigate the risk of the use of funds for unintended purposes. The Financial Management Specialist to be Financial Reporting: The recruited will be appropriately experienced Project may not be able to in financial reporting. The Project produce the financial reports S implementation specialists will also use the Y M required in a timely manner as existing computerized accounting system to required for Project monitoring facilitate the efficient and timely generation and management of financial information. Auditing: Delays in The Project will recruit an independent submission of audit reports or external audit firm which will carry out the delays in implementing the M N L audits. This process will be finalized within recommendations of the 6 months of Project effectiveness. management letter. 35 Conditions Resi- Risk Risk Mitigating Measures Incorporated for Risk dual Rating into Project Design Effectiveness Risk (Y/N) Governance and Robust FM arrangements (including a Accountability: Given comprehensive annual audit of Project institutional weaknesses, there accounts, Bank FM supervision including is the likelihood of abuse of S review of transactions and asset M administrative & political verification) designed to mitigate the positions, misprocurement and fiduciary risks in addition to MA-MWE’s misuse of funds. overall internal control systems. OVERALL FM RISK S M 19. The overall FM risk rating, taking into account the mitigation measures, is deemed Moderate. 20. Governance and Anti-Corruption considerations. Comoros has considerable institutional weaknesses, which comprise limited capacity in procurement and financial management capacity, weak oversight institutions and inadequate accountability mechanisms. The effective implementation of the fiduciary mitigation measures should strengthen the control environment. In addition, the oversight of the Project’s Steering Committee, transparency in Project implementation and dissemination of results and information to stakeholders will help address any potential governance and corruption issues during Project implementation. 21. Implementation Support and Supervision Plan. Based on the outcome of the financial management risk assessment, the following implementation support plan is proposed: FM Activity Frequency Desk reviews Interim financial reports review Quarterly Audit report review of the program Annually Review of other relevant information such as internal Continuous as they become audit reports. available On site visits Review of overall operation of the FM system Annual (Implementation Support Mission) Monitoring of actions taken on issues highlighted in audit As needed reports, auditors’ management letters, internal audit and other reports Transaction reviews (if needed) As needed Capacity building support FM training sessions Before Project starts and thereafter as needed 36 22. List of conditionalities and covenants (i) FM effectiveness conditions:  Recruitment of the Financial Management Specialist responsible for the financial management aspects (prior to effectiveness)  Project Implementation Manual prepared and adopted (ii) Financial covenants/ Dated covenants  Recruitment of the Internal Auditor within six (6) months of Project effectiveness  Purchase of the accounting software within four (4) months of Project effectiveness (iii) Other FM standard covenants  IFRs will be prepared on a quarterly basis and, submitted to the Bank 45 days after each quarter.  Annual detailed work program and budget will be prepared each year by the end of December.  The overall FM system will be maintained operational during the Project’s entire life in accordance with sound accounting practices. Procurement General 23. Comoros is in the process of major procurement reforms. A new Procurement Code was adopted by the Parliament in December 2011 and became effective on May 31, 2012. The main pillars of the code are transparency, efficiency and economy; accountability; equal opportunity for all bidders; prevention of fraud and corruption; and promotion of local capacity. The Procurement Code was supplemented by regulations, procedures manuals, and standard bidding and other procurement documents. The Procurement Code defines methods of procurement and review procedures. The Code also created the Public Procurement Oversight Authority or Autorité de Regulation des Marchés Publics (ARMP) and National Tender Board Directorate or Direction Nationale de Contrôle des Marchés Publics (DNCMP) for procurement reviews, at the Vice- Ministry of Finance level. Finally the Code provides for the creation of procurement units or Cellules de Gestion de Marchés Publics (CGMP) under the leadership of a Personne Responsable des Marchés Publics (PRMP), and a Commission d’Appel d’Offres (CAO) within each department and/or decentralized departments of national public institutions for which the law is applicable. 24. The Procurement Code is generally consistent with good public and international practices and includes provisions for: (i) effective and wide advertising of up-coming procurement opportunities; (ii) public bid opening; (iii) pre-disclosure of all relevant information, including transparent and clear bid evaluation and contract award procedures; (iv) clear accountabilities for decision-making; and (v) an enforceable right of review for bidders when public entities breach the rules. In general, the new procurement code and regulation do not conflict with IDA guidelines but its application is still under observation and it was agreed with the GoC that its efficiency would be assessed in the next fiscal year. Guidelines 37 25. The procurement for the proposed Project will be carried out in accordance with: (i) the World Bank’s “Guidelines: Procurement of Goods, Works and Non-consulting services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers� dated January 2011; (ii) “Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers� dated January 2011; and (iii) the provisions of the Financial Agreement. 26. Anti-corruption guidelines. The “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants�, dated October 15, 2006, and revised in January 2011, will apply to this Project. Procurement documents 27. Procurement Documents. Procurement transactions will be carried out using the Bank’s Standard Bidding Documents or Standard Request for Proposal (RFP) respectively for all International Competitive Bidding (ICB) and Limited International Bidding (LIB), for goods and for selection of consultants. The Sample Form of Evaluation Reports published by the Bank will be used. Advertising Procedure 28. General Procurement Notice (GPN), Specific Procurement Notice (SPN), Requests for Expression of Interest (EOI) and results of the evaluation and contracts award should be published in accordance with advertising provisions in the guidelines: The borrower will keep a list of received responses from potential bidders interested in the contracts. Procurement Methods 29. Procurement of Works. No procurement of works is expected to be financed out of the proceeds of this Project. 30. Procurement of Goods. The Goods to be financed by IDA would include: the purchase of management information systems, hardware and software equipment in the commercial and technical areas, electrical equipment as well as office furniture and office supplies, etc. Similarly, Goods that could be provided by a same vendor would be grouped in bid packages estimated to cost at least US$500,000 per contract and would be procured through ICB. Goods estimated to cost less than US$500,000, for which there is only a limited number of Suppliers and for which there is a need for compatibility may be procured through LIB. Goods estimated to cost less than US$50,000 equivalent per contract may be procured through shopping procedures. For shopping, contracts will be awarded following evaluation of bids received in writing on the basis of written solicitation issued to several qualified suppliers (at least three) who have a physical shop of the concerned goods. The award would be made to the supplier with the lowest price, only after comparing a minimum of three quotations open at the same time, provided he has the experience and resources to execute the contract successfully. For shopping, the Project procurement officer will keep a register of suppliers updated at least every six months. 31. Selection of Consultants. The Project will finance Consultant Services such as technical assistance and studies during Project implementation. Consultant firms will be selected through the following methods: (a) Quality and Cost Based Selection (QCBS); (b) selection based on the Consultant’s Qualification (CQS) for contracts which amounts are less than US$200,000 equivalent and are relevant for studies and research which require specific and significant 38 expertise; (c) Least Cost Selection (LCS) for standard tasks such as insurances and, financial and technical audits costing less than US$200,000; (d) Single Source Selection (SSS), with prior agreement of IDA, for services in accordance with the paragraphs 3.10 to 3.12 of Consultant Guidelines. Individual Consultant (IC) will be hired in accordance with paragraph 5.1 to 5.4 of Bank Guidelines; Sole source may be used only with prior approval of the Bank. 32. Except for technical assistance for management services, short lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines, if a sufficient number of qualified individuals or firms are available. However, if foreign firms express interest, they would not be excluded from consideration. 33. Procurement of consulting services other than consulting services covered by Consultant Guidelines. The provisions for procurement of goods and works will be used. 34. Training, Workshops and Conferences. The training (including training material and support), workshops and conference attendance, will be carried out on the basis of approved annual training and workshop/conference plan. A detailed plan giving the nature of training/workshop, number of trainees/participants, duration, staff months, timing and estimated cost will be submitted to IDA for review and approval prior to initiating the process. The appropriate methods of selection will be defined from the detailed schedule. Operational Costs. Operating costs financed by the Project are incremental expenses, including office supplies, vehicles operation and maintenance, maintenance of equipment, communication costs, supervision costs (i.e. transport, accommodation and per diem), and salaries of additional locally contracted staff and excluding all payments to civil servants. They will be procured using the procurement procedures specified in the Project Financial and Accounting Manual acceptable to the Bank. Assessment of the Agency’s Capacity to Implement Procurement 35. At its preparation, the Project will be under the responsibility of the PIU of an existing Bank financed – ABGE Project. During Project implementation the Project implementation specialists recruited by ABGE´s PIU will move to MA-MWE; a procurement capacity assessment for the CGMP of MA-MWE has been carried out during the pre-appraisal mission. Table 6 outlines the procurement risk assessment and corresponding risk mitigation measures. Table 6: Procurement Risk Assessment and Risk Mitigation Designation Concerns Risk mitigation Due date Staffing UGPM staff capacity is Recruitment of a By effectiveness weak Procurement Specialist for the Project Program management Lack of clarity on roles Project implementation By effectiveness and responsibilities for manual to be elaborated the new Project and training to be held at all levels 39 Other Mitigation Measures: 36. Apart from identifying the minimum required staffing and equipment needed for a procurement unit satisfactory to IDA, no other mitigation measures can be identified at this time. However, close supervision and support will be provided to propose any additional mitigation measure, if and when they are needed. 37. Frequency of procurement reviews and supervision. Bank’s prior and post reviews will be carried out on the basis of thresholds indicated in Table 7. The Bank will conduct bi- annual supervision missions and annual Post Procurement Reviews (PPR); with the ratio of post- review at least 1 to 5 contracts. Overall Procurement Risk Assessment: Substantial (HIGH) Table 7: Procurement and selection review thresholds Expenditure Contract Value Procurement Contract Subject to Category (Threshold) Method Prior Review US$ 1. Works No works expected for this Project 2. Goods ≥500,000 ICB All <500,000 LIB All <50,000 Shopping The first two contracts No threshold Direct contracting All 3. Consulting Firms ≥200,000 QCBS All contracts <200,000 QCBS; LCS; CQS First two contracts Individuals ≥100,000 comparison of 3 CVs All contracts First two contracts and contracts for <100,000 comparison of 3 CVs procurement of fiduciary team Firms & No threshold Single Source All Individuals All Term of reference regardless of the value of the contract, and all legal services, are subject to prior review. 38. Procurement Plan. All procurement activities will be carried out in accordance with approved original or updated procurement plans. The Procurement Plans will be updated at least annually or as required to reflect the actual Project implementation needs and capacity improvements. All procurement plans should be published at national level and on the Bank website according to the Guidelines. 39. Procurement Filing. Procurement documents must be maintained in the Project files and archived in the safe place until at least two years after the closing date of the Project. The Project procurement specialist will be responsible for the filing of procurement documents. 40 Monitoring & Evaluation 40. Overall monitoring and coordination of Project activities will be performed by the Project implementation specialists that will have an overall responsibility for monitoring and evaluating the different components/activities in accordance with the indicators included in the results framework (Annex 1). The Project implementation specialists will work in coordination with the different departments at MA-MWE to get updated targets, especially on the technical components and with the Vice-presidency in charge of energy for targets related to Component 2. No later than 45 days after each quarter, the Project implementation specialists will submit to the Bank and the Vice-presidency in charge of energy the quarterly progress reports covering all Project activities, including procurement and financial summary report. Bi-annual reviews, the first one to take place six months after effectiveness, should provide detailed analysis of implementation progress toward achieving the Project development objectives and include evaluation of the financial management and a post-review of procurement aspects. 41. At present there is very limited capacity and resources to collect adequate data. The Project, through Component 1.b. will support the acquisition of the necessary software and hardware that will allow for a systematic collection of key data. Role of Partners 42. Various donors are starting to support the energy sector in Comoros, including the African Development Bank (AfDB), the Qatar Development Fund and the European Union. The AfDB has initiated the preparation of a wide ranging project aimed at supporting equipment including: rehabilitation of generation in Grand Comore, Anjouan and Moheli, rehabilitation of distribution and reduction in losses (aimed at supporting the upgrading of the transmission system including system protections and rehabilitation of selected sub-stations and distribution lines), rehabilitation of fuel storage, preparation of renewable energy studies to enable diversification of generation mix and technical assistance for both MA-MWE and EDA. The project will likely be co-financed by the AfDB (US$23 million) and the Qatar Development Fund (US$10 million). AfDB is also considering distributing Compact Fluorescent Lamps (CFLs) to households to lower their electricity bills and at the same time, reduce the electricity generation requirements and thus fuel purchases. 43. The European Union (EU) is supporting Solar Photovoltaic Generation in the Island of Mohéli through a 2 million euro grant from the EU Energy Facility. The objective of this project is to install 6 grid-connected micro power stations with storage (for a total capacity of 300 kW). This project could potentially reduce fuel cost by 30% in the Island of Mohéli. Project implementation, under MA-MWE’s responsibility, has recently started. 44. Other sources of funding such as Global Partnership for Output Based Aid (GPOBA) could also be available in the future to support the energy sector in the country. 41 Annex 4: Operational Risk Assessment Framework (ORAF) COMOROS: Electricity Sector Recovery Project Stage: Board 1. Project Stakeholder Risks Rating: High Description : Risk Management: Risk of opposition to reform from stakeholders benefiting from the Adequate prioritizing of reforms: the Bank team advised against status quo, namely utility employees, and some consumers groups: involuntary retrenchment to avoid the risk of alienating MA-MWE’s • Utility employees: MA-MWE has for quite some time been workforce whose support will be critical for Project implementation. a vehicle of patronage. Its workforce (around 775 when The over staffing of MA-MWE is part of a much larger issue affecting considering permanent employees and termed contracts) is all public institutions, and which cannot be addressed frontally without clearly excessive compared to the size of the utility. a significant risk of social and political backlash. The most practical • Consumers: Reducing non-technical losses and enforcing approach regarding MA-MWE is to limit new recruitments to the strict collection discipline will result in higher cost from some business necessity and rely on natural attrition to gradually reduce existing users (though electricity supply in Grande Comore personnel costs. Capacity building for MA-MWE staff is also included is currently very unreliable at best or extremely sporadic in the Project to professionalize the work force. In addition, the two depending on location of users. For a vast majority of international consultants will look at the organization and HR aspects users, the choice is therefore not between “free� electricity of the utility and will propose a more efficient use of staff resources. and paying for the service, but rather between paying for Consumers: restoration of payment discipline needs to be accompanied the service or not getting electricity. by tangible improvement in service provision, as consumer complaints are overwhelmingly related to reliability, rather than prices. A public communication campaign will also be part of the accompanying measures. Status: Stage: Due Date : June Resp: GoC Not yet Implementation 2017 Due 2. Implementing Agency Risks (including fiduciary) 2.1 Capacity Rating: High Description : Risk Management: Weak implementation capacity of the utility Weak utility capacity: the Project will support senior managers permanently based in Comoros. The emphasis of this assistance will be on reinstating sound utility management practices and procedures for the commercial and financial functions. Also, a need assessment with regard to technical training of MA-MWE’s staff has been initiated (AfDB). Component 1 of the Project also included extensive capacity building and training for staff on the new data management systems to 42 be procured for the utility. The Project will finance the recruitment of Project implementation specialists based at MA-MWE. The Project implementation specialists will include a financial management specialist and a procurement specialist. Extensive training will be provided to the staff prior to Project effectiveness. Resp: GoC, Stage: Preparation Due Date: June Status: Donors and implementation 2017 Ongoing 2.2 Governance Rating: High Description: The electricity sector has historically been Risk Management: characterized by weak governance, including limited policy The Government of Comoros has adopted in August 2012 a sector reforms, limited transparency regarding the budget support to the reform strategy paper which identifies inadequate sector governance as sector, lack of managerial autonomy and accountability on the part one of the key sector issues and identifies actions to improve sector of the utility. governance and management. The actions are related in particular to (i) corporate governance of the utility and accountability mechanisms for its managers, (ii) energy pricing, (iii) enabling environment for enforcement of payment discipline for electricity. Points (i) and (ii) will be supported through the Project (international technical consultants to put in place adequate reporting to create accountability mechanisms and ensure sufficient managerial autonomy, various sector governance studies, will also be financed under Component 2 aimed at improving governance and accountability in the sector. The Government has already taken some steps regarding point (iii) (law enforcement support to MA-MWE for disconnection campaigns). In addition, the Vice- presidents in charge of energy and finance have signed a Letter of Policy Development reiterating their commitments to the sector recovery. Resp: GoC, Stage: Preparation Due Date: June Status: Donors and implementation 2017 Ongoing 3. Project Risks 3.1 Design Rating: Substantial Description: Risk of excessive Project complexity. Risk Management: Simple Project design with a limited number of activities and contracts. Close coordination with other donors during Project preparation and implementation to ensure that donors provide coordinated support to the sector while minimizing interdependency, which could slow implementation. Resp: Bank Stage: Preparation Due Date : June Status: team, GoC and implementation 2017 Ongoing 3.2 Social & Environmental Rating: Moderate 43 Description: Given the nature of the activities to be supported by Risk Management: The Project will not finance construction of new the Project, no significant Environmental risks are expected. infrastructure and it will not lead to land acquisition nor will it deprive people of access to their usual means of livelihood. The Project will fund consultancies, studies not related to infrastructure Project and the acquisition of electricity meters, management information systems, hardware and software equipment in the commercial and technical areas, thus, no significant adverse environmental impacts are There are risks related to the enforcement of payment of electricity anticipated. on the poor. The Project will finance a PSIA to better understand the impacts of the enforcement of electricity payment on the poor and identify measures to mitigate those impacts. Resp: Status: Stage: Due Date : GoC, Bank Not yet Implementation December 2014 team Due 3.3 Program & Donor Rating: Moderate Description: Risk of insufficient, insufficiently sustained, or Risk Management: Regular donor coordination has been carried-out uncoordinated donor support to the sector. through Project preparation and will continue throughout Project implementation. By defining a comprehensive sector reform strategy and defining its priorities, the GoC has exhibited ownership of the process and the establishment of a high-level Steering Committee that will guide all donor financed projects in the energy sector should facilitate the coordination among donors and avoiding overlapping of activities. It that context, it has been agreed that the Bank will concentrate on the financial and commercial recovery of the utility and AfDB, with potential co-financing from the Qatar Development fund will finance improvements in the distribution system. Finally, the Project has been ring-fenced for Project implementation from delays on the part of other development partners. Resp: GoC, Stage: Preparation Due Date : June Status: Donors and implementation 2017 Ongoing 3.4 Delivery Monitoring & Sustainability Rating: Substantial Description: Lack of financial sustainability of service expansion, Risk Management: The proposed operation, as well as the support lack of sustainability of performance improvement after departure from other donors, will pursue consolidation and recovery of the sector of technical assistants, lack of maintenance of equipment. in the short and medium term. No major expansion of service and access is planned. Instead the focus is on restoring acceptable level of services to already connected users, as well as adequate utility management practices (maintenance, billing, collection, HR). Training and capacity building of staff in the utility is an integral part of the 44 Project, to ensure sustainability in the commercial and financial performance of the utilities. Status: Resp: GoC, Stage: Due Date: June Not yet donors Implementation 2017 Due 3.5 Political Rating: Substantial Description: Political instability. Although the next presidential For the last couple of years, Comoros has enjoyed political stability. election (which will replace the president of the Union, as well as The 2009 constitutional revision seems to have achieved a workable the three Vice-Presidents, who each come from a different island) compromise with regard to power sharing between the islands, and is scheduled for 2016, the fragility in the political environment suppressed the demands for secession in Anjouan, which played a large remains a challenge. part in political instability. The team will work closely with the CMU in monitoring the political situation. Status: Stage: Due Date: June Resp: GoC, Not yet Implementation 2017 Due 4. Overall risk 4.1 Implementation Risk Rating: High 45 Annex 5: Implementation Support Plan COMOROS: Electricity Sector Recovery Project 1. The strategy for implementation support (IS) has been developed based on the nature of the Project and its risk profile. It will aim at making implementation support to the client more flexible and efficient, and will focus on implementation of the risk mitigation measures defined in the ORAF. 2. The World Bank Task Team Leader will handle the day-to-day matters of the Project as well as coordination with the client and among Bank team members. The implementation support envisaged under the proposed Project includes technical and fiduciary (FM and procurement) support. 3. The team proposes bi-annual supervision missions. In line with the World Bank’s policy, the team would conduct twice-yearly supervision missions, including technical and fiduciary staff. In conjunction with the Government counterparts, the World Bank team would monitor and report on progress against the monitoring indicators agreed in the Results Framework, as well as verification of their achievement. They will also monitor risks, updating the risk assessment as needed and paying particular attention to the implementation risks. 4. A mid-term review would encompass a more in-depth stock-taking of performance under the Project. It would be carried out approximately half-way through implementation of the proposed Project. The mid-term review would assess progress towards achieving the individual Project Development Indicators and Project Development Objective. Based on the assessment of progress at the mid-point of the program, recommendations for improvements/changes and use of the contingency funds to the Project would be considered by both the Government counterparts and the World Bank management team. The mid-term review would also review overall Project implementation arrangements, making adjustments as necessary. 5. Tables 1 and 2 below map out the proposed Implementation Plan, Skills Mix and other Inputs required. 46 Table 1: Implementation Plan Time Focus Skills Needed Resource Estimate Partner Role Team leadership, technical TTL, sector reform US$150,000 First twelve Ongoing and procurement review of specialist, energy months exchanges of the ToRs and procurement specialist information as documents and required by the Institutional arrangement preparation of the and Project supervision Project; coordination preparation of TORs, procurement of Strengthening of Project goods and implementation specialists consultants; capacity including preparation of procurement and FM Procurement and Project reports training FM specialists Project implementation specialists appointed and available for training Project overall supervision, TTL, sector reform S$400,000 Supervision of 12-48 months technical and procurement specialist, energy management review of the ToRs and specialist contract for MA- procurement documents; MWE, design and technical support; Project implementation of supervision coordination reform, laws and regulations, as Fiduciary compliance applicable; preparation of Project reports Procurement and FM specialists 47 Table 2: Skills Mix Required Skills Needed Number of Staff Number of Trips Comments Weeks TTL/Power Sector 6 SWs annually first 2 per annum Washington DC based Specialist twelve months; 4 SWs annually afterwards Sector reform Specialist 4 SWs annually first 2 per annum Washington DC based twelve months; 3 SWs annually afterwards Energy Specialist 4 SWs annually first 2 per annum Washington DC based twelve months; 3 SWs annually afterwards Procurement 3 SWs annually first 2 per annum Madagascar Office staff twelve months; 2 SWs annually afterwards FM 3 SWs annually first 2 per annum South Africa Country twelve months; 2 SWs Office staff afterwards 48 Annex 6: Electricity sector background and performance COMOROS: Electricity Sector Recovery Project 1. The sector background and performance assessment contained in this annex and used as an important input to the appraisal is based on outputs of the analytical work carried out by the World Bank during 2011-12 and documented in the report: “République des Comores: Diagnostic du Secteur de l’énergie�. This also led to the August sector policy note for the energy sector adopted by the GoC (“Document de politique de l’énergie électrique et des produits pétroliers de l’Union des Comores� July 2012). 2. Organization of the sector. The sector is overseen by the Minister in charge of water, energy, agriculture, environment, crafts and fisheries. Under this Ministry, the Director-General for water and energy is responsible for the public institutions forming the electricity sector. 3. Electricity production, transmission and distribution is carried out by MA-MWE for Grand Comore and Moheli and by EDA for Anjouan. MA-MWE and EDA purchase diesel for power generation from the Societe Comorienne des Hydrocarbures (or SCH), a fully Government owned entity. SCH in turn has a long-term contract to purchase diesel from overseas. The Government fixes the price of diesel and electricity within Comoros. 4. Within the sector, power to appoint senior staff in the two utilities, as well as reporting structures within the sector are complex. The President appoints the Managing Director and Secretary General. The Minister in charge of energy appoints MA-MWE’s Director – Commercial and Director – Technical whilst the Vice-President with responsibility for finance appoints MA-MWE’s Director – Finance. In terms of reporting, these three functional directors report to the Managing Director. The Managing Director technically reports to the Board of MA-MWE. The Board includes representation from the President, Prime Minister, Ministry of Finance, Ministry of Energy, staff representatives and consumer representatives. This Board reports to an inter-ministerial committee which oversees all public enterprises. In practice, this inter-ministerial committee meets infrequently and the Managing Director and Board appear to effectively report directly to the Minister in charge of energy. The fragmentation in who appoints senior staff and the difference between appointing structure and reporting structure appears to dilute some of the authority and responsibilities of the senior staff – as there is a question as to whether senior staff have the full confidence of the politician they are reporting to. The reporting structure itself is somewhat complex – with multiple parties potentially having a role in governance of the sector. See Figure 1 below for further details. Power sector reform will need to address streamlining/consistency of appointment and reporting lines within the sector. 49 Figure 1: Electricity sector organization with arrows indicating appointment authority 5. An energy strategy (including an action plan) was adopted during 2012, prior to which there was no published policy, strategy for the sector or form of prioritization of actions. So historically, investment and operating decisions have been made with short term priorities in mind, rather than on the basis of long-term planning. Major investment decisions have often been made by politicians rather than utility management. Prices in the sector are still not set on the basis of any methodology, process or timeline. 6. Electricity production Installed generating capacity is of the order of 18.6 MW in Grand Comore, 6 MW in Anjouan and 2 MW at Moheli. However, available capacity is of the order of 8 MW in Grand Comore, 3-4 MW in Anjouan and less than 1 MW in Moheli. Most of these plants are actually not particularly old but suffer from lack of spare parts and maintenance. The diagnostic study found that most have been operated for significantly less than 50,000 hours (normal operation of plants would enable more than 120,000 hours of operation). 50 Table 1: Installed and available generating capacity in Grand Comore Hours of operation Generator Installed capacity (MW) Available capacity (MW) (up to January 2012) CAT 2 1.6 1.3 30,358 CAT 3 1.6 1.3 47,614 CAT 4 1.6 1.0 40,499 CAT 5 1.6 0 30,835 CAT 6 1.6 0 42,304 G1BIS 1.6 0.9 21,858 G5 1.8 0 113,284 GE1 1.4 0 24,498 GE2 1.02 0 19,203 GE3 1.2 0.8 24,935 GE4 1.2 0.95 26,109 GE5 1.2 0.85 26,872 GE6 1.2 0.95 26,182 Total 18.62 8.05 7. Transmission and distribution MA-MWE’s overall losses are of the order of 45%. Technical losses are estimated at 18% with the rest being commercial losses. Poor design of the network and poor maintenance is blamed for the technical losses. The commercial losses are a function of significant numbers of illegal connections (estimated at 10,000 – mostly in Moroni). Two forms of metering have been installed for consumers by MA-MWE. There are over 10,000 PP2 SEMLEX meters and almost 7,000 PP1 Egyptian meters. The former have been highly prone to illegal wiring and tampering, especially as they are located inside consumer’s homes and thus difficult to check. The latter are equipped to address illegal connections. 8. In terms of quality of service, power supply is sporadic, of the order of 6 to 20 hours per day depending on whether consuming in a rural part of Grand Comore or in Moroni. Service is better in Anjouan, where typical service is up to 20 hours per day. Supply is affected by availability of diesel (due to the poor financial situation of sector), availability of generation and quality of transmission and distribution. Access rates are 60% in Grand Comore, 50% in Anjouan and 20% in Moheli. 9. Commercial performance MA-MWE had 44,000 customers in 2012. The number of customers has been increasing by 15% each year. EDA had over 15,000 customers in 2010, and their increase has been at approximately 11% per year. Each customer consumes a relatively small amount of electricity – 10-50 kWhs per month. MA-MWE’s billing rate is the worst in Africa (at 55% in 2010). EDA’s is somewhat better (60%). Of this level of billing, collection in 2010 was 58% for MA-MWE and 93% for EDA. Clearly, these figures, especially for MA- MWE, point to problems at every level. Technical problems regarding the network, metering equipment, customer databases and billing processes, problems of capacity, problems of complicity between MA-MWE staff and consumers over non-payment, lack of customer focus and customer service, etc. The overall effect is that MA-MWE is paid for only approximately 30% of electricity it produces. 10. Financial situation MA-MWE’s accounts have not been audited since 2009 (the 2009 report had several reservations). Tariffs for electricity for households are USc 32/kWh (CF 120/kWh) or USc 35/kWh (CF 132/kWh) if prepaying and for industries are USc 24/kWh (CF 51 90/kWh) for day time and USc 29/kWh (CF 110/kWh) for night time. At this level of tariff and with the billing and collection rates described above, MA-MWE makes significant losses. Table 2: MA-MWE treasury information (in million FC) 2008 2009 2010 Billing 4,424 4,839 5,020 Collection 2,566 2,807 2,912 Current operating 4,477 2,992 6,714 costs Current operating (1,911) (185) (3,802) profit (loss) 11. For the energy sector as a whole, subsidies were of the order of CF 300 million (direct) and CF 2.7 billion (indirect) in 2011. Together, the electricity sector and diesel based products represent expenditure of 10% of the national budget. 52 Annex 7: Recovery and Development Plan and Role of Senior managers COMOROS: Electricity Sector Recovery Project 1. Specific areas where expertise is required from the senior managers to be hired as part of this Project is based on the findings of the analytical work carried out by the World Bank during 2011-12 and documented in the report: “République des Comores: Diagnostic du Secteur de l’énergie�. This also led to the August 2012 sector policy note for the energy sector adopted by the GoC (“Document de politique de l’énergie électrique et des produits pétroliers de l’Union des Comores�, July, 2012). 2. The Recovery and Development Plan will be developed during project preparation by an independent technical expert or team of experts familiar with modern techniques in commercial and financial management (with an emphasis on billing and collection in small utilities). The Plan is also expected to develop performance contracts to hold the MA-MWE management team (Board, Managing Director, senior staff including the senior managers) accountable for certain performance improvements in terms of electricity supply, set specific objectives and create a performance accountability framework for the senior managers to be hired under this Project. The Plan will be fairly clear about targets, and will provide an indicative timeline for achieving the targets. It will suggest modalities for achieving the targets (use of software, equipment, processes, etc.) together with likely costs. However, it will leave specific decisions on choice and timing to the discretion of the senior managers and MA-MWE management. Given the different options for responsibilities between the senior managers and MA-MWE management, the Plan will also suggest models for allocation of responsibilities and decision making depending on the profile of the eventual senior managers. 3. Under Component 1a of the Project, it is expected that at least two senior managers will be hired. One with a focus on commercial performance of the utilities and the other with a focus on effective financial management. Further experts may be made available for shorter periods as required. The exact modalities for the working of the senior managers will be defined in consultation with the Managing Director of MA-MWE and the Minister in charge of energy, once they have been selected. The Recovery and Development Plan, prepared during preparation, will support the setting of performance targets and the allocation of roles, responsibilities and decision making powers. EDA will also benefit from management systems deployed for MA-MWE with the intention of maximizing dissemination of expertise across the Comoros - whilst respecting the autonomy of management within each island. 4. Commercial management. The senior manager will put in place a modern and workable (in the context of Comoros) new system to allow for: different technologies of metering, reporting of key performance indicators on a regular basis (including losses by location, reliability of supply, billing volume and value, collection, etc.). Certain indicators of performance are expected to be published on the MA-MWE website. Billing information will be expected to become reliable and auditable. The new system should be deployed and working, with customers being appropriately migrated to the system. A process should be put in place for ensuring reliability of billing information. There also needs to be improvement in the interface with the client, and how errors are dealt with. 5. Financial management. The senior manager will: put in place a modern and workable (in the context of Comoros) new software to allow objectives set out in the Recovery and 53 Development Plan to be met; ensure there is a reliable system in place for budgeting of expenses; ensure there is a robust system in place for recording use of fuels, generation of electricity, and reconciliation with expenses/revenues; and supervise the various activities involved with accurate information on inventory, debtors, creditors, reconciliation of debts, etc., to ensure there is reliable information for establishment of MA-MWE’s balance sheet. Preparation of full company accounts that can be audited. 6. The senior managers will also be expected to contribute to issues relating to human resources and capacity building/training. With regards to human resources, evaluation of competence of existing staff will be expected – together with identification of needs over the coming 5-6 years and the putting in place of a system that will bring forward new management and technical competence. Developing training programs that develop competence in key areas of MA-MWE’s activities will be important. 54 Annex 8: Signed Letter of Policy Development COMOROS: Electricity Sector Recovery Project UN ION DES COMORES UnitC-Solidnritc-Dcvcloppcmcnt VICE- PRESIOENCE VICE PRESIDENCE CHARGEE DU Ml 'ISTEREDES FINANCES, MINlSTERE DE LA PROD UCfiON, DE DE L'ECONO MIE, DU BUDGET, L'ENVlRONNEMENT, DE L'ENERG IE DE L' INVESTISSE MENT ET DU COMMERCE DE L'INDUSTRIE ET DE EXT ERTEUR C HARGE DES PRIV ATISAT!ONS L'AilTISANAT N"l3- Ojs·----NP:M~E-BICEPICAB w ;:;:-:r~-----NP:MPEEIA/CAB AL'AlTENTIONDEMADAME n-11 ~ J;. d-Ui ~ 1-10 n. ·rvo·· :l- I Haleh Z. Bridi Directrice des Operations pour les Comore s Region Afiique Banque mondiale Rue Andriamilidy L. Razafimanantsoa Anosy- Antananarivo 101 Madagascar Objet : lctlre de politique de developpcmcnt sectoriellie au projet de redressement du secteur de l'clectricite Madame Ia Directrice, Au nom du Gouvcrnement de !'Union des Comores, nous demandons par Ia prcscme !'octroi d'un don d' un montant equivalent II 5 millions de dollars americains pour le financemcnt du Projct de Redressemcnt du Secteur de I'Eiectricite. Cc projet va appuyer lc programme du Gouvemernent dans le secteur de l'electricite. II a pour but d'ameliorer Ia perfonnance commerciale ct financiere des societes d'c!lectl'icite ainsi que Ia gouvernance etle cadre de planification et de prise de decision dans le secteur. Contexte et developpements reeents La croissance cconornique augmente doucement. Elle a aueint 2,5% en 2012, contre 2.2% rannec precedente, grace aux bons rcsultats du secteur agricole, au rapatriement des salaires et A Ia construction de logcmentS qui y est associee, et au Ieger redressement de l'investissement etranger direct. Bien que cene croissance ~lobale positive marque unc hcureuse rupture nvcc le passe, elle reste encore trop faible. Avec un accroissemenl d~mographique estime ~ 2.4% par an, unc croissance economique nenemcnt plus rapide et prolongee sera necessaire pour rCduirc Ia pauvrete. Dans ce contexte. des effons sont neccssaircs pour restaurer progressivement Ia contiance dans Ia capacite du GoU\•emement Agl!rer Ia complexe transition politique et economique du pays entre fragilite Cl resilience. Le Gouvemerncnt progresse dans Ia resolution des problemes structurels qui ont longtemps entrave Ia croissance. Au-dela des decennies d'instabi lite politique, plusieurs problemes structurels onl limite les possibilites de croissance rapide, allan! d'un contexte diffici le pour lcs affaires (avec des procedures administratives lourdes) a des infrastructures deficientes. Dans le cas de l'energie, le Gouvernemcnt clabo•·c actuellement un programme de reforme du secteur de l'electricite visanl a ameliorer Ia gestion et les resullatS opl!rationnels de MA-M WE eta rehabiliter les infrastructures du secteur. k r 55 Politique de r<'forme du s~teu r Sur Ia base d'un diagnostic scctoriel conduit en 2011 avec le souticn de Ia Banque mondiale, le Gouvemement a adopte en aoOt 2012 une note de politique sectorielle («Document de politique de l'encrgie electrique ct des produits petroliers de I' Union des Comores >>). Ce document d~finit une approche intt!!,'l'~c visam Ia reforme et lc retabli~scment du secteur grace a Ia resolution des problemes ~ long et a court terme. Les quatre domaines prioritaires recenses dans ce document sont les suivants : Une vaste reformc de Ia direction et de Ia gestion commerciale et technique de Ia MA-MWE, pour veiller a Ia ptrennite des activites de rehabilitation et reduire les charges budgetaires, assoeiee a Ia rehabilitation des installations (production, transport ct distribution), pour amcliorcr Ia fiabili t~ de I' approvisionncment ; La preparation dtS fururs inve.;~iso;emcnts dans Ia production d'elcctricite a partir de sources renouvelables (microcentrales hydrauliques). t!ventucllement d'~nergie eolienne et gt!othennique, pour rt~ultcs dont: Ia rt!habilitation de Ia production d Grande Comore, Anjouan et Moh~li; Ia rehabilitation de Ia disu ibution et Ia r~duction des pertes (dans le but d'appuycr Ia modernisation du reseau de transport, notamment grace a Ia protection du reseau et A Ia rehabilitation de certaines sous-station~ et !ignes de distribution): Ia rehabilitation des installations de stoekage des carburants ; Ia preparation d'etudes sur les energies renouvelables visant Ia diversification des sources de production d'electricite; et I'Msistancc technique t\ Ia MA-MWE et I'EDA. Les fonds du Qatar (10 millions de dolla,..) pourraicnt cofinancer le projet de Ia BAD sur Ia rehabilitation de Ia production et Ia distribution. Ce cofinancement sera contirme dans Jes deux mois Avenir. 56 L'UE appuie Ia production d'~lectriciu~ photovoha1'que daM l'ile de Vfoheli grace a un don de 2 mill ions d'curos des fonds de I'UE pour l'energie. Ce programme a pour object if de connecter au reseau six microccntrales dot~ de systemes de stockage (soil une capacite totale de 300 kW). Ce projet pourrait n!duire de 30% le cout du carburant sur l'ile de Moh de Ia MAM-WE visant a r&luire le \OI d'elcctricite ct a augmenter le recouvrement des factures. Le Gouvcmemenl etl•die egalement serieusement les moyens de renforcer le soutien externe et l'expenise technique de Ia MA-MWE. Nous avons dans un premier temps envisage Ia possibilite de recrutcr une entreprise externe pour lui conficr Ia gestion de Ia MA-M WE. Un appcl a manifestations d'imeret pour Ia gcstlon de Ia MA-MWE (pour une periode de quatre ans) a c16 public en septembre 2012 dans des publicat ions financi~res internationales et des publications regionales. Plusieurs entreprises poten1ielles om ete contactces ~ titre ootcicux. Cepcndant une seule manifestation d'intc!r~t a l!t6 re~ue et elle ~manait d'une societe de conseil et non d'une societe ayant une experience directe de Ia ce