Document of The World Bank FOR OFFICIAL USE ONLY Report No: 52204-MZ PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 49.7 MILLION (US$80 MILLION EQUIVALENT) TO THE REPUBLIC OF MOZAMBIQUE FOR AN ENERGY DEVELOPMENT AND ACCESS PROJECT (APL-2) January 6, 2010 Africa Energy Team Sustainable Development Department Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective November 30, 2009) Currency Unit = Mozambique Meticais (MTS) 30.0 MTS = US $1 SDR 0.621048 = US $1 FISCAL YEAR January 1 ­ December 31 ABBREVIATIONS AND ACRONYMS ADB African Development Bank AFD Agence Française de Developpement AGO's GCCC Anti-Corruption Office ALI Africa Lighting Initiative APL Adaptable Program Loan CNELEC National Electricity Commission CPIA Country Portfolio Implementation Assessment CPAR Country Portfolio Assessment Report CPS Country Partnership Strategy CREST Commercial Reorientation of Electricity Sector Toolkit DPL Development Policy Lending DED Electrification and Projects Directorate DNSP/ME National Directorate for Studies and Planning / Ministry of Energy DVO Direct Vegetable Oil EC European Union EDAP (APL-2) Energy Development and Access Project EdM Electricidade de Moçambique EIB European Investment Bank EITI Extractive Industry Transparency Initiative ERAP Energy Reform and Access Project ESMAP Energy Sector Management Assistance Program ESMF Environmental and Social Management Framework ESW Economic Sector Work FUNAE Fundo de Energia / Energy Fund GoM Government of Mozambique GTZ German Technical Cooperation HCB Hidroelectrica Cahora Bassa IBMS Integrated Business Management System IBRD International Bank for Reconstruction and Development IC Individual Consultant ICB International Competitive Bidding IMF International Monetary Fund LCS Least Cost Selection ME Ministry of Energy MICOA Ministry of Environment MINEC Ministry of Education and Culture MISAU Ministry of Health MoF Ministry of Finance MTR Mid-term Review MPD Ministry of Planning & Development MV Medium Voltage MW Mega Watt NCB National Competitive Bidding NEDAP National Energy Development and Access Program NEPAD New Partnership for Africa's Development NDF Nordic Development Fund NORAD Norwegian Cooperation OFID OPEC Fund for International Development PARPA II Poverty Reduction Strategy Program II PDO Project Development Objective PFM Public Financial Management PIM Project Implementation Manual PIU Project Implementation Unit PRSC Poverty Reduction Support Credit PV Photo-voltaic RAP Resettlement Action Plan RESIP Rural Electrification Strategy and Investment Program RETs Renewable Energy Technologies RPF Resettlement Policy Framework SBD Standard Bidding Documents SME Small and Medium Enterprises SSS Single Source Selection SWAp Sector Wide Approach UGEA Project Procurement Unit VAT Value Added Tax Vice President: Obiageli K. Ezekwesili Sector Director: Inger Andersen Country Director Luiz A. Pereira Da Silva Sector Manager: Subramaniam V. Iyer Task Team Leader: Boris E. Utria MOZAMBIQUE MZ- Energy Development and Access Project (APL-2) CONTENTS Page I. STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 A. Country and sector issues.................................................................................................... 1 B. Rationale for Bank involvement ......................................................................................... 4 C. Higher level objectives to which the project contributes .................................................... 5 II. PROJECT DESCRIPTION ................................................................................................. 5 A. Lending instrument ............................................................................................................. 5 B. Program objective and Phases ............................................................................................ 6 C. Project development objective and key indicators............................................................ 11 D. Project components ........................................................................................................... 12 E. Lessons learned and reflected in the project design.......................................................... 13 F. Alternatives considered and reasons for rejection ............................................................ 14 III. IMPLEMENTATION .................................................................................................... 16 A. Partnership arrangements .................................................................................................. 16 B. Institutional and implementation arrangements ................................................................ 16 C. Monitoring and evaluation (M&E) of outcomes/results ................................................... 17 D. Sustainability..................................................................................................................... 18 E. Critical risks and possible controversial aspects............................................................... 18 F. Loan/credit conditions and covenants ............................................................................... 19 IV. APPRAISAL SUMMARY ............................................................................................. 21 A. Economic and financial analyses ...................................................................................... 21 B. Technical ........................................................................................................................... 25 C. Fiduciary ........................................................................................................................... 26 D. Social................................................................................................................................. 27 E. Environment...................................................................................................................... 29 F. Safeguard policies ............................................................................................................. 30 G. Policy Exceptions and Readiness...................................................................................... 30 Annex 1: Country, Sector and Program Background ............................................................. 31 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ................. 37 Annex 3: Results Framework and Monitoring ........................................................................ 40 Annex 4: Detailed Project Description...................................................................................... 45 Annex 5: Project Costs .............................................................................................................. 67 Annex 6: Implementation Arrangements ................................................................................. 68 Annex 7: Financial Management and Disbursement Arrangements ..................................... 80 Annex 8: Procurement Arrangements ...................................................................................... 97 Annex 9: Economic and Financial Analysis .......................................................................... 111 Annex 10: Safeguard Policy Issues .......................................................................................... 143 Annex 11: Project Preparation and Supervision .................................................................. 147 Annex 12: Documents in the Project File ............................................................................... 149 Annex 13: Statement of Loans and Credits ............................................................................ 150 Annex 14: Country at a Glance ............................................................................................... 152 Annex 15: National Energy Development and Access Program (NEDAP) ......................... 154 Annex 16: MAP (IBRD 32473) ................................................................................................ 173 REPUBLIC OF MOZAMBIQUE MZ-ENERGY DEVELOPMENT AND ACCESS PROJECT (APL-2) PROJECT APPRAISAL DOCUMENT AFRICA AFTEG Date: January 6, 2010 Team Leader: Boris Enrique Utria Country Director: Luiz Pereira Da Silva Sectors: Power (70%); Renewable energy (15%); Sector Manager: Subramaniam V. Iyer Central government administration (15%) Themes: Access to urban services and housing (25%); Infrastructure services for private sector development (25%); Rural services and infrastructure (24%); Regulation and competition policy (13%); Climate change (13%) Project ID: P108444 Environmental category: Partial Assessment Lending Instrument: Adaptable Program Joint IFC: Loan Joint Level: Project Financing Data [ ] Loan [X] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US $m.): 80.00 Proposed terms: Standard, with 40 years maturity including a grace period of 10 years. Financing Plan (US $m) Source Local Foreign Total BORROWER/RECIPIENT 0.00 0.00 0.00 International Development Association 24.00 56.00 80.00 (IDA) Total: 24.00 56.00 80.00 Borrower: Republic of Mozambique Responsible Agency: Ministry of Energy 25 de Septembro Av. 1218 P.O. Box 1381 Maputo, Mozambique Tel: (258) 2135-7600; Fax: (258) 2135-7668 Electricidade de Mozambique Avenida Filipe Samuel Magaia, 368, 1 Andar, PO Box 2532 Maputo, Mozambique Tel: (258) 2135-3629 Fax: (258) 2132-2074 Fundo de Energia (FUNAE) Rua da Imprensa, N. 256 - 6 Andar Porta 607-610 Maputo, Mozambique Tel: (258) 2142-9409 Fax: (258) 2130-9228 Estimated disbursements (Bank FY/US $m) FY 2010 2011 2012 2013 2014 2015 Annual 2.0 16.0 25.0 22.0 10.0 5.0 Cumulative 2.0 18.0 43.0 65.0 75.0 80.0 Project implementation period: 5 years Expected effectiveness date: March 15, 2010 Expected closing date: June 30, 2015 Does the project depart from the CAS in content or other significant respects? [ ]Yes [X] No Ref. PAD I.C. Does the project require any exceptions from Bank policies? Ref. PAD IV.G. [X]Yes [ ] No Have these been approved by Bank management? [X]Yes [ ] No Is approval for any policy exception sought from the Board? [X]Yes [ ] No Does the project include any critical risks rated "substantial" or "high"? [ ]Yes [X] No Ref. PAD III.E. Does the project meet the Regional criteria for readiness for implementation? [X]Yes [ ] No Ref. PAD IV.G. Project development objective Ref. PAD II.C., Technical Annex 3 The overall Project Development Objective is to increase access to electricity and modern energy services in peri-urban and rural areas in a sustainable and affordable manner. Within that overall PDO the project will seek to support the Borrower to: (a) Increase grid-based access to and improve reliability of the supply of affordable electricity services in peri-rural areas; (b) Increase off-grid access to electricity and modern energy services in unserved rural areas through conventional and renewable energy resources and technologies (RETs); (c) Leverage the mobilization of multi-lateral and bilateral donor financing for improving grid- based access to modern energy services through the reinforcement of the existing primary electricity network and the extension of the grid to un-served areas; (d) Improve the overall performance of the main sector institutions and their capacity to expand electrification and to mobilize new private sector and donor investment financing through the provision of institutional strengthening and capacity development support; and, (e) Elaborate a "National Rural Electrification Strategy and Investment Program". Project description [one-sentence summary of each component] Ref. PAD II.D., Technical Annex 4 (I) Reinforcement of the Primary Networks and Grid Extension Component (US $50.0 million): This component will finance: (i) engineering and consulting services; (ii) a MV network transmission efficiency pilot project; (iii) rehabilitation and reinforcement of the existing primary networks; and, (iv) extension and intensification of the medium and low voltage grid in peri-urban areas; (II) Investments on Rural and Renewable Energy Component (US $18.0 million): This component will increase and accelerate decentralized access to modern energy services in rural areas by supporting the implementation and/or scaling-up of: conventional and renewable energy sources and technologies. (III) Energy Sector Planning, Policy and Institutional Development Component (US $10.2 million): This component will finance: (i) the elaboration of a national "Rural Electrification Strategy and Investment Program (RESIP)"; (ii) technical assistance and consulting services; and, (iii) institutional strengthening and capacity building of the Ministry of Energy. Project cost structure includes US $1.8 million in unallocated funds. Which safeguard policies are triggered, if any? Ref. PAD IV.F., Technical Annex 10 Environmental Assessment (OP/BP 4.01): This policy will be triggered due to the potential adverse environmental impacts of planned investments regarding electricity grid extensions and renewable energy. An ESMF for the project was prepared by the Borrower and was disclosed on October 16, 2009. Involuntary Resettlement (OP/BP 4.12): This policy will be triggered due to the potential adverse social impacts related to land acquisition. An RPF for the project was prepared by the Borrower and was disclosed on October 16, 2009. Significant, non-standard conditions, if any, for: Ref. PAD III.F. Board presentation: N.A. Credit effectiveness: · Establishment of "Social and Environmental Safeguards Unit" at EdM; · Adoption of a Project Implementation Manual (PIM); · Recruitment of required FM staff (FM Consultant); and, · Update of the FM Procedures Manual for ME and FUNAE, and for EdM. Covenants applicable to project implementation: Credit Dated Covenants: · Annual submission to IDA of EdM annual self-assessment and of CNELEC annual report on EdM Performance Contract no later than September 30; · By June 30, 2011 an electricity tariff setting mechanism will be put in place for EdM which sets and thereafter maintains throughout the project implementation period average tariffs in a manner that reflect full cost recovery principles; and, · Hiring external auditors within 3 months of credit effectiveness. Financial covenants: · EdM needs to maintain throughout the project implementation period: (i) current ratio of 1.1 (current assets/current liabilities); and, (ii) debt service coverage ratio of 1.1 (cash generated from operations/debt service requirements); and, · When EdM engages in any non-financially viable operations, financing arrangements between the Government and EdM will be made to ensure that these investments will be cash neutral to EdM. FM Covenants: · The Recipient shall maintain a financial management system in accordance with the provisions of Section 4.09 of the General Conditions; · The Recipient shall prepare and furnish to the Association not later than forty five (45) days after the end of each calendar quarter, interim unaudited financial reports for the Project covering the quarter, in form and substance satisfactory to the Association; · The Recipient shall have its Financial Statements audited in accordance with the provisions of Section 4.09 (b) of the General Conditions. Each audit of the Financial Statements shall cover the period of one fiscal year of the Recipient. The audited Financial Statements for each such period shall be furnished to the Association not later than six months after the end of such period; · The Recipient shall, by not later than three months after Effective Date, hire the auditors referred to in Section 4.09 (b) of the General Conditions, with qualifications, experience and mandate satisfactory to the Association: and, · The Project Implementing Entity for Part 1 of the Project (EdM) shall maintain a financial management systems and prepare financial statements in accordance with consistently applied accounting standards acceptable to the Association, both in a manner adequate to reflect EdM's operations and financial condition, including the operations, resources and expenditures related to its respective part of the Project. These financial statements shall be audited by independent auditors acceptable to the Association. Each audit of these financial statements shall cover the period of one fiscal year of EdM. The audited financial statements for each period shall be furnished to the Association no later than six months after the end of the period. I. STRATEGIC CONTEXT AND RATIONALE A. Country and sector issues 1. Mozambique has been a strong economic and social performer in Africa. Since the devastating civil war ended in 1992, the country has enjoyed a remarkable recovery, achieving an average annual rate of economic growth of 8 percent between 1996 and 2008. As a result, the poverty headcount index fell by 15 percentage points between 1997 and 2003, bringing almost 3 million people above the poverty line and out of extreme poverty (out of a total population of 20 million). From the human development perspective, this has meant a 35 percent decrease in infant and under-five mortality, and a 65 percent increase in net primary school enrolment. Inequality remained relatively low by regional standards, and progress has been made toward the key Millennium Development Goals of infant mortality and primary enrolment. Nevertheless, with an annual per capita income of US $330 in 2007 and 54 percent of the population still below the poverty line, Mozambique remains a poor country with considerable social and economic challenges; infrastructure assets and services (energy, transport, water and sanitation, and telecom) are still inadequate, and there are serious unmet education and health needs. 2. The urban and peri-urban areas are expected to grow at 4 percent annually until 2010, underscoring the need for the continuous expansion of urban and peri-urban infrastructure services. Only around 10.5 percentage of households have access to electricity with over half of them living in Maputo and its surrounding areas and the most of the remainder in the provincial capitals and municipal heads. Most of these urban and peri-urban centers are connected to the main national electrical grid which is owned and operated by the Mozambican power utility, Electricidade de Moçambique (EdM). Access to grid-based electrification in the rural areas is extremely low (2%) and due to low demographic densities and geographically dispersed loads, will remain very low for the foreseeable future. Off-grid electrification schemes have and can continue to increase access to modern energy services. Looking forward, substantial and sustained investments are required to systematically increase access to electricity nationally. Such a national electricity access scale up program needs to be anchored by a long-term national electrification strategy and a medium term spatial least cost rollout and investment program ­ grid based and a complementary off-grid program. 3. At the household level, the main requirement for energy is for cooking and lighting. The principal energy source for the majority of Mozambicans is biomass, particularly wood fuel. Within rural communities, this accounts for nearly all the total energy consumed. Charcoal production and use is widespread in small urban settlements, district capitals and around larger towns and cities. The commercial production of charcoal for the growing urban and peri-urban markets is posing serious and tangible negative environmental impacts. 4. The Ministry of Energy (ME) is responsible for national energy planning and policy formulation and for overseeing the operation and development of the energy sector. ME is composed of three main thematic areas (Power Sector, Renewables and Liquid Fuels) and a central services management group. ME is represented in the provinces through Provincial Directorates of Mineral Resources and Energy. ME presently has a total of 156 staff, of which only 30% are university level professionals. While ME has experienced a remarkable 1 development in the last few years, it remains seriously understaffed with respect to its level of responsibilities and volume of work, requiring significant institutional strengthening and capacity development. 5. Electricidade de Moçambique (EdM), is a vertically-integrated, government-owned electric utility with an installed capacity of 140MW hydropower (86MW operational) and installed 109MW (82MW operational) in thermal power stations. EdM buys most of its power supply (400MW) from Hidroelectrica de Cahora Bassa (HCB), owner and operator of the Cahora Bassa plant on the Zambezi (2,075 MW). The GoM owns 82 percent of HCB which operates as an Independent Power Producer (IPP). The bulk of the electricity generated at HCB is exported to South Africa, with a small amount to Zimbabwe. EdM sells any excess electricity on the Southern Africa Short Term Energy Market. The Mozambique transmission grid is currently interconnected with South Africa, Zimbabwe and Swaziland. 6. The Fundo Nacional de Energia (FUNAE) was established in 1997 as a public institution to promote rural electrification and rural access to modern energy services, in a sustainable manner, and as a contributor to economic and social development in the country. Since its establishment FUNAE has been able to implement numerous successful projects using solar, wind and biomass energy resources and technologies to electrify and/or bring access to modern energy services (water pumping, crop grinding, communications, etc.) to schools, clinics and communities. FUNAE has two decentralized offices in Tete and Nampula. 7. The Conselho Nacional de Electricidade (CNELEC) was established as an independent advisory regulatory body for the electricity sector in early 2008 with support from IDA's "Energy Reform and Access Project" (ERAP APL-1; P069183). In a July 2006 directive issued by the Minister of Energy, CNELEC was instructed to give its highest priority to an evaluation of EdM's performance under its Performance Contract with the Government of Mozambique (GoM). This Performance Contract covers the years 2007 to 2009 and sets out the goals and indicators to be met annually by EdM and by government. The 2006 directive also instructed CNELEC to conduct a review of the current methodology used by EdM in setting tariffs. In performing the review of EdM's performance, the directive instructed CNELEC to conduct its review in an open and transparent manner with public hearings in several locations throughout the country. The directive also required that CNELEC make use of surveys of public opinion on EdM's performance. In early 2009, the Government of Mozambique (GoM) approved the allocation of 2.5% of the concession fees from Hidroelectrica de Cahora-Bassa, in addition to a 25% share of any other electricity sector concession fees, to fund CNELEC's future operating budget. This decision is seen as a very positive signal of GoM commitment to CNELEC. At present, the Bank funds the major portion of CNELEC's operating budget through ERAP (APL-1). 8. The World Bank already supports the Energy Sector through various projects. The ERAP (APL-1) project was approved by the Board on August 19, 2003 and was declared effective on March 30, 2004. It is described in more detail in section II.B (Program Objective and Phases). 9. The Bank is also supporting national and regional transmission project initiatives that will facilitate large scale investment in least cost power generation and regional trade. In FY08 the 2 Board approved the Mozambique-Malawi Interconnection Project (P084404). The Bank is currently supporting the preparation of the Mozambique Regional Transmission Interconnection Project (P108934), which will provide the transmission capacity to evacuate power generated in a set of "mega-projects" currently under development in the Tete region of Mozambique (i.e. Mphanda Nkuwa, Cahora Bassa North, Lurio, Moatize, Benga and Ressano Garcia), totaling more than US $15 billion in mostly private sector investments. 10. The combination of the different generation and transmission "Mega Projects" under preparation will ensure long-term sustainable least-cost power generation in the country, enable foreign investments in Mozambique, support regional integration through electricity trade, help finance the expansion of rural electrification and, inter alia, strengthen the balance of payments. 11. In November 2007, the Government of Mozambique completed the historic buy-back of the Cahora Bassa Hydroelectric Power Generation Facility. The transaction involved raising US $800 million debt under non-recourse, commercial financing structure with no sovereign guarantee. The success of this transaction raised Mozambique's profile as an attractive destination for foreign investment. It also demonstrated the benefits that can be derived from the further development of Mozambique's electricity generation potential for domestic and regional markets. 12. In addition to the overarching need for the Development of Mozambique's extensive energy resources (hydro, coal, gas and biomass) for both regional and domestic consumption the main challenges in the power sector in Mozambique are: (a) Ensuring that an affordable electricity supply is available to meet the rapidly growing domestic demand. In the near term, this will involve the continued extension of the grid with a focus on loss reduction and intensification; (b) Reaching the vast areas of the country beyond the EdM grid. GoM is committed to supporting decentralized electrification of rural schools and clinics and to increase access to modern energy services to villages and rural enterprises through Solar Photo-voltaic systems, mini-hydro schemes, modern biomass energy, and other Renewable Energy technologies (RETs); (c) Ensuring that power shortages do not become a constraint on economic growth The proposed generation and transmission "mega-projects" will address sufficiency and security of supply for the medium to long-term; (d) Government capacity to negotiate and manage the new generation developments. With up to 5 mega-power generation projects and a Transmission Backbone project at various stages of preparation, there is urgent need for increased specialized institutional capacity for this type of complex transactions at Ministry of Energy, Ministry of Finance and EdM; and, 3 (e) Institutional strengthening and capacity development at the main sector institutions (ME, EdM, FUNAE and CNELEC) in order to improve their respective performance, governance and effectiveness. B. Rationale for Bank involvement 13. The Government of Mozambique (GoM) has affirmed within the Poverty Reduction Strategy Program (PARPA II) the critical role of the energy sector in reducing poverty. The energy-related goals set in the PARPA II are being operationalized by GoM through a number of strategies1, investments and studies that have been prepared or are under way. The PARPA II (§507ff) outlines a program for the energy sector, which entails: Electrification, Liquid Fuels, Renewable Energy, and inter-sectoral Collaboration. The importance of the energy sector is also reflected in the Bank's 2008-11 Country Partnership Strategy (CPS). Pillar III -- Sustainable and Broad-based Growth -- of the CPS identifies adequate access to energy resources and services as a key driver of growth and poverty alleviation. Pillar II of the CPS -- Equitable Access to Key Services -- identifies further areas of focus for the World Bank's support such as the provision of energy services to rural schools, administrative posts, and hospitals (CPS §84). 14. Within the context of the PARPA II, and of the strategic investment priorities for the power sector, GoM prepared a comprehensive 5-year/US $230 million "National Energy Sector Development and Access Program" (NEDAP Program). 15. NEDAP's objectives are: (a) Ensuring that an affordable electricity supply is available to meet the rapidly growing domestic demand and that power shortages do not become a constraint on economic growth; (b) Reaching the vast areas of the country beyond the EdM grid; (c) Government capacity to negotiate and manage the new generation developments; and, (d) Institutional strengthening and capacity development at the main sector institutions (ME, EdM, FUNAE and CNELEC). 16. The World Bank is one of the main donors in the energy sector in Mozambique, enjoys close working relations with GoM, and has consistently played a key policy and institutional development and technical advisory role in the energy sector for more than a decade. From August 2007 to July 2009, the World Bank served as co-Chair with GoM of the "Energy Sector Working Group" that was established within the framework of the Paris Declaration on aid effectiveness. 17. The proposed US $80 million IDA Energy Development and Access Project (EDAP APL-2) constitutes both the second phase of IDA's "Energy Reform and Access Program APL Program" and the lead investment project within GoM's NEDAP Program. 18. The support of the World Bank for the proposed EDAP (APL-2) has enabled GoM to mobilize more than US $110 million in parallel financing from various other donors for the 1 Such as, Off-grid and Renewable Energy Strategy; Generation and Transmission Master Plan; North-south (backbone) Transmission Least-Cost Study, and National Bio-fuels Strategy. 4 implementation of the its broader NEDAP Program. That additional support includes OPEC Fund for International Development (OFID) (US$ 8 million, approved on June 17, 2009); Agence Francaise de Developpement (AFD) (pending Appraisal); European Investment Bank (EIB) (pending Appraisal), BADEA, Islamic Development Bank, Kuwait Fund for Arab Economic Development (pending pledge confirmation and Appraisal). Furthermore, it is anticipated that the African Development Bank (ADB) will provide additional support to the energy sector starting in 2011 within its next funding cycle (ADFXII), and that the European Commission (EC) will do the same within its next funding cycle (FED 12). 19. The proposed IDA Energy Development and Access Project (EDAP APL-2) is fully consistent with the PARPA II, CPS, GoM's new sector strategy and GoM's NEDAP Program, and builds on the ERAP (APL-1)'s ongoing investment project. It will also complement the Bank's ongoing Generation and Transmission support program. EDAP (APL-2) will specifically support: (i) scaling-up of electricity connections in peri-urban and rural areas; (ii) promoting rural and renewable energy resources and technologies; (iii) elaboration of a national Rural Electrification Strategy and Investment Program (RESIP); (iv) capacity building and institutional strengthening of the main sector agencies -- Ministry of Energy (ME), Electricidade de Mozambique (EdM), Fundo Nacional de Energia (FUNAE) and Conselho Nacional de Electricidade (CNELEC); and, (v) mainstreaming of a flexible Sector Wide Approach (SWAp) and process to establish a comprehensive donor partnership framework for coordinated and sustained financing of investment and capacity strengthening aligned with national priorities and procedures. The term flexible relates to the setting-up of flexible financing and implementation arrangements which accommodate the requirements of the different donors. C. Higher level objectives to which the project contributes 20. EDAP (APL-2) will contribute to: (i) increasing sustainable access to affordable electricity and modern energy services in peri-urban and rural populations for poverty alleviation and improvement of their quality of life; and, (ii) energy sector policy and institutional development to support shared economic growth and improved sector management and governance. In particular, the project will help prepare a Government-led sector-wide approach and harmonization process in the electricity sector. The GoM views the establishment of a flexible SWAp framework and process as a means of steering away from business as usual modalities of fragmented aid delivery to the energy sector towards a sector development perspective led by Government and shaped by the basic tenets of donor engagement - anchored by national priorities, alignment, harmonization, and joint accountability and managing for results. Further, it will also provide the impetus to leverage substantial additional resources for the Energy sector to scale-up investments. II. PROJECT DESCRIPTION A. Lending instrument 21. The proposed Energy Development and Access Project (EDAP APL-2) corresponds to the second phase of an ongoing 2-phased APL instrument. The first phase was approved by the 5 Board on August 19, 2003, and is currently under implementation in the form of the "Energy Reform and Access Project (ERAP APL-1; P069183). The proposed EDAP (APL-2) Project will have an implementation period of 5 years. The ERAP (APL-1) was restructured in June 2007 and December 2009. 22. Change of name of the APL Series. The name of the overall APL series is being changed from "Energy Reform and Access Program" to the "Energy Development and Access Program" (EDAP APL-2), to: (i) better align the Program and APL-2 Project with the government's new energy policy and strategy for the sector; (ii) align the proposed EDAP (APL- 2) project with the government's "National Energy Development and Access Program (NEDAP), and; (iii) to more adequately reflect the scope of IDA's new assistance strategy for the sector. B. Program objective and Phases 23. The objective of the Energy Reform and Access Program APL series, as set out in the original appraisal document of July 2003 of phase I, is to increase access to modern energy in peri-urban and rural areas, thereby facilitating improved quality of life of the respective communities and generating income. The original project design had been based on a conservative sector reform strategy of unbundling EdM into Generation, Transmission and Distribution companies, and concessioning the distribution company to a private concessionaire. The original project components were: (i) Power Sector Reform; (ii) Grid-based Peri-Urban Electrification; (iii) Independent Grid Rural Electrification; (iv) Renewable Energy and Cross- sectoral Linkages; and (v) Institutional Development and Capacity Building. 24. Significant changes in energy sector policy in Mozambique have occurred since the preparation of the first phase of the program in 2002/3. In January 2005 a new Ministry of Energy was established. The new Ministry team reviewed the strategy in light of developments in the power sectors of neighboring countries and experience in Sub-Saharan Africa and elsewhere. The difficulties and potential drawbacks of implementing an approach based on unbundling the incumbent utility and relying on private sector concessionaires have been documented in World Bank research that points out the paucity of results from more than a decade of focus on private participation in electric power sectors in Sub-Saharan Africa. Conversely, some of the more successful electricity utility companies in Sub-Saharan Africa were shown to have achieved good results as vertically integrated companies without private participation. 25. After reviewing the evidence, and following extensive discussions with IDA and a stakeholder workshop in November 2005, the Government presented its new approach on power sector reform to the World Bank. Under the new approach, the Government opted not to seek private participation in EdM in the near-term. Instead, the strategy focused on achieving improved performance of EdM through the combination of an effective Performance Contract for EdM, increased technical and financing support for EdM and operationalizing an independent advisory power sector regulator -- Comissão Nacional de Electrificação (CNELEC) -- to monitor EdM's performance. In addition, the Government identified a priority role for the 6 private sector in new generation and transmission "Mega-Projects", to be developed through public-private partnerships. 26. ERAP (APL-1) (P069183). As a result of those changes in sector strategy, the ERAP (APL-1) project was restructured in June 2007 to better align it with GoM's new strategy for the energy sector. The project also includes US $3.1 million in GEF financing for off-grid activities. ERAP's restructured components are: (a) Component A: Power Sector Reform: support for establishment and initial operations of CNELEC. (b) Component B: Grid-Based Peri-Urban Electrification, including grid intensification and a set of activities to demonstrate methods for reducing losses and improving customer service (Commercial Reorientation of the Electricity Sector Toolkit (CREST). (c) Component C: Independent Grid Rural Electrification. This component was reduced at restructuring because of the lack of private sector interest in the available concessions. Since restructuring, the remaining concession has been cancelled by the Government. (d) Component D (Co-financed with GEF Grant): Renewable Energy and Cross-Sectoral Linkages: this provides financing for (i) solar PV Systems to electrify 300 Schools and Health Clinics in rural areas, and, (ii) a pilot to use solar PV systems for the provision of community-level services in rural villages (e) Component E: Institutional Development and Capacity Building, including training, studies and technical assistance, including support for legal and financial advisers to assist the government in advancing the generation `mega-projects'. 27. As such the sector reform agenda launched by the ERAP (APL-1) was in effect expanded and amplified far beyond its original scope. Proof of this is the several generation (Mphanda Nkuwa, Cahora Bassa North, Lurio, Moatize, Benga and Ressano Garcia) and transmission (Mozambique Regional Transmission Development Program) "mega-projects" currently under preparation, with a potential value of more than $15 billion, in mostly private sector investments. ERAP's restructuring resulted in a significantly improved sector dialogue with GoM and enhanced project implementation performance and ratings. Furthermore, EDAP (APL-2) builds directly off the trajectory and successes of the first phase of the APL series. ERAP (APL-1) was restructured a final time in December 2009 to make a final adjustment in its structure2 and budget allocation in preparation for closing in March 2011. Summary of ERAP (APL-1) Achievements 28. Power Sector Reform. A Government directive dated July 2006 established the basis for operationalizing the National Energy Regulatory Council (`CNELEC'), Mozambique's new independent advisory regulatory agency, setting out the regulatory functions that it should undertake. Subsequently, the Performance Contract between the GoM and EdM, to be 2 Notably to adjust for the cancellation by the Government of the independent grid concession in Component C 7 monitored by CNELEC in a public manner, was signed on June, 2007.3 This is the first example in Africa of a performance contract between the Government and the power utility being publicly monitored by an independent regulator. 29. Financial and technical/advisory support via ERAP APL-1 has been instrumental to the successful establishment of CNELEC. The core operations of CNELEC ­ including staffing, logistics and technical assistance ­ are all in place. The Commissioners for CNELEC were appointed in April 2008. It is expected that the first full performance review of EdM will be completed in the first half of 2010. 30. Grid-Based Peri-Urban Electrification. The principal activity in this component is grid intensification works, which commenced in September 2007. As of end-September 2009, 99% of construction of the distribution networks has been finished and 17,685 customers have been connected and energized. In addition to the customer connections, the new medium-voltage (MV) and low-voltage (LV) networks installed by the project will supply high-quality electricity to approximately 40,000 customers, meaning that EdM will be able to connect many thousands more households in the project areas. Furthermore, the project has been able to reduce the average cost of connections per household to at most $950. Once the project is completed and 25,000 customers are connected, this component should have an average cost of approximately $6904, exceeding the target by a significant margin. 31. Renewable Energy and Cross-Sectoral Linkages. The main activity in this component is the installation of solar PV systems in 150 schools and 150 clinics in rural areas, financed both by IDA and the fully-blended GEF grant. By end-September 2009, 223 systems have been installed and 181 site acceptance certificates have been issued, with the remainder expected to be completed by end-December 2009. Technical issues identified earlier in implementation, including problems with the quality of light-bulbs, are being addressed. 32. The restructuring of ERAP in July 2007 included the addition of a new village electrification pilot program in five villages to test an alternative approach for sustainable provision of renewable energy services in remote areas. This approach has an innovative community-based management model, to ensure both technical and financial viability of the pilot. Installation of systems in all five villages is now complete, with over 300 solar PV `kits' deployed. 33. Institutional Development and Capacity Building. This component has successfully provided support to the Ministry of Energy in a range of technical areas. Highlights have included a study on the gas market in Mozambique and important support to GoM's efforts to develop a new generation of `mega-projects', including through financing studies on (i) the financial benefits of the mega-projects, and (ii) the commercial options for the structure of the proposed Regional Transmission Backbone project. ERAP APL-1 will continue to provide 3 EdM's Performance Contract with the Government of Mozambique (GoM) has four principal components: (i) A survey of public opinion on EdM's performance; EdM's self-evaluation report on its performance (ii) Public consultations on EdM's performance; (iii) A public report from CNELEC to the GoM assessing EdM's performance and making recommendations for improvements 4 At the current exchange USD:EUR rate of 0.68 8 important support to the preparation of this project, including financing legal and financial advisers to the Ministry for the mega-projects. This component has also provided critical management support to the Ministry of Energy, enhancing both procurement and financial management capacity. Status of ERAP (APL-1) Triggers 34. Consistent with the Adaptable Program Lending (APL) format, the second phase of the program was subject to the completion of Triggers. The triggers of the restructured ERAP (APL-1) and their respective compliance status are summarized in Table 1, below. Table 1: Status of ERAP (APL-1) Triggers Trigger Evaluation Criteria Status/Comment Continued operation of Continued operation of The N. Inhambane independent grid the N.Inhambane independent grid concession was cancelled (and Component C Independent grid concessions in N. was removed from the ERAP's framework concessions, one of which Inhambane. through restructuring in December 2009. will be based on a Hence the trigger is no longer relevant to the renewable energy APL Series because it only applied to any sources, and another be continuation of the same component in the bulk-supplied from the APL-2 phase, which is not proposed. national grid. The above notwithstanding, it is important to note that the operational and policy objective of this Trigger was to ensure that at least one private sector concession would remain in the power sector. While the small Vilanculos distribution concession (approx. US $3 million worth) was canceled (due to the alleged non- compliance by the concessionaire with the Concession Contract) the Hydro-power Plant at Cahora Bassa (US $750 million) was concessioned in December 2008 through a private sector "non-recourse financing" transaction, and all generation (Mphanda Nkuwa; Cahora Bassa North, Lurio, Moatize, Benga and Ressano Garcia) and transmission (Mozambique Regional Transmission Development Program) Mega-projects proposals are based on private sector concessions. Thus, in spite of the cancellation of the Vilanculos Concession, the sector reform agenda launched by the ERAP APL-1 was in effect expanded and amplified far beyond its original small-scale scope. 9 EdM performance (1) Self-evaluation by EdM (1) The self-evaluation by EdM was contract in place and at of its performance in meeting satisfactorily completed and delivered to least one performance the performance contract CNELEC in April 2009; monitoring cycle targets; including review by CNELEC has been (2) Survey of customer (2) EdM recruited an independent firm to completed as per satisfaction conducted by an undertake the survey. The survey was instructions issued by independent consulting firm completed on and delivered to CNELEC in Minister of Energy in hired by EdM; and, April, 2009; and, 2006. CNELEC gives advice and (3) Independent assessment (3) CNELEC is using ERAP funds to finance a recommendations in an of EdM's performance done consulting firm to assist them in this activity. open and transparent by CNELEC, using steps (1) Recruitment of the Consultant procurement manner so that the and (2) above as input, plus and will be completed by December 2009. The general public and independently conducted accrued delays are essentially due to stakeholders in the "public opinion consultation CNELEC's inexperience with World Bank electricity sector are sessions on EdM's procurement procedures. Because of the aware of CNELEC's performance in three separate delays, the organization of the three public views. cities". consultation sessions collided with the national elections, and Government requested CNELEC to delay their execution until after the elections cycle. Thus, the full completion of the CNELEC trigger will not be achieved in time for EDAP (APL-2)'s Board date in January 2010. However, steps (1) & (2) of the performance monitoring cycle will be satisfactorily completed by the Board date. Step (3) will be "launched and on the way to completion", but not fully achieved by the Board date. While the completion of the trigger is delayed, it is essential to recognize that the Mozambican government is the first African government to explicitly assign the task of monitoring the performance of a public utility under a "Performance Contract" to the National Electricity Regulator. Several other African countries have asked for more information on the Mozambican initiative including copies of the Ministerial directive that assigned CNELEC the task of being the Government's "eyes and ears" with respect to the performance contract. Furthermore, the government's directive to CNELEC specifically mandates 10 that the monitoring should be done openly and publicly with a requirement of public consultations in several cities around the country. Thus, the lack of completion of the CNELEC trigger does not stem from either lack of ownership of the underlying and fundamental sector reform process and policy, but exclusively from procedural delays in the processing of procurement, and the resulting overlap with elections activities in the country. While the public consultation session could have been organized during the current election season, the government decided not to do so in order to ensure the complete independence of the CNELEC public consultation process from any possible political influence, again, underscoring the respect for the integrity of the CNELEC independent function. 35. From the above, and in spite of the lack of completion of the triggers as per their original standard, IDA is satisfied that: (i) the cancellation of the N. Inhambane Independent Grid Concession trigger is no longer relevant to the continuation of the APL program, and the Board is asked to waive this trigger, and (ii) despite the partial completion to date of the CNELEC trigger, this trigger is expected to be completed in full by mid-2010, in time for the next annual EdM performance evaluation cycle. The evolution of this trigger will be carefully monitored during project supervision. It is assessed that the overall program is on track to meets its objectives and hence that moving to APL-2 is justified. Increase of IDA Financing Envelope under the APL Program 36. The originally approved APL Program had envisaged a total IDA investment of US $40 million for APL-2. However, given the substantive progress and tangible outcomes achieved in the sector during the first phase of the APL Program (ERAP APL-1), and the considerable electrification demands from a rapidly growing urban and peri-urban population, the original investment envelope has been increased to US $80 million. Additionally -- and providing further proof of the legitimacy and substantiated basis for larger investments -- other donors, previously absent from the energy sector, have agreed to support GoM's broader NEDAP Program with more than US $120 million in parallel financing. C. Project development objective and key indicators 37. The overall Project Development Objective (PDO) of the proposed EDAP (APL-2) project is to increase access to electricity and modern energy services in peri-urban and rural 11 areas in a sustainable and affordable manner. Within that overall PDO the project will seek to support the Borrower to: (a) Increase grid-based access to and improve reliability of the supply of affordable electricity services in peri-urban areas; (b) Increase off-grid access to electricity and modern energy services in unserved rural areas through conventional and renewable energy resources and technologies (RETs); (c) Leverage the mobilization of multi-lateral and bilateral donor financing for improving grid-based access to modern energy services through the reinforcement of the existing primary electricity network and the extension of the grid to un-served areas; (d) Improve the overall performance of the main sector institutions and their capacity to expand electrification and to mobilize new private sector and donor investment financing through the provision of institutional strengthening and capacity development support; and, (e) Elaborate a "National Rural Electrification Strategy and Investment Program" (RESIP). 38. The Key indicators that will be used to measure the achievement of the PDO are (see Annex 3 for more details): (a) Number of people provided with access to electricity under the project by household connections in peri-urban areas; (b) Number of people provided with access to electricity under the project by household connections in rural areas; (c) Number of community electricity connections under the project (schools and health clinics); and, (d) Increased satisfaction reported in Customer Satisfaction Survey; D. Project components 39. EDAP (APL-2) constitutes the continuation and scaling-up of the support program launched in 2003 through the ERAP-APL-1. The proposed EDAP (APL-2) will be divided into three main components: (a) Reinforcement of the Primary Networks and Grid Extension Component (US $50.0 million): This component will finance: (i) engineering services for the design, procurement and supervision of EdM investment program for: (ii) a medium voltage (MV) network transmission efficiency pilot project (Bairro 25 de Junho); (iii) the 12 rehabilitation and reinforcement of the existing primary networks that have been overloaded as a result of the grid extension and new connections implemented over the last five years; (iv) the extension and intensification of the medium and low voltage grid in peri-urban areas in Nampula and Tete provinces to service 25,000 new customers; and, (v) implementation of an Integrated Business Management System (IBMS), including the provision of software, hardware and technical assistance services required for the full implementation and regular operation of each and all the management information systems (MIS) that integrate the IBMS. This component will be implemented by EdM. (b) Investments on Rural and Renewable Energy Component (US $18.0 million): This component will increase and accelerate decentralized access to modern energy services by supporting the implementation and/or scaling-up of: (i) decentralized micro and small investments on renewable energy production and distribution systems, solar PV and thermal, biomass energy and other Renewable Energy Technologies (RET) in rural and some peri-urban areas, including the installation of 500 solar PV systems in rural school and health clinics, and the electrification of 30 rural villages by RET; (ii) promotion/dissemination of 50,000 improved woodfuel stoves for use in the household and SME sectors, introduction of 1,250 improved charcoal kilns, and support to interfuel substitution for traditional biomass in household and institutions (schools, clinics, etc.); (iii) demonstration projects to accelerate the sustainable market penetration of clean Renewable Energy Technologies (RETs) in agriculture, household, SME and for rural mobility, including deployment of 70 multifunctional platforms in rural villages; and (iv) capacity development and institutional strengthening of FUNAE. As applicable, implementation of individual RET projects under this component will be done by FUNAE, other government agencies and/or the private sector. This component will be implemented by FUNAE, in close coordination with the Ministry of Energy (ME). (c) Energy Sector Planning, Policy and Institutional Development Component (US $10.2 million): This component will finance: (i) the elaboration of a national "Rural Electrification Strategy and Investment Program (RESIP)"; (ii) technical assistance and consulting services to strengthen the GoM's capacity to promote and participate in the development of new energy infrastructure projects ­ specially power IPPs and other energy "mega-projects" ­ of national and regional interest; (iii) institutional strengthening and capacity building of the Ministry of Energy to improve its performance and governance and to support the design and subsequent establishment of a flexible SWAp for the energy sector; and (iv) institutional strengthening support to the National Electricity Commission (CNELEC) for it to effectively discharge its critical advisory/regulatory function. This component will be implemented by ME. E. Lessons learned and reflected in the project design 40. The Proposed EDAP (APL-2) is based on the successful components and lesson learned within ERAP (APL-1) in Mozambique. The implementation of EDAP (APL-2) will based on 13 the existing institutional arrangements of ERAP (APL-1), which will enable the immediate continuation of the ongoing work and reduce implementation costs. 41. In addition to the country-specific lessons derived from the ERAP (APL-1) project, the proposed EDAP (APL-2) has also benefitted from the experience and lessons learned from a wide range of similar World Bank operations in the Africa Region and other parts of the world. The main lessons include: (a) Developing a broad sectoral investment program closely following the Client priorities and needs in order to maximize project ownership and implementation commitment by the Borrower at all levels; (b) Focusing the utility-based electrification strategy on rapidly growing peri-urban areas with a potentially viable commercial demand-base to be able to expand access to electricity to new consumers on a sustainable basis; (c) Supporting off-grid rural electrification through alternative and renewable energy sources and technologies, and implementing such efforts through specialized entities with low transaction costs and which are able to provide the required level of technical assistance, implementation support and monitoring to ensure the sustainability of the investments; (d) Given the prevailing constraints on IDA resources to support infrastructure investments in Part II countries, it is essential for IDA to: (i) increase donor coordination and collaboration; and (ii) to increase its flexibility in project architecture ­ technical design and financing and implementation arrangements -- so as to maximize the mobilization/leveraging of additional donor financing. EDAP (APL-2)'s multi-donor financing leveraging, and being itself an operational instrument for the design and subsequent establishment of a flexible SWAp in the energy sector, confirms the full adoption of best practice to support the Borrower to assume the leadership for the development of the energy sector; and, (e) The need to maintain a strong independent sector advisory/ regulatory body as a means to support a rational development of the power sector and ensure good governance. EDAP (APL-2) will continue to provide institutional strengthening and capacity development support to the national Regulatory/Advisory Commission (CNELEC) that was established under ERAP (APL-1). F. Alternatives considered and reasons for rejection 42. The main alternative considered for the above project design was moving from a Sector Investment Loan (SIL) based APL format to a considerably larger "Development Policy Lending" instrument (DPL; $300-$500 million) to provide GoM with a greater degree of flexibility and ownership in the implementation of its new sector development strategy and accelerate the operationalization of a flexible SWAp. Such a DPL would enable GoM to 14 advance key energy investments of national and regional interest, and would feature a comprehensive set of multi-sector policy triggers, possibly including: (a) adoption of a minimum percentage of clean and renewable energy within the country's energy matrix (production and end-use); (b) establishment of an investment "Warehousing" mechanism for the promotion of local private sector participation in infrastructure investment projects and for the development of a local stock exchange5; (c) adoption of the Extractive Industry Transparency Initiative (EITI) and EITI++ frameworks for the energy sector; (d) adoption of a sustainable multi-purpose management regime of water resources and basins, including power generation, irrigation, flood control, Climate Change adaptation, and erosion and sedimentation reduction control/mitigation objectives6; (e) adoption of internationally acceptable social and environmental safeguard for the production of biofuels in the country7; (f) adoption of participatory and sustainable forest and woodfuel supply management policies and practices8; and, (g) adoption of urban and peri-urban "in-door" pollution reduction policies and programs. 43. This system of multi-sectoral policy triggers are founded on World Bank Economic and Sector Work (ESW) (and/or other donor research and development work) whereby the required knowledge base is available to support the preparation of such a DPL in Mozambique. While considered highly relevant, innovative and beneficial to the Borrower, this alternative approach was however judged to be premature vis-à-vis the Borrower's capacity for simultaneous multi- sector policy coordination and of the rather nascent stage of GoM-donor policy and financing coordination (SWAp). This alternative financing approach will be revisited in FY10 in conjunction with the elaboration of the PARPA III by GoM and the evolution of the energy sector flexible SWAp under the proposed EDAP (APL-2) project. 5 See "Improving the Domestic Impact of Large Investment Projects", DFID-IMF-Government of Norway-World Bank Options Paper, April 22, 2008. 6 See "Mozambique Country Water Resources Assistance Strategy: Making Water Work for Sustainable Growth and Poverty Reduction", World Bank, August, 2007. 7 See, "Mozambique: Mozambique Biofuels Assessment", World Bank/Italian Cooperation), May 2009. 8 GoM with WB support developed since 1998 policy and operational proposals for mainstreaming sustainable and participatory forest and woodfuels supply management schemes in Mozambique. Those same policies and schemes have been successfully implemented with WB and other donor support in other parts of Africa. 15 III. IMPLEMENTATION A. Partnership arrangements 44. GoM presently receives cooperation in the energy sector from more than 10 multilateral and bilateral donors. A joint GoM-Donor Community "Energy Sector Working Group" has been in active operation within the framework of the Paris Declaration since 2007. The EDAP (APL- 2) Project constitutes a first concrete step towards the elaboration of a flexible energy sector or sub-sector SWAp. EDAP (APL-2) will specifically finance technical assistance support to GoM for it to effectively lead the preparation and broad consultation process required for the subsequent establishment of the proposed flexible SWAp. 45. While the proposed EDAP (APL-2) project is a stand-alone instrument, it will serve as the lead project of GoM's NEDAP Program. The implementation of EDAP (APL-2) will be technically coordinated with the donors that support other elements of the NEDAP program (parallel financing). It is important to note, however, that the cancellation of financing or implementation delay of any remainder portion of the broader NEDAP Program under parallel financing arrangements will not affect the full implementation of the proposed EDAP (APL-2) IDA project, nor reduce its expected developmental outcomes or outputs. 46. As regards environmental and social management related to EDAP (APL-2): (i) FUNAE's qualified staff will continue to screen the planned investments for potential adverse environmental and social impacts and take appropriate mitigation measures; (ii) EdM is in the process of its Environmental and Social Safeguards Unit (with technical assistance from DANIDA) to ensure that potential adverse environmental and social impacts of future investments are properly identified, mitigated and monitored, particularly regarding large-scale investment projects being considered by GoM and EdM outside the context of the proposed EDAP (APL-2) ; and, (iii) the Ministry of Energy will support EdM and FUNAE, and oversee the implementation of the provisions of the Environmental and Social Management Framework (ESMF) and the Resettlement Policy Framework (RPF). Specialized environmental management capacity designed to meet the particular needs of each institution will be provided within each project component as an integral part of the respective institutional development sub-components of the project. It should be noted that EDAP (APL-2) is a single stand alone project and will not be jointly co-financed. B. Institutional and implementation arrangements 47. The implementation of the proposed EDAP (APL-2) will be mostly based on the existing institutional arrangements of ERAP (APL-1) to facilitate the continuation of the ongoing work and investment program and to reduce transitional implementation costs and possible delays. The only significant change from ERAP (APL-1) to EDAP (APL-2) will be that under ERAP (APL-1) only the Ministry of Energy (ME) and Electricidade de Mozambique (EdM) were formal Implementation Agencies. Within the EDAP (APL-2), FUNAE will also be an Implementing Agency. 16 48. Electricidade de Mozambique (EdM) will be responsible for the implementation of the "Rehabilitation and Reinforcement of Primary Networks and Grid Extension Component" (Component 1) under a Subsidiary Agreement, and will maintain the same structure (i.e., Project Implementation Unit at Direcção de Electrificação e Projectos (DEP), management, administration and implementation arrangements that were set-up for the implementation of the ERAP APL-1. This will enable EdM to capitalize on the long-standing experience and capacity of the existing PIU and to give IDA a good level of comfort that EdM can successfully and smoothly implement the proposed EDAP (APL-2) project. 49. In addition, EdM's new Environmental and Social Safeguards Unit, currently being established, will be a critical component in ensuring full compliance with World Bank safeguards requirements in the course of the implementation of EDAP. The staff of this unit will be responsible for (i) carrying out social & environmental audits; (ii) supervising social & environmental consultants; (iii) guiding the Project Manager on major social & environmental issues; (iv) preparing terms of reference for environmental consultants; (v) monitoring the implementation of the Environmental and Social Management Framework (ESMF) and Resettlement Policy Framework (RPF) and any Environmental and Social Management Plans (ESMPs), Resettlement Action Plans (RAPs) or abbreviated RAPs, as applicable; (vi) liaising with EdM's Distribution Areas in the targeted provinces to ensure fulfilment of social & environmental standards for utilities in the distribution areas; and (vii) liaising with the Ministry of Energy. 50. Fundo Nacional de Energia (FUNAE) will be responsible for the implementation of the "Investments on Rural and Renewable Energy Component" (Component 2) under a Subsidiary Agreement with the Ministry of Energy. For that purpose FUNAE will strengthen the project management implementation structure that was set-up for ERAP (APL-1). Maintaining and strengthening the existing project management structure will enable FUNAE to capitalize on the experience accumulated under ERAP and to smoothly transition into the implementation of EDAP (APL-2). While FUNAE was not an Implementing Agency in ERAP (APL-1), it was responsible for the full implementation of its work program and for all management and fiduciary activities (procurement, reporting, monitoring, etc.) with the Ministry of Energy playing only an overall supervisory role. Within that context, FUNAE has several years of experience and demonstrated capacity to implement an IDA financed project. 51. The Ministry of Energy (ME) will be responsible for the implementation of the "Energy Sector Planning, Policy and Institutional Development Component" (Component 3), and will do so following the same institutional and operational arrangements set-up for ERAP (APL-1). ME should be able to fully capitalize on its experience from the implementation of ERAP (APL-1) -- and other donor funded projects ­ and should be able to implement the EDAP (APL-2) project without difficulties. In addition, the ME will be responsible for implementation of the activities related to CNELEC. C. Monitoring and evaluation (M&E) of outcomes/results 52. The monitoring and evaluation (M&E) system set-up for the project will establish: 17 (a) a database for each component of the project to periodically monitor the evolution of expenditures, implementation, outcomes and results; and, (b) systems for regular data gathering and process information required to monitor the main performance indicators and intermediary indicators as defined in Annex 3 of the Project Appraisal Document. 53. These M&E activities will be undertaken with support from specialized technical assistance within each of the components of the project. The Ministry of Energy will be responsible for integrating the M&E reports and submitting a consolidated report to the Bank together with the mandatory quarterly progress reports. To the extent possible, M&E of the project will be aligned with existing M&E plans of the participating implementing agencies and support sector M&E capacity development. D. Sustainability 54. GoM has shown a strong leadership in and commitment to the reform, rationalization and expansion of the energy sector and, in particular, of the power sub-sector. This has been evidenced since the restructuring of ERAP (APL-1) in 2007 and the resulting project implementation ratings. In parallel to that, it is unquestionable that it is over the last 5 years that Mozambique has seen the largest historical expansion of electricity services and connections, going from an average of 20,000 new connections in 2003 per year to 100,000 new connections in 2008. GoM is clear about the economic, social and political imperatives of continuing that pace of development of the power sector and is fully committed to doing so. 55. The investments to be financed by the proposed EDAP (APL-2) project constitute top priorities to GoM and to the targeted beneficiary population across the country. Thus, GoM is expected to maintain a conducive and evolving policy and institutional environment within which to implement EDAP (APL-2) and ensure the post-implementation sustainability of its outcome and outputs. Likewise, the target beneficiary population, who will benefit from increased access to peri-urban and rural electrification, modern energy services, and/or improved biomass energy technologies, are fully expected to value their benefits and thus to maintain EDAP (APL-2)'s investments and therefore to sustain its development outcomes overtime. E. Critical risks and possible controversial aspects 56. The proposed EDAP (APL-2) project constitutes the second phase of an ongoing APL series. As such, EDAP (APL-2) was designed fully taking into account the lessons learned under the ERAP (APL-1), and in particular, with a view to scale-up its successful investment elements. The EDAP (APL-2) contains no controversial policy reform or regulatory issues. As it was the case with the ERAP APL-1, there are no major social or environmental impacts expected from the implementation of the project, and the implementation of any investment/activity which could result in any Environmental Category "A" type social or environmental impacts or risks has been expressly ruled out from the EDAP (APL-2) project, and cannot be financed by IDA. 18 EDAP (APL-2)'s possible "B" type environmental and /or social safeguards issues have been identified and included within the Environmental and Social Management Framework (ESMF) and a Resettlement Policy Framework (RPF) which have been prepared and disclosed for the project. TA to be provided under the project will include strengthening of environmental conflict identification, analysis and management capacity at the main sector institutions. Furthermore, no environmental category "A" impacts are expected to occur from the implementation of the other investment elements of GoM's broader NEDAP Program, to be financed by other donors through parallel financing. Table 2, below, presents a summary of the project's overall risk assessment and Annex 6 (Implementation Arrangements) includes a detailed table with critical risks and possible controversial aspects. Table 2: Summary of Overall Critical risks and possible controversial aspects Risk factors Description of risk Rating of residual risk Overall Risk The overall and reputational risk of the operation is rated as moderate. That rating relates to Moderate identified overall country risks and to non-fiduciary physical implementation risks at the project level. Annex 6 presents a detailed assessment of the risks of the proposed EDAP (APL-2). The project is well aligned with the Government's priorities in the energy sector. The overall development of the energy sector and increasing access to modern energy services are at the heart of the PARPA II and CPS. The proposed EDAP (APL-2) investment program mostly entails the scaling-up of the activities successfully piloted and/or implemented under ERAP (APL-1). As such, the respective sector institutions have already developed the experience and capacity to implement the proposed EDAP (APL-2) investment program. Additional institutional strengthening and capacity development is need and will be provided to reduce implementation risks to a minimum. National elections were held in Mozambique in October 2009, but there is no expectation that a new administration team would significantly change and/or depart from the current energy sector policy framework as there is widespread stakeholder agreement on it. The proposed EDAP (APL-2) will support the design and gradual mainstreaming of a flexible SWAp in the energy sector -- mostly likely focused on rural Electrification -- and that will help improve coordination between GoM and donors, and among donors. F. Loan/credit conditions and covenants 57. Credit effectiveness Conditions: · Establishment of "Social and Environmental Safeguards Unit" at EdM; · Adoption of a Project Implementation Manual (PIM); · Recruitment of required FM staff (FM Consultant); and, · Update of the FM Procedures Manual for ME and FUNAE, and for EdM. 19 58. Credit Withdrawal Conditions: · No withdrawal shall be made: (a) for payments made prior to the date of this Agreement. (b) under Categories (1)(b) and (3)(b) of the project, as defined in the Financing Agreement, unless the proceeds of the Credit allocated to Category (8) in Schedule 1 to the ERAP DCA have been fully disbursed. 59. Credit Dated Covenants: · Annual submission to IDA of EdM annual self-assessment and of CNELEC annual report on EdM Performance Contract no later than September 30 of each year; · By June 30, 2011 an electricity tariff setting mechanism will be put in place for EdM which sets and thereafter maintains throughout the project implementation period average tariffs in a manner that reflect full cost recovery principles; and, · Hiring external auditors within 3 months of credit effectiveness. 60. Financial covenants: · EdM needs to maintain throughout the project implementation period: (i) current ratio of 1.1 (current assets/current liabilities); and, (ii) debt service coverage ratio of 1.1 (cash generated from operations/debt service requirements); and, · When EdM engages in any non-financially viable operations, financing arrangements between the Government and EdM will be made to ensure that these investments will be cash neutral to EdM. 61. FM Covenants: · The Recipient shall maintain a financial management system in accordance with the provisions of Section 4.09 of the General Conditions; · The Recipient shall prepare and furnish to the Association not later than forty five (45) days after the end of each calendar quarter, interim unaudited financial reports for the Project covering the quarter, in form and substance satisfactory to the Association; · The Recipient shall have its Financial Statements audited in accordance with the provisions of Section 4.09 (b) of the General Conditions. Each audit of the Financial Statements shall cover the period of one fiscal year of the Recipient. The audited Financial Statements for each such period shall be furnished to the Association not later than six months after the end of such period; and, 20 · The Recipient shall, by not later than three months after Effective Date, hire the auditors referred to in Section 4.09 (b) of the General Conditions, with qualifications, experience and mandate satisfactory to the Association. · EdM shall maintain a financial management system and prepare financial statements in accordance with consistently applied accounting standards acceptable to IDA, both in a manner adequate to reflect EdM's operations and financial condition, including the operations, resources and expenditures related to its respective part of the Project. These financial statements shall be audited by independent auditors acceptable to IDA. Each audit of these financial statements shall cover the period of one fiscal year of EdM. The audited financial statements for each period shall be furnished to IDA no later than six months after the end of the period. IV. APPRAISAL SUMMARY A. Economic and financial analyses Economic Analysis 62. An economic analysis of the EdM project component of EDAP (APL-2) was carried-out and resulted in a positive evaluation of the proposed project. In the base case scenario the project is expected to have Net Present Value (NPV) of US $56.5 million at a 12 percent discount rate, with an Economic Internal Rate of Return (EIRR) of 29%. Annex 9 presents a comprehensive summary of the economic analysis of the project. Figure 1 EDAP - EdM Component: Cost & Benefits Stream 60.00 50.00 40.00 30.00 US $ Million COSTS 20.00 BENEFITS 10.00 NET BENEFITS - (10.00) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 (20.00) (30.00) Years 21 63. A parametric analysis concluded that the NPV would remain positive if expected benefits were reduced by 20 percent (NPV = US $38.0 million; EIRR = 24%), if costs increased by 20% (NPV = US $50.7 million; EIRR = 25%), and even if a 20 percent reduction of benefits was combined with a 20 percent increase in costs (NPV = US $25.3 million; EIRR = 19%) (see Table 3, below). 64. A "switching values analysis" indicated that cost would have to increase by 157.6 percent for the NPV to fall to zero, and that cost of power purchases by EdM would have to rise by 372.6 percent for the NPV to fall to zero. Table 3: Results of Parametric Analysis of the EdM Component BASE LOWER BENEF. HIGHER COSTS L-Benef & H-Cost COSTS P-PURCHASE @12% SCENARIO 20% 20% 20% / 20% NPV = 0 NPV = 0 Invest = 56.5 56.5 67.8 67.8 145.6 56.5 NPV = 55.9 38.0 50.7 25.3 0.0 0.0 EIRR = 29% 24% 25% 19% 12% 12% 157.6% 372.6% 65. An economic analysis of the FUNAE Solar PV component was carried-out and resulted in a positive evaluation of the component project. In the base case scenario the project is expected to have Net Present Value (NPV) of US $1.75 million at a 12 percent discount rate, with an Economic Internal Rate of Return (EIRR) of 18% (See Annex 9). 66. A parametric analysis concluded that the NPV would become negative if expected benefits were reduced by 20 percent (NPV = US -$0.53 million; EIRR = 10%), if costs increased by 20% (NPV = US -$0.18 million; EIRR = 11%), and if a 20 percent reduction of benefits was combined with a 20 percent increase in costs (NPV = US -$2.47 million; EIRR = 5%) (see Table 4, below). Table 4: EDAP (APL-2) ­ FUNAE Component / Summary of Economic Analysis Results BASE LOWER HIGHER L-Benef & H-Cost COSTS Tarriff Incre. @12% SCENARIO Benefit 20% Costs 20% 20% / 20% NPV = 0 NPV = 0 INVST= 15,373.9 15,373.9 18,448.6 18,448.6 18,155.9 15,373.9 NPV = 1,751.8 (534.6) (184.3) (2,470.6) 0 0 EIRR = 18% 10% 11% 5% 12% 12% 18.10% 18.21% 67. A "switching values analysis" indicated that if costs increase beyond 18.1 percent the NPV would to fall to zero, and if the electricity tariff estimated as a proxy for the valuation of the benefit stream was reduced by 18.2 percent for the NPV to fall to zero. 68. The results of the parametric and sensitivity analysis of the FUNAE component indicate that this component is very vulnerable to variations in its key economic/financial parameters. That, however, did not come as a surprise as it is well established that rural electrification in 22 developing country contexts is not yet a fully commercially viable endeavor and that therefore it still requires some level of subsidized support for it to work. Figure 2 EDAP - FUNAE: Cost-Benefit Analysis of Solar PV Investments 5,000.0 4,000.0 3,000.0 US $000 2,000.0 Costs 1,000.0 Benefits - -1,000.0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Net Benefits -2,000.0 -3,000.0 -4,000.0 Years Financial Analysis 69. The largest project component, "Reinforcement of the Primary Networks and Grid Extension" includes sub-components of activities and investments that will be implemented by EdM. The component includes engineering services for EdM's investment program, a medium voltage network transmission efficiency pilot project, rehabilitation and reinforcement of the existing primary networks, and extension and intensification of the medium and low voltage grid in peri-urban areas in Nampula and Tete provinces, among other investments. This is the only component that would involve a loan on-lent to the implementing entity. Therefore the financial analysis focuses on the historical financial performance and future financial viability of EdM's operations to assess the financial impact of EDAP investments on EdM's financials. 70. Historical Financial Performance of EdM: EdM is currently unable to meet all its revenue requirements, comprising of power purchase costs and other operating expenses, debt service obligations and financing of a portion of investments from own resources, from its revenues. According to its audited financial statements, EdM's total operating revenues in FY08 were about US $188 million and the operating expenses were about US $184 million, making a marginal operating profit of about US $4 million before financial charges. This operating margin has been very low or negative during the last three years mainly due to lack of tariff adjustments and increase in operating expenses. After the non-operating income and net financial charges, EdM shows a net profit of $1 million in FY08, a slight improvement from a net loss of $5-6 million experienced in the past three years. While EdM has been contributing partly to its capital investments through its own sources, it has had an annual debt service requirement that averaged US $25 million in 2006/09. Therefore EdM was obliged to obtain US $6.2 million in local financing to meet shortfalls in Electricity III project and $10 million for suppliers of materials. 23 71. EdM's balance sheet shows that the current ratio ranges between 0.8 and 1.1 over the past three years, indicating that the short term assets can more or less cover the short term liability of the company. However, EdM's liquidity has been negatively affected by the issues related to withholding tax on rural electrification projects, and VAT on donor funded rural electrification projects that are currently putting a burden on EdM. 72. EdM's debt to equity ratio has gone down from the level of 70% in 2005 to around 55% due primarily to the debt restructuring that took place in 2006. EdM has been taking on loans from local banks, at the level of $10 million on average during the past years, and has been meeting all of its debt service obligations in respect of direct loans (including local), amounting to US$ 11.7 million in 2009. Following debt restructuring, EdM has accumulated MT 979 million (about US $36 million) during 2006/09 in unpaid debt service obligations to Government. EdM's does not seem to be in a position to clear this debt any time soon unless further debt restructuring is carried out. 73. Financial Impact of EDAP II on EdM: EdM's financial model was reviewed to analyze the impact of the investments made under the proposed EDAP. According to the base case scenario with the current tariff level and unchanged cost structures, EdM would not be financially sustainable by failing to maintain a positive operating income or cash flows due primarily to the following reasons: · EdM's power purchase costs per kWh will increase over the coming years as more expensive power is procured to meet growing demand; · Investment requirements (excluding mega projects) are forecast at US $1.4 billion (2009- 18), including EDAP US $153 million; and, · Debt servicing of existing and new debt is projected to grow from US$ 25 million in 2007 to US $89 million by 2018. 74. The above projection, however, does not mean that it is the EDAP project that is affecting EdM's performance. EdM would have faced a difficult financial situation regardless of the EDAP investments. Its financial problems are unrelated to EDAP. EdM faces a challenge over the coming years as its costs are growing at a faster pace than its revenues. In order to ensure EdM's financial sustainability, there are key actions that need to be taken by EdM and GOM. A tariff sensitivity analysis (Annex 9) demonstrated that electricity tariffs will need to be increased under all scenarios for EdM to meet its financial needs. In addition, the following actions would help improve EdM's future financial projections; (i) Government's contribution to the non-financially viable operations of EdM including the customer connection program in rural areas and street lighting; (ii) efficiency improvements of EdM operations; (iii) further debt restructuring of EdM; (iv) further review of EdM's payroll and overhead costs to cut out waste and uneconomic practices; and (v) EdM to focus on medium to longer term planning and loans rather than taking on expensive short term loans. 75. Financial Covenants: In order for EdM to ensure that it maintains its financial sustainability, the following two financial covenants are proposed throughout the project period; (i) current ratio of 1.1 (current assets/current liabilities); and (ii) debt service coverage ratio of 24 1.1 (cash generated from operations/debt service requirements). In addition, the following dated financial covenants for GOM are proposed: · By June 30, 2011 an electricity tariff setting mechanism will be put in place for EdM which sets and thereafter maintains throughout the project implementation period average tariffs in a manner that reflect full cost recovery principles; and, · When EdM engages in any non-financially viable operations, financing arrangements between the Government and EdM will be made to ensure that these investments will be cash neutral to EdM. 76. If the electricity tariffs go up in accordance with the increase in costs, the Government contributes 25% to EdM's non-financially viable operations, and EdM carries out its planned efficiency improvements, EdM would be in a position to meet all of its obligations through its cash flows from operations and meet the financial covenants. 77. Component on Fundo de Energia (FUNAE): Due to the nature of its operation, mainly consisting of rural electrification and alternative energy, FUNAE does not envisage to operate as a commercially oriented utility. The financial statement it produces treats all cash inflows from the Government and donors as revenues, which means that these incoming funds are subsidizing FUNAE's operations. FUNAE's historical financial performance is attached at Annex. EDAP investments and operating costs under the component implemented by FUNAE would be in a form of a grant. Therefore, EDAP would not have any notable financial impact on FUNAE. B. Technical 78. Reinforcement of Primary Networks and Grid Extension. This component will upgrade the existing Medium Voltage network and two primary Substations in order to cope with the power demand growth, reduce power distribution network technical losses, and, extended the power distribution grid to enable EdM to connect 25,000 new consumers. The project proposals were done according to engineering "best practices" and updated EdM Standards. All planning activity was done taking into consideration the optimization of the power grid configuration and cost benefit ratio. Two existing Medium Voltage Substations, one in Matola city and other in Chimoio city, will be upgraded with standardized 30 MVA transformers. The use of short Low Voltage power lines, up to 500 meters, and robust Medium Voltage power grid with medium size transformers, up 100KVA, will guarantee the minimization of technical losses. Each Distribution Transformer will supply up to 200 consumers. All EDAP Tender Documents will be done by competitively selected (ICB) experienced Engineer Consultants. All specifications will meet the technical requirements suitable for long-term operation, maintenance and replacement. 79. Rural and Renewable Energy. Experience suggests that areas located far from the grid with low demand are often better served by renewables technologies (solar PV, small hydro, etc.) rather than by costly and technically challenging power lines extensions. During the implementation of ERAP, FUNAE accumulated great experience on off-grid PV systems, and the EDAP (APL-2) proposals are based on the lessons learned and on improved designed standards (including that systems have at least three days of autonomy without drawing more than 50% of the battery capacity). The Biomass proposals are also based on the lessons learned 25 on previous projects implemented in the country. The main goal is to achieve better energy efficiency either on the use of biomass for cooking or on the process to produce charcoal. The current traditional practices for charcoal production have a transformation efficiency of only 8 percent. FUNAE kilns proposal is already field-tested and accepted by the community, and can achieve efficiencies of up to 18-20 percent. This will have a positive impact on the conservation of Forest resources. The introduction of the multifunctional energy service platforms in the rural villages will give rural population access to modern energy services capable of enhancing productivity, economic growth and/or quality of life (water pumping, irrigation, land preparation and tilling, crop milling, lighting, 1 & 2-way communication systems, mobility), and consequently support village-level economic growth and social development. 80. All the technological solutions being proposed are fairly mature and tested worldwide requiring, however, some degree of local adaption and institutional work. It is envisaged that the successful adaption of these Renewable Energy technologies will be a critical input to the preparation and implementation of the Rural Electrification Strategy and Investment Program (RESIP) by broadening the range of every solution choices available to the GoM for full scale deployment under the RESIP. C. Fiduciary 81. The proposed Financial Management arrangements for the project have been assessed and found to be satisfactory, with a Moderate residual FM risk rating. Fiduciary management of the project will be the responsibility of the respective Project Implementation Units under the broad oversight of the Ministry of Energy. Given the project management and implementation experience and expertise developed to date by ME and FUNAE which has been improving with time, no major FM issues are expected to arise during project implementation. EdM financial statements have been qualified in the last two financial reporting periods, due, among other issues, to the following: · Insufficient provision for retirement pensions; · Unreconciled differences between the accounting system and `prepaid' system; · EdM not supplying the auditors with required information relating to inactive consumers, thereby making it impossible for the auditors to verify the completeness of the amount provided for doubtful debts; and, · Incomplete expenditure documentation. 82. The pension shortfall will require the intervention of government and possible policy changes to redress. Regarding the other issues, a concerted effort by EdM to address the purely accounting type issues is underway to ensure compliance with the auditors' agreed recommendations. Additionally, the proposed project will finance the recruitment of technical assistance and additional specialized staff, as well as training, to ensure that there is sufficient qualified staff in each implementing entity to assure the project's compliance will all fiduciary requirements. 26 83. Procurement. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under Investment Bank for Reconstruction and Development (IBRD) Loans and IDA Credits" dated May 2004 revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, revised October 2006 and the provisions stipulated in the Legal Agreement. An assessment of the capacity of the project's three Implementing Agencies (EdM, FUNAE and ME) was carried out by the Bank on April 21, 2009. The procurement capacity assessments concluded that the three implementing agencies have the necessary capacity and experience to undertake the procurement functions and responsibilities for the project. The assessment also provided specific recommendations regarding strengthening of capacity (recruitment and training) and procedures to support the implementation of all procurement activities. Annex 8 presents the detailed procurement arrangements for the project. D. Social 84. This energy distribution project is designed to have a high impact on the overall well- being of the rural and peri-urban population in Mozambique. It aims at providing electricity to vulnerable peri-urban and rural communities with no or minimal cost. Through solar PV systems, it will also electrify 500 schools and health centers and other community-level services in rural areas. In terms of social safeguards, although the process of bringing electricity to those vulnerable communities, and to the population in general, has a marginal and non durable negative impact, mitigation measures have been taken to ascertain that no harm will be done. These measures have been prepared based on the requirements of the Mozambican law and World Bank social safeguard policies. Indeed, the existing 1997 Environmental Framework Law No. 20/97 and 1998 ESIA Regulations Decree No. 76/98 require preparation of an environmental and social impact assessment report to assess potential environmental and social impacts of public investments. The environmental categorization of the project (Category B) indicates that the proposed investment sub-projects may generate relatively minor to moderate environmental and social impacts, mostly local and easily manageable. The triggering of OP4.12 is mainly dictated by the construction of new or upgrading of existing electricity distribution networks installation of new distribution transformer for the grid extension, and installation of solar PV system. It is expected that these activities will potentially result in land acquisition, loss of socioeconomic assets or restriction to access to certain assets. In order to anticipate minimizing these foreseen potential impacts, and to effectively comply with both Bank safeguard policies guidelines and the national legislation and regulation in Mozambique, the Borrower has prepared a Resettlement Policy Framework (RPF) to assess the potential causes for involuntary displacements. The Resettlement Policy Framework (RPF) is a statement of the policy, principles, institutional arrangements and procedures that will guide and govern the project as sub-projects are selected for inclusion, and that the Borrower will follow in each sub-project involving resettlement. It sets out the elements that will be common to all the sub-projects. The RPF will build up from the Environmental and Social Management Framework (ESMF). 85. Aside from the ESMF which clearly states that given the magnitude of proposed activities, environmental and social impacts are likely to be minimal and localized; an RPF was prepared to guide the preparation and implementation of sub-projects activities with activities requiring land acquisition that would lead to physical relocation. If this materializes, and once 27 the real physical locations of proposed project activities have been identified, a more detailed and comprehensive RAP will be prepared for each of the concerned sub-projects (or, depending on the circumstances, an abbreviated RAP), and impacted Project Affected Person (PAP) will be entitled to an adequate compensation package. 86. IDA approved draft RPF and the ESMF were disclosed in Mozambique and at InfoShop on July 21, 2009. The final versions of the RPF and ESMF were disclosed in Mozambique and at InfoShop prior to Negotiations on October 16, 2009. 87. As far as social development aspects are concerned, investment operations will target poor and most vulnerable groups whose lives and livelihoods will be largely positively impacted by the project. Both the RPF and the ESMF include appropriate ways of sustainably involving these targets for the sustainable maintenance of the energy infrastructures. To that extent, extensive public consultation and participation meetings have been held and will be continued during the process of preparation and implementation of the ESMPs and RAPs. 88. In the latter stages of the implementation of the grid-intensification activities of ERAP (APL-1), a review process was launched in April 2009 to comprehensively assess the extent of safeguards compliance, including determining any appropriate actions needed. This review by the World Bank included the following elements: (i) evaluation of the environmental and social screening process in ERAP (APL-1), (ii) assessment of the follow-up actions that were taken after screening was completed, particularly with respect to the compensation process for affected persons and the implementation of environmental mitigation measures, and (iii) deployment of a safeguards mission to further assess the issue and to determine appropriate actions as needed to ensure full compliance with Bank guidelines. 89. As part of the review process, the importance of full compliance with IDA safeguards requirements was reiterated to the ERAP (APL-1) Project Implementation Unit (PIU). In particular, it was emphasized that installation work that risks damaging assets or livelihoods should not commence until the affected persons have been satisfactorily compensated, in line with both IDA O.P. 4.12 (Involuntary Resettlement) and the ERAP (APL-1) Resettlement Policy Framework (RPF). For damage which might occur to assets (crops, trees, etc.) as a result of the project action but which could not be ascertained, evaluated or valued ex-ante. (for example, in situations where the damage to crops from pole installation for MV and LV lines is not ascertainable in advance), it was agreed that it would be reasonable to compensate affected persons after the installation work is completed, as long as the compensation remains fair and is done without delay, i.e. immediately after the infrastructure work is completed at the specific site where damage occurs and before the contractor leaves that specific site. The methodology for such compensation will be discussed in advance with the PAP. 90. As noted above in section III B, EdM's new Environmental and Social Management Unit will be a critical component in ensuring full compliance with World Bank safeguards requirements. This unit, established in 2009 and to be staffed, inter-alia, with a trained socio- environmental specialist, will benefit from DANIDA-funded technical assistance and will be responsible, working in tandem with the consulting engineer and contractors, for implementation of the project ESMF and RPF. As part of this technical assistance, EdM needs to develop 28 operational manuals, environmental manuals and guidelines, and acquire computers to facilitate the work of the Environment Unit. 91. As noted above, EDAP (APL-2) is a single stand alone project and will not be jointly co- financed. The financing provided by other donors under parallel financing arrangements is part of GoM's broader NEDAP Program, and not part of IDA's EDAP (APL-2) project. E. Environment 92. The Borrower has prepared an Environmental and Social Management Framework (ESMF) which outlines the environmental and social screening process (steps 1-7) for sub- projects for purposes of assessing, mitigating and monitoring potential adverse environmental and social impacts related to the components supporting (a) the reinforcement of the primary networks and grid extension; and (b) investments in rural and renewable energy. Potential adverse environmental and social impacts requiring mitigation measures include workers' safety, disposal of spent batteries, loss of vegetation, construction waste including PCB and asbestos, and loss of livelihoods. The ESMF includes useful annexes (see annex 10 of the PAD) to facilitate the identification, assessment, mitigation and monitoring of potential adverse environmental and social impacts. 93. The ESMF furthermore includes an environmental training program for national and provincial personnel. It is proposed to integrate EDAP's environmental training program with ongoing programs organized by FUNAE and EdM. Training topics will be related to the implementation of the ESMF, environmental protection, environmental policies and legislation as well as the safe disposal of asbestos and PCB. 94. Overall responsibility for overseeing the implementation of the ESMF will rest with the Environmental Focal Point (EFP) of the Ministry of Energy. At the provincial levels, the Ministry of Energy, through its Environment Unit, will appoint EFPs in the Governors' Offices (GOs) who will coordinate their work with the provincial representatives of the Ministry of Environment and Coordination (MICOA). FUNAE's Environment Unit will implement the ESMF under its renewable energy sub-projects. EdM is in the process of establishing an Environment Unit with support from Danish TA to ensure that all sub-projects are implemented in accordance with national environmental legislation as well as the Bank's safeguard policies as discussed in the ESMF. 95. The Ministry of Energy, through the Project Coordination Unit (PCU), will have primary responsibility for monitoring. The PCU will include representatives from FUNAE and EdM. At the provincial level, the EFPs/GO will be responsible for monitoring. It is proposed that monitoring also be carried out during the planning, construction and operations phases (see annex 10 of the PAD). As necessary, EDAP will provide M&E training for personnel responsible for the environmental and social management of sub-projects. 29 F. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [X] [] Natural Habitats (OP/BP 4.04) [] [X] Pest Management (OP 4.09) [] [X] Physical Cultural Resources (OP/BP 4.11) [] [X] Involuntary Resettlement (OP/BP 4.12) [X] [] Indigenous Peoples (OP/BP 4.10) [] [X] Forests (OP/BP 4.36) [] [X] Safety of Dams (OP/BP 4.37) [] [X] Projects in Disputed Areas (OP/BP 7.60)* [] [X] Projects on International Waterways (OP/BP 7.50) [] [X] 96. The project has been assigned the environmental category B. As it has triggered OP 4.01 Environmental Assessment and OP 4.12 Involuntary Resettlement, an Environmental and Social Management Framework (ESMF) and a Resettlement Policy Framework (RPF) have been prepared because the exact locations and impacts of the planned investments could not be determined prior to the appraisal of EDAP. The draft ESMF and draft RPF have been disclosed in Mozambique and at the Bank's Infoshop on July 21, 2009; the final ESMF and final RPF have been disclosed in Mozambique and at the Bank's Infoshop on October 16, 2009. The ESMF was prepared in consultation with the Ministry of Energy, FUNAE, EdM and reflects experience gained with similar types of sub-projects under other operations, including ERAP. As mentioned earlier, EdM is in the process of establishing an Environment Unit with support from Danish Technical Assistance; establishment of such a unit will be a condition of effectiveness. G. Policy Exceptions and Readiness 97. Based on the preparation work undertaken by the Borrower and the Project Task Team(s), and as confirmed through the Appraisal conducted from September 23 to October 9, 2009, the proposed EDAP (APL-2) is considered ready for implementation. Particularly being an APL-2 instrument, the proposed implementation Agencies and the required institutional arrangements are also deemed fully prepared and empowered to implement the project. * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas 30 Annex 1: Country, Sector and Program Background MOZAMBIQUE: MZ-Energy Development and Access Project (APL-2) 1. Country and Sector Background 1. Mozambique has staged a remarkable recovery from a devastating civil war that ended in the early 1990s and has successfully completed an ambitious program of "first generation" reforms. Since 1992, infrastructure has been improved and is now approaching its pre-war levels, and incomes have risen considerably. The poverty headcount fell from 69 percent in 1997 to 54 percent in 2003. On average the economy grew by 8 percent annually between 1996 and 2006. This accomplishment can be attributed to the Government of Mozambique's (GoM) phased but determined approach to stabilization and reforms, as well as to concessional assistance (half of Government expenditures), healthy agricultural catch-up growth, and fast expansion in tourism, construction, and certain manufacturing sub-sectors. Another significant factor was the GoM's success in attracting "mega-projects" in aluminum smelting, natural gas, and titanium mining. 2. Nevertheless, with a population of 21 million inhabitants, an annual per capita income of US $330 in 2007 and 54 percent of the population still below the poverty line, Mozambique remains a poor country with considerable social and economic challenges; infrastructure assets and services (energy, transports, water and sanitation, and telecom) are is still inadequate; and, there are serious unmet education and health needs. The urban and peri-urban economically active population is expected to grow at 4 percent annually until 2010, underscoring the need for the continuous expansion of urban and peri-urban infrastructure services. Only around 10.5% of households have access to electricity with over half of them living in Maputo and its surrounding areas. All the provincial capitals and most of the municipal areas are also supplied with electricity. Most of these urban centers are connected to the main national electrical grid which is owned and operated by the Mozambican power utility, Electricidade de Moçambique (EdM). Access to grid-based electrification in the rural areas is extremely low (2%) and due to low demographic densities and geographically dispersed loads, will remain very low for the foreseeable future. Off-grid electrification schemes have and can continue to increase access to modern energy services but much investments are required in this area and a comprehensive long-term national rural electrification strategy and investment program is still needed. 3. Mozambique's vast energy resources have the capacity to satisfy most of its domestic energy needs. They include hydropower, natural gas, coal, biomass, solar and wind. The country is endowed with a considerable hydropower potential which has been broadly estimated at 12,500 MW with a corresponding annual energy generation potential of 60,000 GWh. It is estimated that around one third of this potential can be developed at a relatively low cost. The largest potential is in the Zambezi River basin at sites such as Cahora Bassa north and Mphanda Nkuwa. So far only about 2,200 MW has been developed. In addition, the potential for small hydro is 190 MW, which includes 6 MW micro hydro (1MW<=8) and 166 MW small hydro (8>MW<15). Potential sites for these micro hydropower schemes are located within the mountainous terrain with perennial streams and rivers of the Manica, Tete and Niassa provinces. 31 4. Mozambique receives a considerable amount of sunshine. With an annual average radiation of 5 KWh/m²/day, it offers very favorable conditions for photovoltaic and solar thermal energy development. 5. At the household level, the main requirement for energy is for cooking and lighting. The principal energy source for the majority of Mozambicans is biomass, particularly wood fuel. Within rural communities, this accounts for nearly all the total energy consumed. Charcoal production and use is widespread in small urban settlements, district capitals and around larger towns and cities. The commercial production of charcoal for the growing urban and peri-urban markets is beginning to pose serious tangible negative environmental impacts. While market demand for charcoal cannot be easily reverse until viable alternative household and SME fuels are available in the marketplace at affordable prices, there is an urgent need to promote improved charcoal production methods and practices, and to sustainably manage forest exploitation for charcoal making. 6. EdM's existing installed capacity is approximately 240MW (109MW hydro and 130MW diesel and gas). Nevertheless, most of EdM's available supply capacity - about 136MW (61MW Hydro and 75MW thermal) - is generated by ageing plants which would require refurbishment. 7. In 2005, the total energy consumption was 1,707 GWh and peak-demand was 284.6 MW. The total power generating capacity including the share from Cahora Bassa is in excess of what is needed in the country. However, due to lack of power transmission lines and distribution networks, the availability of hydroelectricity for the time being is largely restricted to urban and peri-urban areas. In the rural areas, the electricity simply is not available and where it is available, is supplied from diesel generators. According to the Ministry of Energy's Management Strategy for the Energy Sector (2008-2012), Mozambique is recording a yearly growth in the electricity demand of 7%. GoM's objective is to reach an electrification rate of 15% by 2019 (and 20% by 2020). By 2020, Mozambique should have a total energy need of 5.40 GWh and an electricity demand close to 900 MW based on an estimated annual demand growth of 7 - 8%. 8. The main source of electricity to the national grid comes from hydropower plants. The remaining centers have diesel or gas generators that supply electricity which is distributed through mini-grids that are independent of the main national grid system. All except a few of these independent systems are owned by the State and operated by district administrations, municipalities or other government institutions. 9. There are still many district capital and other rural localities with relatively high population concentration that are either not currently supplied with electricity or have old generation and distribution systems which are no longer functioning. In low-demand rural centers, electricity development, connection and operation costs per customer are higher than those in larger towns and cities. Revenues from consumers rarely cover costs. Most consumers fall within the domestic consumer category and very little electricity is used for economic purposes. There are very few large consumers. Under the current regime of uniform tariffs throughout the country, there is an implicit cross-subsidy of consumers in these low-demand centers by consumers in the larger cities and towns. 32 2. Energy Sector APL Program Background 10. The objective of the Energy Reform and Access Program APL series, as set out in the original appraisal document of July 2003, was to increase access to modern energy in peri-urban and rural areas, thereby facilitating improved quality of life of the respective communities and generating income. The original project design had been based on a conservative sector reform strategy to unbundle EdM into Generation, Transmission and Distribution companies, and to concession the distribution company to a private concessionaire. The original project components were: (i) Power Sector Reform; (ii) Grid-based Peri-Urban Electrification; (iii) Independent Grid Rural Electrification; (iv) Renewable Energy and Cross-sectoral Linkages; and (v) Institutional Development and Capacity Building. 11. Significant changes in energy sector policy in Mozambique have occurred since the preparation of the first phase of the program in 2002-3. In January 2005 a new Ministry of Energy was established. The new Ministry team reviewed the strategy in light of developments in the power sectors of neighboring countries and experience in Sub-Saharan Africa and elsewhere. The difficulties and potential drawbacks of implementing an approach based on unbundling the incumbent utility and relying on private sector concessionaires were summarized in analytical work undertaken by the World Bank that pointed out the paucity of results from more than a decade of focus on private participation in electric power sectors in Sub-Saharan Africa.9 Conversely, some of the more successful electricity utility companies in Sub-Saharan Africa were shown to have achieved good results as vertically integrated companies without private participation. 12. After reviewing the evidence, and following extensive discussions with IDA and a stakeholder workshop, in November 2005 the Government presented its new approach to power sector reform to the World Bank. Under the new approach, the Government opted not to seek private participation in EdM in the near-term. Instead, the strategy focused on achieving improved performance of EdM through the combination of an effective Performance Contract for EdM, increased technical and financing support for EdM and operationalizing a strong, independent advisory power sector regulator, CNELEC, to monitor EdM's performance. In addition, the Government identified a priority role for the private sector in new generation and transmission "Mega-Projects", to be developed through public-private partnerships. 13. ERAP-1 (APL-1). As a result of those changes in sector strategy, the ERAP (APL-1) project was restructured in June 2007 to better align it with GoM's new strategy for the energy sector. The project also includes US $3.1 million in GEF financing for off-grid activities. ERAP's restructured components are: (a) Component A: Power Sector Reform: support for establishment and initial operations of CNELEC; (b) Component B: Grid-Based Peri-Urban Electrification, including grid intensification and a set of activities aimed at demonstrating methods for reducing losses and 9 "Reforming Power Markets in Developing Countries: What Have We learned", John E. Besant-Jones, WB Energy and Mining Department, September 2006. 33 improving customer service (Commercial Reorientation of the Electricity Sector Toolkit (CREST); (c) Component C: Independent Grid Rural Electrification. This component was reduced at restructuring because of a lack of private sector interest in taking up the available concessions. Since restructuring, the remaining concession has also been cancelled; (d) Component D (Co-financed with GEF Grant): Renewable Energy and Cross-Sectoral Linkages: this provides financing for (i) solar PV Systems to electrify 300 Schools and Health Clinics in rural areas, (ii) a pilot to use solar PV systems for the provision of community-level services in rural villages, and (iii) support for the participation of the private sector in supplying solar PV products in rural areas, using subsidies to buy down capital costs; and, (e) Component E: Institutional Development and Capacity Building, including training, studies and technical assistance, including support for legal and financial advisers to assist the government in advancing the generation `mega-projects'. 14. As such the sector reform agenda launched by the ERAP (APL-1) was in effect expanded and amplified far beyond its original scope. Proof of this is the several generation (Mphanda Nkuwa; Cahora Bassa North, Lurio, Moatize, Benga and Ressano Garcia) and transmission (Mozambique Regional Transmission Development Program) "mega-projects" currently under preparation, totaling more than $15 billion in mostly private sector investments. ERAP's restructuring resulted in a significantly improved sector dialogue with GoM and enhanced project implementation performance and ratings. Furthermore, EDAP (APL-2) builds directly off the trajectory and successes of the first phase of the APL series. The project is currently being restructured to prepare the project for closing in December 2010. 15. In line with the above, the name of the overall APL series is being changed to the "Energy Development and Access Program" (EDAP APL-2), and the proposed APL-2 operation is similarly changed to "Energy Development and Access Project" to more adequately reflect the scope of IDA's assistance strategy for the sector and to better aligned the project with the government's National Energy Development and Access Program (NEDAP). Annex 15 present a detailed description of the NEDAP Program. Summary of ERAP (APL-1) Achievements 16. Power Sector Reform. A Government directive dated July 2006 established the basis for operationalizing the National Energy Regulatory Council (`CNELEC'), Mozambique's new independent advisory regulatory agency, setting out the regulatory functions that it should undertake. Subsequently, the Performance Contract between the GoM and EdM, to be monitored by CNELEC in a public manner, was signed on June, 2007.10 This is the first example 10 EdM's Performance Contract with the Government of Mozambique (GoM) has four principal components: (iii) A survey of public opinion on EdM's performance (iv) EdM's self-evaluation report on its performance (v) Public consultations on EdM's performance 34 in Africa of a performance contract between the Government and the power utility being publicly monitored by an independent regulator. 17. Financial and technical/advisory support via ERAP has been instrumental to the successful establishment of CNELEC. The core operations of CNELEC ­ including staffing, logistics and technical assistance ­ are all in place. The Commissioners for CNELEC were appointed in April 2008, allowing the regulator to start operations. Since that point, CNELEC has devised and begun to implement a strategic plan that will allow the agency to successfully discharge its mandate. Overall, good progress is being made in the review of EdM's performance contract, both by CNELEC and EdM. The public opinion survey on EdM's performance and EdM's self-evaluation report were both submitted to CNELEC in July 2009. CNELEC is in the final stages of hiring an outside consulting firm to assist it in performing the public consultations on EdM's performance and in producing a public report to the GoM assessing EdM's performance and making recommendations for improvements. It is expected that the performance review of EdM will be completed by the second quarter of calendar year 2010. 18. Grid-Based Peri-Urban Electrification. The principal activity in this component is a 11.6 million grid intensification contract, which commenced in September 2007. Following early delays, which were resolved by the July 2007 restructuring of ERAP, activities have accelerated. As of end-September 2009, 99% of construction of the distribution networks has been finished and 17,685 customers have been connected and energized. In addition to the customer connections, the new medium-voltage and low-voltage networks installed via the project will be able to supply high-quality electricity to approximately 40,000 customers, meaning that EdM will be able to connect many thousands more households in the project areas as and when they apply for service. Furthermore, the project has met one of the objectives set out in the project's Results Framework, which was to reduce the average cost of connecting each household to at most $950. Assuming that 25,000 customers are connected by the end of the project, this component will have an average cost of approximately $69011, exceeding the target by a significant margin. 19. Renewable Energy and Cross-Sectoral Linkages. The main activity in this component, installation of solar PV systems in 150 schools and 150 clinics in rural areas, financed both by IDA and the fully-blended GEF grant, has proceeded well. By end-September 2009, 223 systems have been installed and 181 site acceptance certificates have been issued, with the remainder expected to be completed by end-December 2009. Technical issues identified earlier in implementation, including problems with the quality of light-bulbs, are being addressed. 20. The restructuring of ERAP in July 2007 included the addition of a new village electrification pilot program in five villages to test an alternative approach for sustainable provision of renewable energy services in remote areas. This approach has an innovative community-based management model, to ensure both technical and financial viability of the pilot. Installation of systems in all five villages is now complete, with over 300 solar PV `kits' deployed. (vi) A public report from CNELEC to the GoM assessing EdM's performance and making recommendations for improvements 11 At the current exchange USD:EUR rate of 0.68 35 21. Institutional Development and Capacity Building. This component has successfully provided support to the Ministry of Energy in a range of technical areas. Highlights have included a study on the gas market in Mozambique and important support to GoM's efforts to develop a new generation of `mega-projects', including through financing studies on (i) the financial benefits of the mega-projects, and (ii) the commercial options for the structure of the proposed Regional Transmission Backbone project. ERAP will continue to provide important support to the preparation of this project, including financing legal and financial advisers to the Ministry for the mega-projects. This component has also provided critical management support to the Ministry, enhancing both procurement and financial management capacity. 36 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies MOZAMBIQUE: MZ-Energy Development and Access Project (APL-2) 1. ERAP (APL-1) and its link to the sector issues were discussed under A.1 and have been described in detail in this document (pp 6 and under A.1) and will thus not be discussed again here. 2. Sector issues discussed in A.1: · Affordable electricity supply, grid access and generation capacity; · Low rural electrification, difficult because of low population density; and, · Limited capacity, institutional strengthening and capacity development at the main sector institutions (ME, EdM, FUNAE and CNELEC), including capacity to negotiate and manage the new generation developments. Summary of recent projects12 Sector issues discussed in A.1 For WB addressed? How? projects: OED or IP and DO ratings13 ERAP (ADB, NDF, WB): energy Grid intensification, capacity DO: S sector reform facilitating private building, and studies (e.g. least cost IP: MS sector involvement, grid based expansion plan) components. peri-urban electrification, Addresses sector issue 1. independent grid electrification (to Off grid component implemented by be dropped), off grid renewable FUNAE. A addresses sector issue 2. energy, institutional development Capacity building component. and capacity building Address sector issue 3. Mozambique-Malawi Lays the foundation for DO: MS Interconnection Project (WB strengthening the northern network. IP: MU (lead), additional financing Address sector issue 2. possibly from Norway): building a transmission line between Mozambique and Malawi including substations, associated system strengthening in Mozambique and Malawi, associated capacity support Rural electrification in Sofia, The extension of the grid to rural Manica, Tete and Chibabava Buzi areas. Address sector issue 2. N.A. (Sweden (lead), Denmark, Norway) 12 WB and other international agencies 13 For completed WB projects: OED's rating, for ongoing WB projects: IP and DO ratings 37 Rural electrification in Niassa The extension of the grid to rural province (Sweden (lead), Norway) areas. Address sector issue 2. N.A. Access to Modern Energy The project addresses Sector Issues 1 Services Mozambique ­ AMES-M and 2: Component 1 subsidizes grid N.A. (Dutch-German Partnership connections for households that Energizing Development, cannot afford the connections but are implemented by the German able to pay for energy consumption Technical Cooperation GTZ) (Sector Issue 1); The project has 3 components: Component 2 aims to provide energy Component 1: Grid services to rural households in densification/household remote areas by supporting private connections to the grid in Matola traders in supplying adequate and and Maputo affordable SSHS (hardware) and Component 2: Solar energy (a) for creating maintenance capacity rural households, supporting the (Sector Issues 1 and 2); commercialization of small solar Component 3 supports electricity home systems (SSHS), and (b) for provision to rural households at rates social infrastructure (schools and agreed upon by the community health facilities) (Sector Issue 1); use of pico-hydro Component 3: Pico hydro power, technology allows serving (very) upgrading maize mills to provide small settlements (Sector Issue 2). electricity to the local community through a mini-grid Electricity III (ADB): extend the Grid extension to rural areas. N.A. grid to 19 rural centers supplying Address sector issues 1 and 2. about 7053 consumers in four provinces, namely Gaza, Imhambane, Tete, and Nampula Electricity IV (ADB): transmit Grid extension to rural areas. N.A. electricity to satisfy long-term Address sector issues 1 and 2. demand and to improve the Support for quality and reliability. electricity access, reliability, and Address sector issue 3. quality of supply to consumers in Sofala and Manica. The project will improve electricity supply to an estimated 79,364 existing customers. Rural electrification of Chibabava The extension of the grid to rural N.A. Buzi-Sofala (EdM) funded by EC areas. Address sector issue 2. Electrification of rural areas of The extension of the grid to rural N.A. Cabo Delgado province (EdM) areas. Address sector issue 2. funded by EC Electrification of rural areas of The extension of the grid to rural N.A. Tête province (EdM) funded by areas. Address sector issue 2. EC Photovoltaic solar panels in Provide affordable electricity supply, N.A. 38 isolated rural areas (FUNAE) grid access and generation capacity. funded by EC Address sector issues 2. Electrificaco da Communidade de Provide affordable electricity supply, N.A. Majua , districto de Milange grid access and generation capacity. (FUNAE) funded by EC Address sector issue 2. Capacity building in Energy Capacity building component. planning and management (ME) Address sector issue 3. N.A. funded by EC co-financed by WB Pipeline Mozambique Regional Least cost power production and Transmission Project (WB (lead), transmission. Address sector issue 1. Norway): support to the GoM to The back bone will help to facilitate N.A. facilitate a transmission back bone electrification of the country. for Mozambique with private Address sector issue 2. sector participation Out of the project, its PPF and various TF capacity building and specialized consultancies will help to mitigate sector issue 3. Capacity building program for Rehabilitation of power plants will EdM (Sweden): focusing on help to address sector issue 1 N.A. financial management and The capacity building support to rehabilitation of the hydro power EdM will help to address sector issue plants in Mavuzi and Chicamba 3. AFD Urban andPeri-urban Urban and Peri-urban electrification Electrification (NEDAP) in Maputo and Cabo Delgado N.A. provinces. EIB Urban and Peri-urban Urban and peri-urban electrification Electrification (NEDAP) in Maputo and Manica provinces. N.A. OFID Urban and Peri-urban Urban and peri-urban electrification Electrification (NEDAP) in Maputo and Nampula provinces. N.A. Arab Funds Urban and Peri-urban Pending definition of funding Electrification and renewable priorities among urban, peri-urban N.A. Energy (NEDAP) and rural electrification. Belgium Renewable Energy Dissemination of decentralized Project (FUNAE) renewable energy technologies, N.A. particularly solar PV. 39 Annex 3: Results Framework and Monitoring MOZAMBIQUE: MZ-Energy Development and Access Project (APL-2) PDO Project Outcome Use of Project Outcome Indicators14 Information Increase access to electricity and (1) Number of people provided with modern energy services in peri- access to electricity under the project Yr 1 & Yr2: Gauge implementation urban and rural areas in a sustainable by household connections. ( Power, progress and Borrower commitment and affordable manner. Core 1) to project PDOs; (2) Number of people provided with access to electricity under the project Yr3: Inform MTR on adjustments by household connections. that might be required to project (Renewable Energy, Core 1) design or implementation strategy; (3) Number of community electricity connections under the project Yr 4 & Yr5: Monitor (Renewable Energy Core 2) implementation to ensure PDO achievement by Closing (2014). (3.1) Number of health clinics electrified (3.2.) Number of schools electrified (4) Increased satisfaction reported in customer satisfaction survey. Intermediate Outcomes Intermediate Outcome Use of Intermediate Indicators Outcome Monitoring Component 1 ­ Reinforcement of the Primary Networks and Grid Extension. The objective of this component is to increase grid-based access to and improve reliability of Yr 1: Evaluate progress on IBMS the supply of electricity services in design and procurement thereof. peri-urban areas. (1) Electricity grid reinforced (1) Transmission and distribution lines (KM) constructed or Yr3 -5: Evaluate annual progress of rehabilitated under the project. implementation of physical (Power, Core 5) investments to assist the Borrower to address any emerging (2) Electricity grid extended (2) Number of new peri-urban implementation issues on a timely connections established. basis to ensure full implementation of physical investments by project Closing (2014). (3) Improved efficiency in electricity (3.1) Electricity losses per year in transmission. the project area ( Power, Core 4) (3.2) Average interruption frequency per year in the project area (SAIFI) ( 14 Note: "Core Indicators" refer to a set of standardized indicators adopted by the World Bank for results monitoring in IDA operations. The Results Framework reflects the applicable core indicators for the power sector where appropriate. The core indicators for the power sector are divided into the sub-categories of (i) Power and (ii) Renewable Energy. 40 Power, Core 3) (4) Improved management capacity (4) IBMS deployed. of EdM. Component 2 ­ Investments on This component pilots a range of Rural and Renewable Energy. The RETs and will be evaluated by an objective of this component is to impact assessment at the end of the increase off-grid access to electricity project and the results framework and modern energy services in reflects this demand-driven unserved rural areas through approach. conventional and renewable energy resources and technologies (RETs). (1) Off-grid access to electricity and (1.1) Number of systems installed in Yr 1 & Yr2: Evaluate physical modern energy services in rural rural schools progress towards project areas is increased. (1.2) Number of systems installed in outcomes/outputs. rural health clinics. (1.3) Generation capacity (MW) of Renewable Energy constructed Yr3: Inform MTR one adjustments under the project. (Renewable that might be required to project Energy, Core 3) design or implementation strategy. (2) Alternative methods for (2) Number of RET pilots Yr 4 & Yr5: Monitor delivering modern energy services successfully completed (f.x. biomass implementation to ensure full piloted. demonstrations, Multifunctional achievement of intermediary platforms, improved stoves and outcomes/outputs by Closing (2014). kilns, community solar systems). Component 3 ­ Energy Sector Planning, Policy and Institutional Development. The objective of the Yr 1 & Yr2: Evaluate Borrower component is to improve the overall commitment and progress towards performance of the Ministry of rural electrification, and evaluate Energy and CNELEC. progress on establishment of flexible SWAp. (1) Institutional capacity to promote (1) National Rural Electrification rural electrification and to mobilize strategy and investment Program new private sector and donor finalized by GoM. Yr3: Inform MTR on adjustments investment financing is improved; that might be required to project and, design or implementation strategy. (2) Improved Energy Sector (2.1) Timely submission by Management CNELEC of monitoring reports on Yr 4 & Yr5: Monitor ME/EdM performance contract, (as implementation to ensure full per relevant legal mandate) achievement of intermediary outcomes/outputs by Closing (2014). (2.2) Energy sector/sub-sector flexible SWAp is established by 3rd year of project implementation. 41 Arrangements for results monitoring Target Values Data Collection and Reporting Project Outcome Frequency Data Collection Responsibility Indicators Baseline YR1 YR2 YR3 YR4 YR5 and Instruments for Data Reports Collection (1) Number of people EDAP (APL-2) EdM; provided with access to 42,500 --- --- 52,500 66,250 67,500 Annually Progress Ministry of electricity under the project (40%) (95%) (100%) Reports; WB Energy (ME) by household connections. Procurement (Peri-urban) Systems. (2) Number of people 33% 67% 100% Quarterly EDAP (APL-2) FUNAE provided with access to 233 (2,500) (5,000) (7,500) Progress ME electricity under the project Reports; WB by household connections. Procurement (Rural) Systems. (3) Number of community 300 405 510 620 710 800 Quarterly EDAP (APL-2) FUNAE electricity connections (21%) (42%) (64%) (82%) (100%) Progress ME under the project (total) Reports; WB Procurement (3.1) Number of health 150 200 255 310 355 400 Systems. clinics electrified (21%) (42%) (64%) (82%) (100%) (3.2.) Number of schools 150 200 255 310 355 400 electrified (21%) (42%) (64%) (82%) (100%) (4) Increased satisfaction Assessment reported in customer of satisfaction survey. customer To be To be To be To be To be Annually Customer ME satisfaction confirmed confirmed confirmed confirmed confirmed Satisfaction (CNELEC) survey in Survey. course until December 31, 2009. 42 Target Values Data Collection and Reporting Intermediate Outcome Frequency Responsibility Indicators Baseline YR1 YR2 YR3 YR4 YR5 and Data Collection for Data Reports Instruments Collection Component 1 (1) 500 km MV MV lines: transmission lines and 800 410 km --- --- 370 km 410 km EDAP (APL-2) km LV distribution lines (90%) (100%) Quarterly Progress EdM constructed or rehabilitated LV lines: Reports; WB under the project. 835 km --- --- 750 km 835 km Procurement (90%) (100%) Systems. (2) 25,000 new peri-urban EDAP (APL-2) connections established. 42,500 --- --- 52,500 66,250 67,500 Quarterly Progress EdM (40%) (95%) (100%) Reports; WB Procurement Systems. (3.1) Electricity losses per Nampula --- --- 13% 12% 10% year in the project area 15% --- --- 13% 12% 10% EDAP (APL-2) Tete 22% Quarterly Progress EdM (3.2) Average interruption --- --- 226 150 75 Reports; WB frequency per year in the Nampula --- --- 116 77 38 Procurement project area: 2.5% Systems. Tete 4.5% (4) IBMS deployed. --- procurement system system tested system EDAP (APL-2) process installed functional Quarterly Progress EdM finalized Reports; WB Procurement Systems. 43 Target Values Data Collection and Reporting Intermediate Outcome Frequency Responsibility Indicators (Continuation) Baseline YR1 YR2 YR3 YR4 YR5 and Data Collection for Data Reports Instruments Collection Component 2 (1.1) 250 rural schools have 150 200 255 310 355 400 Quarterly EDAP (APL-2) FUNAE systems installed. Schools (21%) (42%) (64%) (82%) (100%) Progress report (1.2) (1.2) 250 health clinics 150 200 255 310 355 400 Quarterly EDAP (APL-2) FUNAE have systems installed. Clinics. (21%) (42%) (64%) (82%) (100%) Progress report (1.3) Number of RET 0 0 1 2 3 4 Quarterly EDAP (APL-2) FUNAE pilots successfully (0%) (25%) (50%) (75%) (100%) Progress report completed Component 3 Selection of (1) National Rural consultant Mobilization of EDAP (APL-2) Electrification strategy and None. (preparation RESIP RESIP RESIP funds and Quarterly Progress report; ME investment Program is of TOR, Finalized Dissemination Dissemination implementation Council of finalized by GoM by 2nd Shortlist, of the RESIP Ministers Year of implementation. RFP, etc) Memoranda. (2.1) Timely submission Report Report Report Report Report EDAP (APL-2) by CNELEC of monitoring None. submitted submitted submitted on submitted on submitted on Annual Progress report; ME reports on ME/EdM on time on time time time time Annual GoM- performance contract Donor Joint Review Report. (2 2) sector/sub-sector None. SWAp SWAp SWAp SWAp under SWAp under EDAP (APL-2) flexible SWAp is preparation negotiation established implementation implementation Annual Progress report; ME established. in progress in progress Annual GoM- Donor Joint Review Report. EdM = Mozambique Power Utility / Electricidade de Mocambique FUNAE = Energy Fund / Fundo de Energia ME = Ministry of Energy / Ministerio de Energia 44 Annex 4: Detailed Project Description MOZAMBIQUE: MZ-Energy Development and Access Project (APL-2) 1. The proposed EDAP (APL-2) constitutes the continuation of the IDA support program launched in 2003 through the ERAP-APL-1. EDAP (APL-2)'s design is based on the continuation and broadening of the successful interventions of and lessons learned from the ERAP (APL-1) project. EDAP (APL-2) also constitutes the lead project of GoM's broader Energy Development and Access Program of investments for the Energy Sector (NEDAP Program) (see Annex 15 for additional information on NEDAP). 2. The Proposed IDA EDAP (APL-2) Project has a total investment envelope of US $80 million15 and is composed of three complementary components, which are described in the detail in the following sections: a. Component 1: Reinforcement of the Primary Networks and Grid Extension Component (US $50.0 million); b. Investments on Rural and Renewable Energy Component (US $18.0 million); and, c. Energy Sector Planning, Policy and Institutional Development Component (US $10.2 million). Component 1: Reinforcement of the Primary Networks and Grid Extension Component Sub-component 1.1: Engineering Consulting Services for Preliminary Engineering Design, Scoping and Packaging, Tender Documents and Procurement of Contractors (US $6.8 million) 3. In order to implement the physical investment sub-components of the EdM EDAP (APL- 2) project, namely the rehabilitation/reinforcement sub-component and the network expansion and customer connections sub-component, EdM will procure a reputable International Engineering Consulting firm to undertake a detailed examination of the Program activities and the preliminary scope proposed and to provide the following services under EdM's guidance: (i) perform a preliminary survey and the corresponding scoping and engineering design work for the two sub-components; (ii) elaborate the most suitable scope and prepare the corresponding tender documents for each project package; (iii) run the procurement process for suppliers and contractors pertaining to the defined packages, including assisting EdM in Pre-Award-Contract Negotiations and preparation of contracts documents pertaining to the successful suppliers and contractors, and (iv) assist EdM in supervising the works being executed by the selected contractors and suppliers for the different project packages under the two sub-components. 15 Out of the total IDA envelope US $77.5 million corresponds to identified investment items and US $2.5 million to Unallocated. 45 4. An International Competitive Bidding (ICB) process will be followed for selection of the Engineering Consulting Firm under QCBS as well as for selection of suppliers and contractors under BoQ and Unit Price shall be used for procurement in accordance with the World Bank Procurement Guidelines. Sub-component 1.2: Medium Voltage (MV) Network transmission efficiency improvement Pilot. (US $1.2 million) 5. This sub-component will finance a high priority pilot project to demonstrate the possible efficiency gains in the operation of the Low Voltage distribution network in Maputo. The Pilot will be implemented in the MV network at the "25 de Junho" area in Maputo. Under the proposed pilot the Low Voltage (LV) network will be reconfigured, with two existing large distribution transformer stations with capacities of 630kVA each will be replaced by various smaller transformers with capacities varying between 50 and 100kVA. This reconfiguration will enable to reduce the length of LV resulting in a considerable reduction in the prevailing level of technical losses on distribution within the system. The two large transformers will not be disposed of, rather they will be reallocated to other existing substations in need of transformer capacity upgrading. The Pilot project was identified and prepared as part of the efficiency improvement activities undertaken under ERAP (APL-1) but its implementation was deferred to the APL-2 phase for funding reasons. It is expected that this pilot will be successful and that it will be replicated once its results have been confirmed. Sub-component 1.3: Rehabilitation and Reinforcement of the primary Network (US $8.2 million) 6. The primary networks in two of the cities (Matola and Chimoio) where peri-urban sites/areas are being electrified and new customers are expected to be connected under the ongoing ERAP (APL-1) will have various primary substations and medium voltage lines saturated as a result of additional load to be created by the new customers being connected. The upcoming extension of networks and connection of new customers under the proposed EDAP (APL-2) project will further saturate and overload those and other substations and medium voltage lines. It is therefore necessary to reinforce and upgrade those existing substations and medium voltage lines under EDAP (APL-2) to ensure sufficient capacity and quality of supply for both existing and new customers. Activities to be carried out in Maputo/Matola 7. The 10MVA power transformer in the existing substation at Matola Rio will be replaced by with a 30MVA transformer. The corresponding concrete base for the power transformer and the corresponding power operating equipment (circuit breakers, switch disconnectors), metering, control and protection systems will be upgraded accordingly. 8. The existing combined 33kV and SWER (19.1kV) system installed in the highly demanding farming area between Changalane and Catuane will be reinforced and upgraded to 46 increase its capacity and reliability to meet the current and confirmed expected demand of power (new customers who have already applied and are waiting to be connected to the system). Activities to be carried out in Chimoio 9. Most of the existing 6.6 kV lines are very long, old and do not have sufficient capacity to supply electricity to the several sites/areas which are being electrified under the ongoing ERAP. Those lines are further expected to be extended to supply electricity for the neighboring sites/areas under the proposed EDAP (APL-2), thereby making the upgrade more necessary. These lines will be rehabilitated and upgraded to 22kV. Consequently, the existing local substation at Chimoio will be upgraded in terms of installing an additional transformer of 30MVA, 66/22kV as well as adding new 22kV power bays to allow for connecting the lines that will be upgraded to 22kV. Implementation methodology 10. Replacement of existing power transformers at the two substations will be done without requiring extension of existing areas/spaces. The existing power transformers will not be disposed; rather they will be transported to other places to be used in other smaller substations where reinforcement is also required by EdM to meet the new customer demands. Similarly, all power operating equipment, substation bays, monitoring and protection systems to be rehabilitated or upgraded will be done within the existing spaces. 11. The extent of any possible adverse environmental and social impacts from the rehabilitation and reinforcement activities will be determined during the course of the implementation of the environmental and social screening process outlined in the ESMF. As with the other project activities where screening will occur, any necessary compensation/resettlement action plans (or abbreviated RAPs) will be prepared and implemented in compliance with the project's Resettlement Policy Framework (RPF). Impact 12. Reinforcement and upgrading the primary substations and medium voltage networks is an important activity to improve availability and reliability of power supply to allow for improving satisfaction of existing customers and to allow for connection of new additional customers. Several types of customers such as agricultural farms, schools, hospitals, shops, commercial and public institutions, and households will be connected to the distribution networks which will create new jobs and will bring significant improvement to the quality of life of the targeted peri- urban population in general, and for women and children in particular. 13. About 30,000 existing customers and approximately 50,000 additional new customers (financed by EDAP (APL-2 and other sources) in the Matola and Chimoio cities will benefit from better quality of power supplies resulting from the improvements and upgrades in the existing primary network. 47 Scope of works and cost estimates 14. The scope of works and cost estimates for the whole rehabilitation/reinforcement/ upgrade sub-component is indicated in the summarized table below. Table A.4.1 Project Rehab. & Upgrade of Existing Network /Substations (Basis: US $'000) Area Designation Qnty Cost Cost Replace. & Upgrade Maputo Transformers 30 MVA 1 2,759 2,759 Province 66/33kV in Matola Rio SS Transmission Efficiency Pilot Program 1 1,200 1,200 "25 de Junho) Rehab. & Reinforcement Existing 33/19kV 1 1,000 1,000 Chalange - Catuane Installation of Power Transformers 30 MVA 1 2,431 2,431 Chimoio DA 66//22kV + Accessories (Manica Prov.) Replacement/Upgrade 6.6kV MV to 22kV oh line 75 27 2,025 Sub-total 1: 9,415 Contingency (5%): 471 Total 2: 9,886 Sub-component 1.4: Extension of the distribution networks and customer connections (US $21.5 million) 15. Due to the very fast demographic and housing expansion registered in peri-urban areas, it is expected that large areas with new households will be readily available for electrification in the main existing peri-urban sites, immediately after the completion of the ongoing ERAP (APL- 1) project. Given that and the success experienced under ERAP (APL-1), GoM and EdM have accorded high priority to further expand peri-urban electrification in Matola, Nampula, Chimoio, Tete and Pemba from the provinces of Maputo, Nampula, Manica, Tete and Cabo-Delgado, respectively. The proposed IDA EDAP (APL-2) project will finance the extension of distribution networks and new customer connections in the Nampula and Tete provinces. 16. EdM will implement a similar program of investments in the Maputo, Manica and Cabo Delgado provinces under parallel financing arrangements from other donors within GoM's broader NEDAP program (see Annex 15). Implementation methodology 17. The project will be implemented within the cities/towns and peri-urban areas where streets, roads and other acceptable open access ways are already available. No new access ways will be open or created for the extension of the MV and LV lines, and no resettlement of people 48 or public or private structures is expected to take place under the proposed EDAP (APL-2) project. It is envisaged that medium voltage (MV) lines with less than 0.8 kilometers, low voltage (LV) lines with a maximum of 0.5 kilometers and service cables with less than 0.03 kilometers will be used to complete the intended extension of the network. 18. All available viable technological and design measures to avoid/mitigate any possible social or environmental impacts from the project will be considered. In terms of technology, ABC (twisted) cables will be used in all LV lines and concentric (Airdac) cables will be used in service connections to the new houses. The two types of over head cables planned to be installed are completely insulated to ensure mechanical and electrical protection and they can be even extended close to walls and roofs of buildings without endangering the people. In addition to the two types of insulated LV cables, the project will use the special insulated XLPE cable in all those MV over head lines to ensure that no trees and/or other structures need to be removed for safety reasons. However, as with other project activities where the environmental and social screening process will, any necessary compensation/resettlement action plans (or abbreviated RAPs) will be prepared and implemented in compliance with the project's Resettlement Policy Framework (RPF). Performance indicators 19. Due to fast growth in peri-urban areas of the main cities and towns, an accelerated increase on construction of new houses in various sites has been witnessed without being accompanied by corresponding installation of distribution networks to allow for the supply of electricity to them. As consequence, due to uncontrolled pressure from people who demand power supply to their houses, some partially unplanned ­ and in some cases illicit -- networks based on substandard materials have been installed to supply electricity to some customers in those peri-urban areas creating pockets of served areas with substandard networks within the proposed EDAP (APL-2) project areas. 20. During implementations of EDAP (APL-2), the extension of networks will be designed not only to the pockets without any electrification but it will be designed to replace existing substandard networks in small pockets as well to ensure uniform standard networks in whole areas of the program sites. Customers previously connected to substandard networks will be transferred to higher standard networks, together with the new customers. 21. The average cost of connecting new customers will be slightly higher than under ERAP (APL-1) as the upgrade of the network will have to also account for some of the existing customers. The summarized performance indicators for the project are as follows: · 25,080 new Customers in the Nampula and Tete provinces will be connected by the end of the EDAP (APL-2) project. Impact: 22. Continuous and reliable access to modern energy is a basic prerequisite to increase quality of life in the country's peri-urban areas on a sustainable basis. Today those areas are 49 supplied with energy through small stand alone generators, batteries, solar panels, and woodfuels. Initially electricity for households shall replace the present consumption of other non indigenous sources of energy, like kerosene (used mainly for lightning) and batteries (used for radios). Electricity is a cleaner source of energy, and the replacement of consumption of kerosene and non rechargeable batteries will contribute to environmental conservation, through reduction of emissions. Greater access to and use of improved energy services will deliver other benefits, particularly better health and education, and as a result, improved productivity of labor. Scope of works and cost estimates 23. The summarized scope of works and cost estimates for the whole network expansion and customer connection sub-component of the EDAP (APL-2) project for the selected cities is indicated in the table below. Table A.4.2 Activities 2: Network Extension and Intensification of Service Connections (Basis: US $'000) Project Service Connections 33kV OHL AAAC 150 mm2 0.4kV ABC 3x50+50=25mm2 Distribution Transformers Pre-Pyment Meters Qnty Cost/US$ Qnty Cost/US$ Qnty Cost/US$ Qnty Cost/US$ Qnty Cost/US$ Nampula 12,028 4,210 36 972 300 7,500 65 1,521 12,028 842 Tete 13,052 4,568 45 1,215 220 5,500 73 1,708 13,052 914 Sub-total 25,080 8,778 81 2,187 520 13,000 138 3,229 25,080 1,756 Contingency 439 109 650 161 88 5% Total 25,080 9,217 81 2,296 520 13,650 138 3,391 25,080 1,843 IDA EDAP Grand Totals Beneficiaries: 25,080 Cost (US $'000): 30,397 Sub-component 1.5: Institutional Strengthening and Capacity Building (US $10.0 million) 24. The institutional strengthening and capacity building of EdM will include: (i) conventional capacity development support ("on-the-job" and formal training, TA, etc.); (ii) institutional development on environmental and social safeguards (establishment of an Environmental and Social Safeguards Unit); and establishment of an Integrated Business Management System (IMBS). 25. EdM is in the process of establishing a Social and Environmental Safeguards Unit within Danish technical assistance support. The establishment of said Unit constitutes a Credit Effectiveness condition for the EDAP (APL-2) project. This unit should have three staff who would be responsible for (i) carrying out environmental audits; (ii) supervising environmental consultants; (iii) guiding the EDAP (APL-2) Project Manager on environmental issues; (iv) preparing terms of reference for environmental consultants; (v) monitoring the implementation of Environmental and Social Management Plans (ESMPs), Environmental and Social Management Frameworks; (vi) liaising with EdM's Distribution Areas in the provinces to ensure 50 fulfillment of environmental standards for utilities in the distribution areas; and (vii) liaising with the Ministry of Energy. In addition, EdM will need to develop operational manuals, environmental manuals and guidelines, and establish the necessary logistic conditions for the operation of the social and environmental safeguards unit. 26. Given the rapid growth in its assets, customer base and level of operations EdM urgently need to upgrade and modernize its management systems. That will be accomplished through the deployment of an Integrated Business Management System (IBMS) under the EDAP (APL-2). The IBMS system will enable EdM to improve all the main areas of corporate management, particularly the management of its customer base and assets and its financial management. The design of the IBMS incorporates World Bank "Best Practice", and will be designed taking into consideration the local context. This aspect of institutional strengthening and capacity building is complimentary to the efforts of other development partners in the area, but was chosen as it can be implemented as a stand-alone activity 27. The deployment of the new integrated management system will include comprehensive, intensive and advanced training of staff to ensure that the relevant personnel are able to run the system efficiently after its full deployment. In addition to training in the new IBMS system, EdM staff will be trained on the management of large projects, on the management and implementation of Loss Reduction Programs, on improved Financial and Accounting Management. 28. The need to acquire and install an Integrated Business Management System at EdM stems from the fact that EdM suffers from the following problem: (a) Operations: · generally low performance in the operations; · significant number of manual processes and paper circulation between offices; · duplicity of effort; · data inaccuracies; · manual and repetitive activities that increase the risk of human error; · non-standardized procedures; and, · business carried out differently depending on the region/division. (b) Information Systems · lack of validations and controls, very open to fraud; · important business processes are not automatically covered or partially covered (significant number of manual activities required); · lack of interface and integration ("Islands of information"); · late and inaccurate operational and managerial information, mostly manually elaborated; · generally Low performance; and, · insufficient communication infrastructure to meet business requirements. (c) Organization inappropriate organizational structures for the business; 51 generally based on system/resource constraints instead of business oriented; not clear responsibilities and accountabilities; duplication of functions and responsibilities; and, processes mostly oriented to execute repetitive operations, not to manage and improve them. (d) External factors · New Regulation Reporting demands; · commercialization requirements; and, · Market pressure (customers more product/service aware). 29. Within the above context EdM needs to implement an Integrated Business Management System (IBMS) to improve the company's operations and management and enhance corporate governance. The IBMS will be comprised of 3 main management information systems (MIS) and an internal communication system (ICS) to support their operation, namely: (i) commercial management system (CMS) to support execution of all commercial operations (consumption metering, reading, billing, collection, attention of customers in agencies or through call centers, disconnection and reconnection related to commercial debts, new contracts, etc.);(ii) incidents recording and management system (IRMS) to attend and resolve customers' claims for interruptions and bad quality in electricity supply; and, (iii) enterprise resource planning (ERP) to support management of all corporate resources, such as accounting and finances, human resources, procurement and logistics (stocks, fleet, etc), plant and equipment maintenance, etc.: · Customer Relations Management. · Accounting and Financial Management Information System. · Payroll/Human Resources Information System. · Integrated Stock Management & Procurement System. · Plant and Equipment Maintenance System. · Fleet Management System. · Management Information System (MIS) and Enterprise Business Intelligence (EBI) solution · Associated Work Flow Processes Impact: 30. The deployment of a powerful and modern integrated management system -- including training of personnel in commercial and financial areas -- will improve EdM's business management and will enable it to face the ongoing and future challenges related its expansion. Training of staff on large project management will enable EdM to face the challenges imposed by the expected forthcoming "mega" power generation and transmission projects. Component 2: Investments on Rural and Renewable Energy Component (US $18.0 million) 31. The Investments on Rural and Renewable Energy Component will increase and accelerate decentralized access to modern energy services by supporting the implementation 52 and/or scaling-up of: (i) decentralized small- and medium-size investments on renewable energy production and distribution systems, including solar PV and thermal, wind and biomass energy in rural and some peri-urban areas; (ii) demonstration projects to accelerate the sustainable market penetration of clean Renewable Energy Technologies (RET) in agriculture, household, small and medium enterprises (SME) and for rural mobility; and (iii) capacity development and institutional strengthening of FUNAE. As applicable, implementation of individual RET projects under this component will be done by FUNAE, other government agencies and/or the private sector. This component will be implemented by FUNAE, in close coordination with the Ministry of Energy (ME). Sub-component 2.1: Solar Systems and Technologies (US $9.25 million) Institutional Solar Systems (Rural Schools/Health Clinics) 32. Under this activity FUNAE will install PV Systems in Schools and Health Clinics. In addition to lighting and refrigeration services, those PV systems will support potable water pumping for those schools and health clinics. PV systems will also be installed in the houses of the teachers and health workers improving their living conditions, which have become a pre- requisite to retain qualified staff in rural areas. The implementation of this sub-component will be done in close coordination with the Ministries of Health and Education. Table A.4.3 presents a summary of the different "Solar Kits that FUNAE has established for rural electrification applications in Mozambique. 33. FUNAE intends to electrify 250 schools and 250 Health Clinics in rural areas through PV Systems. The electrification of schools and Health Clinics is estimated on US $4.25 million dollars and it is expected that it will reach approximately 350.000 beneficiaries. 34. The PV Systems to be installed for electrifying schools and health clinics will be supplied and maintained by the private sector. The Ministry of Health (MISAU) and the Ministry of Education and Culture (MINEC), respectively, will be responsible for covering the annual recurrent cost of associated maintenance contracts for the equipment installed in Health Clinics and Schools. 35. Under the ERAP (APL-1) activities, FUNAE has already established protocols with relevant entities in order to train the technicians who will be in charge of the operation and maintenance of the PV systems to be installed. 53 Table A.4.3: FUNAE Solar PV Kits for Rural Electrification Power Type Nr. of Components Maximu Ranges Components of the Type of of infrastructura m daily (Wh/day) Photovoltaic system current Kit l consumpt compartments ion 1. Solar Lantern 1 Solar lantern w/ 7W bulb 40 20 Solar panel of 1x10Wp DC A 1 7Ah battery 2. Photovoltaic System for Residences 2 to 4 Up to 4 indoor bulbs, being 1 of 18W and the rest 548 From 130 to Photovoltaic module of 2x100Wp AC B compartments 11W 165 1 battery pack of 3x130Ah 1 outdoor 11W bulb 1 200W inverter 1 socket for radio/TV/video/DVD 1 20A low regulator 3. Photovoltaic System for Residences or a Commercial Establishments 2 to 4 Up to 4 indoor bulbs, being 1 of 18W and the rest of 998 From 430 to Photovoltaic module of 3x100Wp AC C compartments 11W 465 1 battery pack of 731Ah 1 outdoor 11W bulb 1 700W inverter 1 socket for radio/TV/video/DVD 1 30A low regulator 1 socket for a refrigerator 4. Photovoltaic System for Schools N/A 2 Classrooms 3,232 848 Photovoltaic module of 8x120Wp AC D 2x5 indoor 18W bulbs Battery pack of 4x627Ah 2x1 outdoor 18W bulbs 1 1500W inverter 2x1 socket for radio/TV/video/DVD 1 75A low regulator Administration Area 3 indoor 11W bulbs 1 outdoor 18W bulb 1 socket for radio/TV/video/DVD/computer/printer 54 5. Photovoltaic System for Health Center Type I 8 6 indoor 18W bulbs (general) 1,510 From 550 to Photovoltaic module of 4x120Wp AC E 2 indoor 23W bulbs (examination) 590 Battery Pack of 2x627Ah 2 outdoor 18W bulbs 1 900W inverter 1 socket for vaccine fridge 1 35A low regulator 1 socket for communication radio 1 socket for radio/TV/video/DVD 6. Photovoltaic System for Health Center Type II 5 3 indoor 18W bulbs 1,294 540 Photovoltaic module of 4x100Wp AC F 3 indoor 23W bulbs (examination) Battery Pack of 900Ah 2 outdoor 18W bulbs 1 700W inverter 1 socket for fridge for vaccines 1 30A low regulator 1 socket for communication radio 1 socket for radio/TV/video/DVD 7. Photovoltaic System for Administrative Post 3 3 indoor 11W bulbs 2,128 Up to 550 Photovoltaic module of 6x120Wp AC G 1 outdoor 18W bulb Battery Pack of 2x900Ah 1 socket for radio/TV/video/DVD/computer/printer 1 700W inverter 1 70A low regulator 8. Photovoltaic System for Police Post 2 1 indoor 18W bulbs 416 130 Photovoltaic module of 1x120Wp AC H 1 outdoor 18W bulb Battery Pack of 295Ah 1 socket for radio/TV/video/DVD 1 200W inverter 1 10A low regulator 9. Public Lighting NA 10 lamps w/ LEDs of 10W/12V 600 10 Photovoltaic module of 1x75Wp DC I 1 40Ah Battery 1 10A low regulator w/ Photocells for the control panel 10. Water Pumping System Average depth of submersible Pump 3000 900W Photovoltaic module of 6x100Wp DC J 55m Tank of 10,000 Ltrs Control Panel 3 Fountains (for consumption, washing clothes and drinking source for cattle) 11. Air pumps L Depth of up to Airpump at a minimum height of 5 meters NA NA Minimum speed of wind of 3m/s NA 30m Tank of 10,000 Liters Fountains 55 36. FUNAE intends to electrify schools and health clinics trough PV Systems in the following provinces16: Table A.4. Provinces Schools17 Health Clinics18 Cost (MUS$)19 Cabo Delgado 75 75 1.28 Niassa 75 75 1.28 Inhambane 50 50 0.85 Manica 50 50 0.85 Total 250 250 4.25 Impact 37. Extending education and providing basic health care to rural communities are two major pillars to improving the quality of life in un-served rural areas. Availability of lighting will enable the rural population to attend alphabetization classes in the evening and/or at night. Additionally, the electrification of schools will enable the organization of additional class schedules in the evenings, which should contribute to addressing the lack of school facilities in the rural areas, and therefore, to increasing access to education services to the rural poor. Access to electricity is also expected to improve the working conditions of teacher, reflecting on improvements in the quality of the education being offered in those rural areas. 38. In the health sector, the electrification will allow for the improvement of the quality of services, night care, conservation of drugs, preventive medicine and, for the possibility of hospitalize patients who require it. Community Solar Systems 39. In Mozambique, being one of the poorest countries in Africa with a highly scattered population, the expansion of access to modern energy supplies in rural areas poses a major challenge and the viability and sustainability of those efforts have to be ensured. Although the cost of PV systems is still an important limiting factor, PV Systems are indeed highly suitable for the needs and conditions of the rural areas of this country where the national grid supply is not available. 40. Within the context of the ERAP (APL-1), FUNAE provided electricity to small villages by installing PV systems for the provision of community-level services (clinics, schools, etc.). In 16 These specific provinces were selected for inclusion in the EDAP (APL-2) project of activities because during the ERAP (APL-1) mostly schools and health clinics in Zambezia e Nampula provinces were electrified. 17 The electrification of schools comprises: 2 classrooms, 1 administrative office and 2 staff houses 18 The electrification of health clinics comprises: 1 health clinic type II including refrigerator and 2 staff houses 19 The costs used for the calculation of schools and health clinics, were the average cost of the actual systems used in the installations at rural schools and clinics under ERAP (APL I). 56 doing so FUNAE was able to have a significant local impact and provide benefit to the entire community in those villages. Under EDAP (APL-2) FUNAE aims to continue with that program and intends provide PV Systems to 30 new rural villages. The composition of the solar systems to be installed include: household lighting equipment, water pumping systems, public lighting, battery charging systems, and refrigeration to be installed in a rural community center. 41. Following the model established within the ERAP (APL-1) program, the local leaders, with assistance from FUNAE, will set-up a Community Management Commission to oversee operation and maintenance of the PV systems and to and collect the monthly fees to be paid by the beneficiary households. These Commissions will get from 10% up to 15% of the total fees collected and they will deposit the remaining value in a specific community account designated for the project. 42. In each community, and with the percentage of fees retained by the Commission, they will select and recruit an individual (or individuals) who will have the following responsibilities: · Supporting connections to the local communities; · The timely collection of payment for the consumption of energy; · Identification of new consumers and identify productive uses that use electricity; · Commercialization of energy equipment; · Participation in the search for new and innovative solutions for the most common maintenance jobs (such as gardening of weeds), as a way of involving the community and thus contributing to the creation of local employment; · Fight and dissuasion of vandalism and theft activities. 43. The estimated cost for the electrification of up to 30 villages20 is US $3.5 million dollars, and is expected to reach about 73,000 direct beneficiaries. FUNAE intends to implement this activity in the following provinces: Table A.4.5 Provinces Number of projects Cost (USD M) Cabo Delgado 10 1.18 Niassa 10 1.16 Inhambane 10 1.16 Total 30 3.50 20 The electrification of the villages includes: households (solar lanterns), non-residential dwellings, shop owners, water pumping systems, schools, clinics, administration and police posts and public lighting. The average cost per system was calculated on the basis of the same systems that were installed by FUNAE under ERAP (APL I). 57 Developing the market for PV products in rural areas 44. GoM is committed to supporting a rapid expansion of access to electricity and wishes to attract private sector participation in rural electrification with renewable energies. Private operators will be encouraged and expected to make investments to develop a renewable energy technologies market which will contribute towards improving the operation of the productive sector, the provision of social services and in improving the quality of life of the rural communities. 45. In order to stimulate the participation of the private sector in supplying renewable energy products in rural areas, appropriate support mechanisms and incentives will be used. These mechanisms and incentives include short training as solar engineers to locals that then sell and maintain solar systems, a model that has yielded good results in South Asia; an integrated approach with the electrification of schools and clinics that capitalizes on the sales and maintenance infrastructure established; and subsidies to firms per unit of power (Watt-peak) of PV systems supplied to households or SMEs. 46. The overall objective is to increase and expand the private sector's role in the supply of PV systems, by demonstrating that the private sector can profitably supply them, so that new suppliers are incentivized to enter the market. FUNAE aims to reach 3,750 new customers within EDAP (APL-2). Impacts 47. The availability of energy through PV systems will allow for the pumping of water, so that people ­ especially women and children -- will no longer need to walk far distances to get it. The availability of potable water will help reduce the incidence of many diseases such as cholera and diarrhea, by consumption of unsafe water. The operation of system of PV systems for water pumping is also a good business opportunity for local entrepreneurs. 48. One of the applications of photovoltaic systems will be the use of solar lanterns. The use of these lamps has a positive impact on the environment by reducing the burning of kerosene. The users of solar lanterns have in average, monthly saving of about 4 to 5 liters of kerosene. Sub-component 2.2: Biomass Energy Systems (US $6.3 million) 49. Within this sub-component, FUNAE will: (i) promote the dissemination and use of improved stoves and ovens in rural areas; (ii) promote the energetic use of waste from agriculture and agro-industry; (iii) promote the use of renewable energy sources for household and SME use and end-use energy efficiency of biomass resources; (iv) increase modern energy access among rural communities through the introduction of stationary and mobile energy services multifunctional energy service platforms using Direct Vegetable Oil (DVO) and/or Biodiesel in villages; and (v) develop small biofuel community agriculture plots to lessen dependence of the multifunctional platforms on commercial liquid fuels (imported diesel). 58 Promotion of Improved Stoves and Charcoal Kilns 50. The sustainable management and rational use of biomass resources can and should be done to address the prevailing deforestation trends in Mozambique. The ongoing uncontrolled cutting of trees makes the rationalization of the overall consumption of woodfuels an important environmental, economic and social necessity. The production of charcoal through traditional methods is today responsible for an important share of the ongoing deforestation in the country. The dissemination of improved stoves (such as "Poupa Lenha") would contribute to increase end-use energy efficiency in households and institutions (schools, clinics, etc.), would help lower woodfuel requirements by type of user and would reduce "in-door air pollution", with concomitant health benefits. A number of rural health clinics and school that received FUNAE support have already discontinued the use of the traditional "three stones stoves" for cooking in favor of improved stoves and are, reportedly, saving about two thirds of their previous consumption of firewood. Both the improved stoves and kilns will be disseminated on a cost recovery basis, with the funds recovered becoming a progressive revolving fund at FUNAE to further expand stove and kiln dissemination. 51. Within that context, FUNAE will actively support the market-based production and promotion of: (i) 50,000 improved stoves for schools, health clinics and households; (ii) 1,250 improved charcoal kilns and carbonization methods to increase firewood-to-charcoal conversion efficiencies; and, (iii) biomass energy conservation methods and practices within small and medium enterprises (SMEs) and rural households. Promotion of Multifunctional Energy Service Platforms 52. FUNAE will promote and support the installation of up to 70 stationary and/or mobile multifunctional energy service platforms which run on Direct Vegetable Oil (DVO) and/or Biodiesel in rural villages. FUNAE will also assist villages to set-up their own small-scale sustainable biofuel agriculture plots (jathropha or other) to establish a small village-based independent and self-reliant biofuel production system for the platforms. The multifunctional platforms have a standard diesel engine that can power a variety of tools and provide various energy services such as, cereal milling, husk removal, battery charging, lighting, basic Direct Current (DC) power and water pumping, and in the case of the mobile platforms, basic mobility, light mechanization and distributed irrigation and power generation. Different models/concepts of multifunctional platforms concept have been utilized for the some years in a number of countries in Africa, Latin America and Asia, and have proven that their deployment, operation and maintenance can be successfully handled by a local operators with only minimal external introductory and follow-up support. It is expected that the platforms will have a tangible impact in terms of providing access to multiple modern energy services to villagers in Mozambique and, thus, that they will contribute towards their social and economic development. 53. FUNAE will target between 70 and 135 villages. Direct beneficiaries within those villages will include community organizations and individuals who already own any sort of diesel powered equipment in the target villages. When possible, priority for ownership of platforms will be given to village Women Associations or Women Producer Groups. Target villages will be selected based on being rural, poor and where FUNAE has already been active to 59 facilitate to process of knowledge and technology transfer as well as implementation monitoring and impact evaluation. At a later stage the experience gained will be extended to other rural communities. The Platforms will be disseminated on a non-interest cost-recovery basis with FUNAE utilizing recovered funds to continue to expand the dissemination of multifunctional platform over time. The detailed criteria and mechanism for the dissemination and cost-recovery of the cost of the multifunctional platforms will be detailed in the project implementation manual and will be applied uniformly during the implementation of the project. 54. The multifunctional platform "Kit" for the project will have a maximum cost of US $ 15,000 per kit and will consist of: (a) stationary or mobile multifunctional platform with equipment modules such as: grinding mills, battery charger, electric and/or mechanic water pumps, vegetable or nut oil press, carpentry tools and mini electric grids for lighting. Specific equipment modules will be adjusted to better suit specific community needs; and (b) the inputs and technical assistance necessary to establish a 3 ha to 5 ha sustainable biofuel agricultural plot per platform that is installed in each participating village. Platforms will only be deployed in villages where either a biofuel is already available or after a small agricultural plot for the production of the biofuel has been established in the village in order to ensure the availability of the independent fuel supply for each platform. Promotion of Household and SME Interfuel Substitution 55. This activity will promote the substitution of traditional biomass fuels (woodfuel and charcoal) for cooking, heating and lighting applications in the household and small and medium enterprises (SME) sectors nationwide in the form of: (i) market-based LPG and kerosene inter- fuel substitution programs; and/or (ii) identification, evaluation and promotion of other technically and economically viable renewable fuels (gelfuel, ethanol, briquettes, etc.) and/or technologies (solar, wind, LEDs, etc.). This subcomponent would help increase access to households and SMEs to modern and cleaner energy services and should help reduce consumption of woodfuels. In addition to benefiting the targeted beneficiaries (approximately 7,000), this sub-component will help demonstrate new approaches and fuel/technologies options for inter-fuel substitution efforts, thus establishing a solid operational basis and experience for subsequent replication and scale-up in the country. The implementation of this subcomponent will greatly benefit from the previous experiences on interfuel substitution projects in Mozambique21 and from the vast operational experience of the World Bank22 and other donors, and of the technical assistance of specialized programs like the Energy Sector Management Assistance Program (ESMAP)23, the "Lighting Africa"24 initiative and the PROBEC Program (GTZ)25. 21 Interfuel Substitution project in Mozambique include: "Mozambique Urban Household Energy Project" (WB financed), "Programme for Basic Energy and Conservation in Southern Africa" (ProBEC; GTZ financed). 22 World Bank Interfuel Substitution project experience includes: "Senegal: Sustainable and Participatory Energy Management Project"; "Mali: Urban Household Energy Project"; Burkina Faso: Sustainable Energy Management Project" 23 For more information see: www.ESMAP.org 24 For more information see: www.Lighting Africa.com 25 For more information see: www.probec.org 60 Biomass Energy Technologies Demonstration Pilots 56. As a result of growing worldwide concern regarding environmental impacts of utilizing fossil fuels, particularly climate changes, there is currently a great deal of interest in renewable energy in general and modern biomass energy in particular.26 Such modern biomass energy experimentation and demonstration projects are thus under implementation in many develop and developing countries, with particular emphasis on oil-importing nations. GoM is particularly keen on exploring the development of its vast biomass energy production potential, both, as a partial substitute for imported petroleum fuels as well as a means to sustainably increasing decentralized access to modern energy services for the rural population through small-scale decentralized energy technologies. Of particular interest to GoM is the identification and field demonstration of those modern biomass energy fuels and technologies (liquid fuels, biomass co- generation/"green power", high efficiency briquettes, biogas, etc.) which could become an integral part of the "National Rural Electrification Strategy and Investment Program" (RESIP)27 that will be elaborated under the proposed EDAP (APL-2) project and rolled-out in 2011. To date the prevailing "vision" for rural electrification in the country has been based on the eventual extension of the national grid. Today GoM is fully aware of the need and committed to exploring a broader range of decentralized energy options to underpin the acceleration of rural "energization" before grid-based electrification becomes economically viable. 57. In order to demonstrate the use of modern biomass energy technologies (liquid fuels, biomass co-generation/"green power", high efficiency briquettes, biogas, etc.) and, thus, effective prepare for their subsequent replication and scale-up within the implementation of the RESIP and otherwise this sub-component will support selected small-scale demonstration pilot projects for: (i) sustainably producing modern biomass energy/fuels in Mozambique; and/or (ii) of utilizing modern biomass energy fuels and technologies in productive activities (i.e., agriculture, agro-industry, rural mobility and transport, electricity generation, commerce, services, other) and/or social applications (education, health, communication, other). These pilot projects will be either implemented by FUNAE in partnership with private sector entrepreneurs and/or academic and research centers, or implemented by private sector entrepreneurs and/or academic and research centers with FUNAE financing and supervision. The selection for implementation of any project will require the prior demonstration of the technical and economic viability of the project and will include non-interest cost-recovery principles for all hardware investments financed by FUNAE. The detailed criteria for the selection of these pilot projects will be detailed in the Project Implementation Manual and will be applied uniformly during the implementation of the project. 58. The implementation of any modern biomass energy technologies demonstration project will be screened for strict compliance with EDAP (APL-2)'s environmental and social safeguards. 26 For more information see: "Advancing Bioenergy for Sustainable Development: Guideline for Policymakers and Investors", Volume I, II and III, ESMAP/WB 2005. 27 The RESIP will be elaborated as part of the proposed IDA EDAP project and will be implemented through a long-term sub-sectoral SWAp on Rural Electrification (see Component 3 for additional information). 61 Impacts 59. The impact of the introduction of improved stoves will be measured in terms of the level of penetration and use of the improved stoves by the rural and peri-urban institutions and households, and in terms of changes in the level of individual and aggregate consumption of woodfuel in each village/area. The impact of the introduction of improved charcoal kilns and production methods will be measured in terms of changes in the volumes/quantities of wood required for the production of charcoal after the introduction of the improved kilns and production methods. 60. The impact of the introduction of the stationary and mobile multifunctional platforms will be measured in terms of the income and social benefits (increases in agricultural production, increases income as a result of added value in foodstuff processing, increases in access to potable water, increase in access to lighting and basic DC electricity for other economic and social activities, and in the case of the mobile platforms, increase to transport services for productive and social (medical emergencies, deliveries, education, entertainment, etc.) purposes. The degree of sustainable self-sufficiency achieved in the small-scale village-based production of the biofuels required for the multifunctional platforms will also be used as an impact evaluation criterion of this activity. Table A.4.65 Promotional Biomass of Household Energy Improved Stoves28 Charcoal Kilns29 Multifunctional Platform and SME Technologies Interfuel Demonstratio Total Provinces Substitut. n (USD) Number of Number of Number of Cost Cost (USD) Cost (USD) Cost (USD) Cost (USD) Projects Projects Platforms (USD) Cabo Delgado 10000 0.08 250 0.12 30 0.45 0.30 0.40 1.35 Niassa 10000 0.08 250 0.12 30 0.45 0.30 0.35 1.30 Inhambane 10000 0.08 250 0.12 30 0.45 0.30 0.35 1.30 Gaza 10000 0.08 250 0.12 25 0.38 0.30 0.35 1.23 Manica 10000 0.08 250 0.12 18 0.27 0.30 0.35 1.12 Total 50000 0.40 1250 0.60 133 2.00 1.50 1.80 6.30 61. The impact of the promotion of household and SME interfuel substitution will be to reduce the present dependence on traditional biomass fuels in the household and SME sectors in Mozambique, to demonstrate the viability of introducing a wider range and choice of commercial fuels to consumers, and the viability of changing long-standing energy consumption patterns in order to promote increased sustainability and a lower carbon emission fuel mix. The impact of 28 The cost of production of the improved stoves (US $8.0) was calculated by FUNAE from the cost applied by the ProBEC Progam (GTZ) in similar programs in Mozambique. 29 The cost of production of Charcoal Kilns (US $480 per kiln) was calculated from the site: http://chestofbooks.com/crafts/scientific-american/sup3/charcoal-kilns.html plus additional costs. 62 this activity will be measured in terms of the number of households and SME enterprises who totally or partially substitute traditional biomass fuels for better fuel options as a result of the project, and in terms of the variety of renewable fuels and technologies that are introduced in the marketplace as a result of the project. 62. The impact of the modern biomass energy technologies demonstration pilots will be to showcase and prove the technical and commercial viability of the adaptation and/or establishment of those modern technologies in Mozambique with a view to encouraging the private sector to invest in their subsequent broader commercialization. Each demonstration pilot project will have its own specific relevant monitorable indicators, which will be systematically tracked, analyzed and reported. In particular employment and incremental income generation among beneficiaries as a result of the pilot will be monitored against strict baselines to be able to fully document the economic and social impact of the deployment of those modern biomass energy technologies. Table A.4.76 Description year 1 year 2 year 3 year 4 year 5 Total Beneficiaries: 146,630 146,630 146,630 122,250 122,250 684,390 Institutional Solar Systems (Schools) 5,000 5,000 5,000 5,000 5,000 25,000 Institutional Solar Systems (Clinics) 64,750 64,750 64,750 64,750 64,750 323,750 Community/Local Operator System 24,380 24,380 24,380 0 0 73,140 Support to private Sector TDB TDB TDB TDB TDB TDB supply/delivery systems Promotion of Improved Stoves 50,000 50,000 50,000 50,000 50,000 250,000 Promotion of charcoal kilns 2,500 2,500 2,500 2,500 2,500 12,500 Promotion of Multifunctional TDB TDB TDB TDB TDB TDB platforms Promotion of household and SME TDB TDB TDB TDB TDB TDB interfuel substitution Power (kW) 260 260 260 165 165 1,110 Note: (*) The number of beneficiaries from the Biomass Demonstration Pilots and the Inter-fuel substitution activities will be determined on a project by project basis, and it will be monitored and accounted as project implementation advances. 63. The overall FUNAE program of activities under EDAP (APL-2) will have the following annual and final progress indications and targets: 63 Table A.4.8 Sub-component 2.3: Institutional Strengthening & Capacity Building (US $2.45 million) 64. FUNAE's internal capacity building program is aimed at improving its performance and increasing the implementation of energy projects in rural areas and improving its environmental management capacity. Under EDAP (APL-2) FUNAE intends to support training activities in order to further up-grade FUNAE´s staff capabilities on good management practices, project evaluation, techniques of monitoring and assessment of performance indicators. The cost of the training program is estimated at about 0.5 million dollars over the 5 year implementation period of the EDAP (APL-2) project. FUNAE's environmental management plan has been estimated at US $0.5. Additional capacity building requirement for the 5-year EDAP (APL-2) project of FUNAE include US $0.75 million for technical assistance and consulting services for support to development, implementation and evaluation of programmatic activities and "on-the-job" training of FUNAE staff ($0.5) and for Auditing services. FUNAE's Institutional strengthening requirements under the 5-year EDAP (APL-2) project include office and field work equipment (US$0.25 million), vehicles (US$0.2 million) and travel costs (US $0.25 million). 64 Component 3: Energy Sector Planning, Policy and Institutional Development Component (US $10.2 million) 65. The Energy Sector Planning, Policy and Institutional Development Component will finance: (i) the elaboration of a national "Rural Electrification Strategy and Investment Program (RESIP)"; (ii) technical assistance and consulting services to strengthen the GoM's capacity to promote and participate in the development of new energy infrastructure projects ­ specially power IPPs and other energy "mega-projects" ­ of national and regional interest; (iii) institutional strengthening and capacity building of the Ministry of Energy to improve its performance and governance and to support the establishment of a flexible SWAp for the energy sector; and (iv) institutional strengthening support to the National Electrification Commission (CNELEC) for it to effectively discharge its critical advisory/regulatory function. This component will be implemented by ME. Sub-component 3.1: Promotion of Rural Electrification (US $2.0 million) 66. This sub-component will support the elaboration, consultation process and dissemination of a comprehensive national "Rural Electrification Strategy and Investment Program (RESIP)". To date several parallel efforts have been made by GoM (ME, FUNAE and EdM) with strong support from key donors. That has resulted in good but partial proposals and localized investments and, by extension, a comprehensive national rural electrification strategy and long- term investment program is still to be produced. The proposed subcomponent would support the elaboration of a RESIP, starting with the assembling of all relevant work done to date on the subject to build on already existing knowledge and to avoid duplication of efforts. Subsequently, complementary field and analytical work would be conducted to complete any relevant missing elements (technical, policy, institutional, economic/financial, environmental, social, etc.). The RESIP would incorporate both grid and off-grid electrification options, all available and viable energy resources and technologies, and all socially relevant levels of decentralization. The rural electrification strategy would be gradually articulated with comprehensive stakeholder participation. The joint GoM-Donor "Energy Sector Working Group" would play an active consultative role in the entire process of elaboration of the RESIP as it would constitute the framework for a specific Rural Electrification flexible SWAp. This sub-component would be implemented by a specialized Consultant group, managing the complete process from beginning to end and would provide "on-the-job" training to ME staff in all key areas of the work. Sub-component 3.2: Promotion of New Energy Infrastructure (US $1.2 million) 67. The GoM's new pragmatic strategy to expand private sector participation in the energy sector has resulted in the launching of preparation of several generation (Mphanda Nkuwa; Cahora Bassa North, Lurio, Moatize, Benga and Ressano Garcia) and transmission (Mozambique Regional Transmission Development Program) "mega-projects". These projects will total more than US $10 billion in mostly private sector investments. Given the level of technical, financial and legal complexity of these projects, GoM needs to strengthen its capacity to accompany their preparation and to negotiate them. This sub-component will provide specialized technical assistance and consulting services (technical, legal, financial, etc.) to strengthen the ME's capacity to promote and actively participate in the adequate development and negotiation of those new projects of national and regional interest. The availability of that expertise to would 65 both assist ME in the development and negotiation of specific projects, and would help create that capacity within ME by allowing for substantive "on-the-job" training of ME staff in all the key areas of investment identification, preparation and negotiation. Sub-component 3.3: Support to CNELEC (US $2.0 million) 68. The continuous, successful and independent operation of the National Electrification Commission (CNELEC) as a strong, independent advisory regulator remains a cornerstone of GoM's new energy sector development strategy. This sub-component will provide specialized technical assistance and institutional strengthening support to CNELEC for it to be able to continue to effectively discharge its critical advisory/regulatory function in the sector. CNELEC's future general operating budget will be funded through an assigned share of power sector concession fees (mostly coming from the Cahora-Bassa project). The EDAP (APL-2) assistance will focus on funding different forms of specialized technical assistance. These are likely to include consultant assistance in the following areas: annual reviews of EdM's performance under future Performance Contracts, establishment of monitoring systems for financial, technical and commercial performance, establishment of customer codes in several areas (connections, disconnections, metering and billing disputes), cost of service and tariff studies, a regulatory accounting system and a customer complaint system. Table A.4.9 Consulting Assistance for CNELEC 1. Annual reviews of EdM's performance accompanied by US $1,000,000 surveys of public opinion 2. Monitoring system of EdM's technical, commercial and 300,000 financial performance 3. Establishment of customer codes 150,000 4. Cost of service and tariff studies 300,000 5. Regulatory accounting system 100,000 6. Creation of a customer complaint system 150,000 Total $2,000,000 Sub-component 3.4: ME Institutional Strengthening & Capacity Development (US $5.0 million) 69. This sub-component will provide institutional strengthening and capacity building for the Ministry of Energy (ME) for it to continue to: (i) improve its overall performance and governance; and, (ii) support its leadership role in the establishment of a flexible SWAp for the energy sector, including preparation of studies, organization of a broad consultation process and other activities necessary for the preparation of a sound SWAp proposal. This sub-component will provide: (i) specialized technical assistance; (ii) support for sectoral studies to underpin ME evolving strategic agenda (energy policy and pricing, renewable energy development and regulatory issues, regional energy integration protocols, other.); (iii) general institutional strengthening of ME and, in particular of the Renewable Energy Department; (iv) training (energy planning and policy making, project management, monitoring and evaluation systems, procurement, etc.); and, (v) material strengthening (vehicles and equipment). 66 Annex 5: Project Costs MOZAMBIQUE: MZ-Energy Development and Access Project (APL-2) Mozambique: Energy Development and Access Project (EDAP APL2) (Basis: US $000) Project Component (US $ '000) 1 - Rehab. & Reinforcement of Primary Network & Grid Extension 1.1 - Engineering Services for Design & Supervision 6,800 1.2 - MV Network Transmis. Efficiency Improv. Pilot (Maputo) 1,200 1.3 - Rehabilitation & Reinforcement of Primary Network 8,200 1.4 - Extension of Distribution Networks & Cust.Connections Nampula Province 10,050 Tete Province 11,460 Sub-total Sub-component 1.4 21,510 1.5 - Institutional Strenthening and Capacity Development (*) 10,000 1.6 - Contigency (5%) 2,290 Component Total 50,000 2.- Investments on Rural and Renewable Energy 2.1 - Solar Systems 9,250 2.2 - Biomass Energy Systems 6,300 2.3 - Institutional Development & Capacity Building (*) 2,450 Component Total 18,000 3.- Energy Sector Planning, Policy & Institutional Development 3.1 - Promotion of Rural Electrification 2,000 3.2 - Promotion of New Energy Infrastructure 1,200 3.3 - Support to CNELEC 2,000 3.4 - ME Institutional Strengthening & Capacity Development 5,000 Component Total 10,200 Sub-Total Project Costs 78,200 4. Unallocated 1,800 TOTAL PROJECT COSTS 80,000 (*) Includes funds for the implementation of environmental and social mitigation measures under OP/OB 4.01 (EA) and OP/OB 4.12 (Involuntary Resettlement). 67 Annex 6: Implementation Arrangements MOZAMBIQUE: MZ-Energy Development and Access Project (APL-2) 1 The implementation of the proposed EDAP (APL-2) will be mostly based on the existing institutional arrangements of ERAP (APL-1) to facilitate the continuation of the ongoing work and investment program and to reduce transitional implementation costs and possible delays. The only significant change from ERAP (APL-1) to EDAP (APL-2) will be that under ERAP (APL-1) only the Ministry of Energy (ME) and Electricidade de Mozambique (EdM) were formal Implementation Agencies. Within the EDAP (APL-2) FUNAE will also be an Implementing Agency. 2. Electricidade de Mozambique (EdM) will be responsible for the implementation of the "Rehabilitation and Reinforcement of Primary Networks and Grid Extension Component" (Component 1) under a Subsidiary Agreement, and will maintain the same structure (i.e., Project Implementation Unit at Direcção de Electrificação e Projectos (DEP), management, administration and implementation arrangements that were set-up for the implementation of the ERAP (APL-1). This will enable EdM to capitalize on the long-standing experience and capacity of the existing PIU and to give IDA a good level of comfort that EdM can successfully and smoothly implement the proposed EDAP (APL-2) project. Figure A.6.1 presents a summarized diagram of EdM's EDAP (APL-2) project Implementation arrangements and functional structure. In addition, EdM will be responsible, via its Environmental and Social Management Unit, for overseeing the implementation of the project's ESMF and RPF. Figure A.6.1 68 3. EdM is in the process of establishing a Social and Environmental Safeguards Unit within Danish technical assistance support. The establishment of said Unit constitutes a Credit Effectiveness condition for the EDAP (APL-2) project. In addition to advising EdM's management on social and environmental safeguards issues and undertaking internal capacity building and safeguards oversight for all EdM operations, that unit will be specifically responsible for the monitoring, evaluation and enforcement of the EDAP (APL-2) safeguards framework, as specified within the project's ESMF and RPF. It is anticipated that the establishment and proper operation of this unit will significantly contribute to the smooth implementation of the EDAP (APL-2) project. 4. Fundo Nacional de Energia (FUNAE) will be responsible for the implementation of the "Investments on Rural and Renewable Energy Component" (Component 2) under a Subsidiary Agreement with the Ministry of Energy. For that purpose FUNAE will strengthen the project management implementation structure that was set-up for ERAP (APL-1). Maintaining and strengthening the existing project management structure will enable FUNAE to capitalize on the experience accumulated under ERAP and to smoothly transition into the implementation of EDAP (APL-2). While FUNAE was not an Implementing Agency in ERAP (APL-1), it was responsible for the full implementation of its work program and for all management and fiduciary activities (procurement, reporting, monitoring, etc.) with the Ministry of Energy playing only an overall supervisory role. Within that context, FUNAE has several years of experience and demonstrated capacity to implement an IDA financed project. Figure A.6.2 presents a summarized diagram of FUNAE's EDAP (APL-2) project Implementation arrangements and functional structure. Figure A.6.2 69 5. The Ministry of Energy (ME) will be responsible for the implementation of the "Energy Sector Planning, Policy and Institutional Development Component" (Component 3), and will do so following the same institutional and operational arrangements set-up for ERAP (APL-1). ME should be able to fully capitalize on its experience from the implementation of ERAP (APL-1) -- and other donor funded projects ­ and should be able to implement the EDAP (APL-2) project without difficulties. Figure A.6.3 presents a summarized diagram of ME's EDAP (APL-2) project Implementation arrangements and functional structure. Figure A.6.3 Ministry of Energy Component UGEA (Procurement Financial Unit) Management Procurement Officer Accountant Officer Procurement Accountant Assistants Assistant 5. The specific implementation arrangements for other investment projects within the context of the broader NEDAP Program will be established between GoM and each respective donor. 6. A detailed Project Implementation Manual (PIM) will be prepared prior to Effectiveness containing a detailed project implementation plan. In particular, the Project Implementation Manual will lay out the criteria for selection and detailed procedures for the implementation of the: (i) Solar Systems sub-component; and the (ii) Biomass Energy Systems sub-component under Component 2. The PIP will also will provide the guidelines for the preparation of an Environmental and Social Management Program (ESMP) and will establish a set of relevant environmental and social monitoring indicators. 70 7. Table 6.1 presents a detailed summary of the project's critical risks and possible controversial aspects. Annex 7 and Annex 8 respectively provide additional discussion on Financial management and disbursement arrangements and procurement arrangements. Table 2: Summary of Overall Critical risks and possible controversial aspects Risk factors Description of risk Mitigation measures Rating of residual risk I. Country and/or Sub-National Level Risks Macroecono Country Portfolio Implementation Assessment Country teams and economists actively Low mic (CPIA) rating consistent at 4.2 for the past 4 engage with Government on macro Framework years management. Country team engages with the Monetary Policy Committee. On track with International Monetary Fund (IMF) program since 1987. Fiscal and monetary The macroeconomic impact of the shocks is policies pursue external and internal balance. expected to be manageable. The WB's PRSC Further improvements in macroeconomic 5 operation will support the Government's management in 2007. Monetary Policy mitigation response package, focusing on the Committee introduced in 2007. Fiscal policy is most vulnerable people. consistent with macro stability and debt sustainability. To mitigate the risks of fiscal slippage, the PRSC program (within the broader context of Notwithstanding strong macro performance, there donor coordination) supports the efforts by is risk related to the sharp increase in food and the Government to strengthen Public fuel prices. Financial Management (PFM) systems (including the revenue collection systems), The Parliamentary, Presidential and Provincial which increase transparency and reduce the elections in Mozambique are scheduled in late country's vulnerability to fiscal slippage. 2009. Approaching the elections, the Government IDA's overall satisfaction with the will need to resist pressures for additional macroeconomic management and stability in spending that are not sustainable, and prevent a Mozambique is further reflected by the reduction in the level of revenues collection (as ongoing processing of the new Poverty happened in 2004). Reduction Support Credit (new PRSC series), PRSC-6. 71 Country Generally strong demand from Ministry of The Bank will continue to support MPD staff and Low Engagement Planning & Development (MPD) and other coordinate closely on portfolio and other program With World ministries for WB support. Coordination issues. At the same time, will also reinforce Bank between MPD and ministries is not optimal, message to MPD leadership of the need for however, as MPD has performed relatively strengthened MPD role as WB's key counterpart. weak oversight function and lacks full ownership. This requires continued and Introduction of new portfolio monitoring system significant support from WB, as relevant MPD continues to help address portfolio issues more staff, structure, and processes remain weak and systematically. insufficient attention is given to WB program by MPD line management. Relationship with Ministry of Finance has elaborated a multi- MPD Minister, however, is strong and currency module for its integrated electronic generally effective in resolving problems. expenditure system (e-SISTAFE), which will facilitate the use of the single treasury account by Ministry of Finance has succeeded in bringing donors. WB has articulated a strategy (in most externally financed projects into the collaboration with the government and donor budget. Key challenge will be to bring partners) to move WB projects onto the single externally-funded projects into single treasury treasury account account. Country CPIA Rating of 3.0 for 2007 The Bank, African Development Bank and Moderate Governance NORAD to continue supporting computerization Law protects property rights in theory, but of property registries for a credit register, registries function poorly. Efforts to securities register for movable property, and computerize property registries have largely companies register for immovable property. stalled at the Ministry of Justice. According to the "Doing Business Report", Mozambique The Bank team to collaborate with the new ranks 149 out of 181 countries in terms of Minister of Justice and encourage implementation securing property rights. However with the and completion of reform initiatives that will appointment of a new Minister of Justice, it is improve the justice system. expected that the pace of work will pick up. The judicial system is weak but there are The Bank and other partners need to support efforts to strengthen it including hiring of 22 enforcement of recently approved or amended new judges and court administrators and the laws related to property rights which include: introduction of performance measurement of 1. Code of Industrial Property approved in March judges. While laws are not changed arbitrarily, 2007. they are not always publicly available nor are 2. The Strategy for Intellectual Property Rights they enforced consistently. As a result of the approved in May 2007 above-mentioned reforms, Mozambique did 3. Support enactment of the law on Company improve its ranking on enforcing contracts in Bankruptcy the "Doing Business" indicators. However, enforcing a contract takes 730 days and an average of 30 procedures. The Bank is working with donors and the IMF to support implementation of the ongoing reforms Government has made good progress in some (as part of a broad PFM action plan), which are preventive anti-corruption measures in the expected to improve transparency and areas of PFM systems (e.g., improvements in accountability in public finances. financial management; procurement reform; As part of new Country Partnership Strategy, key civil service census; strengthening audit pillar will be governance (improving voice and institutions). accountability; public sector reform). 72 Systemic CPIA Rating of 3.0 for 2006 and 2007. Fundamental institutional reforms are on-going to Substantial Corruption modernize the public procurement system, financial According to the Transparency International management, and the internal and external auditing. 2007 Corruption Perceptions Index, Significant progress has been achieved in last two Mozambique ranks 111 out of 179 countries years, and implementation of the reforms is broadly with a CPI score of 2.8 out of 10. on-track with the Government's multi-year action The Authority for Civil Service was upgraded plan. This will mitigate the possibilities for to a ministry with a mandate to coordinate systemic large scale abuse of public funds. implementation of the Anti-Corruption Strategy in the public administration system. Institutional strengthening of the Attorney There have been determined efforts to crack General's Office is underway with new leadership down on administrative corruption with public to assist in combating corruption and organized servants but there has been less progress on crime. prosecuting allegations of corruption against senior public figures. The Country Partnership Strategy foresees a strengthening of civil society organizations to The Government has taken some steps such as enhance demand for better accountability. the change of the Attorney General. The Additional measures will be needed to strengthen Constitutional Council struck down the the AC drive, and to increase transparency and Presidential decree establishing the AGO's accountability in the award of concessions and the Anti-Corruption Office (GCCC), which has led exploitation of natural resources. The WB is to setbacks. Forceful implementation of the providing technical support to this end. reforms is as still lacking, as is overall reporting on anti-corruption cases in the system. Despite preventive anti-corruption measures, forceful implementation of these reforms is lacking. There is a need to strengthen the regulatory and monitoring system for the provision and execution of concessions for new megaprojects and the exploitation of natural resources. Corruption and lack of accountability appear to be more significant for local government, particularly outside Maputo. In 2007, the Supreme Audit Institution expanded audits to several provincial governments and a few districts. This strengthens oversight of provincial governments and districts. Vested interests continue to affect the everyday dealing of government agencies, especially at the local level. Political influence on agencies' activities is more common in some sectors than other and suggests weak and uneven accountability system in the country. 73 Infectious HIV/AIDS presents a considerable health The World Bank provides support to the Moderate Diseases threat (16% prevalence rate) with significant Government through the HIV/AIDS Response economic impact. Fall in productivity due to SIL. The project's performance has recently AIDS and economic costs associated with loss deteriorated and the Bank is working with the of labor as a result of deaths are very high. government and donors to find measures to improve the government response. The Bank has also been conducting analytical work on the modes of transmission of the epidemic. The results will be used to ensure that the prevention measures are properly aligned to the modes of transmission. Should government performance improve, the Bank would contemplate a follow-up HIV/AIDS Response operation. In FY09 a Health Service Delivery Project that will strengthen health service delivery including prevention and control of HIV/AIDS in the northern provinces. There are initial discussions about a possible regional operation for Southern African countries. Due to the nature and scope of infrastructure work (LV and MV) to be carried out within the framework of EDAP, the risk for the project of becoming a vector of HIV dissemination are negligible (i.e. no worker camps will be built, a substantial number of the workers are recruited from the local communities, and most of the infrastructural work can be completed within a few days, which, objectively, minimize the contact of external workers with the local communities). Country Major weaknesses exist in the FM environment The government is committed to the reform Moderate Fiduciary (staffing, operating system, reporting), program, and has introduced a new legal and Management resulting primarily from low capacity. While regulatory framework that is underpinned by the (FM) the Government's reform program aims to introduction and roll out of the integrated financial strengthen accounting and audit capacity management system (e-SISTAFE). through the recruitment and training of FM Introduction of e-SISTAFE will contribute to specialists and accountants, this is still a long improvements in budget execution and reduced way from being achieved. Although the new off-budget expenditures. The process has the full integrated financial information management support of the Development Partners, with WB system (e-SISTAFE) has now been rolled out support currently channeled through the ongoing to all ministries at central level, it is still in the Public Sector Reform Project, as well as the process of cascading down to provincial and upcoming decentralization project (phase II), that district level as well as other government will also strengthen financial planning and institutions. User training is uneven, meaning management at local levels. that it is not yet operating at its optimal level. Country New procurement law and regulations, Capacity building program started countrywide. Moderate Procurement capacity building program has started and Procurement website operational. Need for more Systems procurement system is more transparent with capacity building and assistance at the Functional Ethics Code sanctions and appeal mechanisms Unit for Supervision of Acquisitions (UFSA). The included in the approved procurement law. government has started the development of a Regulatory unit (UFSA) in Ministry of Finance monitoring system for the assessment of the (MoF) operational. Standard Bidding quality of procurement and enforcement of the Documents (SBDs) issued acceptable with few Procurement Regulation. Bank teams will monitor reservations. Implementation of new law, how the new system works. however, remains very challenging due to limited capacity. 74 II. Sector Governance, Policies and Institutions Sector Specific As evidenced by the early implementation of Since the restructuring of ERAP (APL-1) there Low Risks ERAP, the energy sector had a mixed track has been a close alignment between GoM and record in terms of policy consistency and the WB group (and other donors). GoM government commitment. presently has a strong ownership over its new energy sector policy and strategy. EDAP (APL-2) is based on that new policy/strategy. Reliability of Power Supplies. Delays in the New power generation projects that would development of generation projects in mitigate that possible energy shortage are Mozambique, combined with the power crisis under preparation in the region (including in in Southern Africa (South Africa in particular), Mozambique: Mphanda Nkuwa, Moatize, could limit power supplies and result in load Benga, Cahora Bassa North, Lurio, etc.). Moderate shedding. The benefits of electrification Additionally GoM and EdM have negotiated through grid extensions would be limited in additional power purchase rights from Cahora such a scenario, resulting in suppressed Bassa (HCB), as the most reliable risk demand and slower than anticipated cost mitigation strategy in the short run. EDAP recovery. (APL-2) will support energy efficiency improvements to reduce aggregate demand and alleviate system stress. Since the additional supply from HCB is non-firm power and delays in commissioning of new project could occur the residual risk is still considered moderate. Establishment of flexible SWAp. Improvement GoM and the main donor partners in the sector of GoM leadership and of GoM-Donor are interested in moving towards a flexible coordination and increased mobilization of SWAp approach and process, especially donor financing for the energy sector is regarding rural electrification. The Bank will expected to result from the gradual continue to play a leadership role within the Low mainstreaming of a flexible SWAp approach joint GoM-Donor "Energy Sector Working and process over the implementation cycle of Group" in support of that objective. There is EDAP (APL-2). There is a limited risk that full agreement among the participating donors alignment of GoM and Donors cannot be that a "Common Fund" mechanism for the achieved on sector policy, strategy and/or energy sector will not be sought as part of the procedural issues thus delaying the proposed flexible SWAp, until the existing establishment of a sector-wide or sub-sector differences between the Bank and other donors (Rural Electrification) flexible SWAp. on procurement and fiduciary issues are fully harmonized. Thus, the risks of the proposed flexible SWAp not advancing within the EDAP (APL-2)'s implementation cycle is considered as low. Low adoption of RET. Incomes/cost, The proposed dissemination strategy for RETs technical, market barriers or operational has been developed over the last 3 years by FUNAE in the context of ERAP (APL-1). In Low constraints could limit the expected adoption of RETs in peri-urban and rural areas. support of the expected scale-up, EDAP (APL- 2) will monitor closely and adjust as necessary the implementation of the strategy. Additionally, EDAP (APL-2) will establish a close working relationship with ongoing Africa-wide RET initiatives like the World Bank's "Africa Lighting Initiative" to mobilize "best practices" on RET applications to 75 ensure the completion of the project targets and outcomes. Given FUNAE's experience under ERAP (APL-1) the risk of a "low adoption" of RETs is considered low. III. Operation-specific Risks Technical Mobilization of Donor co-financing for EDAP As a result of the increase of IDA funding for Low Design (APL-2). Mobilization of financing for the proposed EDAP (APL-2) project from energy sector projects has proven to be US$40 million to US $80 million, no difficult in the past and as per the original additional co-financing is required to APL series estimates IDA only had US $40 implement it. million available for the EDAP (APL-2). Nevertheless, due to the good performance of the Borrower under ERAP (APL-1) and other parallel projects, and due to the leveraging efforts of the World Bank, it has by now been possible to mobilize in excess of US $120 million in Parallel Financing for GoM's broader NEDAP program. To date, OFID already approved US $8 million in parallel financing for activities under NEDAP, and the Government of Mozambique has received pledge confirmations of Parallel Financing from the Agence Francaise de Developpement (AFD), the European Investment Bank (EIB), and funding pledges from three different Arab Funds. Additionally, NEDAP was selected as a "pilot infrastructure activity" under the Tunis Tripartite Collaboration Initiative entered into by the Bank, EC and ADB. Thereto, additional parallel financing is expected to be available for NEDAP in FY10 and FY11. Implementation Overall implementation capacity in non-PIU After a difficult start for ERAP, the Borrower's Low Capacity And based projects in Mozambique is mixed. implementation track record has steadily Sustainability ERAP (APL-1) itself had significant improved since 2007. Essential capacities and implementation issues until it was processes have been built and are established. restructured. The Ministry of Energy (ME) Since EDAP (APL-2) will be an extension of and EdM, in particular, have capacity and ERAP, it will bank and build on those institutional limitations vis-à-vis their capacities. Possible capacity limitation risks responsibilities and operational requirements. will be mitigated by further strengthening and expanding capacity in the main sector institutions under EDAP (APL-2), looking not only at their immediate project responsibilities but -- and more importantly -- at their overall functions and responsibilities within the energy sector. PIU team capacity will be enhanced on Bank social and environmental safeguard policies to facilitate the implementation of both RPF/RAP and ESMF/ESMP recommendations, and well as facilitate their participatory monitoring and evaluation. Financial EdM Financial sustainability. The last update EdM is aware of these issues and is committed Moderate Analysis of EdM's financial model (June 2009) to working with the Bank to address them. indicated that without any participation in the Options for how EDAP (APL-2) is expected to 76 mega projects, with all the RE investment help shore-up EdM financial sustainability planned EdM could see its financial position were indentified during the project preparation deteriorate. Conversely, EdM's role in large process and were included in to the project's projects will have to be carefully structured to design. The financial analysis section of the make sure that these do not imply major risks PAD contains the analysis and the specific to the company. actions required regarding the electricity tariff to ensure EdM financial sustainability. Additionally, EDAP (APL-2) will finance the implementation of a "State-of-the-Art" Integrated Business Management Systems (IBMS) at EdM to bring all the financial and resource management functions of EdM in line with industry's international standards. The IBMS is expected to reduce financial losses by up to 15 percent as a result of the improved management and monitoring capacity of such a system. Lastly, EDAP (APL-2) will finance additional "Best Practice" institutional strengthening and capacity development. Financial EdM entity audits have been qualified for the EDAP resources will be segregated with a Moderate Management past two financial years due, among other dedicated Designated Account, with normal issues, to the following: protection of IDA resources from seizure by EdM creditors. Wherever possible, the bank · Insufficient provision for retirement will also provide necessary support and advice pensions; to address the more straight forward issues such as internal control and documentation · Unreconciled differences between the management, while continuing to encourage accounting system and `prepaid' both the government and the entity to take the system; steps recommended by the auditors to rectify the deeper issues. · EdM not supplying the auditors with required information relating to inactive consumers, thereby making it impossible for the auditors to verify the completeness of the amount provided for doubtful debts; · Incomplete expenditure documentation. The fact that the same reasons for qualification appear to come up each year indicates that the organization does not yet have the means to address these issues. There is a real risk therefore that EdM accounts will continue to be qualified even during the implementation of EDAP, with the most alarming issue being the questions on going concern imposed by the pension obligations. Procurement ERAP (APL-1) had significant procurement ME and EdM have over the last two years Low delays at the beginning of its implementation reinforced their procurement capabilities and process. There is a high turn-around of procedures. However, additional capacity qualified procurement staff in Mozambique, building and institutional development will be who can normally find higher paying supported by EDAP (APL-2) under a vision 77 employment with the private sector after that the procurement function will be central to being training by donor supported projects. the EDAP (APL-2)'s success. Rather than The scale-up of activities contemplated within minimal investment on this issue EDAP (APL- EDAP (APL-2) will bring new procurement 2) will seek to build-in a healthy redundancy in challenges to ME and EdM. the procurement capacity in the main energy sector institutions. No fiduciary and or corruption issues have arisen within the implementation of ERAP whereby the expected fiduciary risk for EDAP (APL-2) is considered as low. Social And Environmental Assessment and Involuntary The safeguards systems implemented under Low Environmental Resettlement Safeguard Policies (B Rating). ERAP proved to be sufficiently robust and Safeguards The construction of grid intensification comprehensive being able to even detect the infrastructure and/or the generation of occurrence of small safeguards issues in non- electricity off-grid on small scale might IDA financed components of ERAP. Those modestly affect properties and the households. issues were analyzed in detailed and the Batteries in renewable energy systems and necessary corrective actions were immediately other equipment might carry limited social implemented. That experience showed that and environmental risks. continuous monitoring is necessary to further reduce the risk of safeguards slippages. The "lessons learned" in that regard were fully incorporated into EDAP (APL-2)'s design and continuous monitoring of the social and environmental safeguards will be undertaken. Screening forms will help identify subprojects with potential impacts. On a case-by-case basis, adequate safeguard instruments will be prepared to better capture any emerging issues and trigger appropriate measures to minimize any potential risk, and/or provide timely compensation, especially on poor and vulnerable groups. Throughout the project cycle, participatory public consultation will be held to ensure safeguards compliance as well as public awareness, and ownership and social accountability of beneficiary communities for the maintenance and sustainability of the new energy infrastructures. Lastly, the World Bank responsibility for safeguards policies will apply only to the EDAP (APL-2) IDA-financed activities, since no joint co-financed activities are planned within the framework of EDAP. IV. Overall The overall and reputational risk of the operation is rated as moderate. That rating relates to Moderate Risk identified overall country risks and to non-fiduciary physical implementation risks at the project level. The project is well aligned with the Government's priorities in the energy sector. The overall development of the energy sector and increasing access to modern energy services are at the heart of the PARPA II and CPS. The proposed EDAP (APL-2) investment program mostly entails the scaling-up of the activities successfully piloted and/or implemented under ERAP (APL-1). As such, the respective sector institutions have already developed the experience and capacity to implement the proposed EDAP (APL-2) investment program. Additional institutional strengthening and capacity development is need and will be provided to reduce implementation risks to a minimum. National elections were held in Mozambique in October 2009, but there is 78 no expectation that a new administration team would significantly change and/or depart from the current energy sector policy framework as there is widespread stakeholder agreement on it. The proposed EDAP (APL-2) will support the design and gradual mainstreaming of a flexible SWAp in the energy sector -- mostly likely focused on rural Electrification -- and that will help improve coordination between GoM and donors, and among donors. 79 Annex 7: Financial Management and Disbursement Arrangements MOZAMBIQUE: MZ-Energy Development and Access Project (APL-2) Introduction and BACKGROUND 1. The financial management assessment was carried out in accordance with the Financial Management Practices Manual issued by the Financial Management Board on 3 November 2005. The objective of the assessment was to determine whether the Ministry of Energy, EdM, and FUNAE, as implementing agencies of EDAP, have acceptable financial management arrangements which will ensure: (1) that the project funds are used only for the intended purposes in an efficient and economical way, (2) the preparation of accurate, reliable and timely periodic financial reports, and (3) that the entities' assets are adequately safeguarded. Summary of the Assessment 2. As the EDAP will be implemented by the Ministry of Energy (ME), Electricity of Mozambique (EdM) and Fundo Nacional de Energia (FUNAE), the proposed financial management arrangements for each of the implementing agencies were assessed in accordance with the Financial Management Practices Manual. The findings of the assessment are as follows: i) The overall risk rating for the project is substantial. However, several mitigating measures are proposed, including the use of the government e-SISTAFE IFMIS for financial management and reporting, the codification of project specific FM and disbursement procedures in an FM Manual, and the hiring of a private firm of external auditors to buttress the audit effort of the Tribunal Administrativo on the project. ii) The residual risk after the proposed measures is expected to be moderate, when all the mitigation measures are adopted and fully operational. 3. The assessment was favorably impacted by the fact that both ME and EdM are already familiar with Bank procedures and have been successfully implementing the ongoing ERAP bank financed projects. Although FUNAE has been a beneficiary of funds up to now, the financial execution and reporting was done by ME. For the new EDAP however, FUNAE will be receiving and executing funds directly through the CUT, with ME coordinating the reporting for all beneficiaries. Institutional Arrangements 4. The ME will be the overall coordinator of the project. There will be two other implementing units in FUNAE and EdM. These implementing agencies are autonomous; however FUNAE is an entity subordinate of the Ministry of Energy, while EdM is a public company. FUNAE, EdM and ME will be responsible for components one, two, and three respectively, and each of the three implementing agencies will carry out their own complimentary set of activities, under the overall coordination of the ME. FUNAE is long established, has its own board, and a full FM department that will handle ongoing as well as 80 project related FM issues EdM already has a department dedicated to projects, and it is expected that the same personnel responsible for the successful implementation of the ongoing ERAP, will continue to handle the fiduciary activities of EDAP. The institutional arrangements at ME which were set up for ERAP will remain in place in order to take full advantage on the experience gathered and provide the financiers with the necessary comfort that the project will be successfully implemented. Overall policy guidance for Financial Management 5. The ME Director for the Department of Administration and Finance (DAF) will have overall responsibility for the accounting and financial management for the project. The DAF's duties will include: · establishing indicators of progress and performance in planning and financial management across the three agencies · providing a platform for discussion of FM matters between the various implementing units and monitoring performance against the agreed indicators · ensuring proper review and follow up of work plans, financial reports and audit reports · ensuring that management information reports such as Interim Financial Reports, and audit reports are prepared and circulated on time Country issues 6. The country's public financial management system has previously been noted as weak in diagnostic studies carried out in this area. The most recent of these is the Report based on the PFM PEFA Strengthened Approach (2006), which itself was a follow up to the country's first Public Financial Management Assessment conducted in September 2004. Prior to that, a Country Financial Accountability Assessment (CFAA) had been conducted in 2001. These early reports observed that the public sector financial management systems in Mozambique were weak and that the overall public sector fiduciary risk in Mozambique was high. Furthermore, although satisfactory improvements had been registered in the management of the economy, the comprehensiveness and transparency of the budget was poor, the medium-term planning and budgeting was weak, while budget execution and accounting and reporting presented serious weaknesses. 7. Coming out of these diagnostic reviews, the Government of Mozambique, with the support of its development partners, instituted a number of reforms in an effort to address the weaknesses. These initiatives included the introduction of a new Financial Management (FM) law that formed the basis for the introduction and implementation of a computerized integrated financial management information system, e-SISTAFE, which has since been rolled out to all the line ministries at national and provincial level, as well as to 50 of 128 districts. To accompany the new FM law, the government also: (i) issued regulations for the Financial Management law; (ii) initiated the introduction of a new and more-detailed functional classifier into the budget; (iii) introduced restrictions on bank accounts held by public institutions; (iv) started to incorporate off-budget revenues as well as donor-funded expenditures into the budget; (v) initiated training 81 for budget staff in double-entry accounting; and (vi) established a consolidated electronic treasury account to improve control of treasury operations and cash management. 8. Comparing the situation in 2004 to that of 2006, the PEFA report confirmed that significant improvements had been achieved in the quality of PFM systems and processes, particularly in the areas of: · Payroll, Procurement, and Internal Controls; · Cash Management; · Donor Practices, especially predictability of budget support disbursements; · Revenue Collection and Management. 9. On the negative side however, the overall indicators covering accounting, recording, and reporting appear to have deteriorated slightly during the period, although even therein, improvements have been noted in the timeliness and regularity of account reconciliations, and the timeliness and regularity of in-year budget reports. What has not happened is a Public Expenditure Tracking Survey (PETS) in the last three years. 10. The report noted that the quality of the PFM was expected to continue improving as a natural consequence of ongoing reforms such as e-SISTAFE; but indicated that this would take some time. An AFTFM conducted review of E-SISTAFE and its supporting pillars in 2008 concluded that the Mozambique public FM system be adequate for handling Bank investment projects subject to the successful resolution n of some cross cutting issues identified at the time. The issues included: · Assurances regarding the timeline between the disbursement of Bank funds and their availability to spending units; · Agreed procedures for amendments to project budget; · Timeliness and content of intra-year and year-end financial reports; · Assurances on the timeliness and accuracy of CUT (Single Treasury Account) bank reconciliation; and, · Progressively greater involvement of the Tribunal Administrativo in the external audit of Bank projects. 11. These have generally been resolved, resulting in the decision to manage EDAP resources, among other projects, through the CUT. Governance and Accountability 12. The government of Mozambique approved an Anti-Corruption Law in 2004. The law stipulates that all contracts to which state or municipal bodies are party must incorporate an anti- corruption clause and that whistle blowers are protected. Public officials now have to present a list of their assets every year and a final list on leaving office. Critics argue, however, that although the law is extensive in scope, implementation is lacking. The Central Office for Combating Corruption (GCCC) has been established within the Attorney General's Office, replacing the now defunct anti-corruption agency from 2003 (known as the Anti-Corruption 82 Unit). The GCCC carries out investigations of complaints in relation to corruption-related offenses within the public sector and has delegations in Maputo, Beira and Nampula. The unit receives an increasing number of reports on corruption, but the number of investigations and prosecutions is still low, due partly to under-staffing and lack of funds. 13. While no specific issues of governance and accountability came to light during the FM assessment, the following steps will be undertaken to minimize the incidence of corruption during implementation of the project: · PFM system development : To enhance the use of national systems in the management of the credit proceeds, as well as ensure adherence to laid done procedures and controls, all funds flow, accounting, and reporting for the project will be through e-SISTAFE, the government IFMIS; · External Audit: The TOR s for the auditors will include specific responsibilities towards the detection and reporting of fraud and corruption in project activities. 14. The above steps are anchored in the Mozambique country assistance strategy's three pillars for achieving growth with equity, a critical part of which is "strengthening governance". Risk Assessment 15. The financial management arrangements should be strong enough to: (i) ensure that funds are used only for their intended purposes in an efficient and economical way while implementing agreed activities; (ii) enable the preparation of accurate and timely financial reports; (iii) to ensure that funds are properly managed and flow rapidly, adequately, regularly and predictably; (iv) enable project management to monitor the efficient implementation of the EDAP, and; (v) safeguard the assets and resources procured using project funds. 16. In order to ensure a strong financial management system, the implementing units should have an adequate number and mix of skilled and experienced staff, the internal control system should ensure the conduct of an orderly and efficient payment and procurement process and the proper recording and safeguarding of assets and resources. The accounting system should support the project's requests for funding and meet its reporting obligations to both the Government and IDA. Lastly, the Project's financial statements and internal controls should be the subject of an independent audit. 16. The table below shows the results of the risk assessment. This identifies the key risks that management may face in achieving the project's objectives, together with the appropriate ratings. It also outlines the risk mitigating measures that are incorporated into the project design. 83 Risk Rating Summary Condition of Remarks Risk factors Description of risk Rating of Mitigation measures Rating of Effectiveness, risk residual Board or risk Negotiation (Yes or No) 1. Major weaknesses Substantial The government is committed to Moderate No exist in the FM the reform program, and has Country Level environment (staffing, introduced a new legal and operating system, regulatory framework that is reporting), resulting underpinned by the introduction primarily from low and roll out of the integrated capacity. financial management system (e- SISTAFE). 2. The Government's reform program aimed at The development partners strengthening accounting continue to finance the activities and audit capacity of UTRAFE, the body tasked with through the recruitment the roll out of, and user training and training of FM on, e-SISTSAFE. specialists and accountants is still a long way from being achieved, 3. Although the new integrated financial information management system (e-SISTAFE) has now been rolled out to all ministries at central level, as well as to all provinces, it has not yet 84 reached optimal performance due to uneven user training. 1. FUNAE is new to Substantial The Bank will deliver workshops Moderate No bank support and may on its FM and Disbursement Entity Level not have sufficient FM policies and procedures as a capacity for the FM training program and update to the related tasks ahead. FM staff of the executing agencies. 2. Due to the multiplicity of agencies, ME may not The proposed institutional have the capacity to framework supports project coordinate both the oversight and implementation by project activities and ME. Budgetary control through e- Bank reporting SISTAFE enhances cost control, requirements. and the computerized information system facilitates the timely preparation and submission of financial reports. ME will have overall responsibility for financial management, consolidating its results with those of FUNAE and EdM to provide an overall project picture. Project Level The major risks will Substantial 1. Each of the implementing Moderate No. Supervision relate to the Use of agencies will be responsible for missions will Country systems for the ensuring that the financial assess the implementation of the management arrangements for continuing project activities. While their agency remain adequate per adequacy of this is the fifth project to the assessment for the life of the the FM go onto the CUT, only project, especially as regards arrangements one has actually started human capacity and training. and implementation to recommend confirm the usability of 2. More frequent Bank measures to the system for supervision missions will be be taken management of Bank fielded in the early stages of when financed projects. In implementation to confirm the appropriate. addition, EdM will 85 operate on advances proper operation of the system as from e-SISTAFE as it is described. not directly linked to the system, increasing the 3. Transfers to EdM will be risk of both error and limited to approved and paid manipulation. invoices as processed into the system for each month. Overall Inherent Substantial Moderate Risk II. Control Risk Budgeting Budgeting, budgetary M. Use of e-SISTAFE defines M No control, and budget arrangements required for revisions may not follow budgeting, and requirements for national procedures. budget revisions. Yearly project budgets will need to be prepared in line with the procurement plan and the approved work plan Accounting EdM being a public S. 1. ME and FUNAE are already M Yes Hiring of an company, applies familiarized with the FM accrual accounting, and government's accounting Consultant particular attention will procedures, which are documented for the need to be placed to in official government Financial project will ensure only paid Procedures and regulations. be a `expenditure' is included condition of as expenditure for EdM 2. ME will be responsible for the effectiveness. under the project. overall accounting and will make use of one additional FM Consultant for overseeing and coordinating accounting in each of the three implementing agencies. Accounting will be on cash basis in accordance with Mozambique government requirements, which are said to equate to International Accounting Standards. Internal Control 1. The risk that EdM's S. EdM has its own accounting M Yes Approval of internal control procedures manual. This will be the EdM FM procedures may not be reviewed with a view to ensuring procedures subject to the same its adequacy from the Bank's manual, and 86 scrutiny as, nor be as viewpoint, and updated as adoption of effective as those of necessary to incorporate project an approved FUNAE and ME. activities. project FM procedures 2. The fixed asset Each agency will be required to manual for module of e-SISTAFE have acceptable asset management each of ME has not yet been procedures recording all receipts and FUNAE activated, exposing of assets, ensuring authorization of will be an project assets to the risk any movement or disposal, and effectiveness of loss and misallocation indicating location to facilitate condition. in the absence of the regular asset inventories. The approved system. auditors will also be required to verify the existence of project assets during their annual audits. Funds Flow 1. There is a risk that S. A designated account will still be M. No. project funds may be retained to carry funds advanced applied towards other for the six monthly forecasts but government not required immediately by the commitments once project. captured in the CUT or that there may delays in A predetermined minimal the release of funds from incubation period will be allowed the CUT towards for any amounts transferred into qualifying activities. the CUT, to minimize the time that they are not available to the ME once in the system. In-built system controls prevent the funds in the relevant budget codes being spent on line items not `married' to those income accounts. .2. Risk that funds Only approved invoices, paid transferred to the EdM upfront by EdM, will be reimbursed from the CUT. could be used for purposes other than those intended. Financial Reporting 1. The risk that the S. Government accounting standards M. Yes IFR formats government may not be have already been reviewed and and the reporting in terms of deemed to equate to international formats of 87 international accounting accounting standards. audited standards. financial Custom designed reports to meet statements 2. The current ERAP the needs of the project will be were agreed project has generally used to ensure all activities are at struggled to make the covered by one comprehensive Negotiations. audit submission report. IFRs are now also being deadlines, as well as the submitted regularly; hence this IFR report submission experience is expected to benefit deadlines. the new project. 3. Audits have also been Assurances are being given that qualified and there is a the Dec 2008 audit will be risk that the new project received on time may suffer the same fate. The reporting requirements and formats will be described in the FM manual. Auditing The risk that both the S. The TA will be encouraged to M. Yes Audit TOR audit coverage and seek the additional support of were agreed technical quality may private audit firms to conduct at not be satisfactory. satisfactory audits, at least in the negotiations. early stages of implementation. Audit will be conducted The audit contract will include the by the TA in accordance activities of the quasi- with national governmental institutions. With requirements and improving capacity, the audits will procedures. The TA is in future be run by the TA on its still relatively under- own. capacitated. Overall Control S. M. Risk OVERALL RISK S. M. RATING: Key : H ­ High S ­ Substantial M ­ Moderate L ­ Low 88 17. The FM risk for the project is rated "substantial" as per above. However, upon implementation of the mitigating measures, the residual risk will be "moderate". The general improvement in the country's PFM systems has been noted, and it is expected that even activities by EdM will be captured on e-SISTAFE, albeit indirectly executed. Strengths and Weaknesses 18. The main strength is the flow of funds through e-SISTAFE, which provides a large measure of comfort with its enhanced security and controls. The errors and experience of ERAP referred to above can also be viewed as a plus for the ME, on the assumption that the ministry learnt from those mistakes. 19. The main weakness will relate to the above strength, in that this is one of the pilot projects to be put on CUT. It is expected that there will be challenges in making this work seamlessly. In addition, the double capturing that will be associated with EdM expenditure, as actual activities take place outside the e-SISTAFE, and have to be re- captured into the system at ME. Funds Flow Mechanisms and Disbursement of funds 20. The project will operate one Designated Accounts in US$ at the Banco de Mozambique as follows: · US$ Designated Account A managed by the ME, and covering all project payments going through the CUT. 21. FUNAE activities will be paid for directly from the CUT, while EdM expenditures fall under the category- indirect execution from the CUT. 22. All funds will be disbursed through the Government `single treasury account, CUT, following national procedures. Expenditure by each of ME and FUNAE will be posted directly into e-SISTAFE at the point of expenditure, while EdM expenditure is captured on presentation of the paid EdM invoices and supporting documentation. The presence of all project expenditure in e-SISTAFE enables the project Finance Manager to directly collate all expenditure information and produce the necessary regular reports independently. Figure A.7.1 present a flow chart for the funds channeled through the CUT. 89 Figure A.7.1: Flows for the funds channeled through CUT. World Bank Banco de Mozambique DA (USD) CUT (USD and MTn on demand) (ME and FUNAE) Reimbursement of EdM expenditure EdM Vouchers and receipts submitted to ME for reimbursement ME + FUNAE EdM Expenditure Units Suppliers/Service Providers Disbursement 23. The project will use Report- based disbursement procedures to operate effectively through the CUT. This will be effected by producing quarterly disbursement IFRs. Disbursements will be on a quarterly basis. Upon effectiveness of the Financing Agreement, an initial advance, based on an estimate of six months forecast financing requirements will be disbursed into the DA to cover eligible expenditure. 90 24. The project may also use the (i) Reimbursement disbursement method whereby eligible expenditures paid for by GoM will be reimbursed by the Bank from the Credit account; (ii) Direct Payment method by making direct payments to suppliers and contractors from the Credit account at the request of the project; (iii) the Special Commitment method, whereby the Bank will issue special commitment to commercial banks for payment of eligible expenditures. 25. The Bank will issue the "Disbursement Letter" which will specify the additional instructions for withdrawal of the proceeds of the Credit. FINANCIAL MANAGEMENT Budgeting 26. Budgeting, budgetary control, and budget revisions will follow national procedures. Approved activities on the budget will be captured in a procurement plan, which for IDA purposes will be the document driving implementation. Internal control and Accounting procedures 27. For ME and FUNAE activities, accounting will be e-SISTAFE based, with internal controls derived from standard government accounting and procedures as issued by Treasury. However, procedures relating specifically to Bank document processing and reporting (including IFR formats) need to be developed and captured in a FM procedures manual for the project to be developed by ME for all implementing agencies, including EdM. 28. For its day to day accounting, EdM will use its existing FM procedures manual, already reviewed and approved for the ongoing ERAP project. 29. Special attention will need to be paid to accounting for project assets, as e- SISTAFE does not yet have an activated assets module. Asset management procedures will be detailed in the FM procedures manuals, and will include regular inventories and audit checks. 30. Finalization of all the FM manuals will be an effectiveness condition. Accounting system 31. The accounting system is used to track, record, analyze and summarize the financial transactions relating to the project. The Project financial statements will be prepared on a cash basis in accordance with Mozambique government requirements, which are said to equate to International Accounting Standards. 91 32. The project will use the government's e-SISTAFE integrated accounting and financial system for those activities implemented directly by ME and FUNAE, and indirectly by EdM. Accounting staff within both ME and FUNAE are already familiar with the operations of e-SISTAFE as they use this for their daily accounting. Ongoing technical support will ensure proper maintenance of the system and that appropriate controls are instituted to safeguard the confidentiality, integrity, and availability of the data. The existence of the direct link to e-SISTAFE helps to reduce the risk of human errors in record keeping, and enhances efficiency in preparing reports. Documentation will be retained at each spending unit / implementing unit and made available upon request during supervision and audit missions. 33. While EdM expenditures will occur outside e-SISTAFE on its AGRESSO system, all related vouchers and invoices will be on-captured into e-SISTAFE on reimbursement of EdM for those expenditures. Reporting Arrangements 34. The objective of the reporting system is to enable the production of sufficiently detailed and regular information to assist in the management and monitoring of the implementation of the project. The ME projects FM consultant will be responsible for consolidation of all project activities into a single report. This will incorporate the activities of ME, FUNAE and EdM. The design of the IFR will enable easy consolidation of the individual reports, as well as allow monitoring of individual performance. Narrative report submissions by EdM to support their expenditures will be made to ME within 30 days of end of quarter to enable the ME projects FM consultant complete the consolidated report before the due date to the Bank. 35. Quarterly reports in a format be agreed at negotiations will be prepared and submitted to the Bank within 45 days of the end of the reporting period. The financial reports will be designed to provide quality and timely information to project management, implementing agencies, and various stakeholders on project performance. These quarterly reports include Designated Account Activity Statements, Summary Statements of DA expenditures subject to Prior Review, as well as DA expenditure not subject to prior Review; Sources and Uses of Funds by disbursement categories; Detailed Use of Funds by Project Component/ Activity with comparison of budgets and actual and explanation of variances; and short-term forecasts of expenditure. A narrative summary of implementation highlights for the quarter helps the readers understand the financial statements better. 36. Annually, audited financial statements will be submitted to the Bank within six months of the end of the financial year audited. The audits will be conducted in accordance with international standards on auditing. The Annual Financial Statements for the project will incorporate all activities (Ministry and non-Ministry), and include: a Statement of Sources and Uses of Funds showing funds from IDA and how they were applied, a Summary of Expenditures analyzed by both Component and Category, and the supporting Notes in respect of significant accounting policies and accounting standards 92 adopted by management; Designated Account Activity for the Year showing deposits and replenishments received, payments substantiated by withdrawal applications, interest that may be earned on the account and the balance at the end of the fiscal year; an Implementation Report, which would be a narrative summary of the implementation progress for the project; and a Summary of Withdrawals using IFRs, listing individual withdrawal applications by reference number, date and amount. Oversight Arrangements: Audits Internal Auditing 37. The Ministry of Finance plays a central role in the management of public finances and in the coordination of the implementation of SISTAFE. Its organizational structure includes an Inspectorate General of Finance (IGF), whose responsibilities include inspection/ internal audit of all government expenditures. For operational purposes, the IGF is split into three geographical teams based in Maputo, Nampula, and Beira, with each team covering provinces in the southern, northern, and central regions respectively. Selection of entities for audit during each year is based on the government's business needs, as well as history of performance by the subject units. Thus ME and FUNAE will not have an internal arrangement for internal audit, but will be subject to IGF audits as and when scheduled. Any internal audit reports produced by the IGF covering project matters will be used to compliment bank supervision efforts, as well as give guidance on audit emphasis for the external audit (below). EdM does have a department which is strictly dedicated to internal auditing and inspections of EdM. This department is not only for the regular activities of the company, but covers projects activities as well. Likewise, any internal audit reports produced by the EdM internal audit department will be reviewed by the Bank FM team and used to augment the supervision effort. External Auditing 38. The "Tribunal Administrativo" (TA) is constitutionally mandated to audit all government projects. The audit may be subcontracted to a firm of private auditors, with participation by TA staff in the actual audit (private audit firms would be unable to access e-SISTAFE without this assistance. At this time, audit reports are not published in Mozambique, nor are they reviewed by Parliament. GoM will prepare the audit terms of reference in consultation with the Bank. The audit will cover all project activities, including those implemented by EdM and FUNAE. Some emphasis will be placed on verifying project assets and assessing the adequacy of the accounting arrangements for assets, due to the in-availability of the e-SISTAFE assets module at this time. EdM shall also maintain a financial management system and prepare financial statements in accordance with consistently applied accounting standards acceptable to IDA, both in manner and adequate to reflect EdM's operations and financial condition, including the operations, resources and expenditures related to the EDAP project. This financial statement shall be audited (Entity Audit) by independent auditors acceptable to IDA. The audited financial statements for each period shall cover one fiscal year of EdM and shall be furnished to IDA no later than six months after the end of each period. 93 39. The project and entity audited financial statements, together with the respective auditor's report and management letter (incorporating management's comments) covering identified internal control and accounting system weaknesses, will be submitted to IDA within six months of the end of each financial year. A single audit opinion will be issued of each. In the case of the project audit, it will cover all project income and expenditures, Designated Account and quarterly reports. Any firm of auditors subcontracted to carry out the audit will meet IDA's requirements in terms of independence, qualifications and experience. 40. The most recent EdM entity audits (last two years) have been qualified due, among other issues, to the following: · Insufficient provision for retirement pensions; · Unreconciled differences between the accounting system and `prepaid' system; · EdM not supplying the auditors with required information relating to inactive consumers, thereby making it impossible for the auditors to verify the completeness of the amount provided for doubtful debts; · Incomplete expenditure documentation and unsatisfactory internal controls. 41. The pension shortfall will require the intervention of government and possible policy changes to redress. Regarding the other issues, a concerted effort by EdM to address the purely accounting type issues is underway to ensure compliance with the auditors' agreed recommendations. Additionally, the proposed project will finance the recruitment of technical assistance and additional specialized staff, as well as training, to ensure that there is sufficient qualified staff in each implementing entity to assure the project's compliance will all fiduciary requirements. FM Action Plan Action Indicative Date By whom Engage Financial Consultant By effectiveness ME Update FM Procedures Manual Condition of effectiveness ME and FUNAE Update project FM procedures Manual Condition of effectiveness EdM Contract external auditors Within 3 months of effectiveness ME/TA 94 42. Conditionality: Effectiveness · Engagement of required FM staff (FM Consultant); · Update of the FM Procedures Manual for ME and FUNAE, and for EdM. Dated Covenant · External auditors for the project to be hired within 3 months of effectiveness. Financial Covenants · The Recipient shall maintain a financial management system in accordance with the provisions of Section 4.09 of the General Conditions; · The Recipient shall prepare and furnish to the Association not later than forty five (45) days after the end of each calendar quarter, interim unaudited financial reports for the Project covering the quarter, in form and substance satisfactory to the Association; · The Recipient shall have its Financial Statements audited in accordance with the provisions of Section 4.09 (b) of the General Conditions. Each audit of the Financial Statements shall cover the period of one fiscal year of the Recipient. The audited Financial Statements for each such period shall be furnished to the Association not later than six months after the end of such period; and, · The Recipient shall, by not later than three months after Effective Date, hire the auditors referred to in Section 4.09 (b) of the General Conditions, with qualifications, experience and mandate satisfactory to the Association. Supervision Plan 43. Supervision will be risk based, and will include: review of quarterly IFRs; review of annual audited financial statements and the auditor's management letter; and management response thereto as well as timely follow up of issues arising. As a substantial risk project, a minimum of two FM supervision missions will be fielded per year and adjusted based on the risk rating of the project. 44. The Bank Financial Management Specialist in charge of the EDAP will play a key role in monitoring the timely implementation of the financial management arrangements. Conclusions 95 45. The overall conclusion of the assessment is that the overall risk is "substantial" and that the FM arrangements meet the Bank's OP/BP10.02 minimum requirements under financial management. On adoption of the mitigation measures, the residual risk is moderate. IDA EDAP (APL-2) Disbursement Categories Category Amount of the Percentage of Financing Allocated Expenditures to be (US $ Million) Financed (inclusive of Taxes) (1) Goods, works, consultants' services and Training for Part 1 of the Project. 50.0 100% (2) Goods, works, consultants' services, Training and Operating Costs for Part 2 of the 18.0 100% Project. (3) Part 3 of the Project: (a) Goods, consultants' services and Training. 9.7 100% (b) Operating Costs. 0.5 Unallocated 1.8 TOTAL AMOUNT 80.0 IDA EDAP (APL-2) Disbursement Profile by Quarter FY Year FY Q Q Quarterly ($) ACUMM 2010 3 1 500 500 4 2 1,500 2,000 2011 1 3 2,000 4,000 2 4 4,000 8,000 3 5 5,000 13,000 4 6 5,000 18,000 2012 1 7 6,000 24,000 2 8 6,000 30,000 3 9 6,000 36,000 4 10 7,000 43,000 2013 1 11 6,000 49,000 2 12 6,000 55,000 3 13 5,000 60,000 4 14 5,000 65,000 2014 1 15 2,500 67,500 2 16 2,500 70,000 3 17 2,500 72,500 4 18 2,500 75,000 2015 1 19 2,500 77,500 2 20 2,500 80,000 TOTAL 80,000 80,000 96 Annex 8: Procurement Arrangements MOZAMBIQUE: MZ-Energy Development and Access Project (APL-2) A. General 1. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under Investment Bank for Reconstruction and Development (IBRD) Loans and IDA Credits" dated May 2004 revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, revised October 2006 and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 2. The Government of Mozambique and World Bank, with the support of the German Development Cooperation (KfW) and the African Development Bank, have carried out in 2008 an update of the Country Procurement Assessment Report (CPAR). The 2008 CPAR highlights that the Country has made considerable progress from the 2002 CPAR, the government has adopted a new Procurement Regulation which has made progress towards meeting the requirement of Organization for Economic Cooperation and Development (OECD) Development Assistance Committee (DAC) indicators. In general the outcomes of 2008 Country Procurement Assessment Report (CPAR) show some improvements on the pillars I and III. No relevant progresses on the pillars II and IV were observed. Bank and Partners will continue to engage with Government and support the implementation of the 2008 CPAR Action Plan. 3. Along with the Decree 54/2005, the government issued standard bidding documents (SBDs) for works, goods and non- consulting services, drugs and medical supplies and consulting services. The Standard Bidding Documents (SBD) are generally consistent with Bank guidelines and may be used under National Competitive bidding with exception indicated under section F below. Furthermore, in accordance with para.1.14 (e) of the Procurement Guidelines, each bidding document and contract financed out of the proceeds of the Financing shall provide that: (i) the bidders , suppliers, contractors and subcontractors shall permit the Association, at its request, to inspect their accounts and records relating to the bid submission and performance of the contract, and to have said accounts and records audited by auditors appointed by the association; and (ii) the deliberate and material violation by the bidder, supplier, contractor or subcontractor of such provision may amount to an obstructive practice as defined in paragraph 1.14(a)(v) of the Procurement Guidelines. 4. The implementation of proposed EDAP (APL-2) Project will be based on the existing institutional arrangements of ERAP Project to facilitate the continuation of the 97 ongoing work and investment program and further reduce implementation costs and possible delays. The only proposed change with respect to the ERAP institutional structure will be that the Energy Fund (FUNAE) will be a formal Implementing Agency to enable it to increase its day-to-day operational efficiency. 5. Electricity of Mozambique (EdM) will be responsible for the implementation of the Component 1, Rehabilitation and Reinforcement of Primary Networks and Grid Extension Component, and will maintain the exact same structure (i.e., Project Implementation Unit at Direcção de Electrificação e Projectos), management, administration and implementation arrangements that were set-up for the implementation of the ERAP (APL-1). This will enable EdM to capitalize on the long-standing experience and capacity of the existing PIU and to give IDA (and other donors) a good level of comfort that EdM can successfully and smoothly implement the proposed EDAP (APL-2) project. 6. The Ministry of Energy (ME) will be responsible for the implementation of the Energy Sector Planning, Policy and Institutional Development Component, and will do so following the same institutional and operational arrangements set-up for ERAP. Alike, EdM and FUNAE, ME should be able to fully capitalize on its experience from the implementation of ERAP. 7. The National Directorate for Studies and Planning of the Ministry of Energy (DNSP/ME) will be responsible for the overall coordination of the project including integrating the Monitoring reports and submitting a consolidated report to the Bank together with the mandatory quarterly progress reports. Nevertheless, each implementing agent will be responsible for its day-to-day procurement processing and management. 8. Procurement of Works: Works procured under this project would include: Installation, rehabilitation, and reinforcement of MV and LV power lines, power transformers, electricity regulation, monitoring and metering equipment, ancillary support hardware; supply and installation of village-scale mini electricity grids, and supply and installation of small scale: (i) solar PV systems, (ii) biomass energy system (co-generation, boilers, gasification, distillation, and briquetting), and (iii) wind energy systems. The procurement will be done using the World Bank's Standard Bidding Documents (SBD) for all International Competitive Bidding (ICB) contracts. The complex and specialized contracts that may need a pre-qualification will be indicated in the procurement plan. National Competitive Bidding (NCB) documents in Portuguese language, in accordance with the Mozambican Procurement Regulations, Decree Number 54/2005 of December 13, 2005, with the exceptions elaborated below (section F), will be used as agreed upon by the World Bank. For contracts estimated to cost less than US$5,000,000 equivalent per contract NCB procedures will apply. Small simple works estimated to cost less than US$100,000 equivalent per contract may be procured by requesting at least three written quotations from qualified contractors. 9. Procurement of Goods: Goods procured under this project would include: Vehicles, IT equipment, office equipment, transformers, stationary and mobile multi- 98 functional energy service platforms, improved charcoal kilns, improved biomass fuel stoves, small-scale biomass energy production equipment and end-use appliances, and inputs and hand tools for small-scale biofuel agricultural plots. Procurement will be done using the World Bank's Standard Bidding Documents (SBD) for all International Competitive Bidding (ICB) contracts. National Competitive Bidding (NCB) documents in Portuguese language, in accordance with the Mozambican Procurement Regulations with the exceptions elaborated in the Section F, will be used as agreed upon by the World Bank. For contracts estimated to cost less than US $500,000 equivalent per contract NCB procedures will apply. Off the shelf goods estimated to cost less than US $75,000 per contract may be procured under the shopping method, by requesting at least three written quotations from the qualified and reputable suppliers. 10. Procurement of non-consulting services: Non-consulting services procured under this project would include very limited contracts estimated to cost less than $75,000 per contract: printing materials, preparation and organization of seminars and workshops, among others. These will usually be procured under the shopping method by requesting at least three written quotations from qualified contractors. 11. Selection of Consultants: Consultant's services required include: Engineering services for design, tendering and supervision, deployment of an Integrated Business Management System (IBMS), training in the new IBMS, management and implementation of loss reduction programs, special advisory services (including environmental management), studies, monitoring and evaluation and auditing services. All consulting service contracts costing more than US $200,000 equivalent for firms will be awarded through Quality and Cost Based Selection (QCBS) method. Contracts for assignments estimated to cost less than US $200,000 equivalent may be contracted through Consultants' Qualification (CQS). 12. Least-Cost Selection (LCS) will be used for selecting consultants for assignments of a standard or routine nature (audit services) where well-established practices and standards exist estimated to cost less than US $200,000.00. 13. Single Source Selection (SSS) may be employed with prior approval of the Bank and will be in accordance with paragraphs 3.9 to 3.12 of the Consultant Guidelines. 14. All services of individual consultants (IC) will be procured under individual contracts in accordance with the provisions of paragraphs 5.1 to 5.4 of the Guidelines. 15. For the selection of Consulting Services estimated to cost less than the equivalent of US $200,000 per contract, the short list may comprise only national consultants, and the Decree 54/2005 may apply. 16. All terms of reference (TOR) for the selection of firms and individual consultants, regardless of the estimated value of the assignment, will be subject to Bank review and no-objection. 99 17. Training: This category would cover all costs related to the carrying out training and workshops, i.e. hiring of venues and related expenses, stationery, resource required to deliver the workshops and per diem and travel costs of participants. Training programs would be part of the Project's Annual Work Plan and Budget and will be included in the procurement plan. Prior review of all activities will be required, only on annual basis, including proposed budget, agenda, participants, location of training and other relevant details. 18. Operating Costs: Operating costs for FUNAE and ME shall consist of incremental cost not presently covered by ERAP (APL-1) and all necessary costs after the closing of ERAP (APL-1) for office supplies; operation and maintenance costs for vehicles and equipment; travel expenses and subsistence expenditures; salaries of support staff, but excluding Government civil servants; among others. The operating costs for ME will only be financed after the allocation for these Operating Costs under ERAP (APL-1) are fully disbursed. The operating costs will be procured using the administrative procedures which shall be reviewed and found acceptable to the Bank during Negotiations. 19. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, will be presented in the Project Implementation Manual to be agreed before negotiations. B. Assessment of the agency's capacity to implement procurement 20. The coordination of the project will be handled by the Project Coordination Unit a National Directorate for Studies and Planning (DNSP/ME). Procurement activities under the project will be handled by the three implementing agencies, the Electricity of Mozambique (EdM) for the Rehabilitation and Reinforcement of Primary Networks and Grid Extension Component; Energy Fund (FUNAE) for the Investments on Rural and Renewable Energy Component; and, National Directorate for Studies and Planning (DNSP/ME) for Energy Sector Planning, Policy and Institutional Development Component. 21. An assessment of the capacity of the mentioned Implementing Agencies to implement procurement actions of the project has been carried out by Amós Malate (Procurement Analyst) on April 21, 2009. The assessment reviewed the organizational structure for implementing the project and the interaction between the project's staff responsible for procurement, finance, administration, among others sectors. 22. The summaries of the procurement capacity assessments of the three implementing agencies are as follows: Electricidade de Mozambique (EdM) 23. The EdM's Electrification and Projects Directorate (DEP) will manage the activities to be implemented by EdM component. A team comprised by a Project 100 Coordinator and an engineer is responsible for the coordination and management of EdM Component. These staff have experience in procurement and they are familiar with World Bank procurement procedures and guidelines as they have been involved with the carrying out procurement under ERAP (APL-1), DANIDA and SIDA financing. The team has attended training organized in the region on Bank procurement, including the Procurement of goods, works and consulting services. 24. While the unit is staffed with qualified personnel, the filing system still needs to be enhanced, as documentation is not always filed on the same location. 25. The summary of the assessment is that EdM possesses relevant experience and qualifications in procurement and under Bank fiduciary requirements, there is an experienced team to be responsible for procurement and that the EdM component risk is Moderate. The National Directorate for Studies and Planning (DNSP/ME) 26. Procurement activities will be carried out by the UGEA at the National Directorate for Studies and Planning. The UGEA is established within the Department of Administration and Finance (DAF) and the head of Department is also the head of UGEA. The Permanent Secretary will act as the Competent Authority to sign on behalf of the Ministry as defined in the Mozambican Procurement Regulation Decree 54/2005. The UGEA is comprised by staff that is managing procurement activities with the use of the Mozambican Procurement Regulations and others, three, using Bank procedures for procurement under the ERAP (APL-1) Project. These staff have adequate and relevant experience with the WB procedures. 27. With the valuable experience of the three procurement officers under the current ERAP (APL-1) Project, which will be retained under EDAP (APL-2), the ME component risk is Moderate. Energy Fund (FUNAE) 28. Procurement activities will be carried out by the UGEA at the Energy Fund (FUNAE). The FUNAE's Board Chairperson will act as the Competent Authority to sign on behalf of the Ministry as defined in the Mozambican Procurement Regulation. 29. FUNAE has been successfully implementing their own component under the ERAP project and several staff have been trained in Bank procurement and will be retained to manage the EDAP (APL-2) project and are incorporated into the FUNAE' UGEA. 30. The summary of the assessment is that FUNAE also possesses relevant experience and qualifications in procurement and with Bank fiduciary requirements, there is an experienced team to be responsible for procurement and that the FUNAE's component risk is Moderate. 101 31. To provide for lessons learned in previous Bank financed operations, the Procurement section of the Operations Manual should detail the approval requirements by the Government during the procurement process, particularly the mandatory clearances by the Ministry of Finance and Administrative Tribunal, including the time required for their review. The review time for these institutions should be considered in the procurement planning to avoid delays in project implementation. Table A: Procurement Management Action Plan Risk Mitigation Measures By When 1. Inadequate filing system All relevant documents of the procurement Continuous process shall be available on the file including for contract management 2. Procedures for Update the ERAP (APL-1) Procurement Manual Effectiveness Procurement not laid to incorporate applicable procedures under EDAP properly (APL-2) project. 32. Based on the fact that the three components possesses relevant experience and qualifications in procurement and under Bank fiduciary requirements, the nature and complexity of some key activities of the project, the overall project risk for procurement is Moderate. 33. The thresholds for the use of the various procurement and selections methods are summarized below: Table B: Thresholds for Procurement Methods and Prior Review Contract Value Contracts Subject to Expenditure Category Threshold Procurement Method Prior Review30 (US$) 1. Works >5,000,000 ICB All 100,000 - 5,000,000 NCB None <100,000 Shopping None Direct Contracting All 2. Goods and Services >500,000 ICB All (other than 75,000 - 500,000 NCB None Consultants' Services) <75,000 Shopping None Direct Contracting All 30 The Bank may, at its own discretion, require that a sample of contracts below the threshold be subject to prior review, at any time or when the Procurement Plan is updated 102 Contract Value Contracts Subject to Expenditure Category Threshold Procurement Method Prior Review30 (US$) 3.Consultants'Services >200,000 QCBS, All Firms <200,000 LCS, and CQS None Single Source All 4. Individuals >100,000 IC All <100,000 IC None All Single Source All C. Procurement Plan 34. The Borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan was agreed between the Borrower and the Project Team on October 9, 2009 and is available at National Directorate of Studies and Planning of the Ministry of Energy. It will also be available in the project's database and in the Bank's external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. D. Frequency of Procurement Supervision 35. Frequency of procurement supervision missions: Once every six months, including special procurement supervision for post procurement reviews, at least once every twelve months. E. Details of the Procurement Arrangements Involving International Competition 1. Goods, Works, and Non Consulting Services (a) List of contract packages to be procured following ICB and direct contracting: 103 EdM Component: GOODS Ref. Contract Estimated Procurement Pre - Domestic Review Expected Comments No. (Description) Cost (USD) Method Qualification Preference by Bank Bid- *1000 (yes/no) (yes/no) (Prior / Opening Post) Date 9/1 Vehicles for 120.00 NCB Yes No Prior Feb 10 Deducted PIU (4x4 DC) from Sub comp. 1.1 9/2 Vehicles for 330.00 NCB Yes No Prior Feb 10 Deducted PIU (4x4 SC) from Sub comp 1.1 10/1 Office 50.00 Shopping No No Post Jan 10 Deducted Equipment from Sub for PIU comp 1.1 EdM Component: WORKS Ref. No. Contract Estimated Procurement Prequali Domestic Review Expected Comments Pac/Lot (Description) Cost (USD) Method fication Preference by Bank Bid-Opening *1000 (yes/no) (yes/no) (Prior / Date Post) 1/1 Maputo Province: 1,200.00 ICB No No Prior Feb 11 Procurement 1.2 MV Network under ERAP Transmission (APL 1) Efficiency Improvement Pilot.. 2/1 Maputo Manica 5,150.00 ICB Yes No Prior Feb 11 Province: 1.3 ­ Reh. & Reinf of Primary Network (A1 and A3) SEs Matola & Manica. 2/2 Maputo Province: 1,000.00 ICB Yes No Prior Feb 11 1.3 ­ Reh. & Reinf of Primary Network (A2) Upgrade Swear Chang. 2/3 Manica Province: 2,050.00 ICB Yes No Prior Feb 11 1.3 ­ Reh. & Reinf of Primary Network (A4) Upgrade OHL 6.6 to 22kV. 4/1 B - Nampula Province: 10,050.00 ICB Yes No Prior Feb 11 1.4 ­ Extension of Dist Networks & Customer connections (B1; B2; B3; B4; B5). 6/1 D ­ Tete Province: 11,460.00 ICB Yes No Prior Feb 11 1.4. D ­ Extension of Dist Networks & Customer connections (D1; D2; D3; D4; D5). 8/1 1.5.2 Supply, Installation 6,200.00 ICB Yes No Prior Feb 11 & Training of Integrated Business System (IBMS). 104 FUNAE Component: GOODS AND WORKS Bank CONTRACT Review Ref. Procurement Bid DESCRIPTION Estimated Cost (Prior/ Comments Nr Method Opening Post Review) Prior 1 Vehicles 200,000.00 NCB Feb 10 review Office and field Prior 2 250,000.00 NCB Feb 10 equipment review Institutional Solar Prior 3 Systems - Rural 2,180,000.00 ICB Feb 10 review Schools Institutional Solar Prior 4 2,070,000.00 ICB Feb 10 Systems - Rural Clinics review Community/Local Prior 5 3,500,000.00 ICB Feb 10 Operator Solar Systems review Support to Private Prior 6 Sector Supply/Delivery 1,500,000.00 ICB Mar 10 review Systems Multifunctional Prior 7 2,000,000.00 ICB Mar 10 Platforms review Promotion of Prior 8 Households and SME 1.500.000.00 ICB Mar 10 review Interfuel Substitution Biomass Energy Prior 9 Tecnhology 1,600,000.00 ICB Mar 10 review Demonstration Pilots Biomass Improved Prior 10 400,000.00 ICB Mar 10 Stoves review Prior 11 Charcoal Kilns 600,000.00 ICB Mar 10 review ME Component: GOODS Ref. Contract Estimated Procurement Prequalification Domestic Review Expected Comments No. (Description) Cost Method (yes/no) Preference by Bid- (USD) (yes/no) Bank Opening (Prior Date / Post) 1. Office 120,000 NCB NO NO Post Feb 10 The Equipment (IT, Review purchasing Photocopy process Machine, will be by Scanner, lots, Software), for accordingly 105 the ME 2 Office 140,000 NCB No No Post Feb 10 The equipment review purchasing (Furniture), for process the ME and will be by CNELEC lots, accordingly 3 Office 20,000 Shopping No No Post Feb 10 The equipment review purchasing (Consumables), process for the ME and will be by CNELEC. lots, accordingly 4. Motor Vehicles 250,000 NCB NO NO Post Mar 10 The for ME Review purchasing process will be by lots, accordingly 5. Office 70,000 Shopping NO NO Post Feb 11 The Equipment (IT, Review purchasing Photocopy process machine, will be by Scanner, lots, Software) for accordingly CNELEC (b) Contract estimated to cost above US $5,000,000 equivalent for works and US $500,000 equivalent for goods and services per contract and all direct contracting will be subject to prior review by the Bank. 2. Consulting Services (a) List of consulting assignments with short-list of international firms. EdM Component: CONSULTING SERVICES Estimated Selection Review Expected Ref. Description of Assignment Method by Bank Proposals Comments No. Cost (USD) (Prior / Submission Post) Date *1000 1 1.1 Consultancy Services for Design & Supervision for Rehabilitation $500.00 and Reinforcement of Primary 6,300.00 QCBS Prior Feb 10 Transferred for Network & Grid Extension Goods 2 1.5.1 Consultancy Services for To be Environmental Management managed by 1,000.00 QCBS Prior Feb 10 Plan EdM's ESI- Unit 3 1.5.3- Consultancy Services for 900.00 QCBS Prior Jul 11 106 procurement and supervision of IBMS 4 1.5.3.i) IBMS ­ ERP (Enterprise Resource Planning) 100.00 IC Prior Feb 10 5 1.5. 3.ii) IBMS- CMS (Commercial 100.00 IC Prior Feb 10 Management System) 6 1.5.3.iii) IBMS - IRMS (Incidents recording and Manag. 100.00 IC Prior Feb 10 System) 7 1.5.3.iv) IBMS - ICS (Internal 100.00 IC Prior Feb 10 Communication System) 8 1.5.4. T. Assistance and C. Services US$200.00 transferred for for Network System Planning Section IV. including update of the Master Plan Capacity. Building 1,300.00 QCBS Prior Mar 10 and Training on O & M of Prepaid EdM's PIU Staff split-meters FUNAE Component: CONSULTING SERVICES Bank Expected Review Ref. Estimated Selection Proposals Nr Description Cost Method (Prior/ Submission Comments Post Date Review) Technical Assistance & Consultancy Prior 1 760,000.00 QCBS Apr 10 Services Review Promotion of Household and SME Prior 2 200,000.00 QCBS Feb 10 interfuel substitution review Prior 3 Environmental Management Plan 500.000.00 QCBS Feb 10 review Biomass Energy Technologies Post 4 200,000.00 QCBS Feb 10 Demonstration Pilots review FUNAE Component: TRAINING AND SEMINARS Expected outcome / No. Estimated Estimated Activity Description Start Date Comments Cost Duration 1 Environment 9,700.00 4 Weeks Jul 10 8,250.00 2 Monitoring and Evaluation 4 Weeks Jun 10 Financing of Projects 8,300.00 3 4 Weeks Sep 10 (feasibility analysis) New and Renewable 6,345.00 4 Energies 1 Week Jun 10 Protection Systems in Solar 1,500.00 5 Energy 4 weeks Aug 10 107 6 Biomass 11,180.00 4 Weeks May 2010 Training of trainers in March installation, operation and 50,000.00 June 7 maintenance of photovoltaic 3 Weeks September systems 2010 March Training of users in 50,000.00 June 8 operation and maintenance 3 Weeks September of photovoltaic systems 2010 September Procurement 17.500.00 4 weeks 2010 September Financial Management 17.500.00 4 weeks 2010 ME Component: CONSULTING SERVICES Ref. No. Estimated Selection Review Expected Comments Method by Bank Proposals Cost (Prior / Post) Submission (USD) Date 1. ME - Elaboration of Rural 500,000 QCBS Prior Review Jul 10 Electrification Strategy & Investment Program (RESIP) 2. ME - TA on RESIP 200,000 QCBS Prior Review Oct 10 Consultation and Dissemination Process 3. ME- TA on Promotion of New 1,000,000 QCBS Prior Review Nov 10 Energy Infrastructure 4. ME - Study on energy policy 150,000 QCBS Post review Apr 10 and pricing 5. ME ­ Elaboration of renewable 200,000 QCBS Prior review May 10 energy strategies 6. TA on regulation for feeding 50,000 CQS Post review May 10 tariff on renewable energy 7. ME - Study on regional energy 100,000 QCBS Post review Dec 10 integration protocols 8. Audit services 150,000 QCBS Post review Mar 11 9. CNELEC - Consultant on 200,000 QCBS Prior review Sep 10 Annual reviews of EdM Performance under future Performance Contracts 10. CNELEC - Consultant for 200,000 QCBS Prior review Feb 11 establishment of monitoring systems for financial, technical and commercial performance 11. CNELEC - Establishment of 150,000 QCBS Post review Jun 10 costumer codes in several areas (connections, disconnections, metering and billing disputes) 108 12. CNELEC - Consultant for 200,000 QCBS Prior review May 10 Cost of service and tariff studies, regulatory accounting system and customer complain system 13. Technical assistance for the 250,000 QCBS Prior review July 10 Renewable Energy Department 14. TA for the ME 250,000 QCBS Prior review Aug 10 Environmental Management 15. TA on natural gas 300,000 QCBS Prior review Feb 11 16. TA on petrol 300,000 QCBS Prior review Mar 11 (b) Consultancy services estimated to cost above US $200,000 equivalent per contract for firms and US $100,000 equivalent per contract for Individual consultant and single source selection of consultants will be subject to prior review by the Bank. (c) Short lists composed entirely of national consultants: 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 F. NCB Provisions 36. National Competitive Bidding (NCB) for Goods and Works, in accordance with the Mozambican Procurement Regulations, as per Decree Number 54/2005 may apply subject to the following additional provisions: (i) Eligibility. No bidder, foreign or domestic, shall be precluded from participating in the bidding process for reasons unrelated to their eligibility or capability to perform the contract. Examples of reasons that may not be used to preclude a bidder from so participating include the following: proof that the bidder is not under bankruptcy proceedings in the territory of the Recipient; appointment by the bidder of a local representative in the territory of the Recipient; prior registration by the bidder in the territory of the Recipient; or license or agreement allowing the bidder to operate in the territory of Recipient. (ii) Qualification. Bidders shall be post-qualified unless the Procurement Plan explicitly provides otherwise. Irrespective of whether post qualification or prequalification is used, both national and foreign bidders who meet the qualification requirements stated in the bidding documents shall be allowed to participate in the bidding process. (iii) Bidding Documents. Bidders shall use standard bidding documents for the procurement of goods, works and services, consistent with the provisions of the Procurement Guidelines. 109 (iv) Preferences. No preference for domestically manufactured goods or for domestic contractors shall be allowed. (v) Bid evaluation. The qualification criteria shall be clearly specified in the bidding documents, and all criteria so specified, and only such criteria so specified shall be used to determine whether a bidder is qualified; the evaluation of the bidder's qualifications should be conducted separately from the technical and commercial evaluation of the bid. Evaluation of bids shall be made in strict adherence to the criteria set forth in the bidding documents; criteria other than price should be quantified in monetary terms. A contract shall be awarded to the qualified bidder offering the lowest technically responsive evaluated bid. Bidders shall not be eliminated from detailed evaluation on the basis of minor, non-substantial deviations. (vi) Rejection of All Bids and Re-bidding. In cases where the Recipient rejects all bids and solicits new bids for a contract, it shall, as soon as possible, notify the Association of such decision. (vii) Complaints by Bidders. Complaints by bidders shall be handled by the Recipient, who shall inform the Association of any such complaint. (viii) Right to Inspect/Audit. Each bidding document and contract financed out of the proceeds of the Financing shall provide that the bidder, supplier or contractor, and any subcontractor, shall permit the Association, at its request, to inspect their accounts and records relating to the bid submission and performance of the contract, and to have these accounts and records audited by auditors appointed by the Association. An act by the bidder, supplier, contractor or subcontractor intended to materially impede the Association's exercise of its inspection and audit right constitutes an Obstructive Practice. 110 Annex 9: Economic and Financial Analysis MOZAMBIQUE: MZ-Energy Development and Access Project (APL-2) Economic Analysis 1. The present analysis is based on a simplified overall framework and, in particular, in a reduced number of imbedded assumptions and expert estimates. Project costs were taken at full present value and project benefits were generally undercounted, resulting in a conservative analysis. In spite of that, the results of the analysis clearly indicate that the project has a positive economic rate of return under several parametric and sensitivity scenarios. 2. The economic analysis undertaken for the proposed project is based on the premise that the overall Project Development Objective (PDO) is that of accelerating access to electricity and modern energy services in peri-urban and rural areas in a sustainable and commercially viable manner. Furthermore, that within that overall PDO the project will, inter alia, seek to support the Borrower to: a. Increase grid-based access to and improve reliability of the supply of affordable electricity services in peri-urban areas; b. Increase off-grid access to electricity and modern energy services in unserved rural areas through conventional and renewable energy resources and technologies (RETs); c. Leverage the mobilization of multi-lateral and bilateral donor financing for improving grid-based access to modern energy services through the reinforcement of the existing primary electricity network and the extension of the grid to un-served areas; d. Improve the overall performance of the main sector institutions and their capacity to expand electrification and to mobilize new private sector and donor investment financing through the provision of institutional strengthening and capacity development support; and, e. Elaborate a "National Rural Electrification Strategy and Investment Program (RESIP)". 3. From the above five specific objectives, the economic analysis done for the project focused only on objectives (a) and (b). Objectives (c), (d) and (e) were not included because of the difficulty in quantifying and valuating the expected stream of benefits from the associated investments. That does not mean that those investments are not expected to yield tangible economic and social benefits. On the contrary, very significant benefits are expected to be derived from the investments under those objectives, but the "valuation" of the benefits from the mobilization of incremental investment funds for the electricity sub-sector, from the institutional development and 111 from the preparation of the RESIP would be extremely difficult to do without introducing a set of arbitrary and potentially distortionary assumptions and coefficients into the analysis. 4. The mobilization of incremental investment resources (objective c) for the electricity sub-sector will enable the government of Mozambique ­ through EdM and FUNAE ­ to increase access to modern energy services to more urban, peri-urban and rural low income people in the country, and will underpin further economic growth and development through an increase availability of electricity services in the country. 5. Investments on institutional development (objective d) are critical and essential to increasing the quality, efficiency and governance of the operation and management of the electricity sector in Mozambique. Improvements in capacity and professionalism in the operation of the power utility alone will alone result in increases in operational efficiency and reduced technical and non-technical losses. Like-wise, improvements on sector governance through capacity development should result on improved fiscality and sector oversight. Governance is the single most important factor in economic development and efficiency, however, ex-ante is extremely difficult to quantify and valuate the resulting benefits for other than introducing a series of in arbitrary coefficients. While doing that might make the economic analysis more complete, it would not increase its accuracy or its reliability. 6. The proposed project will support the preparation of a comprehensive "National Rural Electrification Strategy and Investment Program ­ (RESIP)" (objective e) and it will further support the gradual establishment of a flexible Sector Wide Approach (SWAp) between the government and the donor community to mobilize the long-term financing required for the implementation of the RESIP. This work will enable the government of Mozambique to launch a coherent and well funded long-term rural electrification program with which to sustainably increase access to modern energy services to the large unattended rural population in the country. The expected socio- economic developmental benefits of these activities will be in the very least "extremely high", but equally difficult to quantify and valuate ex-ante. Therefore, the benefits of this work, although real, are not considered within this analysis. 7. The following sections present the summary of the economic analysis done for Objectives (a) and (b) of the project which, respectively, relate to Component 1: Reinforcement of the Primary Networks and Grid Extension and Component 2: Investments on Rural and Renewable Energy Component of the project. Reinforcement of the Primary Networks and Grid Extension Component 8. This component will be implemented by EdM and will essentially finance: (i) engineering services for the design, procurement and supervision of EdM's EDAP (APL- 2) investment program; (ii) a medium voltage network transmission efficiency pilot project in Bairro 25 de Junho; (iii) the rehabilitation and reinforcement of the existing primary networks that have been overloaded as a result of the grid extension and new 112 connections implemented over the last five years thus improving the quality of service and reducing distribution losses to some 100,000 existing and new customers; (iv) the extension and intensification of the medium and low voltage grid in peri-urban areas to service 25,000 new customers; and, (v) consulting services for the preparation of the procurement documentation and process and the actual supply and installation of an "Integrated Business Management System (IBMS)", and ancillary technical assistance. 9. In addition to the grid extensification and intensification investments that will be undertaken by the IDA EDAP (APL-2) project in Maputo, Manica, Nampula and Tete provinces, the Borrower will implement additional grid developments investments with parallel financing from AFD, EIB, OFID and three combined Arab Funds (see Annex 15 for more information on GoM's NEDAP Program). 10. A key methodological underpinning of the economic analysis done for this component is that the analysis tried to capture not only the economic value of the increased access to electricity measured in terms of the monetary value of the incremental service and consumption of electricity (increase expected in electricity consumption times the applicable electricity tariff, but also the "socio-economic developmental benefits" of the future increase in access to modern energy services by the intended 25,000 new low-income peri-urban consumers (households and/or micro-enterprises). 11. Another feature of the economic analysis done herein is the decision not to elaborate and evaluate a base case "without project scenario". The reason for that is simply that increasing access to electricity and modern energy services is a stated national policy objective and a committed government program of action. Today low- income household in peri-urban areas utilize charcoal and or wood for cooking and kerosene for lighting services. The continued use of both traditional biofuels and kerosene for meeting the basic household energy necessities is both hazardous to the health of the most vulnerable population in the country but is also socially undesirable and rapidly becoming politically un-acceptable. Since electricity should not be used for low efficiency cooking applications the substitution of electricity for traditional biofuels is not an option in Mozambique. However the substitution of electricity for kerosene for lighting is a highly beneficial option because the use of kerosene in households contributes to severe "in-door air pollution" with huge negative health impacts as well as is the culprit of thousands of burning accidents per year, mostly affecting women and children in Mozambique. Additionally, the quality and benefits of the energy service provided by kerosene is largely inferior to that which can be provided by electricity, whereby they constitute significantly different scenarios to compare. Within that context, the decision of going ahead with the proposed electrification investments does not depend from the comparison of the with- and without-project scenarios as project alternatives, but from the stand alone financial and economic analysis of the proposed project. 12. Table A.9.1: presents a summary of the key parameters and criteria incorporated into the economic analysis of the EdM Component (Component 1: Reinforcement of the Primary Networks and Grid Extension Component). 113 Table A.9.1: Key Economic Analysis Parameters and Criteria Criteria Explanation of Criteria Analysis Parameters Time horizon: 20 years Discount rate: 12 Percent Project Costs Includes all the project costs, in millions of US dollars (US $M), for the recruitment of engineering services and other consultants necessary for: (i) the preparation of the detailed engineering designs for the component's investments; (ii) preparation of bidding documents and management of the procurement process for the procurement of the hardware and installation of all the electricity investments of the component; and (iii) consulting services Engineering Costs for the independent supervision of the implementation of the all electricity investments of the component. Includes the investment costs, in millions of US dollars (US $M), for: (i) the Integrated Business Management System (IBMS; US $11 million); and, (ii) the procurement and installation of the hardware for the medium voltage Efficiency distribution efficiency pilot project in the "Bairro 25 de Junho" of the EdM Investments component. Rehabilitation & Includes all the costs, in millions of US dollars (US $M), for the procurement Reinforcement and installation of the hardware for the rehabilitation and reinforcement Investments investments of the component. Extension & Includes all the costs, in millions of US dollars (US $M), for the procurement Intensification and installation of the hardware for the extensification and intensification Investments investments of the component. Includes taxes and ancillary local costs, in millions of US dollars (US $M). It is important to note that the investment costs included in the analysis explicitly exclude all soft "Institutional Development" investments other than the IBMS. Soft institutional development investments are -- by accepted Other Investment practice ­ not normally included in economic analysis exercises as their Costs stream of benefits are extremely difficult to measure and valuate ex-ante. Volume of incremental power purchases by EdM, in mega-watt/hour (MWh), to supply the new customers that will be connected by the project. Power purchases are expected to increase annually in volume by 4 percent as of EdM Incremental 2009, by 5 percent as of 2014 to by 6 percent as of 2019. That increase was Power Purchase derived from the EdM's historical pattern of increase in electricity (MWh) consumption by newly connected household. Cost of incremental power purchase required by EdM, in millions of US dollars (US $M), to supply with electricity the new customers that will be EdM Incremental connected by the project. Cost of power purchase was assume to increase in Power Purchase value overtime from 20 USC/KWh in 2009 to 35 USC/KWh in 2014 to 40 (US $ M) USC/KWh in 2019, to account for inflation and increased generation costs. Estimated Operation and Maintenance Costs (O&M), in millions of US Incremental dollars (US $M), directly associated to the physical investments undertaken O&M by the project. Those O&M costs are expected to increase from 3 percent of (US $ M) the cost of incremental power purchase by EdM in 2009 to 5 percent in 2014 114 to 10 percent in 2019. That increase is expected to account for the incremental "wear-and-tear" of new installations/equipment which will require incremental maintenance, plus inflation. Project Benefits Volume of incremental power sales by EdM, in mega-watt/hour (MWh), to the new customers that will be connected by the project. This figure was Incremental calculated linearly on the basis of being equal to 80 percent of incremental Sales power purchases by EdM, assuming an average rate of distribution losses of (MWh) 20 percent. Value, in millions of US dollars (US $M), of the reduction in EdM's overall operating cost as a result of the introduction and successful operation of the "Integrated Business Management System ­ IBMS". This benefit was calculated as being equal to a 5 percent reduction in the estimated annual total operating costs of EdM during the horizon of the project. The total operating IBMS Efficiency costs were projected based on EdM financial model (see Financial Analysis Benefit (US $M) Section in Annex 7 of the EDAP APL-2 Project Appraisal Document). Volume of benefits in mega-watt/hour (MWh) from the rehabilitation and reinforcement of the existing grid. This benefit results from an estimated 5 percent reduction of technical and non-technical losses in the distribution of electricity to customers. While this benefit will effectively accrue to both the existing and to the new customers that will be connected by the project, the 5 percent benefit included herein was only associated to the service of new customers, resulting in a very conservative accounting of the benefits from the rehabilitation and reinforcement investments of the project. The volume of benefits to exiting customer is expected to be between 3 and 5 times larger than the volume of the benefits to new customers because the pool of existing customers is much larger than the pool of new customers that will be connected by the project. Nevertheless, since the detail engineering plans for the rehabilitation and reinforcement works are still not completed, a series of Rehabilitation & assumptions would have to be made about the consumption profile of the Reinforcement existing customers that will come to benefit from the rehabilitation and Benefits reinforcement of the grid. That would unnecessarily complicate and (MWh) introduce some level or "arbitrarity" to the framework of the analysis. Escalating tariff projection measured in US cents per kilo-watt/hour (US $/KWh). The tariff escalation utilized for this economic analysis is equal to that of "Option 3" presented in the financial analysis of EdM (see Financial Analysis Section of Annex 9). EdM's current level of electricity tariffs is not financially sustainable but there is agreement between EdM and government Tariff on the need to implement a gradual tariff increase over the next 10 years Projection horizon. The referred Option 3 constitutes a conservative tariff increase (US $/KWh) scenario capable of fully meeting EdM financial needs and obligations. Incremental Sales Value, in millions of US dollars (US $M), of incremental power sales by (US $ M) EdM to the new customers that will be connected by the project. 115 Value, in millions of US dollars (US $M), of the benefits derived from the rehabilitation and reinforcement of the grid, This benefit results from an estimated 5 percent reduction of technical and non-technical losses in the Efficiency distribution of electricity to customers. As indicated above, this benefit is Benefits very conservatively only associated to the electricity service to the new (US $ M) customers that will be connected by the project. Value in million of US dollars (US $M) of the "socio-economic developmental benefits" accrued to the new customers (household and micro- business) that will gain access to modern energy services by being connected by the project to the electricity grid. What this benefit measures is not the "consumer surplus" of access to electricity (Kwh) but the increase in "quality of life" of low-income peri-urban households due to their new access to energy services (lighting, refrigeration, grinding, heating, food processing, communication, entertainment, etc.). This is an extremely important distinction. While the benefit derived from different levels of electricity consumption would necessarily follow the principles of marginal returns to scale (i.e., marginal utility decreasing as consumption increases), in the specific case of the electrification of new low income consumers that norm still holds in principle, but is conditioned by the diversification of the energy services derived from higher levels of electricity consumption which provide for additional level of benefit as consumers access additional and different types of energy services. New low income customers are expected to consume approximately 50Kwh/month for the use of up to 3 light-bulbs in the household, that is, for lighting service. Based on the known evolution of household electricity consumption profiles in peri-urban areas in Mozambique, those initial customers will in time incorporate other electricity appliances to their households ranging from cell phone chargers, refrigerators, radios, irons, television sets, power tools, etc. Each of these appliances will provide consumers for clearly differentiated and incremental levels of utility and therefore incremental levels benefits overtime -- until increased consumption is only a function of increased use of the same energy service which is what is normally observed in the electricity consumption profile of Socio-Economic the higher income groups, starting with middle income households. From the Developmental above, the "socio-economic developmental benefits" included in this analysis Benefits was estimated to start at 40% of the value of sales in 2009, and was increased (US $ M) to 50% of the value of sales in 2014 and up to 60% as of 2022. 13. Table A.9.2 presents a summary of the economic analysis of the EdM component of the proposed IDA EDAP (APL-2) project. As per Table 7.2, the economic analysis of the "Base Case" scenario concluded that the EdM component would have a Net Present Value (NPV) of US $36.5 million at 12 percent discount rate, with an Economic Internal Rate of Return (EIRR) of 26 percent. 116 TABLE A.9.2 Mozambique Energy Development and Access Project (EDAP): EDM INVESTMENT COMPONENT - ECONOMIC ANALYSIS NEDAP INVESTMENT C O S T S E D A P I N V E S T M E N T S B E N E F I TS Engineering Efficiency Rehabiliation & Extension & Other EdM Incremental EdM Incremental Incremental Increm. Rehab/Reinfor. Tariff Increm. IBMS Efficiency Socio-Econ Total Net Benefits (a) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) Year Costs Investm. Reinforcement Intensification Investment Power Purchase Power Purchase O&M TOTAL Sales Benefits Projection Sales Eff. Benef. Benefits Benefits Benefits Stream (b) Investments Investments Costs (MWh) (US $ M) (US $ M) (US $ M) (MWh) (MWh) (US $/KWh) (US $ M) (US $ M) (US $ M) (US $ M) (US $ M) (US $ M) 1 1.50 0.56 - - 0.02 - - - 2.08 - - 0.083 - - - - - (2.08) 2 2.00 0.44 2.60 7.27 1.00 - - - 13.31 - - 0.086 - - - - - (13.31) 3 2.00 11.20 2.50 10.03 1.00 55,088 1.10 0.03 27.86 41,316 2,754 0.089 3.68 4.6 0.25 0.18 8.70 (19.16) 4 0.90 - 1.60 5.30 1.00 94,688 1.89 0.06 10.75 71,016 4,734 0.093 6.60 5.3 0.44 0.33 12.67 1.92 5 0.40 - 1.50 2.70 1.00 97,528 1.95 0.06 7.61 73,146 4,876 0.102 7.46 6.2 0.50 0.37 14.58 6.97 6 101,429 3.55 0.18 3.73 76,072 5,071 0.106 8.06 6.8 0.54 0.81 16.24 12.51 7 105,486 3.69 0.18 3.88 79,115 5,274 0.109 8.62 7.4 0.57 0.86 17.51 13.63 8 109,706 3.84 0.19 4.03 82,279 5,485 0.109 8.97 8.1 0.60 0.90 18.58 14.55 9 115,191 4.03 0.20 4.23 86,393 5,760 0.110 9.50 9.0 0.63 0.95 20.06 15.83 10 120,951 4.23 0.21 4.44 90,713 6,048 0.113 10.25 10.0 0.68 1.03 21.92 17.48 11 126,998 5.08 0.51 5.59 95,249 6,350 0.113 10.76 11.0 0.72 1.61 24.06 18.47 12 133,348 5.33 0.53 5.87 100,011 6,667 0.115 11.50 12.1 0.77 1.73 26.05 20.18 13 140,015 5.60 0.56 6.16 105,012 7,001 0.115 12.08 13.3 0.81 1.81 27.96 21.80 14 148,416 5.94 0.59 6.53 111,312 7,421 0.117 13.02 14.6 0.87 1.95 30.44 23.91 15 157,321 6.29 0.63 6.92 117,991 7,866 0.117 13.80 16.1 0.92 2.07 32.85 25.92 16 166,761 6.67 0.67 7.34 125,070 8,338 0.119 14.88 17.7 0.99 2.23 35.76 28.43 17 176,766 7.07 0.71 7.78 132,575 8,838 0.119 15.78 19.4 1.05 2.37 38.62 30.84 18 187,372 7.49 0.75 8.24 140,529 9,369 0.121 17.00 21.4 1.13 2.55 42.05 33.81 19 198,615 7.94 0.79 8.74 148,961 9,931 0.121 18.02 23.5 1.20 2.70 45.43 36.69 20 210,531 8.42 0.84 9.26 157,899 10,527 0.123 19.42 25.8 1.29 2.91 49.48 40.22 TOTALS 6.80 12.20 8.20 25.30 4.02 2,446,211 90.14 7.70 154.36 1,834,658 122,311 209.43 232.2 13.96 27.37 482.95 328.60 97,528 12,597,691,760,000 P Cost $KWh 1 = 0.020 PP Incre. Rate 1 = 4% Incre. O&M Rate 1 = 3% PS/PP Ratio= 75% Rehab. Efficie. = 5% S-Eco Ben 1= 5% Original Investment = 56.52 276,751 P Cost $KWh 2 = 0.035 PP Incre. Rate 2 = 5% Incre. O&M Rate 2 = 5% Impl. losses = 25% S-Eco Ben 2= 10% 12% NPV = 55.85 P Cost $KWh 3 = 0.040 PP Incre. Rate 3 = 6% Incre. O&M Rate 3 = 10% S-Eco Ben 3= 15% EIRR = 29% Notes: (a) Includes investments for the Integrated Business Management System (US $ 11 million) and Distribution Efficiency Pilot Project (1.2 million). (b) Includes US $ 4.21 million in local costs and taxes. Total investment costs exclude all soft "Institutional Development" investments. (c) Volume (MWh) of incremental power purchase by EdM to supply new customers to be connected by the project. (d) Cost (US $ M) of incremental power purchase by EdM (MWh) to supply new customers to be connected by the project. (e) Estimated Operation and maintenance costs (O&M) in US $ M associated to the physical investments undertaken by the project. O&M costs expected to raise with time from 3% of incremental power purchase to 5% over time. (f) Volume (MWh) of incremental power sales by EdM to the new customers connected by the project. (g) Volume (MWh) of benefits from the rehabilitation of the grid , which result from lower average losses to the new customers connected by the project. (h) Escalating tariff projection estimated to be necessary under option 3 of the financial analysis of EdM (see Financial Analysis Section of Annex 9) (i) Value (US $ M) of incremental power sales by EdM to the new customers connected by the project. (j) Value (US $ M) of 5 % annual reduction of "Total Operating Expenses" as an efficiency benefits from the introduction of the "Integrated Business Management System" by the project. (k) Value (US $ M) of benefits from the rehabilitation of the grid , which result from lower average losses to the new customers connected by the project. (l) Value (US $ M) of socio-economic benefits to the new customers connected by the project due to the access to electricity services. As electricity consumption of new customers normally increases overtime allowing for access to additional energy services "consumer surplus" was estimated to raise from 40% of value of sales to 50% in 2014 and up to 60% as of 2022. 117 14. Figures A.9.1, A.9.2, and A.9.3, respectively, present the breakdown of costs, the stream of project benefits, and the stream of net benefits for the proposed EdM component. Figure A.9.1 EDAP - EdM: Breakdown of Investment Costs 30.0 O&M 25.0 Power Purchase US $ Million Other costs 20.0 Exten. & Intens. Rehab/Reinforc. 15.0 Efficiency Inv. Engineering Costs 10.0 5.0 - 1 3 5 7 9 11 13 15 17 19 Years Figure A.9.2 EDAP - EdM: Composition of Benefits Stream 50.00 45.00 40.00 35.00 US $ Million 30.00 S-Eco. Ben. 25.00 Distrib.Effic. 20.00 IBMS Effic. Elec. Sales 15.00 10.00 5.00 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Years 118 Figure A.9.3 EDAP - EdM Component: Cost & Benefits Stream 60.00 50.00 40.00 30.00 US $ Million COSTS 20.00 BENEFITS 10.00 NET BENEFITS - (10.00) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 (20.00) (30.00) Years 15. Table 7.3 presents a summary of the parametric analysis of the EdM component of the EDAP (APL-2) Project. Table A.9.3: EDAP (APL-2) ­ EdM Component / Summary of Economic Analysis Results BASE LOWER BENEF. HIGHER COSTS L-Benef & H-Cost COSTS P-PURCHASE @12% SCENARIO 20% 20% 20% / 20% NPV = 0 NPV = 0 Invest = 56.5 56.5 67.8 67.8 145.6 56.5 NPV = 55.9 38.0 50.7 25.3 0.0 0.0 EIRR = 29% 24% 25% 19% 12% 12% 157.6% 372.6% 16. As shown in Table 7.3, above, in addition to the "Base Case" scenario of EDAP (APL-2) the following five parametric/sensitivity scenarios were evaluated: a. A reduction of 20 percent in the value of the stream of project benefits: under this scenario the project would have Net Present Value (NPV) of US $38.0 million and an EIRR of 24 percent. b. A 20 percent increase in all project costs: under this scenario the project would have Net Present Value (NPV) of US $50.7 million and an EIRR of 25 percent. c. A combined reduction of 20 percent in the value of the stream of project benefits and a 20 percent increase in all project costs: under this scenario the proposed project would have Net Present Value (NPV) of US $25.3 million and an EIRR of 19 percent. 119 d. Switching values A: At a discount rate of 12 percent the project's NPV would become negative if the project's investment costs were to increase by more than 157.6 percent. e. Switching values B: At a discount rate of 12 percent the project's NPV would become negative if the cost of power purchase by EdM were to increase by more than 372.6 percent. 17. The results of the parametric and sensitivity analysis of the EdM component of the EDAP (APL-2) Project clearly indicate that, in spite of the general undercounting of expected benefits, this component would be very resilient to variations in its key parameters and, therefore, that it would be a robust investment project with significant economic benefit for its beneficiaries and the country at large. Investments on Rural and Renewable Energy Component 18. This component will increase and accelerate decentralized access to modern energy services by supporting the implementation and/or scaling-up of: (i) decentralized micro and small investments on renewable energy production and distribution systems, solar PV and thermal, biomass energy and other Renewable Energy Technologies (RET) in rural and some peri-urban areas, including the installation of 500 solar PV systems among rural school and health clinics, and the electrification of 30 rural villages by RET; (ii) promotion/dissemination of 50,000 improved woodfuel stoves for use in the household and SME sectors, introduction of 500 improved charcoal kilns, and support to interfuel substitution for traditional biomass in household and institutions (schools, clinics, etc.); (iii) demonstration projects to accelerate the sustainable market penetration of clean Renewable Energy Technologies (RETs) in agriculture, household, SME and for rural mobility, including deployment of 70 multifunctional platforms in rural villages; and (iv) capacity development and institutional strengthening of FUNAE. As applicable, implementation of individual RET projects under this component will be done by FUNAE, other government agencies and/or the private sector. This component will be implemented by FUNAE, in close coordination with the Ministry of Energy (ME) 19. For the purpose of the economic analysis of the Investments on Rural and Renewable Energy Component it was decided to limit the analysis to the solar PV activities. The reasons for that were: a. Improved stoves. The improved stoves activities of the project constitute a scaling-up of ongoing stove programs and their gender, health and energy savings justification has been already well established in other projects in Mozambique and in other parts of the developing world. Likewise, it has been clearly established that the dissemination of improved stoves in rural areas in not financially viable and can only be done on a heavily subsidized basis; 120 b. Improved charcoal kilns. The improved charcoal kiln activities of the project are modeled on earlier research programs of the Department of Forestry of the University Eduardo Mondlane. These activities will be implemented as contributions to rural communities with a view to promote an improved and sustainable management of the existing forest resources at the village level. This activity will lead to the development of a national strategy for improved and controlled charcoal production in the country. The cost of the improved kilns will be recovered by FUNAE in full through a repayment plan to be determined within the Project Implementation Manual (PIM). c. Multifunctional Platforms are not yet suited for a reliable economic analysis as it is extremely difficult to estimate with any certainty ex-ante the large suit of social and economic benefits of their deployment, other than in a very arbitrary way. Rather, the project will establish a comprehensive baseline of social and economic indicators for the multifunctional platforms so that their impacts and benefits can be closely monitored and documented; and, d. RET Demonstration Projects. The RET activities included in this sub- component represent filed-based research and demonstration projects with the objective of testing and designing field implementation models (institutional arrangements, field guides, economic and social indicators, M&O protocols, etc.) for these RETs for their subsequent deployment within the implementation of the forthcoming National "Rural Electrification Strategy and Investment Program (RESIP). Thus, undertaking an economic evaluation of these RET activities is not required. Table A.9.4: Key Economic Analysis Parameters and Criteria Criteria Explanation of Criteria Analysis Parameters Time horizon: 15 Years Discount rate: 12 Percent Project Costs Institutional PV Cost of PV systems in US $000 for Rural Schools. Rural School kits include: Systems Rural See Annex 4 for a description of the equipment in this solar PV kit. School Institutional PV Systems for Cost of Rural Clinics PV systems in US $000. Rural Clinic kits include: See Rural Clinics Annex 4 for a description of the equipment in this solar PV kit. Community PV System Cost of Community/District PV systems in US $000. Community/District kits description presented in Annex 4. 121 Support to Private Sector PV Private Sector PV systems. See Annex 4 for description of the equipment in Dissemination this solar PV kit. Other investment costs include: (i) TA, Training, logistics costs, etc; and (ii) Other Investment the replacement of batteries and Lamps after 5 years of use ($500,000 p/year Costs as of years # 6). Operation and Maintenance Costs Operation and Maintenance costs include all items required to sustain the (O&M) project investments. Project Benefits Rural School PV Benefit of Rural Schools PV systems in Units installed, KWh of electricity Systems service rendered and estimated monetary value of the service (US $000). Benefit of Rural Clinics PV systems in number of Units installed, KWh of Rural Clinic PV electricity service rendered and estimated monetary value of the service (US Systems $000). Benefit of Community/District PV systems in number of Units installed, Community/District KWh of electricity service rendered and estimated monetary value of the PV Systems service (US $000). Support to Private Sector Benefit of Private Sector PV systems in number of Units installed, KWh of Dissemination of electricity service rendered and estimated monetary value of the service (US PV Systems $000). Total PV Service Value of PV electricity service calculated at realistic estimated tariff for off- Installed (Kwh) grid rural electrification cost: US$ 0.21 p/KWh. 6-year stream of fees paid by beneficiaries to FUNAE as repayment for the Total "Other initial capital investments. Each type of beneficiary has a different fixed Benefits" (US $000) monthly fee. Value of PV electricity "benefit" calculated at same "service" value to provide Total PV Service a simplified monetized assessment of the benefit at opportunity cost of Value / alternative supply for that service: Calculated @ 80% load factor and US$ Total PV Benefits 0.21 p/KWh. These total figures also include the 6-year stream of fees paid ( US $000) by beneficiaries to FUNAE. 20. Table A.9.5 presents a summary of the economic analysis of the proposed FUNAE component of the EDAP (APL-2) Project. As per Table A.9.5, the economic analysis of the "Base Case" scenario concluded that the FUNAE component of the Project would have a Net Present Value (NPV) of US $1.75 million at a 12 percent discount rate, with an Economic Internal Rate of Return (EIRR) of 18 percent. 122 Table A.9.5 Mozambique Energy Development and Access Project (EDAP APL-2): ECONOMIC ANALYSIS / FUNAE Solar Component EDAP INVESTMENT C O S T S E D A P I N V E S T M E N T S B E N E F I TS Rural Schools Rural Clinics Commun. Support PS Other O&M TOTAL Rural Schools Rural Clinics Comm./District Support to Private Total PV Total PV Other Total PV NET BENEFIT (a) (b) (c) (d) (e) (f) (g) (i) (j) (k) (L) (m) PV Syst. PV Syst. PV Syst. PV Syst. Inv. Costs Costs Cost PV Systems PV Systems PV Systems PV Systems Service Service Benefits Benefits STREAM (h) (h) (h) (h) (h) YEAR (US $000) (US $000) (US $000) (US $000) (US $000) (US $000) (US $000) (#) (KWh) (US 000) (#) (KWh) (US 000) (#) (KWh) (US 000) (#) (KWh) (US 000) (kWh) (US $000) (US 000) (US $000) (US $000) 1 250.0 250.0 1,170.0 100.0 0.3 0.3 1,770.5 25 72,250 15.1 50 657,000 32.2 3 65,174 0.9 300 584,730 44.2 1,103,324 232 92.4 324 -1,446 2 100.0 750.0 1,170.0 200.0 0.3 0.4 2,220.7 65 187,850 39.3 65 854,100 41.9 8 173,798 2.4 800 1,559,280 117.9 2,220,023 466 201.4 668 -1,553 3 1,500.0 1,000.0 1,170.0 300.0 0.2 0.5 3,970.7 115 332,350 69.5 115 1,511,100 74.1 15 325,872 4.5 1,500 2,923,650 221.1 4,074,378 856 369.1 1,225 -2,746 4 1,000.0 1,000.0 - 400.0 0.3 0.6 2,400.9 175 505,750 105.8 175 2,299,500 112.7 20 434,496 5.9 2,400 4,677,840 353.7 6,334,069 1,330 578.2 1,908 -493 5 500.0 500.0 - 500.0 0.3 0.8 1,501.1 250 722,500 151.2 250 3,285,000 161.1 30 651,744 8.9 3,750 7,309,125 552.6 9,574,695 2,011 873.7 2,884 1,383 6 350.0 0.8 350.8 250 722,500 151.2 250 3,285,000 161.1 30 651,744 8.9 3,750 7,309,125 552.6 9,574,695 2,011 873.7 2,884 2,534 7 350.0 0.8 350.8 250 722,500 250 3,285,000 30 651,744 3,750 7,309,125 9,574,695 2,011 2,011 1,660 8 350.0 0.9 350.9 250 722,500 250 3,285,000 30 651,744 3,750 7,309,125 9,574,695 2,011 2,011 1,660 9 350.0 0.9 350.9 250 722,500 250 3,285,000 30 651,744 3,750 7,309,125 9,574,695 2,011 2,011 1,660 10 350.0 1.0 351.0 250 722,500 250 3,285,000 30 651,744 3,750 7,309,125 9,574,695 2,011 2,011 1,660 11 350.0 1.0 351.0 250 722,500 250 3,285,000 30 651,744 3,750 7,309,125 9,574,695 2,011 2,011 1,660 12 350.0 1.1 351.1 250 722,500 250 3,285,000 30 651,744 3,750 7,309,125 9,574,695 2,011 2,011 1,660 13 350.0 1.1 351.1 250 722,500 250 3,285,000 30 651,744 3,750 7,309,125 9,574,695 2,011 2,011 1,660 14 350.0 1.2 351.2 250 722,500 250 3,285,000 30 651,744 3,750 7,309,125 9,574,695 2,011 2,011 1,660 15 350.0 1.2 351.2 250 722,500 250 3,285,000 30 651,744 3,750 7,309,125 9,574,695 2,011 2,011 1,659 TOTALS 3,350.0 3,500.0 3,510.0 1,500.0 3,501.5 12.4 15,373.9 9,045,700 532 41,456,700 583 8,168,525 31 90,145,875 1,842 119,053,440 25,001 2,989 27,990 12,616 Notes: (a) Cost of Rural Schools PV systems in US $000. Rural School kits include: See Annex 4 for a description of the equipment in this solar PV kit. Total Investment = 15,374 (b) Cost of Rural Clinics PV systems in US $000. Rural Clinic kits include: See Annex 4 for a description of the equipment in this solar PV kit. 12% NPV = 1,752 (c) Cost of Community/District PV systems in US $000. Community/Disctrict kits include: See Annex 4 for a description of the equipment in this solar PV kit. EIRR = 18% (d) Private Sector PV systems include: See Annex 4 for a description of the equipment in this solar PV kit. (e) Other investment costs include: (i) TA, Training, logistics costs, etc; and (ii) the replacement of batteries and Lamps after 5 years of use ($500,000 p/year as of years # 6). (f) Operation and Maintenance costs include all items required to sustain the project investments. (g) Benefit of Rural Schools PV systems in number of Units installed, KWh of electricity service rendered, and 6-year stream of repayments by beneficiaries to FUNAE for capital investments. (h) Repayment stream for 6 years from beneficiaries to FUNAE for capital investments (each beneficiaries has a different repayment fee). (i) Benefit of Rural Clinics PV systems in number of Units installed, KWh of electricity service rendered, and 6-year stream of repayments by beneficiaries to FUNAE for capital investments. (j) Benefit of Community/District PV systems in number of Units installed, KWh of electricity service rendered, and 6-year stream of repayments by beneficiaries to FUNAE for capital investments. (k) Benefit of Private Sector PV systems in number of units installed and KWh of electricity service rendered. (L) Value of PV electricity service calculated at realistic estimated tariff for off-grid rural electrification cost: US$ 0.21 p/KWh. (m) Value of PV electricity "benefit" calculated at same "service" value to provide a simplified monetized assessment of the benefit at opportunity cost of alternative supply for that service: Calculated @ 80% load factor and US$ 0.21 p/KWh. Figures also includes the 6-year repayment stream for the capital investment. 123 21. Figures A.9.4, A.9.5, and A.9.6, respectively, present the breakdown of costs, the stream of project benefits, and the stream of net benefits for the proposed FUNAE component. Figure A.9.4 EDAP - FUNAE: Cost-Benefit Analysis of Solar PV Investments 5,000.0 4,000.0 3,000.0 US $000 2,000.0 Costs 1,000.0 Benefits - -1,000.0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Net Benefits -2,000.0 -3,000.0 -4,000.0 Years Figure A.9.5 EDAP - FUNAE: Breakdown of Solar PV Costs 3,000.0 US $000 2,500.0 O&M 2,000.0 Other Costs 1,500.0 Priv.Sec. PV 1,000.0 Commun. PV 500.0 Institut. PV - 1 3 5 7 9 11 13 15 Years 124 Figure A.9.6 EDAP - FUNAE: Distribution of Solar PV Benefits 3,500.0 3,000.0 2,500.0 US $000 2,000.0 Private Sect. 1,500.0 Commun. 1,000.0 Clinics 500.0 School - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Years 22. Table A.9.6 presents a summary of the parametric analysis of the FUNAE component of the EDAP (APL-2) Project. Table A.9.6: EDAP (APL-2) ­ FUNAE Component / Summary of Economic Analysis Results BASE LOWER HIGHER L-Benef & H-Cost COSTS Tarriff Incre. @12% SCENARIO Benefit 20% Costs 20% 20% / 20% NPV = 0 NPV = 0 INVST= 15,373.9 15,373.9 18,448.6 18,448.6 18,155.9 15,373.9 NPV = 1,751.8 (534.6) (184.3) (2,470.6) 0 0 EIRR = 18% 10% 11% 5% 12% 12% 18.10% 18.21% 23. As shown in Table A.9.6, above, in addition to the "Base Case" scenario of the FUNAE component the following five parametric/sensitivity scenarios were evaluated: a. A reduction of 20 percent in the value of the stream of project benefits: under this scenario the component would have Net Present Value (NPV) of US -$.053 million and an EIRR of 10 percent. b. A 20 percent increase in all project costs: under this scenario the project would have Net Present Value (NPV) of US -$0.18 million and an EIRR of 11 percent. c. A combined reduction of 20 percent in the value of the stream of project benefits and a 20 percent increase in all project costs: under this scenario 125 the proposed project would have Net Present Value (NPV) of US -$2.47 million and an EIRR of 5 percent. d. Switching values A: At a discount rate of 12 percent the project's NPV would become negative if the project's investment costs were to increase by more than 18.1 percent. e. Switching values B: At a discount rate of 12 percent the project's NPV would become negative if the electricity tariff assumed as the proxy for the value of benefit stream were to decrease by more than 18.2 percent. 24. The results of the parametric and sensitivity analysis of the FUNAE component of the EDAP (APL-2) Project indicate that this component is very vulnerable to variations in its key economic/financial parameters. That, however, did not come as a surprise as it is well established that rural electrification in developing country contexts is not yet a fully commercially viable endeavor and that therefore it still requires some level of subsidized support for it to work. Financial Analysis 25. The largest project component, "Reinforcement of the Primary Networks and Grid Extension" includes sub-components of activities and investments that will be implemented by EdM. The component includes engineering services for EdM's investment program, a medium voltage network transmission efficiency pilot project, rehabilitation and reinforcement of the existing primary networks, and extension and intensification of the medium and low voltage grid in peri-urban areas in Nampula and Tete provinces, among other investments. This is the only component that would involve a loan on-lent to the implementing entity. Therefore the financial analysis focuses on the historical financial performance and future financial viability of EdM's operations to assess the financial impact of EDAP investments on EdM's financials. Historical Financial Performance of EdM 26. According to its audited financial statements, EdM's total operating revenues in FY08 were Mt 4.6 billion (about US$188 million) and the operating expenses were Mt 4.4 billion (about US$184 million), making an operating profit of Mt 158 billion (about US$4 million). This operating margin has been very low or negative during the last four years (- 2.8% in 2006, 1.6% in 2007, -1% in 2008 and 2009) due primarily to lack of tariff adjustments and increase in operating expenses. 27. Slow Increase in Revenues: EdM has increased its total electricity revenues, including the wheeling revenues steadily over the past four years, at an annual growth rate ranging between 17-22%. The revenue increase is mainly attributed to the high growth of energy sent out in Mozambique, averaging 11% over the last three years and 7% in 2009. This is to reach Mozambique's peak demand of more than 416MW in 2008 126 and 440MW in July 2009. Mozambique has sent out 3,032 GWh of energy, including 670GWh of exports in 2008. Forecast for 2009 is 2,948 GWh, including 421 GWh exports which has declined. The number of customers has increased to about 615,000 in December 2008 (393,000 on prepayment meters) through accelerated customer connection program which has connected 85,000 in 2006, 95,000 in 2007, 105,000 in 2008, and forecasted 110,000 new customers in 2009 including the connections made under ERAP. However, this program places burden on EdM because many of the connections are not commercially viable. 28. EdM's revenues would have been enhanced if there had been periodic tariff revisions at least at the rate of cost increases. However, there has been no tariff revision since the last adjustment that took place in May 2007 at an average increase of 6.3%. Weighted average retail tariff in 2008 reached long run marginal cost (LRMC) level of 9.1 USc/kWh (LRMC study in 2001), however, it has now dropped to 8.1 USc/KWh due to depreciation of Metical. EdM's bill collection rate is at a very high level of 98%. Overall, 72% of the energy sent out in Mozambique is collected. 29. Increase in Operating Expenses: EdM's total operating expenses, on the other hand, have also increased at an annual growth rate of 16-22% over the past four years. Apart from depreciation, the largest cost is the payroll, which corresponds to about 26- 27% of the total operating expense, followed by power purchase (16-19%), administration & overheads (16-19%), and repair & maintenance (7-13%). Payroll costs have gone up by over 20% due to the increase in the number of employees to serve the increasing number of retail customers. Introduction of the EdM's 4% share of the social security contribution in 2007 has also contributed to this increase in payroll costs although EdM has limited its salary increase to 1% in 2008, furthermore, in 2009 certain employee benefits were incorporated into the salaries. While the payroll and overheads costs remain a large share of the total expenses, the average number of customer/employee has gone up from 98 in 2005 to 164 in 2008, making EdM operation more efficient. The overall transmission and distribution losses remained high at around 27% in 2008. The power purchase costs have gone up by 26% annual average in 2006/09 due to; (i) HCB tariffs in South Africa is up at a 22% annual average in 2006/09; (ii) Eskom wheeling charges above 200MW supply are volume related (fixed monthly charge for supply up to 200MW) and indexed to SAPPI. Repairs & maintenance costs have gone up by over 37% due to increased network maintenance and higher material prices. Overheads have gone up by over 7% due to growth in underlying business, increased security protection of property and increases in fuel prices and insurance premiums. 127 Collected Revenues vs. Revenue Requirements in US$ Average Mozambique Collected Revenue & Revenue millions Requirements in US$/kWh 250 200 0.11 150 100 0.09 50 0 0.07 (50) 2006 2007 2008 0.05 Operating costs excl depreciation & other provisions 06 07 08 Investments funded from own resources Debt service requirements Average collected revenue (Mozambique) Revenue surplus/(shortfall) Collected electricity & other revenues Average revenue requirement (net of export revenues) 30. Marginal Net Income and Negative Cash Flows: After the non-operating income and net financial charges, EdM shows a net profit of Mt 28 million (about $1 million) in 2008, an improvement from a net loss of $3-7 million experienced in the past four years. Nevertheless, EdM is still unable to meet all its operating expenses and debt service obligations from its revenues. Despite the marginal level of net income, the cash flow statements show that EdM has had a positive net cash position over the past four years. While EdM is unable to pay for its power purchase costs, other operating expenses, and debt service obligations from its revenues, it has made some capital investments in 2006/09 using its own resources, representing 26% of all investments and 17% of electricity revenues. While EdM has also shown an acceptable debt service coverage ratio of 1.4-1.7 over the past three years, an improvement from 0.84 in 2004, its contributions made to the capital investments have placed heavy financial burdens on EdM. EdM has had an annual debt service requirement that averaged US$25 million in 2006/09 and was obliged to obtain US$ 6.2 million in local financing to meet shortfalls in Electricity III project, and further US$ 10 milion for suppliers of materials. 31. Current and Liquidity Ratios: EdM's balance sheet shows that the current ratio ranges between 0.8 and 1.1 over the past three years, indicating that the short term assets can more or less cover the short term liability of the company. This ratio which had fallen in 2007 partly due to unpaid debt service on GOM on-lent loans and short-term local bank loans, has improved from 0.8 times in 2007 to 1.0 times in 2008. EdM's liquidity has been negatively affected by the issues related to withholding tax on rural electrification projects, and VAT on donor funded rural electrification projects that are currently putting a burden on EdM. 32. Debt to Equity Ratio: EdM's debt to equity ratio has gone down from the level of 70% in 2005 to around 54% in 2008 due primarily to the following debt restructuring that took place in 2006; (i) debt to equity coversion of grant funded on-lent loans of MT2,571 million (about $99 million); (ii) foregin exchange loans of MT1,493 million (about US$58 million) relating to rural projects at a fixed exchange rate with no risks to EdM; and (iii) conversion of overdue debt service of MT 1,205 million (about US$ 47 million) into long-term loan denominated in foreign currency, repayments to start from 2010. EdM has been taking on loans from local banks, at the level of $10 million on average 128 during the past years, and has been meeting all of its debt service obligations in respect of direct loans (including local), amounting to US$ 11.7 million in 2009. Following debt restructuring, EdM has accumulated MT 979 million (about US$ 36 million) during 2006/09 in unpaid debt service obligations to Government. EdM's does not seem to be in a position to clear this debt any time soon unless further debt restructuring is carried out. 33. The key performance indicators of EdM are summarized in the table below. Performance 2006 2007 2008 2009 Targets Actual Actual Actual Forecast Peak demand Mozambique (MW) 320 364 416 445 Energy sent out (GWh) Mozambique 1,883 2,099 2,362 2,528 Exports 498 523 670 421 Growth in sent out (Mozambique) 8.6% 11.4% 12.5% 7.0% Overall T&D losses (Mozambique) 27.0% 28.2% 26.6% 26.6% Electricty sales (GWh) Mozambique 1,323 1,462 1,690 1,809 Exports 498 523 670 421 No. of new customer connection (000's) 85 95 105 110 Av. no. of customers (000's) 377 463 563 670 Av. No. of customers per employee 117 141 164 187 Av. electricty revenue (Mozambique) MT/kWh 2,084 2,281 2,205 2,205 USc/kWh 8.3 8.9 9.1 8.4 Av. operating expenses (USc/kWh) 7.1 7.4 7.8 8.4 Av. operating profit/(loss) (USc/kWh) (0.2) 0.1 0.2 (0.3) Operating margin (%) -2.8% 1.6% 2.0% -4.0% Return on equity (%) -3.4% -0.7% -0.6% -4.0% Billing collection (Mozambique) Av. collection period (days) 45 days 48 45 35 35 Av. billing collection rate (%) 98.0% 98.5% 98.3% 101.3% 98.0% Energy collected/energy sent out (Moz) 72% 71% 74% 72% Self-financing ratio (%) 20.0% 39% 39% 21% 1% Debt service cover (times) 1.1 1.5 1.7 1.7 1.4 Current ratio (times) 1.1 1.1 0.8 1.0 1.6 Debt/equity ratio (%) Excluding short-term debt <70% 46% 49% 51% 57% Including short-term debt <70% 50% 52% 54% 58% 129 Financial Impact of EDAP II on EdM 34. EdM's financial model was reviewed to analyze the impact of the investments made under the proposed EDAP. According to the base case scenario with the current tariff level and unchanged cost structures, EdM would not be financially sustainable by failing to maintain a positive operating income or cash flows due primarily to the following reasons: · EdM's power purchase costs per kWh will increase over the coming years as more expensive power is procured to meet growing demand; · Investment requirements (excluding mega projects) are forecast at US$ 1.3 billion (2009-18), including EDAP US$ 153 million; and, · Debt servicing of existing and new debt is projected to grow from US$ 25 million in 2007 to US$ 110 million by 2018. 35. The above projection, however, does not mean that it is the EDAP project that is affecting EdM's performance. EdM would have faced a difficult financial situation regardless of the investments funded under EDAP as the causes of its problems are unrelated to the project. EdM faces a challenge over the coming years as its costs are growing at a faster pace than its revenues. 36. The following assumptions have been made for the base case: 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Mozambique inflation 3.5% 9.5% 5.8% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% South African PPI 15.0% 8.5% 7.2% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% US CPI 2.7% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Average exchange rate (MT/US$) 26.3 28.2 29.6 30.6 31.6 32.7 33.8 35.0 36.2 37.4 % T&D losses (Mozambique) 26.6% 26.1% 25.6% 24.7% 24.0% 23.4% 22.5% 21.4% 20.5% 20.0% Load growth (Mozambique) 7.0% 10.0% 10.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% Customer connections, including ERAP ('000) 110 134 90 137 137 90 90 90 90 90 Export tariff (non-firm power) (US$/kWh) 0.037 0.040 0.043 0.046 0.048 0.049 0.050 0.051 0.053 0.054 Power purchase tariffs: HCB (ZARc/kWh), for supply up to 400MW 10.7 12.3 13.3 14.3 15.0 15.8 16.6 17.4 18.3 19.2 Eskom Stand-by charge (ZAR/kW max demand of the South) 4.01 4.61 5.01 5.37 5.64 5.92 6.21 6.52 6.85 7.19 Eskom wheeling charges For supply up to 200MW (US$'000/month) 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 For supply above 200MW (ZARc/kWh) 0.57 0.66 0.71 0.76 0.80 0.84 0.88 0.93 0.97 1.02 Motraco wheeling charges (US$/max demand of the South) 675 693 710 728 746 765 784 804 824 844 Motraco monthly fixed charges (US$ millions) 0.23 0.15 0.16 0.16 0.16 0.17 0.17 0.18 0.18 0.19 Increase in employees (1.1 new employee/1,000 new customers) 114 147 99 151 151 99 99 99 99 99 Billing collection rate (Mozambique) 98% 98% 98% 98% 98% 98% 98% 98% 98% 98% Customer accounts receivable (days) 35 35 35 35 35 35 35 35 35 35 130 estm Inv ent PlaninU m S$ illions 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009-18 2009-18 estm Inv ents: Generation 7 18 26 18 3 0 0 0 0 0 71 5% Transm ission 1 19 39 82 79 97 76 42 14 5 455 35% Distribution 110 117 98 92 111 98 33 23 26 28 735 56% Support investm ents 3 4 5 3 3 3 6 7 4 4 41 3% Total 121 158 167 196 197 199 114 71 43 36 1,303 100% Finanacing p lan: w O n resources 26 26 26 27 27 28 29 29 30 31 279 21% Borrow ing 70 112 130 167 165 163 80 38 12 4 942 72% Grants 26 20 11 2 4 9 5 4 1 1 82 6% Total 121 158 167 196 197 199 114 71 43 36 1,303 100% 37. Ensuring EdM's Financial Sustainability: In order to ensure EdM's financial sustainability, there are some key actions that need to be taken by EdM and GOM. They include; (i) initiation of Government's contribution to the non-financially viable operations of EdM such as the customer connection program in rural areas, and street lighting; (ii) efficiency improvements of EdM operations; and (iii) periodic tariff revisions according to the rise in revenue requirements. In addition, further debt restructuring of EdM in a form of debt to equity conversion of the existing long term debt on-lent by the Government would help improve the future financial viability of EdM. (i) GoM Contribution to Non-Financially Viable Operations: 38. As mentioned above, the accelerated program of customer connections places heavy financial burdens on EdM due to the fact that a sizable proportion of such connections (mostly customers with low consumption) are commercially not viable. EdM has therefore made a request to GoM for a 25% contribution of the capital costs of such connections. Such contributions may be off-set against EdM's debt service obligations to GoM. Another non-viable business is street lighting, as EdM is currently not able to charge the municipalities for lighting the public streets and therefore there are no revenues to recover their costs from. 39. The projected costs and the proposed GoM contributions each year are for the customer connection program, and are summarized in the following table. If the street lighting is included, there will be an additional annual funding requirement of about $2.5- 3 million payable by GoM. 131 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009-18 Total number of new customer connections 90,000 90,000 90,000 90,000 90,000 90,000 90,000 90,000 90,000 90,000 900,000 Average cost per connection (escalated at 2.5% annually) 461 472 484 496 508 521 534 547 561 575 Total capital cost of new connections (US$ millions) 41.5 42.5 43.5 44.6 45.8 46.9 48.1 49.3 50.5 51.8 464 Government contribution - % share 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% Government contribution - US$ millions Due in year 10.4 10.6 10.9 11.2 11.4 11.7 12.0 12.3 12.6 12.9 116.1 Total Govt contribution for off-set against debt service 10.4 10.6 10.9 11.2 11.4 11.7 12.0 12.3 12.6 12.9 116.1 (ii) Efficiency Improvements of EdM Operations 40. If the projected reductions in network losses (17% by 2018) are achieved, it will enhance cash flows by US$ 132 million over the next ten years. Administration and overhead costs in 2009 are to be maintained at 2008 levels as per management directive. If achieved, this action will save US$ 43 million for EdM up to 2018. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009-18 1. Network losses Net cash flows: Based on projected losses (6) (0) 10 7 12 21 6 12 16 17 96 Based on 2008 losses (6) (1) 7 3 5 10 (11) (11) (14) (18) (36) Efficiency Gains (US$ millions) 0 1 2 4 8 11 17 23 30 35 132 2. Administration & overhead costs Net cash flows: With reductions of 4% in 2009 and no change in 2010 24 23 23 28 29 30 30 31 32 33 283 With inflationary increases in 2009/10 26 27 27 33 33 34 35 36 37 38 326 Efficiency Gains (US$ millions) 2 4 4 4 4 5 5 5 5 5 43 (iii) Periodic Tariff Revisions According to the Cost Increase 41. An analysis has been carried out to assess the impact of the various tariff levels on EdM. Option 1 assumes the same tariff level of US$0.091/kWh in nominal prices at LRMC according to the tariff study carried out in 2001. This Option is clearly unsustainable as it will significantly grow EdM's deficit over the years. 42. Option 2 assumes LRMC tariff indexed to US CPI from 2010, increasing the tariff gradually to US$0.114/kWh in 2018. This Option could be politically difficult to implement as it will require a large increase at 19% in 2010. 43. Option 3 assumes tariff indexation plus real increases from 2010, to US$0.125/kWh in 2018. This Options does not require any abnormally large tariff increases as it suggests the tariff adjustments according to the revenue requirements. Over the ten years, Options 2 and 3 will require similar increases of between 8 and 19% in real terms and around 112% in nominal terms. 132 44. The tables below summarize the financial impact of the above three Tariff Options: Option 1 - M C aintain tariff at LRM (2001 study) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009-18 Weighted average retail tariffs in US$/kWh US$/kWh in nominal prices 0.084 0.091 0.091 0.091 0.091 0.091 0.091 0.091 0.091 0.091 US$/kWh in 2009 prices 0.084 0.089 0.087 0.085 0.082 0.080 0.078 0.077 0.075 0.073 Profit/(loss) after taxation (12) 8 (0) (32) (55) (58) (76) (90) (100) (114) Net cash inflow/(outflow) (US$ million) (6) 3 10 (13) (36) (25) (58) (74) (84) (103) Real tariff increase/(decrease) 0% 6% -2% -2% -2% -2% -2% -2% -2% -2% -13% Nominal tariff increase 0% 16% 5% 3% 3% 3% 3% 3% 3% 3% 54% C Option 2 - LRM tariff indexed to US CPI, from2010 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009-18 Weighted average retail tariffs in US$/kWh US$/kWh in nominal prices 0.084 0.093 0.096 0.098 0.100 0.103 0.106 0.108 0.111 0.114 US$/kWh in 2009 prices 0.084 0.091 0.091 0.091 0.091 0.091 0.091 0.091 0.091 0.091 Profit/(loss) after taxation (12) 13 7 (15) (30) (24) (31) (33) (27) (23) Net cash inflow/(outflow) (US$ million) (6) 7 19 (0) (12) 8 (14) (17) (12) (13) Real tariff increase/(decrease) 0% 8% 0% 0% 0% 0% 0% 0% 0% 0% 8% Nominal tariff increase 0% 19% 8% 6% 6% 6% 6% 6% 6% 6% 93% Option 3 (Base Case) - Tariff indexation , plus real increases as below from2010 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009-18 Weighted average retail tariffs in US$/kWh inal US$/kWh in nom prices 0.084 0.089 0.093 0.104 0.110 0.113 0.118 0.121 0.122 0.125 US$/kWh in 2009 prices 0.084 0.086 0.088 0.096 0.100 0.100 0.102 0.102 0.100 0.100 Profit/(loss) after taxation (12) 4 3 (2) (5) 5 8 8 9 15 Net cash inflow/(outflow) (US$ m illion) (6) (2) 12 14 13 36 25 26 26 27 Real tariff increase/(decrease) 0% 3% 2% 9% 4% 0% 2% 0% -2% 0% 19% inal Nom tariff increase 0% 13% 10% 15% 10% 6% 8% 6% 4% 6% 112% 45. Results: This analysis demonstrates that electricity tariffs will need to be increased under any Option over the coming years for EdM to meet its financial needs, and preferably, at the rate in accordance with the revenue requirements. 46. Under the tariff adjustments for Option 3, along with the Government's 25% contribution to the customer connections and EdM's efficiency improvements, EdM would be in a position to meet all of its obligations through its cash flows from operations, as shown in the tables below. 133 47. Operational Indicators under Option 3 Performance 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Peak demand Mozambique (MW) Targets 445 489 538 581 628 678 732 791 854 922 Energy sent out (GWh) Mozambique 2,528 2,780 3,058 3,303 3,567 3,853 4,161 4,494 4,853 5,241 Exports 421 418 459 496 536 579 625 675 729 787 Growth in sent out (Mozambique) 7.0% 10.0% 10.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% Overall T&D losses (Mozambique) 26.6% 26.1% 25.6% 24.7% 24.0% 23.4% 22.5% 21.4% 20.5% 20.0% Electricty sales (GWh) Mozambique 1,809 2,003 2,217 2,426 2,643 2,881 3,149 3,448 3,767 4,097 Exports 421 418 459 496 536 579 625 675 729 787 No. of new customer connection (000's) 110 134 90 137 137 90 90 90 90 90 Av. no. of customers (000's) 670 791 903 1,017 1,154 1,267 1,357 1,447 1,537 1,627 Av. No. of customers per employee 187 213 235 256 280 299 313 326 339 351 Av. electricty revenue (Mozambique) MT/kWh 2,205 2,500 2,744 3,167 3,491 3,701 4,001 4,241 4,406 4,670 USc/kWh 8.4 8.9 9.3 10.4 11.0 11.3 11.8 12.1 12.2 12.5 Av. operating expenses (USc/kWh) 8.4 8.2 8.4 9.6 10.2 9.9 10.3 10.4 10.5 10.7 Av. operating profit/(loss) (USc/kWh) (0.3) 0.4 0.4 0.3 0.2 0.6 0.8 1.0 0.9 1.0 Operating margin (%) -4.0% 4.5% 4.9% 2.8% 2.3% 5.8% 7.4% 8.6% 8.0% 8.8% Return on equity (%) -4.0% 1.2% 1.0% -0.6% -1.5% 1.4% 2.3% 2.1% 2.5% 3.8% Billing collection (Mozambique) Av. collection period (days) 45 days 35 35 35 35 35 35 35 35 35 35 Av. billing collection rate (%) 98.0% 98.0% 98.0% 98.0% 98.0% 98.0% 98.0% 98.0% 98.0% 98.0% 98.0% Energy collected/energy sent out (Moz) 72% 72% 73% 74% 74% 75% 76% 77% 78% 78% Self-financing ratio (%) 20% 1% 13% 18% 16% 14% 30% 29% 48% 81% 100% Debt service cover (times) 1.1 1.4 1.5 1.8 1.6 1.5 1.9 1.5 1.3 1.3 1.3 Current ratio (times) 1.1 1.6 1.6 2.0 2.1 2.3 2.8 3.1 3.1 3.2 3.2 Debt/equity ratio (%) Excluding short-term debt <70% 57% 61% 65% 70% 73% 76% 76% 75% 74% 72% Including short-term debt 58% 62% 66% 70% 74% 76% 76% 76% 74% 73% 134 Demand and Supply 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Peak demand (Mozambique) (MW ) 445 489 538 581 628 678 732 791 854 922 Energy s ent out (GW h) Own generation 385 397 243 374 374 756 756 875 875 875 Total IPP's (balance of requirements) 2,540 2,760 3,229 3,384 3,684 3,626 3,976 4,236 4,645 5,086 Imports from Es kom (0.5% of total req) 15 32 35 30 33 35 38 41 45 48 Imports for border villages 8 9 10 11 12 14 15 16 18 20 Total energy s ent out (GW h) 2,948 3,198 3,518 3,799 4,103 4,431 4,786 5,169 5,582 6,029 Mozambique 2,528 2,780 3,058 3,303 3,567 3,853 4,161 4,494 4,853 5,241 Non-firm power 421 418 459 496 536 579 625 675 729 787 Firm power 0 0 0 0 0 0 0 0 0 0 Growth in energy sent out (Mozambique) 7.0% 10.0% 10.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% MW s upply from IPP's 372 412 487 508 554 536 590 627 689 756 Trans mis s ion loss es 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Bulk s upply to dis tribution (GW h) 2,352 2,588 2,847 3,094 3,340 3,606 3,892 4,210 4,545 4,906 Distribution los s es 21.1% 20.6% 20.1% 19.6% 18.9% 18.1% 17.1% 16.1% 15.1% 14.5% Overall T&D los s es : Mozambique 26.6% 26.1% 25.6% 24.7% 24.0% 23.4% 22.5% 21.4% 20.5% 20.0% Mozambique + Exports 22.8% 22.7% 22.3% 21.5% 20.9% 20.3% 19.5% 18.6% 17.8% 17.4% "Free" Electricity (GW h) Public lighting 41 45 49 53 58 62 67 73 78 85 EdM cons umption 6 7 8 8 9 10 10 11 12 13 Total free electricity (GW h) 47 52 57 62 66 72 77 84 90 98 Energy s ales (GW h) Total Mozambique 1,809 2,003 2,217 2,426 2,643 2,881 3,149 3,448 3,767 4,097 Exports 421 418 459 496 536 579 625 675 729 787 Total energy s ales (GW h) 2,229 2,420 2,677 2,922 3,179 3,459 3,774 4,123 4,496 4,884 % growth in s ales : Mozambique 7.0% 10.7% 10.7% 9.4% 9.0% 9.0% 9.3% 9.5% 9.3% 8.7% Exports -37.2% -0.7% 10.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% Overall -5.5% 8.6% 10.6% 9.2% 8.8% 8.8% 9.1% 9.3% 9.1% 8.6% 48. The following tables forecast EdM's key financial indicators and the three financial statements31 through 2018 under Options 3. ey K Perform Indicators ance 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Covenant Audited Audited Audited Forecast Current ratio (times) 1.1 0.8 1.0 1.6 1.6 2.0 2.1 2.3 2.8 3.1 3.1 3.2 3.2 >1.1 Debt/equity ratio 46% 49% 51% 57% 61% 65% 70% 73% 76% 76% 75% 74% 72% Self-financing ratio (%) 39% 39% 21% 1% 13% 18% 16% 14% 30% 29% 48% 81% 100% ebt D service cover (tim es) 1.50 1.74 1.69 1.38 1.47 1.85 1.56 1.51 1.94 1.52 1.32 1.32 1.28 >1.1 31 2008 figures in the financial statements are slightly different from the audited financial statements because the extraordinary items are excluded. 135 Income Statements in nominal US$ millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Audited Audited Aud ited Forecas t Electricity sales (GWh): Mozambique 1 323 1 462 1 690 1 809 2 003 2 217 2 426 2 643 2 881 3 149 3 448 3 767 4 097 Exp orts 498 523 670 421 418 459 496 536 579 625 675 729 787 Total 1 822 1 984 2 360 2 229 2 420 2 677 2 922 3 179 3 459 3 774 4 123 4 496 4 884 Average electricity reven ue (MT/kWh): Mozambique 2 084 2 281 2 205 2 205 2 500 2 744 3 167 3 491 3 701 4 001 4 241 4 406 4 670 Exp orts 374 443 730 980 1 133 1 279 1 423 1 508 1 598 1 694 1 796 1 904 2 018 Overall 1 616 1 797 1 786 1 973 2 264 2 492 2 871 3 157 3 349 3 619 3 841 4 000 4 243 Average electricity reven ue (US$/kWh): Mozambique 0.083 0.089 0.091 0.084 0.089 0.093 0.104 0.110 0.113 0.118 0.121 0.122 0.125 Exp orts 0.015 0.017 0.030 0.037 0.040 0.043 0.046 0.048 0.049 0.050 0.051 0.053 0.054 Overall 0.065 0.070 0.074 0.075 0.080 0.084 0.094 0.100 0.102 0.107 0.110 0.111 0.113 Operating reven ue Electricity revenue: Mozambique 110.4 130.4 154.1 151.8 177.5 205.4 251.1 291.7 325.8 372.3 417.9 458.7 511.3 Exports 7.5 9.1 20.2 15.7 16.8 19.9 23.1 25.5 2 8.3 31.3 34.7 38.4 42.5 Total electricity revenue 117.9 139.4 174.4 167.5 194.2 225.3 274.2 317.2 354.1 403.6 452.6 497.0 553.7 Wheeling revenu e 4.8 5.1 5.3 4.8 4.8 4.8 4.8 4.8 4.8 11.4 11.4 11.4 11.5 Other operating revenue 3.1 5.3 8.0 7.0 8.6 5.9 9.1 9.4 6.3 6.5 6.6 6.8 7.0 Total operating revenu e 125.8 149.8 187.7 179.2 207.6 235.9 288.1 331.4 365.2 421.5 470.6 515.3 572.1 Operating expenses Power purchase 22.6 28.4 35.1 40.0 55.1 71.6 85.1 111.6 113.2 143.0 161.2 195.5 233.8 Generation fuel & lubricants 2.4 2.3 1.7 0.7 0.7 0.7 20.9 21.5 2 2.2 22.8 32.7 33.5 34.3 Payroll 33.7 38.3 49.0 55.7 55.9 57.6 61.0 64.4 6 7.4 70.4 73.5 76.8 80.1 Rep airs & maintenance 10.7 16.6 24.7 21.2 20.0 19.7 24.1 27.1 3 1.6 34.7 37.1 37.6 38.5 Administration & overhead s 22.7 24.7 29.4 24.3 22.7 22.8 28.2 28.9 2 9.7 30.4 31.2 31.9 32.7 Operating expenses b efore depreciation & provis ions 92.1 110.4 139.8 141.9 154.3 172.4 219.4 253.6 264.0 301.3 335.7 375.3 419.5 Depreciation 32.3 35.8 43.9 41.0 39.9 47.4 55.0 63.6 7 2.7 80.6 85.2 88.3 90.7 Provisions for bad debts, stock obsolescence & against investments 4.9 1.3 0.4 3.4 4.0 4.6 5.6 6.5 7.3 8.3 9.3 10.3 11.4 Total operating expenses 129.3 147.5 184.0 186.4 198.2 224.4 280.0 323.6 344.0 390.3 430.3 473.9 521.6 Operating profit/(loss) (3.5) 2.4 3.7 (7.2) 9.4 11.5 8.1 7.7 2 1.1 31.2 40.3 41.4 50.5 Non-operatin g incom e - net 3.5 4.3 3.8 5.0 4.4 4.4 4.5 4.6 4.7 4.8 5.0 5.1 5.2 Net finance charges Net interest payable/(receivab le) 5.9 7.6 9.4 9.6 10.1 12.6 14.7 17.2 2 1.3 27.7 33.9 33.0 34.3 Exchange (gains)/losses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net finance charges 5.9 7.6 9.4 9.6 10.1 12.6 14.7 17.2 2 1.3 27.7 33.9 33.0 34.3 Profit/(loss) before taxation (5.9) (0.9) (1.9) (11.8) 3.7 3.2 (2.1 ) (4.9) 4.5 8.3 11.4 13.4 21.4 Taxation 0.6 0.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.4 3.6 4.3 6.9 Profit/(loss) after taxation (6.5) (1.8) (1.9) (11.8) 3.7 3.2 (2.1 ) (4.9) 4.5 7.9 7.7 9.1 14.6 Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Profit/(loss) transferred to reserves (6.5) (1.8) (1.9) (11.8) 3.7 3.2 (2.1 ) (4.9) 4.5 7.9 7.7 9.1 14.6 136 Bala nce Sheets in nominal US$ millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Audited Audited Audited Forecast Fix ed & Other Long-Term Assets Tangible assets at cost/valuation 564 724 791 873 993 1 145 1 325 1 508 1 695 1 792 1 839 1 857 1 861 Less: Accumulated depreciation 170 224 252 273 294 331 375 425 482 546 611 678 745 Net book value of fixed ass ets 393 500 539 600 699 813 950 1 083 1 212 1 246 1 228 1 179 1 117 Project funds 40 53 57 55 55 55 55 55 55 55 55 55 55 Investments 8 8 8 7 6 6 5 5 5 5 5 5 4 Total long-term assets 440 561 604 662 760 874 1 011 1 144 1 272 1 306 1 287 1 238 1 176 Current assets Stocks 21 26 25 24 29 37 44 50 59 67 75 76 81 Customer accounts receivable 26 25 25 21 22 25 30 35 39 45 50 55 61 Other debtors & prepayments 6 9 11 12 12 12 13 13 13 14 14 14 15 Investments 0 1 1 1 2 2 1 1 1 1 1 1 1 Cash at bank and in hand 15 20 28 21 18 30 43 54 87 109 131 151 173 Total current assets 69 80 91 78 83 105 130 153 199 235 271 298 331 Creditors (amounts falling due within one year) Creditors 33 51 45 23 24 28 36 41 48 50 59 64 72 Corporate tax payable 3 1 0 0 0 0 0 0 0 0 4 4 7 Debt s ervice due 14 25 28 2 3 3 4 4 3 5 7 7 8 Current Portion of Long-Term Loans 16 20 18 25 23 22 21 21 20 19 19 18 18 Total current liabilities 65 97 91 50 50 53 61 65 71 76 89 94 105 Net current assets/(liabilities) 4 (17) (1) 28 32 52 69 88 128 160 182 205 226 Total ass ets less current liabilities 444 545 604 690 792 925 1 079 1 231 1 401 1 466 1 470 1 443 1 402 Creditors (amounts falling due after more than one year) Long-term loans 190 236 279 364 445 553 697 838 982 1 022 1 002 952 882 Less: Current portion (16) (20) (18) (25) (23) (22) (21) (21) (20) (19) (19) (18) (18) Long-term portion 174 217 260 340 422 531 675 817 962 1 003 983 934 865 Project liab ilities 11 19 10 10 10 10 10 10 10 10 10 10 10 Pension provisions 13 19 26 33 40 48 56 64 73 81 90 100 109 Deferred charges 3 3 2 1 0 0 0 0 0 0 0 0 0 Customer dep os its 6 7 7 7 8 9 11 13 15 17 20 23 26 Total creditors (amounts falling due after m ore than one year) 206 264 306 391 480 598 752 904 1 060 1 112 1 103 1 066 1 010 Net assets employed 238 281 298 299 313 327 327 327 341 354 366 376 392 Capital and reserves Paid up capital 116 127 181 167 156 152 147 142 137 133 128 124 120 Grants for investments 47 71 44 65 80 88 87 88 94 96 97 94 92 Reserves 74 83 73 67 76 88 94 97 110 126 141 158 180 Shareholders ' equity 238 281 298 299 313 327 327 327 341 354 366 376 392 137 Cash Flows i n nominal US$ mi llio ns 2006 2007 2008 2 009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009-15 Audited Audi ted Audit ed Forecast Net cash inflow/(out flow) from operating activit ies : Operat ing profit /(loss) (3.5) 2.4 3.7 (7.2) 9.4 11.5 8.1 7.7 2 1. 1 31.2 40.3 41.4 50.5 81.8 Depreciation 32.3 3 5.8 43.9 41.0 39.9 47.4 55.0 63.6 7 2. 7 80.6 85.2 88.3 90.7 400.3 Cust omer capital contributi ons taken to income (2.7) (4.9) (6.5 ) (6.5) (8.0) (5.4) (8.5) (8.7 ) (5.9) (6.0) (6.2) (6.3 ) (6.5) (49.0) (Increas e)/decrease in workin g capital 5.1 1 2.3 (9.9 ) (19.0) (8.5) (8.7) (6.8) (10 .4 ) (9.6) (15.7) (9.0) (6.0 ) (7.5) (78.8) Pension provision s & deferred charges 4.5 5.0 9.0 8 .9 9.0 9.4 11.1 11.7 1 2. 3 12.8 13.4 14.0 14.6 75.2 Other 10.7 3.9 8.2 5 .0 4.4 4.4 4.5 4.6 4.7 4.8 5.0 5.1 5.2 32.4 Net cash inflow/(out flow) from operating activit ies 46.3 5 4.5 48.3 22.2 46.1 58.5 63.4 68.5 9 5. 4 107.8 128.8 136.5 147.0 462.0 Returns from investm ents and servi cing of finance: In terest received 0.7 1.0 1.6 1 .5 1.6 1.6 1.6 1.7 1.7 1.7 1.8 1.8 1.9 11.4 In terest pai d (2.0) (4.0) (6.3 ) (7.6) (13.2) (14.6) (15.6) (16 .4 ) (15.9) (21.8) (29.9) (31 .8 ) (34.7) (105.1) Net cash outflow for returns on investments and servicing of fi nance (1.3) (3.0) (4.7 ) (6.0) (11.6) (13.0) (14.0) (14 .7 ) (14.2) (20.1) (28.2) (30 .0 ) (32.9) (93.7) Taxation paid (1.7) (2.6) (1.2 ) 0 .0 0.0 0.0 0.0 0.0 0.0 0.0 (0.4) (3.5 ) (4.2) 0.0 Investing activities : Paymen ts to acqui re tangible fixed assets (53.3) (105.8) (111 .2 ) (121.5) (157.6) (167.0) (195.5) (1 96 .5 ) (199.2) (114.0) (71.5) (43 .5 ) (36.4) (1 151.3) Receipts from dispos als of tangible fi xed assets 0.0 0.0 0.0 0 .0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net cash outflow from investin g activiti es (53.3) (105.8) (111 .2 ) (121.5) (157.6) (167.0) (195.5) (1 96 .5 ) (199.2) (114.0) (71.5) (43 .5 ) (36.4) (1 151.3) Dividends pai d 0.0 0.0 0.0 0 .0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net cash inflow/(out flow) before financing (10.0) (56.9) (68 .7 ) (105.3) (123.1) (121.5) (146.0) (1 42 .7 ) (118.1) (26.3) 28.7 59.5 73.6 (783.1) Fin ancing acti vities: Grants for investments 14.9 2 1.7 36.2 25.6 19.5 10.8 1.9 4.1 8.5 5.0 4.2 1.0 1.0 75.5 Government contribution for rural connection s (off-set against debt service due) 0.0 0.0 0.0 10.4 10.6 10.9 11.2 11.4 1 1. 7 12.0 12.3 12.6 12.9 78.2 Cust omer deposits 3.5 5.5 6.8 7 .5 9.3 7.0 10.5 11.0 8.4 9.0 9.5 10.0 10.6 62.7 Borrowi ng 19.4 4 7.8 62.9 67.1 108.8 126.7 166.6 165.1 1 62.7 80.3 37.9 12.3 4.5 877.3 Borrowi ng repai d (12.1) (11.7) (11 .9 ) (8.8) (23.7) (20.1) (28.5) (34 .8 ) (35.7) (53.9) (65.0) (68 .4 ) (74.2) (205.6) Project funds and liabilities (16.2) (3.2) (15 .0 ) (1.8) (3.0) (1.4) (1.5) (1.5 ) (1.5) (1.5) (1.5) (1.5 ) (1.5) (12.2) Receipts/(paymen ts) for investments (0.8) (0.3) 0.0 0 .0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net cash inflow from finan cing act ivities 8.9 5 9.7 79.1 99.8 121.6 133.9 160.1 155.3 1 54.1 50.9 (2.6) (33 .9 ) (46.6) 875.8 Increase/ (decrease) i n cash and cash equi valents (1.1) 2.8 10.4 (5.5) (1.6) 12.4 14.1 12.6 3 6. 1 24.6 26.1 25.6 27.0 92.7 Cash and cash equivalents at begi nning of year 17.5 1 5.0 19.4 28.2 20.8 18.0 29.7 42.5 5 3. 5 87.2 108.5 130.6 151.5 28.2 Cash and cash equivalents at end of year 15.0 1 9.4 28.2 20.8 18.0 29.7 42.5 53.5 8 7. 2 108.5 130.6 151.5 173.0 108.5 138 Financial Covenants for the Project 49. Financial Covenants for EdM: In order for EdM to ensure that it maintains its financial sustainability, the following financial covenants are proposed: (i) current ratio of at least 1.1 (current assets/current liabilities); and (ii) debt service coverage ratio of at least 1.1 (cash generated from operations/debt service requirements) will be maintained throughout the project period. 50. Dated Financial Covenants for GOM: In addition, the following dated financial covenants are proposed. · By no later than June 30, 2011, the Recipient shall establish, and thereafter implement, a mechanism, in form and substance satisfactory to the Association, for setting electricity tariffs in accordance with full cost recovery principles; and, · Except as IDA shall otherwise agree, EdM shall not engage in any non-financially viable operations unless financing arrangements, satisfactory to IDA, shall have been made between the Recipient and EdM to ensure that such investments will be cash neutral to EdM. 51. Definition of non-financially viable operations: Operations whose revenues do not cover full cost of operation and maintenance (including depreciation and other provisions), interest charges on any debt incurred, and taxes. This is related primarily to the rural electrification projects and street lighting. 52. Definition of full cost recovery: Revenues from tariffs cover all operations and maintenance costs (including depreciation and other provisions), interest charges on debt, taxes, and a reasonable rate of return on equity employed. 53. Definition of cash neutral: Collected revenues to fully cover all cash operating and maintenance expenses, debt service requirements (repayment of debt principal and interest charges), and taxes. Sensitivity Analysis 54. Under Option 3 suggested above, assuming tariff indexation plus real increases from 2010, to US$0.125/kWh in 2018, further sensitivity analysis has been carried out to assess the impact of changes in various assumptions. For example, what would be the impact on cash flows and related requirement in further tariff increase if EdM's efficiency improvement is not implemented according to the plan? or if the Government does not make its 25% contribution to the customer connection program? Along with the analysis of the risks that would negatively affect EdM's cash flows, analysis on opportunities have been carried out as well. For example, what would be the impact on cash flows and related downward adjustment that can be made to the projected tariff levels if the demand increases at a higher rate than expected? or if further debt equity conversion is carried out? The table below summarizes the results of such an exercise. 139 2009-18 Increase/Decrease in cash flows Downside Risks (US$ million) Tariff Impact 1. Network losses to remain constant at 26.6% (2008 levels) instead of the forecast annual reductions of 0.5% (2010-12), 0.75% (2013-14), and 1% (2015-18)to reach optimum level of 20% by 2018 -121.2 5.5% 2. No Government contribution of 25% to capital cost of customer connections -98.8 4.3% 3. Lower annual demand growth of 4.5%, instead of 10% growth in 2010-11 and 8% from 2012-18 -148.9 7.9% 4. Power purchase costs 10% higher -96.5 4.2% * Tariff impact based on October 2009 weighted average tariff of 0.081US$/kWh 2009-18 Increase/Decrease in cash flows Upside Potential (US$ million) Tariff Impact 5. Network losses to reduce by 1.0% annually to reach optimum level of 20% in 2015 35.5 -1.5% 6. Higher annual demand growth of 12% instead of 10% in 2010-11 and 8% growth from 2012-18 90.4 -3.3% 7. Street lighting to be billed and paid for 67.7 -2.9% * Tariff impact based on October 2009 weighted average tariff of 0.081US$/kWh 55. Additional actions that can improve EdM's financial situation: In addition to the necessary actions that need to be taken by GOM and EdM, including the Government's contribution to the customer connection program and street lighting, operational efficiency improvement program, and tariff increase according to the revenue requirements, the following potential cash generating/cost savings actions can be taken by EdM and GOM: · Carry out further review of EdM's payroll and overhead costs to cut out waste and uneconomic practices; · Avoid expensive short term loans but to plan and seek for more medium to long term loans; and, · Government to further convert EdM debt to equity. Component on Fundo de Energia (FUNAE) 140 56. FUNAE is a public institution, established in 1997 according to the Decree 24/97 of July 22, to operate at a national level with the objective of financing and providing financial guarantees to the projects that contribute to; (i) development, production, and utilization of the forms of energy, that provide the expansion of energy services at low cost in rural and urban areas; and (ii) promotion of conservation and management of rational and sustainable resources of energy. 57. FUNAE's vision is to return to an institution of reference in dissemination mission is to improve the access to energy in a sustainable and rational way to contribute to the economic and social development of the country. 58. FUNAE has recently prepared a strategic plan which defines the strategic objectives of FUNAE for the period 2010-2014 which is aligned with the policies and strategies of the energy sector in Mozambique. For this period FUNAE has defined eleven strategic objectives and corresponding targets in the areas including Solar System, Electrification through generator sets, Minihidrica ­ water resources; wind energy; construction of fuel pumps, biomass and biofuels, and institutional development and capacity building. Funds from EDAP will contribute to these activities. 59. Due to the nature of its operation, mainly consisting of rural electrification and alternative energy, FUNAE does not envisage to operate as a commercially oriented utility. The financial statement it produces treats all cash inflows from the Government and donors as revenues, which signifies that these incoming funds are subsidizing FUNAE's operations. FUNAE's historical financial performance is attached below. 60. EDAP investments and operating costs under the component implemented by FUNAE would be in a form of a grant. Therefore, EDAP would not have any notable financial impact on FUNAE. 141 Income Statement for FUNAE 2004 2005 2006 2007 2008 Income Services 1,124,461 2,340 30,250 21,350 164,062 Other Income 57,885,619 95,917,457 127,047,639 109,202,196 103,109,959 59,010,080 95,919,797 127,077,889 109,223,546 103,274,021 Other costs Salaries 6,840,787 10,099,841 13,011,412 28,281,180 34,863,740 Services and supplies 18,468,670 42,163,400 31,506,699 72,057,903 31,102,710 Taxes and duties 55,031 13,065 55,474 1,505,193 343,040 Depreciation for the year 2,270,765 3,903,876 3,835,914 5,375,807 9,586,577 Provisions for the year - - - 2,879,842 Other operational costs and losses 2,810,640 6,570,170 1,365,685 5,862,478 8,773,162 Total costs 30,445,893 62,750,352 49,775,184 115,962,403 84,669,229 Operational results 28,564,187 33,169,445 77,302,705 (6,738,857) 18,604,792 Financial results 210,776 150,339 1,680,843 (3,167,029) (7,611,419) Extraordinary results (7,177,319) 448,031 20,671,683 1,943,336 - Profits and gains from prior periods 6,023,446 3,381,562 - - - Net result for the year 27,621,090 37,149,377 99,655,231 (7,962,550) 10,993,373 Balance Sheet for FUNAE 2004 2005 2006 2007 2008 Current assets Clients 3,146,292 3,146,292 15,600,699 Other debtors 25,095,413 25,960,162 4,762,496 Cash and banks 34,652,084 44,999,922 126,469,936 124,007,899 37,521,952 Prepayment 1,681,816 9,660,640 11,886,850 9,673,212 9,173,774 Current liabilities Other creditors 8,279,957 4,298,522 5,862,921 4,347,455 24,546,322 Accruals 420,046 1,684,495 1,633,089 26,957,685 758,718 Net current assets 27,633,897 48,677,545 159,102,481 131,482,425 41,753,881 Net fixed assets 9,511,197 23,318,765 22,659,259 42,316,765 376,374,343 Total assets 37,145,094 71,996,310 181,761,740 173,799,190 418,128,224 Equity 82,106,509 181,761,740 173,799,190 Accumulated results 99,655,231 (7,962,550) 10,993,373 net result for the year 181,761,740 173,799,190 184,792,563 142 Annex 10: Safeguard Policy Issues MOZAMBIQUE: MZ-Energy Development and Access Project (APL-2) 1. In April 2009 some safeguards issues were identified (erection of poles in private domains, cutting of trees with economic value, brush clearing) within the implementation of civil works of the grid-intensification activities of the ERAP (APL-1) project, which reflected an improper implementation of World Bank Operational Policy 4.12 (Involuntary Resettlement) in some project sites32. Specifically, the requirement that all compensation measures must be completed prior to the beginning of any physical works was not uniformly adhered to. 2. In order to comprehensively assess the extent of safeguards compliance issues indentified within ERAP (APL-1), including determining any appropriate corrective actions needed, a review process was launched in late April 2009 that included the following elements: (i) a review by the World Bank of the environmental and social screening process in ERAP (APL-1), (ii) a review by the World Bank of the follow-up actions that were taken after screening was completed, particularly with respect to the compensation process for affected persons and the implementation of environmental mitigation measures, and (iii) deployment of an additional safeguards mission to further assess the issue and to determine appropriate actions as needed to ensure full compliance with Bank guidelines. 3. As part of this review process, the importance of full compliance with World Bank safeguards requirements was reiterated to the ERAP (APL-1) Project Implementation Unit (PIU). In particular, it was emphasized that installation work should not commence until affected persons have been satisfactorily compensated, in line with both World Bank O.P. 4.12 (Involuntary Resettlement) and the ERAP (APL-1) Resettlement Policy Framework (RPF). In the supervision phase, the World Bank task team will ensure that a comprehensive operational process is put in place to ensure compliance, including early identification of trees and other productive assets likely to be affected by project works, consultation with affected persons and local authorities, and payment of any compensation before works proceed. The "lessons learned" from the ERAP (APL-1) safeguards review process have been fully incorporated into EDAP. In addition, a condition of Credit Effectiveness is that EdM will have established an "Environmental and Social Safeguard Unit". Social and environmental safeguard specialists will be full members of the supervision task team, and will participate in regular biannual supervision missions. No concrete changes on project design or implementation guidelines have been deemed necessary in EDAP (APL-2), compared to ERAP (APL-1). OP 4.01 Environmental Assessment 4. The Borrower has prepared an Environmental and Social Management Framework (ESMF) to assess, mitigate and monitor potential adverse environmental and social impacts related to the components supporting (a) the reinforcement of the primary networks and grid extension; and (b) investments in rural and renewable energy. Potential adverse environmental 32 The Project Appraisal Document and associated legal agreements of the ERAP (APL-1) presented the project in such a way that activities appeared to form part of a single jointly co-finance project, as opposed to complementary projects under parallel financing arrangements (African Development Bank -ADB, Nordic Development Fund - NDF). Because of that, IDA was deemed liable for safeguards violations that occurred within activities financed by the other donors. 143 and social impacts requiring mitigation include workers' safety, loss of vegetation, disposal of spent batteries, construction waste including PCB and asbestos, and loss of livelihoods. 5. The ESMF describes the environmental and social screening process (steps 1-7) for sub- projects, and to facilitate the work of the Environmental Focal Points (EFPs) it includes (i) an Environmental and Social Screening Form (annex 1) to be completed by qualified personnel; to the extent that the screening results indicate a need for land acquisition, the provisions of the Resettlement Policy Framework (RPF) will apply; (ii) an Environmental and Social Management Plan (annex 2) which outlines specific mitigation measures and institutional responsibilities for their implementation and monitoring; (iii) Environmental Guidelines for Contractors (annex 3) which will be attached to the bidding documents to ensure environmentally and socially sustainable construction practices; (iv) an overview of the Bank's safeguard policies (annex 4) to ensure future sub-projects are implemented in compliance with these policies; (v) draft terms of reference for the preparation of separate EA reports (annex 5) as necessary; (vi) an Environmental and Social Checklist (annex 6) proposing generic environmental and social mitigation measures that might have to be adapted to sub-project specific conditions by qualified personnel; and (vii) an environmental training program for relevant personnel at the national and regional levels. 6. It is proposed to integrate EDAP's environmental training program with ongoing programs organized by FUNAE and EdM. Training topics will be related to the implementation of the ESMF, environmental protection, environmental policies and legislation as well as the safe disposal of asbestos and PCB. 7. Overall responsibility for overseeing the implementation of the ESMF will rest with the EFP of the Ministry of Energy. At the provincial levels, the Ministry of Energy, through its Environment Unit, will appoint EFPs in the Governors' Offices (GO) who will coordinate their work with the regional representatives of the Ministry of Environment and Coordination (MICOA) as necessary. FUNAE's Environment Unit will continue to implement the ESMF under its renewable energy sub-projects. EdM is in the process of establishing an Environment Unit with support from Danish TA to ensure that all sub-projects are implemented in accordance with national environmental legislation as well as the Bank's safeguard policies as discussed in the ESMF. 8. The Ministry of Energy, through the Project Coordination Unit (PCU), will have primary responsibility for monitoring. The PCU will include representatives from FUNAE and EdM. At the provincial level, the EFPs/GO will be responsible for monitoring. Activities requiring monitoring include works on sub-stations (i.e. PCB and asbestos risk assessment and removal plan and operations if needed); determination of loss of land and assets and calculation of compensation; and planning and design of infrastructures in compliance with EA recommendations and ESMPs. As necessary, EDAP will provide M&E training for responsible personnel. 9. It is recommended that each sub-project type (grid extensions and PV/biomass be visited once a month during construction; independent consultants should be appointed to conduct the monitoring together with representatives from the Ministry of Energy, FUNAE, and EdM. 144 During the planning stage, compliance monitoring should ensure that the affected communities are being consulted and given the opportunity to express their grievances; EA recommendations, ESMPs or RAPs and/or community safety plans are adhered to; and project-affected persons are adequately compensated for loss of assets or land. OP/BP 4.12 Related to Involuntary Displacement 10. Although physical displacements, land acquisition and/or damage to assets and means of production are expected to be minimal, a Resettlement Policy Framework (RPF) has been prepared, cleared by the Bank and disclosed in the country and at the InfoShop. An RPF, as a mitigation instrument, has been chosen because the sites for the construction of MV lines are unknown at this stage of project preparation. During implementation, each sub-project will be screened, socially and environmentally. If social safeguard related issues are identified within a given sub-project, a specific RAP (or abbreviated RAP) will be prepared and implemented according to the requirements and procedures of OP/BP 4.12. The RPF, along with lessons learned from ERAP will guide the preparation and implementation of the future RAPs/abbreviated RAPs. The lessons learned can be summarized as follows: · Tree and crop compensation in MV line way-leaves: Following the marking of the individual pole sites, owners of trees with productive capacity (e.g. cashew trees) in the way-leave will be consulted, and the trees individually recorded & compensated in full before the poles are installed. · Crops: Unlike trees, crops situated in the way-leave do not need to be removed for technical or line safety reasons. However, those crops may be damaged by the vehicles used to access the pole-sites, and, therefore, must be compensated. OP/BP 4.12 clearly stipulates that compensation should take place before infrastructure works start. For technical reasons enumerated below, compensation for damaged crops can exceptionally be done immediately after the installation work is completed: · The precise route of the vehicle along the line-route to access the pole-sites is not known in advance of pole delivery and installation at the pole-sites; and, · Nor can it be known which crops will be damaged before installation works are completed. (For example, small cassava plants situated in the space between the tire tracks of high-clearance vehicles may not be damaged by the passage of the vehicle). In these exceptional cases, the compensation must be done without delay, i.e. immediately after the infrastructure work is completed at the specific site where damage occurs and before the contractor leaves that specific site. The methodology for such compensation will be discussed in advance with the PAP. Given the high administrative cost of manually recording each individual crop plant damaged, relative to the value of the plant, a reasonable approach to crop compensation would be to agree with the farmer on a package of compensation reflecting the total value of crops damaged at a particular site. Compensation for crops would thus be recorded and paid on a `per-package' basis, not a per-plant basis. 145 · Tree trimming and branch cutting: In relation to tree trimming and branch cutting, common sense and consultation with the owners will be used to determine whether there is a need for compensation. In the case were a substantial amount of a productive tree's branches need to be cut, compensation should be paid for the whole tree as recovery might take several years. · Sites for `kicker' poles for drop-down connections: Kicker poles need to be located close to the drop-down connection location for technical reasons, particularly for houses that are not constructed from solid materials. In most cases, this means that the kicker pole will be located within the private compound immediately surrounding the house. Compensation will not be required in these cases, given that (i) the pole is an integral part of the delivery of the service to the household, and (ii) the small diameter of the pole means that there is no economic damage. Furthermore, poles do not represent an environmental or safety hazard. · Acquisition of sites for transformers: The transformers necessitate the acquisition of a very small site (4 square meters up to 6 square meters). For safety reasons, the sites will systematically be fenced and maintained. The sites will be chosen on the basis of technical criteria and can be located on public land, private land or collective land. The ERAP (APL-1) safeguards supervision mission noted that in many cases, the sites were located on private land. In terms of compensation, OP/BP 4.12 requires that compensation is done on the basis of land for land. No financial compensation should be done for agricultural land, especially when the land in question is public and people are given usufruct rights. In such a situation, compensation for such small spots will become extremely difficult to achieve. Given the nature of the project and its undeniable positive impact on the population, it is not unrealistic to ask the communities and the local authorities to donate the sites for transformers on a voluntary basis. To avoid any conflicts and undue claims, the sites will need to be secured through a donation certificate duly signed by the donor(s), the village chief and the local authorities. The document could include the following information: (i) location of the site; (ii) its present use; (iii) its status; (iv) the name(s) of its owner(s); (v) a clear statement that the land is freely given to EdM to install a transformer; and (vi) signature of all parties. 146 Annex 11: Project Preparation and Supervision MOZAMBIQUE: MZ-Energy Development and Access Project (APL-2) Planned Actual PCN review December 15, 2009 December 22, 2009 Initial PID to PIC December 26, 2008 January 15, 2009 Initial ISDS to PIC January 22, 2009 July 27, 2009 Appraisal October 12, 2009 October 5, 2009 Negotiations October 19, 2009 December 9, 2009 Board/RVP approval November 24, 2009 January 21, 2010 Planned date of effectiveness January 18, 2010 March 15, 2010 Planned date of mid-term review January 15, 2013 January 15, 2013 Planned closing date June 30, 2015 June 30, 2015 Key institutions responsible for preparation of the project: · Ministerio de Energia (Ministry of Energy ­ ME) · Electricidade de Moçambique (Mozambique Power Utility - EdM) · Fundo de Energia (Energy Fund - FUNAE) Bank staff and consultants who worked on the project included: Name Title Unit Boris E. Utria Sector Leader SD/TTL AFTEG Rob Mills Economist AFTEG Vonjy M. Rakotondramanana Senior Power engineer AFTEG Arun Sanghvi Institutional Specialist (Consultant) AFTEG Midori Makino Sr. Financial Analyst AFTU2 Reto Thoenen Economist AFTEG Elvis Langa Financial Sector Specialist AFTFM Edeltraut Gilgan-Hunt Sr. Environmental Specialist AFTEN Mohamed Arby Ben-Achour Lead Social Development Specialist AFTCS Antonio Chamuco Sr. Procurement Specialist AFTPC Amos Malate Procurement Analyst AFTPC Jutta U. Kern Sr. M&E Specialist AFTRL Suzanne Morris Sr. Disbursement Specialist CTRFC Marjorie Mpundu Counsel LEGAF Anne Louise Grinsted Economist AFCS2 Arlete Q. Comissario Team Assistant AFCS2 Regine Mpoyi Team Assistant AFTEG Salma Chande Team Assistant AFCS2 147 Bank funds expended to date on project preparation: 1. Bank resources: $187,562.85 2. Trust funds: None 3. Total: : $187,562.85 Estimated Approval and Supervision costs: 4. Remaining costs to approval: $50,000.00 5. Estimated annual supervision cost: $100.000.00 148 Annex 12: Documents in the Project File MOZAMBIQUE: MZ-Energy Development and Access Project (APL-2) · National Energy Development Program (NEDAP): Description of NEDAP Program (April 10, 2009); · EdM presentation to the Donors Meeting ­ March 20, 2009 (Revised April 15, 2009); · FUNAE ­ Plano Estratégico 2010-2014 (April 2009); · Ministry of Energy ­ Strategic Plan Matrix 2009-2013; · Ministry of Energy ­ Energy Strategy; · Estratégia de Energia ­ Apresentação Reunião Anual com parceiros e Cooperação (19 de Março, 2009); · Electricidade de Moçambique ­ Plano Estratégico 2006-2009; · Energy Access and Development Project ­ Project Appraisal Document; · FUNAE ­Apresentação Joint Annual Energy Sector Review (Março 2009); · Electricidade de Moçambique ­ Decreto Criação e Estatutos; and, · FUNAE ­ Decreto Criação e Estatutos. 149 Annex 13: Statement of Loans and Credits MOZAMBIQUE: MZ-Energy Development and Access Project (APL-2) Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd P104566 2008 MZ-Water Services & Inst. Support 0.00 15.00 0.00 0.00 0.00 13.36 1.30 0.00 P083325 2007 MZ-APL2 Roads & Bridges 0.00 100.00 0.00 0.00 0.00 87.70 36.31 0.00 P096332 2007 Maputo Municipal Development Program 0.00 30.00 0.00 0.00 0.00 16.63 6.09 0.00 P071465 2006 MZ-TFCA & Tourism Dev (FY06) 0.00 20.00 0.00 0.00 0.00 14.29 1.38 0.00 P093165 2006 MZ-Market Led Smallholder Dev (FY06) 0.00 20.00 0.00 0.00 0.00 16.14 2.44 0.00 P087347 2006 MZ Tech & Voc Edu & Training (FY06) 0.00 30.00 0.00 0.00 0.00 24.25 8.92 0.00 P086169 2006 MZ-Financial Sector TA Project 0.00 10.50 0.00 0.00 0.00 7.36 0.36 0.00 P082618 2005 MZ-Beira Railway SIL (FY05) 0.00 110.00 0.00 0.00 0.00 26.09 -6.53 0.00 P069183 2004 MZ - Energy Reform and Access APL-1 0.00 40.26 0.00 0.00 0.00 23.79 18.56 9.92 P001807 2004 MZ-Decentr Planning &Fin SIL (FY04) 0.00 42.00 0.00 0.00 0.00 1.38 -1.99 -5.03 P078053 2003 MZ-HIV/AIDS Response SIL (FY03) 0.00 55.00 0.00 0.00 0.00 19.95 12.91 0.00 P072080 2003 MZ: Pub Sec Reform (FY03) 0.00 25.60 0.00 0.00 0.00 5.04 1.27 0.00 P073479 2002 MZ-Com Sec Reform 0.00 14.90 0.00 0.00 0.00 2.30 0.17 -0.98 P069824 2002 MZ-Higher Education SIM (FY02) 0.00 75.00 0.00 0.00 0.00 9.44 -15.53 0.00 P042039 2000 MZ-Railway & Port Restr (FY00) 0.00 100.00 0.00 0.00 0.00 0.78 -5.10 -5.10 P052240 1999 MZ-Natl Water 2 (FY99) 0.00 90.00 0.00 0.00 0.00 1.86 -20.90 -6.85 Total: 0.00 778.26 0.00 0.00 0.00 270.36 39.66 - 8.04 MOZAMBIQUE STATEMENT OF IFC's Held and Disbursed Portfolio In Millions of US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2004 ENH 0.00 18.50 0.00 0.00 0.00 13.37 0.00 0.00 GTFP BDC 0.11 0.00 0.00 0.00 0.11 0.00 0.00 0.00 1997 MOZAL 29.70 0.00 58.50 0.00 29.70 0.00 58.50 0.00 2001 MOZAL 10.12 0.00 0.00 0.00 10.12 0.00 0.00 0.00 2000 SEF Ausmoz 0.72 0.00 0.00 0.00 0.72 0.00 0.00 0.00 1997 SEF CPZ 1.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 2000 SEF Cabo Caju 0.58 0.00 0.00 0.00 0.51 0.00 0.00 0.00 2001 SEF Grand Prix 0.33 0.00 0.00 0.00 0.33 0.00 0.00 0.00 2004 SEF Merec 1.02 0.00 0.00 0.00 1.02 0.00 0.00 0.00 Total portfolio: 43.58 18.50 58.50 0.00 43.51 13.37 58.50 0.00 150 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. Total pending commitment: 0.00 0.00 0.00 0.00 151 Annex 14: Country at a Glance MOZAMBIQUE: MZ-Energy Development and Access Project (APL-2) Sub- POVERTY and SOCIAL Saharan Low- Development diamond* M ozambique Africa income 2007 Population, mid-year (millions) 21.4 800 1,296 Life expectancy GNI per capita (Atlas method, US$) 330 952 578 GNI (Atlas method, US$ billions) 7.1 762 749 Average annual growth, 2001-07 Population (% ) 2.3 2.5 2.2 GNI Gross Labor force (% ) 1.8 2.6 2.7 per primary M ost recent estimate (latest year available, 2001-07) capita enrollment Poverty (%of population below national poverty line) 54 .. .. Urban population (%of total population) 36 36 32 Life expectancy at birth (years) 42 51 57 Infant mortality (per 1,000 live births) 96 94 85 Child malnutrition (%of children under 5) 21 27 29 Access to improved water source Access to an improved water source (%of population) 42 58 68 Literacy (%of population age 1 5+) .. 59 61 Gross primary enrollment (%of school-age population) 105 94 94 Mozambique Male 1 13 99 100 Low-income group Female 97 88 89 KEY ECONOM IC RATIOS and LONG-TERM TRENDS 1987 1997 2006 2007 Economic ratios* GDP (US$ billions) 2.4 3.8 7.0 7.8 Gross capital formation/GDP 17.0 20.6 19.0 19.2 Trade Exports of goods and services/GDP 6.6 13.4 40.7 38.6 Gross domestic savings/GDP -7.7 9.3 13.0 12.3 Gross national savings/GDP -14.9 4.6 3.2 2.8 Current account balance/GDP -29.4 -16.3 -16.0 -16.5 Domestic Capital Interest payments/GDP 0.8 1.1 0.4 .. savings formation Total debt/GDP 175.3 203.4 46.9 .. Total debt service/exports 23.5 19.2 1.9 .. Present value of debt/GDP .. .. 10.1 .. Present value of debt/exports .. .. 23.9 .. Indebtedness 1987-97 1997-07 2006 2007 2007-11 (average annual growth) GDP 4.2 7.7 8.5 7.3 7.0 Mozambique GDP per capita 1.6 5.2 6.3 5.3 5.9 Low-income group Exports of goods and services 12.6 18.9 8.0 -8.2 10.0 STRUCTURE of the ECONOM Y 152 19 8 7 19 9 7 2006 2007 G ro wt h o f c a pit a l a nd G D P ( %) (% o f GDP ) A griculture 44.1 34.9 27.6 27.6 40 Mozambique Industry 21.4 17.8 26.6 25.7 20 M anufacturing .. 9.8 16.3 15.2 0 P R IC E S a nd G O V E R N M E N T F IN A N C E Services 34.4 47.4 45.8 46.7 02 03 04 05 06 07 19 8 7 19 9 7 2006 2007 - 20 la t io n ( %) Inf D o m e s t ic pric e nsumptio n expenditure Ho useho ld final co s 96.7 83.9 76.1 75.6 - 40 20 (% change) General go v't final co nsumptio n expenditure 1 1 .1 6.8 10.9 12.1 Co nsumer prices Impo rts o f go o ds and services 1 .4 64.1 31 6.4 24.6 13.2 46.6 8.2 45.6 15 GCF GDP Implicit GDP deflato r 81 1 .4 9.0 7.4 6.2 10 G o v e rnm e nt f ina nc e 19 8 7 - 9 7 19 9 7 - 0 7 2006 2007 5 G ro wt h o f e xpo rt s a nd im po rt s ( %) (average annual gro wth) (% o f GDP , includes current grants) 0 A griculture Current revenue 2.6 1 .4 1 15.3 4.4 10.9 20.7 6.6 20.4 60 02 03 04 05 06 07 Industry budget balance Current 1 -1.9 13.9 4.6 9.1 6.2 6.6 4.6 40 GDP def lator CPI M anufacturing Overall surplus/deficit 4.5 1 -1 .8 13.7 -7.7 6.0 -7.1 5.0 -9.5 20 Services 4.6 6.6 7.9 6.4 0 TRADE Ho useho ld final co nsumptio n expenditure 3.0 5.1 8.4 8.6 -20 02 03 04 05 06 07 General go v't final co nsumptio n expenditure 87 19-0.2 19 9 7 -1.8 20068.4 0 201 77.2 E xpo rt a nd im po rt le v e ls ( US $ m ill.) -40 (US$ millio ns) Gro ss capital fo rmatio n 5.3 7.2 13.1 4.2 Exports Imports To tal expo go (fo b) Impo rts o f rts o ds and services 97 2.6 230 5.0 2,381 10.0 2,412 -2.1 4,000 Cashew nuts, raw cashew and cashew o il 31 29 37 20 P rawn 38 85 88 63 3,000 No te: 2007 data are preliminary estimates. M anufactures .. 20 25 28 pro This table was (cif)duced fro m the Develo pment Eco no mics LDB database.2,91 To tal impo rts 642 760 4 3,093 2,000 * The diamo nds sho w fo ur key indicato rs in the co untry (in bo ld) co mpared with its inco me-gro up average. If data are missing, the diamo nd will Fo o d .. 30 184 195 1,000 be inco mplete. Fuel and energy .. 78 430 526 Capital go o ds .. 154 869 916 0 01 02 03 04 05 06 07 Expo rt price index (2000=100) 143 1 12 198 227 Impo rt price index (2000=100) 90 106 146 161 Exports Import s Terms o f trade (2000=1 00) 158 106 135 141 B A LA N C E o f P A Y M E N T S 19 8 7 19 9 7 2006 2007 C urre nt a c c o unt ba la nc e t o G D P ( %) (US$ millio ns) Expo rts o f go o ds and services 176 509 2,878 3,032 0 Impo rts o f go o ds and services 699 938 3,300 3,576 01 02 03 04 05 06 07 -5 Reso urce balance -523 -429 -421 -544 Net inco me -170 -182 -692 -742 -10 Net current transfers 0 0 0 0 -15 Current acco unt balance -693 -611 ,1 3 -1 1 -1,286 -20 Financing items (net) 751 778 1,252 1,569 Changes in net reserves -58 -168 -139 -283 -25 M emo : Reserves including go ld (US$ millio ns) 139 537 1,241 1,524 Co nversio n rate (DEC, lo cal/US$ ) 290.7 1 1 ,722.6 25,400.0 25,858.4 E X T E R N A L D E B T a nd R E S O UR C E F LO WS 19 8 7 19 9 7 2006 2007 C o m po s it io n o f 2 0 0 6 de bt ( US $ m ill.) (US$ millio ns) To tal debt o utstanding and disbursed 4,125 7,632 3,265 .. IB RD 0 0 0 0 IDA 87 ,1 1 60 655 902 G: 744 B: 655 To tal debt service 55 1 10 55 .. IB RD 0 0 1 0 C: 10 IDA 0 9 17 6 Co mpo sitio n o f net reso urce flo ws F: 2 Official grants 414 518 2,544 .. D: 427 Official credito rs 284 215 343 .. P rivate credito rs 50 1 0 .. Fo reign direct investment (net inflo ws) 6 64 154 .. P o rtfo lio equity (net inflo ws) 0 0 0 .. E: 1,427 Wo rld B ank pro gram Co mmitments 1 11 100 51 275 A - IBRD E - Bilateral Disbursements 48 148 223 212 B - IDA D - Other mult ilateral F - Privat e P rincipal repayments 0 2 8 0 C - IM F G - Short -t erm Net flo ws 48 147 215 212 Interest payments 0 8 10 6 Net transfers 48 139 205 206 No te: This table was pro duced fro m the Develo pment Eco no mics LDB database. 9/24/08 153 Annex 15: National Energy Development and Access Program (NEDAP) National Energy Development and Access Program (NEDAP) 1. Within the context of the PARPA II and of the GoM's new Energy Development Strategy, GoM prepared and submitted for donor consideration a comprehensive 5-year/US $230 million "National Energy Sector Development and Access Program" (NEDAP Program). NEDAP's objectives are: (a) Ensuring that affordable electricity supply is available to meet the rapidly growing domestic demand and that power shortages do not become a constraint on economic growth; (b) Reaching the vast areas of the country beyond the EdM grid; (c) Government capacity to negotiate and manage the new generation developments; and, (d) Institutional strengthening and capacity development at the main sector institutions (ME, EdM, FUNAE and CNELEC). 2. Within that context the NEDAP's Program development objectives are: a. to improve grid-based access to modern energy services through the reinforcement of the existing primary electricity network and the extension of the grid to un-served areas; b. Increase off-grid access to modern energy services in low income rural areas through the promotion of renewable energy resources and technologies (RET); c. To improve the overall performance of the main sector institutions and their capacity to promote rural electrification and to mobilize new private sector and donor investment financing through the provision of institutional strengthening and capacity development support; and, d. To improve Government-Donor coordination in the energy sector through the design and gradual mainstreaming of a flexible sector wide approach and process (SWAp) fully aligned with country priorities and procedures. 3. The following sections provide a detailed description of the complete NEDAP Program. The IDA EDAP (APL-2) Project constitutes the lead project and a sub-set of that broader NEDAP Program and, therefore, the activities that will be funded by EDAP (APL-2) are also included herein. A detailed separate description of the IDA EDAP (APL-2) project is presented in Annex 4: Detailed Project Description. 154 Component 1: Reinforcement of the Primary Networks and Grid Extension Component (US $134.0 million) 4. The Reinforcement of the Primary Networks and Grid Extension Component will support: (i) engineering services for design and supervision of the investment program; (ii) the rehabilitation and reinforcement the existing primary networks that have been overloaded as a result of the grid extension and new connections implemented under IDA's ERAP (APL-1) and other electrification projects; (iii) extension and intensification of the medium and low voltage grid in peri-urban areas with high potential number of new customers totaling 90,000 new customers, including up-grading of existing substation and transformers; and (iv) grid reconfiguration of the MV system (Bairro 25 de Junho). This component will be implemented by EdM. Sub-component 1.1: Engineering Consulting Services for Preliminary Engineering Design, Scoping and Packaging, Tender Documents and Procurement of Contractors (US $9.17 million) 5. EdM will procure a reputable International Engineering Consulting firm to undertake a detailed examination of the Program activities and the preliminary scope proposed and to provide the following services under EdM's guidance: (i) perform a preliminary survey and the corresponding scoping and engineering design work for the two sub-components; (ii) elaborate the most suitable scope and prepare the corresponding tender documents for each project package; (iii) run the procurement process for suppliers and contractors pertaining to the defined packages, including assisting EdM in Pre-Award-Contract Negotiations and preparation of contracts documents pertaining to the successful suppliers and contractors, and (iv) assist EdM in supervising the works being executed by the selected contractors and suppliers for the different project packages under the two sub-components. 6. An International Competitive Bidding (ICB) process will be followed for the selection of the Engineering Consulting Firm under QCBS as well as for selection of suppliers and contractors under BoQ and Unit Price shall be used for procurement in accordance with the World Bank Procurement Guidelines. Sub-component 1.2: MV Network transmission efficiency improvement Pilot. (US $1.38 million) 7. This sub-component will finance a high priority pilot project to demonstrate the possible efficiency gains in the operation of the Low Voltage distribution network in Maputo. The Pilot will be implemented in the MV network at the "25 de Junho" area in Maputo. Under the proposed pilot the LV network will be reconfigured, with two existing large distribution transformer stations with capacities of 630kVA each will be replaced by various smaller transformers with capacities varying between 50 and 100kVA. This reconfiguration will make it possible to reduce the length of LV network resulting in a considerable reduction in the prevailing level of technical losses on distribution within the system. The two large transformers will not be disposed of rather they will be reallocated to other existing substations in need of transformer capacity upgrading. Its results have been confirmed. 155 Sub-component 1.3: Rehabilitation and Reinforcement of the primary Network (US $9.3 million) 8. The primary networks in two of the cities (Matola and Chimoio) where peri-urban sites/areas are being electrified and new customers are expected to be connected under the ongoing ERAP (APL-1) will have various primary substations and medium voltage lines saturated as a result of additional load to be created by the new customers being connected. The upcoming extension of networks and connection of new customers under the NEDAP Program will further saturate and overload those and other substations and medium voltage lines. It is therefore necessary to reinforce and upgrade those existing substations and medium voltage to ensure sufficient capacity and quality of supply for both existing and new customers. Activities to be carried out in Maputo/Matola 9. The 10MVA power transformer in the existing substation at Matola Rio will be replaced by with a 30MVA transformer. The corresponding concrete base for the power transformer and the corresponding power operating equipment (circuit breakers, switch disconnectors), metering, control and protection systems will be upgraded accordingly. 10. The existing combined 33kV and SWER (19.1kV) system installed in the highly demanding farming area between Changalane and Catuane will be reinforced and upgraded to increase its capacity and reliability to meet the current and confirmed expected demand of power (new customers who have already applied and are waiting to be connected to the system). Activities to be carried out in Chimoio 11. Most of the existing 6.6 kV lines are very long, old and do not have sufficient capacity to supply electricity to the several sites/areas which are being electrified under the ongoing ERAP (APL-1). Those lines are further expected to be extended to supply electricity for the neighboring sites/areas under the proposed IDA EDAP (APL-2), thereby making the upgrade more necessary. These lines will be rehabilitated and upgraded to 22kV. Consequently, the existing local substation at Chimoio will be upgraded in terms of installing an additional transformer of 30MVA, 66/22kV as well as adding new 22kV power bays to allow for connecting the lines that will be upgraded to 22kV. Scope of works and cost estimates: 12. The scope of works and cost estimates for the whole rehabilitation/reinforcement/ upgrade sub-component is indicated in the summarized table below. 156 Table A.15.1 Project Rehab. & Upgrade of Existing Network /Substations (Basis: US $'000) Area Designation Qnty Cost Cost Replace. & Upgrade Maputo Transformers 30 MVA 1 2,759 2,759 Province 66/33kV in Matola Rio SS Transmission Efficiency Pilot Program 1 1,200 1,200 "25 de Junho) Rehab. & Reinforcement Existing 33/19kV 1 1,000 1,000 Chalange - Catuane Installation of Power Transformers 30 MVA 1 2,431 2,431 Chimoio DA 66//22kV + Accessories (Manica Prov.) Replacement/Upgrade 6.6kV MV to 22kV oh line 75 27 2,025 Sub-total 1: 9,415 Contingency (5%): 471 Total 2: 9,886 Sub-component 1.4: Extension of the distribution networks and customer connections (US $108.78 million) 13. Due to the very fast demographic and housing expansion registered in peri-urban areas, it is expected that large areas with new households will be readily available for electrification in the main existing peri-urban sites, immediately after the completion of the ongoing IDA ERAP (APL-1) project. Given that and the success experienced under ERAP (APL-1) and other electrification projects, GoM and EdM have accorded high priority to further expanding peri- urban electrification within the NEDAP Program in Matola, Nampula, Chimoio, Tete and Pemba from the provinces of Maputo, Nampula, Manica, Tete and Cabo-Delgado, respectively. Scope of works and cost estimates 14. The summarized scope of works and cost estimates for the whole network expansion and customer connection sub-component of the NEDAP Program for the selected five cities is indicated in the table below. 157 Table A.15.2 Project Network Extension and Intensification of Service Connections (Basis: US $'000) Area Serv. Connections 33kV OHL AAAC 150 mm2 0.4kV ABC 3x50+50=25mm2 Dist. Transformers Pre-Pay. Meters Qnty Cost/US$ Qnty Cost/US$ Qnty Cost/US$ Qnty Cost/US$ Qnty Cost/US$ Matola AD 35,225 12,329 150 4,050 650 16,250 200 4,680 35,225 2,466 Nampula AD 12,028 4,210 36 972 300 7,500 65 1,521 12,028 842 Chomoio AD 21,650 7,578 35 945 200 5,000 60 1,404 21,650 1,516 Tete AD 13,052 4,568 45 1,215 220 5,500 73 1,708 13,052 914 Pemba AD 11,885 4,160 64 1,728 130 3,250 45 1,053 11,885 832 Sub-total 93,840 32,845 330 8,910 1,500 37,500 443 10,366 93,840 6,569 Contingency 1,642 446 1,875 518 328 5% Total: 93,840 34,487 330 9,356 1,500 39,375 443 10,885 93,840 6,897 IDA EDAP Grand Totals Beneficiaries: 93,840 Cost (US $'000): 100,999 Cost p/Connect.: 1,076 Sub-component 1.5: Institutional Strengthening and Capacity Building (US $13.42 million) 15. Given the rapid growth in its assets, customer base and level of operations EdM urgently needs to upgrade and modernize its management systems. That will be accomplished through the deployment of an Integrated Business Management System (IBMS). The proposed IBMS system will enable EdM to improve all the main areas of corporate management, particularly the management of its customer base and assets and its financial management. 16. The deployment of the new integrated management system will include comprehensive, intensive and advanced training of staff to ensure that the relevant personnel are able to run the system efficiently after its full deployment. In addition to training in the new IBMS, EdM staff will be trained on: management of large projects, management and implementation of loss reduction programs, on improved financial and accounting management, environmental management and monitoring and evaluation (M&E). TA and Consulting services will include special advisory services (including environmental management), studies, M&E and auditing services. Scope of works and cost estimates 17. The summarized scope of works and cost estimates for the Institutional Strengthening and Capacity Building sub-component is indicated in the table below: 158 Table A.15.3 Project Integrated Business Management System (Basis: US $'000) Area Designation Qnty Cost Supply, Installation of the System and 1 10,000 EdM Training of Personnel Consulting Services Institutional Strength. 1 1,500 & Capacity Building Sub-total 1: 11,500 Contingency (5%): 575 Sub-Total 2: 12,075 Consultancy (10%) 1,208 Total 3: 13,283 Component 2: Investments on Rural and Renewable Energy Component (US $52.35 million) 18. The Investments on Rural and Renewable Energy Component will increase and accelerate decentralized access to modern energy services by supporting the implementation and/or scaling-up of: (i) decentralized small- and medium-size investments on renewable energy production and distribution systems, including hydro (pico, micro and mini), solar PV and thermal, wind and biomass energy in rural and some peri-urban areas; (ii) demonstration projects to accelerate the sustainable market penetration of clean Renewable Energy Technologies (RET) in agriculture, household, SME and for rural mobility; and (iii) capacity development and institutional strengthening of FUNAE. As applicable, implementation of individual RET projects under this component will be done by FUNAE, other government agencies and/or the private sector. This component will be implemented by FUNAE, in close coordination with the Ministry of Energy (ME). Sub-component 2.1: Solar Systems and Technologies (US $28.57 million) Institutional Solar Systems (Rural Schools/Health Clinics) (US $18.0 million) 19. Under this activity FUNAE will install PV Systems in Schools and Health Clinics. In addition to lighting and refrigeration services, those PV systems will support potable water pumping for those schools and health clinics. PV systems will also be installed in the houses of the teachers and health workers improving them better living conditions -- which has become a pre-requisite to retain qualified staff in rural areas. The implementation of this sub-component will be done by FUNAE in close coordination with the Ministries of Health and Education. 159 20. FUNAE intends to electrify 875 schools and 900 Health Clinics in rural areas through PV Systems. The electrification of schools and Health Clinics is estimated on 15.0 million dollars and it is expected that it will reach approximately 1.2 million beneficiaries. 21. The PV Systems to be installed for electrifying schools and health clinics will be supplied and maintained by the private sector. The Ministry of Health (MISAU) and Ministry of Education and Culture (MINEC), respectively, will be responsible for covering the annual recurrent cost of associated maintenance contracts for the equipment installed in Health Clinics and Schools. 22. FUNAE has already established protocols under previous project (e.g., ERAP APL-1) with relevant entities in order to train the technicians who will be in charge of the operation and maintenance of the PV systems to be installed. 23. FUNAE intends to electrify schools and health clinics trough PV Systems in the following provinces: Table A.15.4 FUNAE: Proposed NEDAP Program for PV System in School and Health Clinics Provinces Schools33 Health Clinics34 Cost (MUS$)35 Cabo Delgado 250 250 4,2 Niassa 225 250 4,0 Inhambane 200 200 3,4 Manica 200 200 3,4 Total 875 900 15,0 Community/District solar systems (US $7.07 million) 24. In Mozambique, being one of the poorest countries in Africa with a highly scattered population, the expansion of access to modern energy supplies in rural areas poses a major challenge and the viability and sustainability of those efforts have to be ensured. Although the cost of PV systems is still an important limiting factor, PV Systems are indeed highly suitable for the needs and conditions of the rural areas of this country where the national grid supply is not available. 25. Within the context of the ERAP (APL-1), FUNAE provided electricity to small villages by installing PV systems for the provision of community-level services (clinics, schools, etc.). In doing so FUNAE was able to have a significant local impact and provide benefit to the entire 33 The electrification of schools comprises: 2 classrooms, 1 administrative office and 2 staff houses 34 The electrification of health clinics comprises: 1 health clinic type II including refrigerator and 2 staff houses 35 The costs used for the calculation of schools and health clinics, were the average cost of the actual systems used in the installations at rural schools and clinics under the ongoing IDA ERAP (APL I) project. 160 community in those villages. Through the NEDAP the Program FUNAE aims to provide PV Systems to 58 new rural villages. The composition of the solar systems to be installed include: household lighting equipment, water pumping systems, public lighting, battery charging systems, and refrigeration to be installed in a rural community center. 26. Following the model established within the ongoing IDA ERAP (APL-1) program, local leaders with assistance from FUNAE, will set-up a Community Management Commission to oversee operation and maintenance of the PV systems and to collect the monthly fees to be paid by the beneficiary households. These Commissions will get from 10% up to 15% of the total fees collected and they will deposit the remaining value in a specific community account designated for the program. 27. In each community, and with the portion of fees retained by the Commission, the Commission will select and recruit an individual (or individuals) who will have the following responsibilities: · Supporting connections to the local communities; · The timely collection of payment for the consumption of energy; Identification of new consumers and identify productive uses that use electricity; · Commercialization of energy equipment; · Participation in the search for new and innovative solutions for the most common maintenance jobs (such as gardening of weeds), as a way of involving the community and thus contributing to the creation of local employment; · Fight and dissuasion of vandalism and theft activities. 28. The estimated cost for the electrification of up to 58 villages36 is US $7.0 million dollars, and is expected to reach about 140.000 direct beneficiaries. FUNAE intends to implement this activity in the following provinces: Table A.15.5 Provinces Number of projects Cost (USD M) Cabo Delgado 15 1.8 Niassa 15 1.8 Inhambane 14 1.7 Manica 14 1.7 Total 58 7.0 36 The electrification of the villages includes: households (solar lanterns), non-residential dwellings, shop owners, water pumping systems, schools, clinics, administration and police posts and public lighting. The average cost per system was calculated based on the same systems that were installed by FUNAE under the IDA ERAP (APL I). 161 Support to private sector renewable energy supply/delivery system (US $3.5 million) 29. The Government of Mozambique is committed to supporting a rapid expansion of access to electricity and wishes to attract private sector participation in rural electrification with renewable energies. Private operators will be encouraged and expected to make investments to develop a renewable energy technologies market which will contribute towards improving the operation of the productive sector, the provision of social services and in improving the quality of life of the rural communities. 30. In order to stimulate the participation of the private sector in supplying renewable energy products in rural areas, appropriate support mechanisms and incentives will be used. These mechanisms and incentives include short training as solar engineers to locals that then sell and maintain solar systems, a model that has yielded good results in South Asia; an integrated approach with the electrification of schools and clinics that capitalizes on the sales and maintenance infrastructure established; and subsidies to firms per unit of power (Watt-peak) of PV systems supplied to households or SMEs. 31. The overall objective is to increase and expand the private sector's role in the supply of PV systems, by demonstrating that the private sector can profitably supply them, so that new suppliers are encouraged to enter the market. FUNAE aims to reach 5,000 new customers within the NEDAP Program. Sub-component 2.2: Biomass Energy Systems (US $14.3 million) 32. Within this sub-component, FUNAE will: (i) promote the dissemination and use of improved stoves and ovens in rural areas; (ii) promote the energetic use of waste from agriculture and agro-industry; (iii) promote the use of renewable energy sources for household and SME use and end-use energy efficiency of biomass resources; (iv) increase modern energy access among rural communities through the introduction of stationary and mobile energy services multifunctional energy service platforms using locally produced biofuels (Direct Vegetable Oil - DVO and/or Biodiesel) in villages; and (v) develop small-scale biofuels community agriculture plots to lessen dependence of the multifunctional platforms on commercial liquid fuels. 33. It is expected that modern biomass fuels and systems will play an important role in increasing decentralized access to modern energy services in rural and peri-urban households and SMEs in Mozambique. In that sense NEDAP is expected to have a critical role in demonstrating and disseminating sustainable micro-to-medium-scale biomass technologies which will then be replicated and scaled-up within the implementation of the proposed "National Rural Electrification Strategy and Investment Program - RESIP". The NEDAP Program will not support "experimentation" with new and/or untested biomass technologies, rather it will support the adaptation of successful and proven socially and environmentally sustainable biomass technologies to the Mozambican context, ranging from improved household stoves, to application of liquid biofuels for household, SME, rural mobility and transportation uses, to micro-small scale biomass co-generation ("green power") systems. 162 Promotion of Improved Stoves and Charcoal Kilns (US $2.4 million) 34. The sustainable management and rational use of biomass resources can and should be done to address the prevailing deforestation trends in Mozambique. The ongoing uncontrolled cutting of trees makes the rationalization of the overall consumption of woodfuels an important environmental, economic and social necessity. The production of charcoal through traditional methods is today responsible for an important share of the ongoing deforestation in the country. The dissemination of improved stoves (such as "Poupa Lenha") would contribute to increase end-use energy efficiency in households and institutions (schools, clinics, etc.), would help lower woodfuel requirements by type of user and would reduce "in-door air pollution", with concomitant health benefits. A number of rural health clinics and school that received FUNAE support under the IDA ERAP (APL-1) have already discontinued the use of the traditional "three stones stoves" for cooking in favor of improved stoves and are, reportedly, saving about two thirds of their previous consumption of firewood. Both the improved stoves and charcoal kilns will be disseminated on a cost recovery basis, with the funds recovered becoming a progressive revolving fund at FUNAE to further expand stove and kiln dissemination. 35. Against that backdrop, under the NEDAP Program FUNAE will actively support the market-based production and promotion of: (i) 165,000 improved stoves for schools, health clinics and households; (ii) 1,410 improved charcoal kilns and carbonization methods to increase firewood- to-charcoal conversion efficiencies; and, (iii) biomass energy conservation methods and practices within small and medium enterprises (SMEs) and rural households. Promotion of Multifunctional Energy Service Platforms (US $3.2 million) 36. FUNAE will promote and support the installation of up to 200 stationary and mobile multifunctional energy service platforms which run on biofuels (Direct Vegetable Oil -- DVO and/or Biodiesel) locally produced in the beneficiary rural villages. FUNAE will also assist villages to set-up small-scale sustainable biofuels agriculture plots to establish a village-based independent and self-reliant fuel production system for the platforms. The multifunctional platforms have a standard diesel engine that can power a variety of tools and provide various energy services such as, cereal milling, husk removal, battery charging, lighting, basic DC power and water pumping, and in the case of the mobile platforms, basic mobility, light mechanization and distributed irrigation and power generation. Different models/concepts of multifunctional platforms have been utilized for the some years in a number of countries in Africa, Latin America and Asia, and have proven that their deployment, operation and maintenance can be successfully handled by local operators with only minimal external introductory and follow-up support. It is expected that the platforms will have a tangible impact in terms of providing access to multiple modern energy services to villagers in Mozambique and, thus, that they will contribute towards their social and economic development. The implementation of this activity will benefit from the operational experience of the World Bank and other donors on multifunctional platforms. 37. FUNAE will target between 100 and 200 villages. Direct beneficiaries within those villages will include community organizations and individuals who already own any sort of diesel powered equipment in the target villages. Special priority will be given to village Women 163 Associations or Women Producer Groups. Target villages will be selected based on being rural, poor and where FUNAE has already been active to facilitate to process of knowledge and technology transfer as well as implementation monitoring and impact evaluation. At a later stage the experience gained will be extended to other rural communities. 38. The multifunctional platform "Kit" for the project will have a maximum cost of US$ 15,000 per kit and will consist of a stationary or mobile multifunctional platform with equipment modules such as: grinding mills, battery charger, electric and/or mechanic water pumps, vegetable or nut oil press, carpentry tools and mini electric grids for lighting. Specific equipment modules will be adjusted to better suit specific community needs. The kit will also include the inputs and technical assistance necessary to establish a 3 ha to 5 ha sustainable biofuels agricultural plot per platform that is installed in each participating village. Promotion of Household and SME Interfuel Substitution (US $4.2 million) 39. This activity will promote interfuel substitution for cooking, heating and lighting applications in the household and small and medium enterprises (SME) sectors nationwide in the form of: (i) market-based LPG and kerosene inter-fuel substitution programs; and/or (ii) identification, evaluation and promotion of other technically and economically viable renewable fuels (gelfuel, ethanol, briquettes, etc.) and/or technologies (solar, wind, LEDs, etc.). This subcomponent would help increase access to household to modern and cleaner energy services and should help reduce consumption of woodfuels. In addition to benefiting the targeted beneficiaries (approximately 15,000), this sub-component should help demonstrate new approaches and fuel/technologies options for inter-fuel substitution efforts thus establishing a solid basis for subsequent replication and scale-up. The implementation of this subcomponent will benefit from the knowledge of the World Bank and other donors, and of the technical assistance of specialized programs like the Energy Sector Management Assistance Program (ESMAP), the "Africa Lighting Initiative (ALI)" and the PROBEC Program (GTZ). Biomass Energy Technologies Demonstration Pilots (US $4.5 million) 40. As a result of growing worldwide concern regarding environmental impacts of utilizing fossil fuels, particularly climate changes, there is currently a great deal of interest in renewable energy in general and modern biomass energy in particular. 41. In order to promote the use of modern biomass energy technologies (liquid fuels, "green power", high efficiency briquettes, biogas, etc.), FUNAE will support selected small demonstration pilot projects, implemented in partnership with private sector entrepreneurs and/or academic and research centers, to research and showcase the commercial viability of: (i) sustainably producing modern biomass energy/fuels in Mozambique; and/or (ii) of utilizing modern biomass energy fuels and technologies in productive activities (i.e., agriculture, agro- industry, rural mobility and transport, electricity generation, commerce, services, other) and/or social applications (education, health, communication, other). 164 Table A.15.6 Promotional Biomass of Household Multifunctional Energy Improved Stoves37 Charcoal Kilns38 and SME Platform Technologies Interfuel Total Demonstration Provinces Substitution (USD Number '000) Number Cost Cost Number Cost of Cost (USD Cost (USD of (USD (USD of (USD Charcoal '000) '000) Stoves '000) '000) Platforms '000) Kilns Cabo 35,000 280 300 145 40 600 800 825 2,650 Delgado Niassa 35,000 280 300 145 40 600 800 750 2,575 Inhambane 30,000 240 300 145 40 600 800 825 2,610 Gaza 30,000 240 250 121 40 600 800 750 2,511 Manica 35,000 280 260 125 40 600 800 850 2,655 Total 165,000 1,320 1,410 680 200 3,000 4,000 4,000 13,000 42. The impact of the promotion of household and SME interfuel substitution will be to reduce the present dependence on traditional biomass fuels in the household and SME sectors in Mozambique, to demonstrate the viability of introducing a wider range and choice of commercial fuels to consumers, and the viability of changing long-standing energy consumption patterns in order to promote increased sustainability and a lower carbon emission fuel mix. The impact of this activity will be measured in terms of the number of households and SME enterprises who totally or partially substitute traditional biomass fuels for better fuel options as a result of the project, and in terms of the variety of renewable fuels and technologies that are introduced in the marketplace as a result of the project. 43. The impact of the modern biomass energy technologies demonstration pilots will be to showcase and prove the technical and commercial viability of the adaptation and/or establishment of those modern technologies in Mozambique with a view to encouraging the private sector to invest in their subsequent broader commercialization. Each demonstration pilot project will have its own specific relevant monitorable indicators, which will be systematically tracked, analyzed and reported. In particular employment and incremental income generation among beneficiaries as a result of the pilot will be monitored against strict baselines to be able to fully document the economic and social impact of the deployment of those modern biomass energy technologies. 37 The production cost of improved stoves (US $8 per stove) was calculated from the cost applied by the ProBEC (GTZ) in a similar program. 38 The production cost of Charcoal Kilns was estimated based on typical costs as reported in http://chestofbooks.com/crafts/scientific-american/sup3/Charcoal-Kilns.html . 165 Table A.15.7 Description year 1 year 2 year 3 year 4 year 5 Total Beneficiaries: 491,171 574,405 562,215 546,048 304,629 2,478,468 Institutional Solar Systems 20,000 20,000 20,000 20,000 10,000 90,000 (Schools) Institutional Solar Systems 259,000 259,000 259,000 259,000 97,125 1,133,125 (Clinics) Community/Local Operator 36,570 36,570 24,380 24,380 19,504 141,404 System Support to private Sector TBD(*) TBD(*) TBD(*) TBD(*) TBD(*) TBD(*) supply/delivery systems Small/Micro Hydropower 48,501 80,835 80,835 64,668 0 274,839 Systems Promotion of Improved 125,000 175,000 175,000 175,000 175,000 825,000 Stoves Promotion of charcoal kilns 2,100 3,000 3,000 3,000 3,000 14,100 Promotion of Multifunctional TBD(*) TBD(*) TBD(*) TBD(*) TBD(*) TBD(*) platforms Promotion of household and TBD(*) TBD(*) TBD(*) TBD(*) TBD(*) TBD(*) SME interfuel substitution Power (kW) 714 893 845 795 291 3,537 Note: (*) The number of beneficiaries from the Biomass Demonstration Pilots will be determined on a project by project basis, will be monitored and accounted as project implementation advances. Sub-component 2.3: Institutional Strengthening & Capacity Building (US $5.48 million) 44. FUNAE's internal capacity building program is aimed at improving its performance and increasing the implementation of energy projects in rural areas and improving its environmental management capacity. Through the NEDAP Program FUNAE intends to support training activities to up-grade FUNAE´s staff capabilities on management practices, project evaluation, and monitoring of performance indicators. The cost of the training program is estimated at about US $1.0 million dollars over the 5 year implementation period of the NEDAP Program. FUNAE's environmental management plan has been estimated at US $ 0.5 million. Additional capacity building requirement for FUNAE include US $1.5 million for technical assistance and consulting services to support the development, implementation and evaluation of programmatic activities and "on-the-job" training of FUNAE staff and for Auditing services. FUNAE's Institutional strengthening requirements within the NEDAP Program include equipment (US$0.60 million), vehicles (US$0.35 million) and travel costs (US $0.5 million). 166 45. The overall FUNAE program of activities under NEDAP Program will have the following annual and final progress indications and targets: Table A.15.8 year 1 year 2 year 3 year 4 year 5 Total Item Quantity Qty MUS$ Qty MUS$ Qty MUS$ Qty MUS$ Qty MUS$ MUS$ Institutional Solar Systemas - Rural 900 200 1.75 200 1.75 200 1.75 200 1.75 100 0.84 7.83 Schools Institutional Solar Systemas - Rural 875 200 1.66 200 1.66 200 1.66 200 1.66 75 0.53 7.17 Clinics Community/Local operator solar systems 58 15 1.81 15 1.81 10 1.21 10 1.21 8 0.97 7.00 Support to private sector supply/delivery 0.50 0.50 0.50 0.50 0.00 2.00 systems Small/Micro Hydropower Systems 17 3 0.50 5 0.85 5 0.85 4 0.80 0 0.00 3.00 Subtotal 1 1850 418 6.22 420 6.57 415 5.96 414 5.91 183 2.33 27.00 Biomass (Improved Stoves) 165000 25000 0.20 35000 0.28 35000 0.28 35000 0.28 35000 0.28 1.32 Charcoal Kilns 1410 210 0.10 300 0.14 300 0.14 300 0.14 300 0.14 0.68 Multifunctional Platforms 200 50 0.75 50 0.75 40 0.60 40 0.60 20 0.30 3.00 Promotional of Household and SME - - 0.80 - 0.80 - 0.80 - 0.80 - 0.80 4.00 Interfuel Substitution Biomass Energy Technologies - - 0.83 - 0.75 - 0.83 - 0.75 - 0.85 4.00 Demonstration Pilots Subtotal 2 166610 25260 2.68 35,350 2.72 35,340 2.65 35,340 2.57 35,320 2.37 13.00 Environmental management 0.10 0.10 0.10 0.10 0.10 0.50 plan Technical Assistance & 0.50 0.50 0.50 0.00 0.00 1.50 Institutional Development & Capacity Consultancy Building Services Training 0.40 0.30 0.30 0.00 0.00 1.00 Vehicles 0.20 0.15 0.00 0.00 0.00 0.35 Office and Field 0.25 0.25 0.10 0.00 0.00 0.60 Work Equipment Travel 0.20 0.20 0.10 0.00 0.00 0.50 Subtotal 3 - - 1.65 - 1.50 - 1.10 - 0.10 - 0.10 4.45 Total 168,460 25678 10.54 35770 10.79 35755 9.71 35754 8.59 35503 4.80 44.45 Sub-component 2.4: Pico, Micro and Small Hydropower Schemes (US $4.0 million) 46. In pursuing the goal of improving the living conditions and standards of rural populations through the provision of cost effective basic electrification services there is a need to encourage and promote the construction and rehabilitation of micro hydropower plants where appropriate. 47. Pico, Micro and Small multipurpose hydropower schemes can provide viable solutions to supply basic electricity and water management services to isolated mini-grids in un-served rural areas. This is particular true in certain provinces in Mozambique where good conditions exists in terms of water availability and adequate topography. Tete, Manica and Niassa provinces are three particularly promising areas for the development of small scale hydropower schemes. FUNAE has already identified a number of viable sites for hydro-power solution. This sub- component will finance a combination of up to 17 Pico, Micro and/or small hydro-power schemes in Tete, Manica and Niassa with an estimated total investment cost of US $3.0 million dollars. Approximate 275,000 rural people are expected to benefit from these hydro-power schemes. 167 Table A.15.9 Number of Pico Provinces and Small Cost (USD) hydropower Tete (Chizolomondo, Kazula, Lifidze and 4 0,8 Ulóngue) Manica (Chôa Mountains, Nhazónia, Chiurarue, 6 1,0 Sembezeia, Rotanda II and Mafuia) Niassa (Mbau, Congerenge, Luazite, Messalo, 7 1,2 Ndirima, Luambala e Malanga) Total 17 3,0 48. On the basis of the studies already carried out by FUNAE and the nature of the proposed investments, is not expected that the proposed pico, micro and/or small-hydro projects will cause any negative environmental or social impacts in the project areas or elsewhere. On the other hand, such projects would avoid the emission of gases from the burning thousands of gallons of kerosene per month for lighting, which would be a positive impact on climate change, would help reduce in-door air pollution, and would contribute to reducing the risk of respiratory diseases associated with inhalation of kerosene smoke and of kerosene-related household fires. The availability of electricity for lighting from hydropower will also help avoid the use and open air disposal of thousands of 1.5 V alkaline batteries of per month. 49. This component has no IDA financing and therefore the World Bank is explicitly not responsible for the establishment, monitoring and/or enforcement of any safeguards policies that apply to this activity. Conversely, the Donor(s) which provide funding for this component will be solely responsible for the all applicable safeguards policies and their satisfactory compliance. Component 3: Energy Sector Planning, Policy and Institutional Development Component (US $17.95 million) 50. The Energy Sector Planning, Policy and Institutional Development Component will finance: (i) the elaboration of a national "Rural Electrification Strategy and Investment Program (RESIP)"; (ii) technical assistance and consulting services to strengthen the GoM's capacity to promote and participate in the development of new energy infrastructure projects ­ specially independent power producers (IPPs) and other energy "mega-projects" ­ of national and regional interest; (iii) institutional strengthening and capacity building of the Ministry of Energy to improve its performance and governance and to support the design and establishment of a flexible SWAp for the energy sector; and (iv) institutional strengthening support to the National Electrification Commission (CNELEC) for it to effectively discharge its critical advisory/regulatory function. This component will be implemented by ME. 168 Sub-component 3.1: Promotion of Rural Electrification (US $2.33 million) 51. This sub-component will support the elaboration, consultation process and dissemination of a comprehensive national "Rural Electrification Strategy and Investment Program (RESIP)". To date several parallel efforts have been made by GoM (ME, FUNAE and EdM) with strong support from key donors. That has resulted in good but partial proposals and localized investments and, by extension, a comprehensive national rural electrification strategy and long- term investment program is still to be produced. The proposed subcomponent would support the elaboration of a RESIP, starting with the assembling of all relevant work done to date on the subject to build on already existing knowledge and to avoid duplication of efforts. Subsequently, complementary field and analytical work would be conducted to complete any relevant missing elements (technical, policy, institutional, economic/financial, environmental, social, etc.). The RESIP would incorporate both grid and off-grid electrification options, all available and viable energy resources and technologies, and all socially relevant levels of decentralization. The rural electrification strategy would be gradually articulated with comprehensive stakeholder participation. The joint GoM-Donor "Energy Sector Working Group" would play an active consultative role in the entire process of elaboration of the RESIP as it would constitute the framework for a specific flexible Rural Electrification SWAp. This sub-component would be implemented by a specialized Consultant group, which would manage the complete process from beginning to end and would provide "on-the-job" training to ME staff in all key areas of the work. Sub-component 3.2: Promotion of New Energy Infrastructure (US $2.23 million) 52. The GoM's new pragmatic strategy to expand private sector participation in the energy sector has resulted in the launching of preparation of several generation (Mphanda Nkuwa; Cahora Bassa North, Lurio, Moatize, Benga and Ressano Garcia) and transmission (Mozambique Regional Transmission Development Program) "mega-projects". These projects will total more than US $15 billion in mostly private sector investments. Given the level of technical, financial and legal complexity of these projects, GoM needs to strengthen its capacity to accompany their preparation and to negotiate them. This sub-component will provide specialized technical assistance and consulting services (technical, legal, financial, etc.) to strengthen the ME's capacity to promote and actively participate in the development and negotiation of those new projects of national and regional interest. That expertise to would assist ME in the development and negotiation of specific projects and would provide substantive and monitorable "on-the-job" training to ME staff in all critical areas of the work. Sub-component 3.3: Support to CNELEC (US $3.9 million) 53. The continuous, successful and independent operation of the National Electrification Commission (CNELEC) as a strong, independent advisory regulator remains a cornerstone of GoM's new energy sector development strategy. This sub-component will provide specialized technical assistance and institutional strengthening support to CNELEC for it to be able to continue to effectively discharge its critical advisory/regulatory function in the sector. It is expected that CNELEC's future general operating budgets will be funded through an assigned share of power sector concession fees (mostly coming from the Cahora-Bassa project). The 169 assistance through NEDAP will focus on funding different forms of specialized technical assistance. These are likely to include consultant assistance in the following areas: annual reviews of EdM's performance under future Performance Contracts, establishment of monitoring systems for financial, technical and commercial performance, establishment of customer codes in several areas (connections, disconnections, metering and billing disputes), cost of service and tariff studies, a regulatory accounting system and a customer complaint system. Sub-component 3.4: ME Institutional Strengthening & Capacity Development (US $9.49 million) 54. This sub-component will provide institutional strengthening and capacity building for the Ministry of Energy for it to continue to improve its overall performance and governance to support its leadership role in the establishment of a flexible SWAp for the energy sector. This sub-component will provide: (i) specialized technical assistance, including for Auditing services; (ii) support for sectoral studies to underpin ME evolving strategic agenda (energy policy and pricing, renewable energy development and regulatory issues, regional energy integration protocols, etc.); (iii) general institutional strengthening of ME and, in particular of the Renewable Energy Department and the Environmental Management team; (iv) training (energy planning and policy making, project management, monitoring and evaluation systems, procurement, etc.); and, (v) material strengthening (vehicles and equipment). NEDAP Costs and Indicative Financing Plan 55. The estimated investment cost of the NEDAP Program is US $223.6 million. Of that total the government of Mozambique is expected to contribute with approximately US $27.3, equivalent to 12%. The remainder US $196.3 million are expected to be mobilized from various donors, including World Bank, Agence Française de Développement (AFD), European Investment Bank (EIB), OFID, BADEA, Islamic Development Bank (IsDB), Kuwait Fund. In addition to these donors who are already preparing financing projects under NEDAP or have pledge to provide financing for it, other donors, including Nordic Development Fund (NDF), African Development bank (ADB) and the European Commission might be able to contribute to the energy sector within the NEDAP program in FY10 and/or FY11. Table A.15.10 presents the indicative financing plan of the NEDAP Program. 56. While the different donor financing instruments are separate and will be based on parallel financing and independent safeguards compliance responsibilities, the specific investment projects by each donor have been carefully coordinated by GoM and discussed within the "Energy Donor Working Group" to ensure that there will be no duplication of activities and/or financing and that all donor projects are both complimentary and non-conflicting. 170 Table A.15.10 Mozambique: National Energy Development and Access Program (NEDAP) / INDICATIVE FINANCING PLAN (Basis: US $000) ESTIMATED COSTS IDA OTHER PARALLEL FINANCING TOTAL PROGRAM Edm Project Component Local Foreign Total GoM EDAP (APL-2) AFD EIB OFID Afund FINANCING FINANCING 1 - Rehab. & Reinforcement of Primary Network & Grid Extension Pledge Pledge Pledge Pledge GAP 1.1 - Engineering Services for Design & Supervision 1,170 8,000 9,170 1,170 6,800 0 1,200 0 0 9,170 0 1.2 - MV Network Transmission Efficiency Improvement Pilot (Maputo) 180 1,200 1,380 180 1,200 0 0 0 0 1,380 0 1.3 - Rehabilitation & Reinforcement of Primary Network A.1 Maputo: Replacement & Upgrade of Power Transformer 30MVA 66/33kv (Matola) 400 2,750 3,150 400 2,750 3,150 0 A.2 Rehabilitation & Reinforcement 33/19.1kV System (Changalane-Catuane) 150 1,000 1,150 150 1,000 1,150 0 A.3 Manica: Installation of Power Transfomer 30MVA 66/22kV + Accesories 250 2,400 2,650 250 2,400 2,650 0 A.4 Manica: Replacement & Upgrade 6.6VMV to 22kV oh Line 300 2,050 2,350 300 2,050 2,350 0 Sub-total Rehabilitation & Reinforcement 1,100 8,200 9,300 1,100 8,200 0 0 0 0 9,300 0 1.4 - Extension of Distribution Networks & Customer Connections A. Maputo Province A.1 Extension 33kv MV oh Line 600 4,050 4,650 600 0 4,050 4,650 0 A.2 Extension 0.4 kv LV Network 2,100 15,250 17,350 2,100 0 13,000 2,250 17,350 0 A.3 Distribution Transformers 690 4,700 5,390 690 0 4,700 5,390 0 A.4 Service Connections 1,800 12,350 14,150 1,800 0 10,000 2,350 14,150 0 A.5 Metering Equipment (CM & PP) 370 2,500 2,870 370 0 2,500 2,870 0 Sub-total Maputo Province 5,560 38,850 44,410 5,560 0 12,500 24,100 2,250 0 44,410 0 B. Nampula Province B.1 Construction 33kv MV oh Line 150 1,000 1,150 150 900 100 1,150 0 B.2 Construction 0.4 kv LV Network 800 7,500 8,300 800 3,400 4,100 8,300 0 B.3 Distribution Transformers 220 1,500 1,720 220 1,300 200 1,720 0 B.4 Service Connections 600 4,200 4,800 600 3,600 600 4,800 0 B.5 Metering Equipment (CM & PP) 120 850 970 120 850 970 0 Sub-total Nampula Province 1,890 15,050 16,940 1,890 10,050 0 0 5,000 0 16,940 0 C. Manica Province C.1 Construction 33kv MV oh Line 140 950 1,090 140 0 950 1,090 0 C.2 Construction 0.4 kv LV Network 730 5,000 5,730 730 0 5,000 5,730 0 C.3 Distribution Transformers 200 1,400 1,600 200 0 1,400 1,600 0 C.4 Service Connections 1,110 7,600 8,710 1,110 0 7,600 8,710 0 C.5 Metering Equipment (CM & PP) 230 1,550 1,780 230 0 1,550 1,780 0 Sub-total Manica Province 2,410 16,500 18,910 2,410 0 0 16,500 0 0 18,910 0 D Tete Province D.1 Construction 33kv MV oh Line 180 1,225 1,405 180 1,000 1,180 -225 D.2 Construction 0.4 kv LV Network 600 5,500 6,100 600 4,000 4,600 -1,500 D.3 Distribution Transformers 250 1,700 1,950 250 1,500 1,750 -200 D.4 Service Connections 670 4,600 5,270 670 4,060 4,730 -540 D.5 Metering Equipment (CM & PP) 130 925 1,055 130 900 1,030 -25 Sub-total Tete Province 1,830 13,950 15,780 1,830 11,460 0 0 0 0 13,290 -2,490 E. Cabo Delgado Province E.1 Construction 33kv MV oh Line 260 1,750 2,010 260 0 1,750 2,010 0 E.2 Construction 0.4 kv LV Network 450 3,250 3,700 450 0 3,250 3,700 0 E.3 Distribution Transformers 150 1,050 1,200 150 0 1,050 1,200 0 E.4 Service Connections 600 4,200 4,800 600 0 4,200 4,800 0 E.5 Metering Equipment (CM & PP) 130 900 1,030 130 0 900 1,030 0 Sub-total Cabo Delgado Province 1,590 11,150 12,740 1,590 0 11,150 0 0 0 12,740 0 Sub-total Sub-component 1.4 13,280 95,500 108,780 13,280 21,510 23,650 40,600 7,250 0 106,290 -2,490 1.5 - Institutional Strenthening and Capacity Development 1. Environm. Mangt. Plan & Funds for Implementation of RPF & RAPs (*) 0 3,000 3,000 1,000 500 1,000 500 3,000 0 2. Supply, Installation & Training of Integrated Business System (IBMS) 200 7,000 7,200 200 6,200 800 7,200 0 3. Consulting Services for Procurement and Supervision of IBMS 200 1,300 1,500 200 1,300 1,500 0 4. Technical Assistance and Consulting services 220 1,500 1,720 220 1,500 1,500 3,220 1,500 Sub-total Sub-component 1.4 620 12,800 13,420 620 10,000 2,000 1,000 500 800 14,920 1,500 1.6 - - Contigency (5%) 400 6,350 6,750 400 2,290 1,350 2,150 250 200 6,640 -110 Component Total 16,750 132,050 148,800 16,750 50,000 27,000 44,950 8,000 1,000 147,700 -1,100 (*) Includes funds for the implementation of environmental and social mitigation measures under OP/OB 4.01 (Environment) and OP/OB 4.12 (Involuntary Resettlement). 171 Table A.15.10 (Continuation) Mozambique: National Energy Development and Access Program (NEDAP) / INDICATIVE FINANCING PLAN (Basis: US $000) [Continuation] ESTIMATED COSTS IDA OTHER PARALLEL FINANCING TOTAL PROGRAM FUNAE Project Component Local Foreign Total GoM EDAP (APL-2) AFD EIB OFID Afund FINANCING FINANCING 2.- Investments on Rural and Renewable Energy GAP 2.1 - Solar Systems 1. Institutional Solar Systems (schools & Health Clinics) 3,000 15,000 18,000 3,000 4,250 9,600 16,850 -1,150 2. Community/Local Operator solar systems 70 7,000 7,070 70 3,500 3,500 7,070 0 3. Support to private sector supply/delivery systems 1,500 2,000 3,500 1,500 1,500 3,000 -500 Sub-total 4,570 24,000 28,570 4,570 9,250 0 0 0 13,100 26,920 -1,650 2.3 - Biomass Energy Systems 1. Promotion of Improved stoves and Charcoal Kilns 400 2,000 2,400 400 1,000 1,000 2,400 0 2. Promotion of Multi-functional Energy Service Platforms 200 3,000 3,200 200 1,500 1,000 2,700 -500 3. Promotion of Household and SME Interfuel Substitution 200 4,000 4,200 200 2,000 1,500 3,700 -500 4. Biomass Energy Technologies Demostration Pilots 500 4,000 4,500 500 1,800 2,000 4,300 -200 Sub-total 1,300 13,000 14,300 1,300 6,300 0 0 0 5,500 13,100 -1,200 2.3 - Institutional Development & Capacity Building 1. Environm. Mangt. Plan & Funds for Implementation of RPF & RAPs (*) 200 500 700 200 500 700 0 2. TA and Consulting Services 200 1,500 1,700 200 750 750 1,700 0 3. Training 50 1,000 1,050 50 500 500 1,050 0 4. Vehicles 150 350 500 150 200 150 500 0 5. Office and Field Work Equipment 150 600 750 150 250 350 750 0 6. Travel 500 500 250 250 500 0 7. Operating Costs 280 280 280 280 0 Sub-total 1,030 4,450 5,480 1,030 2,450 0 0 0 2,000 5,480 0 2.2 - Small/Micro Hydropower Systems 1. Tete 500 1,500 2,000 500 0 1,500 2,000 0 2. Manica 500 1,500 2,000 500 0 1,500 2,000 0 Sub-total 1,000 3,000 4,000 1,000 0 0 0 3,000 4,000 0 Component Total 7,900 44,450 52,350 7,900 18,000 0 0 0 23,600 49,500 -2,850 (*) Includes funds for the implementation of environmental and social mitigation measures under OP/OB 4.01 (Environment) and OP/OB 4.12 (Involuntary Resettlement). Table A.15.10 (Continuation) Mozambique: National Energy Development and Access Program (NEDAP) / INDICATIVE FINANCING PLAN (Basis: US $000) [Continuation] ESTIMATED COSTS IDA OTHER PARALLEL FINANCING TOTAL PROGRAM ME Project Component Local Foreign Total GoM EDAP (APL-2) AFD EIB OFID Afund FINANCING FINANCING 3.- Energy Sector Planning, Policy and Institutional Development GAP 3.1 - Promotion of Rural Electrification 1. Elaboration of Rural Electrification Strategy & Investment Program (RESIP) 250 1,500 1,750 250 1,500 1,750 0 2. RESIP Consultation and Dissemination Process 80 500 580 80 500 580 0 Sub-total 330 2,000 2,330 330 2,000 0 0 0 0 2,330 0 3.2 - Promotion of New Energy Infrastructure 1. Technical Assistance 200 1,800 2,000 200 1,000 800 2,000 0 2. Travel 30 200 230 30 200 230 0 Sub-total 230 2,000 2,230 230 1,200 0 0 0 800 2,230 0 3.3 - Support to CNELEC 1. Technical Assistance 3,000 3,000 2,000 1,000 3,000 0 2. Institutional Strengthening 600 600 600 600 0 3. Office Equipment 300 300 300 300 0 Sub-total 900 3,000 3,900 900 2,000 0 0 0 1,000 3,900 0 3.4 - ME Institutional Strengthening & Capacity Development 1. Technical Assistance 150 2,500 2,650 150 1,000 1,000 2,150 -500 2. Sectorial Studies 100 1,000 1,100 100 500 1,000 1,600 500 3. Institutional Strengthening 200 2,800 3,000 200 1,500 1,000 2,700 -300 4. Trainning 80 500 580 80 500 580 0 5. Vehicles 80 500 580 80 500 580 0 6. Office Equipment 80 500 580 80 500 580 0 7. Operating Costs 500 500 1,000 500 500 1,000 0 Sub-total 1,190 8,300 9,490 1,190 5,000 0 0 0 3,000 9,190 -300 Component Total 2,650 15,300 17,950 2,650 10,200 0 0 0 4,800 17,650 -300 Sub-Total Project Costs 27,300 191,800 219,100 27,300 78,200 27,000 44,950 8,000 29,400 214,850 -4,250 5. Unallocated 0 4,300 4,300 0 1,800 1,900 0 600 4,300 0 TOTAL PROJECT COSTS 27,300 196,100 223,400 27,300 80,000 27,000 46,850 8,000 30,000 219,150 -4,250 172 Annex 16: MAP MAP(IBRD 32473) MOZAMBIQUE: MZ-Energy Development and Access Project (APL-2) 173 GABON RWANDA CONGO BURUNDI INDIAN 34° 36° 38° 40° ZAIRE OCEAN TANZANIA COMOROS TANZANIA ANGOLA r MALAWI LAKE Rive ma Rovu Mayotte ZAMBIA (Fr) R Mocimboa SCA UE MALAWI l IQ da Praia ne GA an MB ZIMBABWE Ch DA MOZA e NAMBIA biqu MA Mozam BOTSWANA 12° 12° ATLANTIC SWAZILAND OCEAN River nda SOUTH LESOTHO Luge AFRICA Ancuabe Pemba Montepuez 32° r Lichinga Rive salo MALAWI Mes ZAMBIA N O R T H E R N R E G I O N r ive io R 14° Lur 14° Nacala Cuamba Monapo Nampula Moçambique Cahora Bassa er 2075 MW 1240 MW Gurué Riv Lake Za ire Cahora Bassa m Ch be Alto Molocué ze Ri ve r 16° Moatize 16° Tete Angoche 400 kV Line to Harare Mocuba Nicuadala MOZAMBIQUE Caia C E N T R A L Quelimane CHANNEL 18° 18° R E G I O N Catandica Luabo Marromeu ZIMBABWE Marica Chibata Mutare MOZAMBIQUE Chimoio 110 kV Line Messica Nhamatanda ENERGY REFORM AND ACCESS PROJECT to Harare Lamego Chicamba 38 MW RURAL AND PERI-URBAN ELECTRIFICATION Mavuzi Mafambica Petroleum Pipeline 52 MW Dondo to Zimbabwe PROJECT Beira 12 MW gas (jet) PERI-URBAN ELECTRIFICATION Buzi 20° 20° INDEPENDENT GRID ELECTRIFICATION PLANNED EXISTING INTERCONNECTED NETWORK: ±533 kV DC LINES 330 (400) kV LINES River 275 kV LINES Save Inhassoro 220 kV LINES 110 kV LINES Vilankulo 66 kV LINES 22° THERMAL POWER PLANTS 22° HYDRO POWER PLANTS SUBSTATIONS S O U T H E R N Lim po po Ri ve r RAILROADS R E G I O N SELECTED CITIES NATIONAL CAPITAL Massingir 60 MW Maxixe REGION BOUNDARIES FOR POWER SUPPLY 24° SOUTH Inhambane INTERNATIONAL BOUNDARIES WELLS WITH GAS DISCOVERY OR GAS SHOWS 24° COAL MINE Chokwe AFRICA Lionde LPG STORAGE Chidengule Corumana KEROSENE STORAGE 14 MW Macia 275 kV Line to Komatipoort Xai-Xai 400 kV Line to Arnot 0 100 200 300 KILOMETERS 57 MW steam 78 MW gas turbines 26° 400 kV Line MAPUTO This map was produced by the Map Design Unit of The World Bank. 26° to Camden Matola The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Crude Oil SWAZILAND IBRD 32473 Group, any judgment on the legal status of any territory, or any Refinery endorsement or acceptance of such boundaries. (Closed) MAY 2003 30° 34° 36° 38° 40° SOUTH AFRICA