The World Bank FOR OFFICIAL USE...

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.

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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 CNELEC CPIA CPAR CPS

Adaptable Program Loan National Electricity Commission Country Portfolio Implementation Assessment Country Portfolio Assessment Report Country Partnership Strategy

CREST DPL

Commercial Reorientation of Electricity Sector Toolkit Development Policy Lending

DED DNSP/ME DVO

Electrification and Projects Directorate National Directorate for Studies and Planning / Ministry of Energy Direct Vegetable Oil

EC EDAP (APL-2)

European Union Energy Development and Access Project

EdM Electricidade de Moçambique EIB European Investment Bank EITI ERAP

Extractive Industry Transparency Initiative Energy Reform and Access Project

ESMAP Energy Sector Management Assistance Program ESMF ESW FUNAE

Environmental and Social Management Framework Economic Sector Work Fundo de Energia / Energy Fund

GoM Government of Mozambique GTZ German Technical Cooperation HCB Hidroelectrica Cahora Bassa IBMS Integrated Business Management System IBRD IC ICB

International Bank for Reconstruction and Development Individual Consultant International Competitive Bidding

IMF LCS ME

International Monetary Fund Least Cost Selection Ministry of Energy

MICOA MINEC

Ministry of Environment Ministry of Education and Culture

MISAU Ministry of Health MoF MTR MPD

Ministry of Finance Mid-term Review Ministry of Planning & Development

MV MW NCB NEDAP

Medium Voltage Mega Watt National Competitive Bidding National Energy Development and Access Program

NEPAD New Partnership for Africa’s Development NDF NORAD OFID PARPA II PDO PFM PIM

Nordic Development Fund Norwegian Cooperation OPEC Fund for International Development Poverty Reduction Strategy Program II Project Development Objective Public Financial Management Project Implementation Manual

PIU PRSC PV RAP RESIP

Project Implementation Unit Poverty Reduction Support Credit Photo-voltaic Resettlement Action Plan Rural Electrification Strategy and Investment Program

RETs Renewable Energy Technologies RPF SBD

Resettlement Policy Framework Standard Bidding Documents

SME Small and Medium Enterprises SSS SWAp UGEA VAT

Single Source Selection Sector Wide Approach Project Procurement Unit 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 Sector Manager: Subramaniam V. Iyer

Sectors: Power (70%); Renewable energy (15%); 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 Loan

Joint IFC: 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 (IDA)

24.00 56.00 80.00

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? Ref. PAD I.C.

[ ]Yes [X] No

Does the project require any exceptions from Bank policies? Ref. PAD IV.G. Have these been approved by Bank management?

[X]Yes [ ] No [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”? Ref. PAD III.E.

[ ]Yes [X] No

Does the project meet the Regional criteria for readiness for implementation? Ref. PAD IV.G.

[X]Yes [ ] No

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.

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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

2

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

3

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,

4

(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.

5

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

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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

7

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

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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

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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 the N.Inhambane Independent grid concessions, one of which will be based on a renewable energy sources, and another be bulk-supplied from the national grid.

Continued operation of independent grid concessions in N. Inhambane.

The N. Inhambane independent grid concession was cancelled (and Component C was removed from the ERAP’s framework through restructuring in December 2009. Hence the trigger is no longer relevant to the APL Series because it only applied to any continuation of the same component in the APL-2 phase, which is not proposed. 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.

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EdM performance contract in place and at least one performance monitoring cycle including review by CNELEC has been completed as per instructions issued by Minister of Energy in 2006. CNELEC gives advice and recommendations in an open and transparent manner so that the general public and stakeholders in the electricity sector are aware of CNELEC’s views.

(1) Self-evaluation by EdM of its performance in meeting the performance contract targets; (2) Survey of customer satisfaction conducted by an independent consulting firm hired by EdM; and, (3) Independent assessment of EdM's performance done by CNELEC, using steps (1) and (2) above as input, plus independently conducted “public opinion consultation sessions on EdM’s performance in three separate cities”.

(1) The self-evaluation by EdM was satisfactorily completed and delivered to CNELEC in April 2009; (2) EdM recruited an independent firm to undertake the survey. The survey was completed on and delivered to CNELEC in April, 2009; and, (3) CNELEC is using ERAP funds to finance a consulting firm to assist them in this activity. Recruitment of the Consultant procurement and will be completed by December 2009. The accrued delays are essentially due to CNELEC’s inexperience with World Bank procurement procedures. Because of the delays, the organization of the three public 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

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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

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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

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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

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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

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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.

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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.

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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:

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(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.

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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 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.

Moderate

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.

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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,


61. FM Covenants:



• 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,

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• 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

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EDAP - EdM Component: Cost & Benefits Stream

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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

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

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

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%

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%

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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

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.

-4,000.0

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EDAP - FUNAE: Cost-Benefit Analysis of Solar PV Investments

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24

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

25

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,


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

26

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.

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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

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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

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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.

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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

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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 (1<MW<=2), 18 MW mini hydro (2>MW<=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.

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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.

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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.

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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

35

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

36

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.

37

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

addressed? How? For WB projects: OED or IP and DO ratings13

ERAP (ADB, NDF, WB): energy sector reform facilitating private sector involvement, grid based peri-urban electrification, independent grid electrification (to be dropped), off grid renewable energy, institutional development and capacity building

Grid intensification, capacity building, and studies (e.g. least cost expansion plan) components. Addresses sector issue 1. Off grid component implemented by FUNAE. A addresses sector issue 2. Capacity building component. Address sector issue 3.

DO: S IP: MS

Mozambique-Malawi Interconnection Project (WB (lead), additional financing possibly from Norway): building a transmission line between Mozambique and Malawi including substations, associated system strengthening in Mozambique and Malawi, associated capacity support

Lays the foundation for strengthening the northern network. Address sector issue 2.

DO: MS IP: MU

Rural electrification in Sofia, Manica, Tete and Chibabava Buzi (Sweden (lead), Denmark, Norway)

The extension of the grid to rural areas. Address sector issue 2.

N.A.

12 WB and other international agencies 13 For completed WB projects: OED’s rating, for ongoing WB projects: IP and DO ratings

38

Rural electrification in Niassa province (Sweden (lead), Norway)


N.A.

Access to Modern Energy Services Mozambique – AMES-M (Dutch-German Partnership Energizing Development, implemented by the German Technical Cooperation GTZ) The project has 3 components: Component 1: Grid densification/household connections to the grid in Matola and Maputo Component 2: Solar energy (a) for rural households, supporting the commercialization of small solar home systems (SSHS), and (b) for social infrastructure (schools and health facilities) Component 3: Pico hydro power, upgrading maize mills to provide electricity to the local community through a mini-grid

The project addresses Sector Issues 1 and 2: Component 1 subsidizes grid connections for households that cannot afford the connections but are able to pay for energy consumption (Sector Issue 1); Component 2 aims to provide energy services to rural households in remote areas by supporting private traders in supplying adequate and affordable SSHS (hardware) and creating maintenance capacity (Sector Issues 1 and 2); Component 3 supports electricity provision to rural households at rates agreed upon by the community (Sector Issue 1); use of pico-hydro technology allows serving (very) small settlements (Sector Issue 2).

N.A.

Electricity III (ADB): extend the grid to 19 rural centers supplying about 7053 consumers in four provinces, namely Gaza, Imhambane, Tete, and Nampula

Grid extension to rural areas. Address sector issues 1 and 2.

N.A.

Electricity IV (ADB): transmit electricity to satisfy long-term demand and to improve the electricity access, reliability, and quality of supply to consumers in Sofala and Manica. The project will improve electricity supply to an estimated 79,364 existing customers.

Grid extension to rural areas. Address sector issues 1 and 2. Support for quality and reliability. Address sector issue 3.

N.A.

Rural electrification of Chibabava Buzi-Sofala (EdM) funded by EC


N.A.

Electrification of rural areas of Cabo Delgado province (EdM) funded by EC


N.A.

Electrification of rural areas of Tête province (EdM) funded by EC


N.A.

Photovoltaic solar panels in Provide affordable electricity supply, N.A.

39

isolated rural areas (FUNAE) funded by EC

grid access and generation capacity. Address sector issues 2.

Electrificaco da Communidade de Majua , districto de Milange (FUNAE) funded by EC

Provide affordable electricity supply, grid access and generation capacity. Address sector issue 2.

N.A.

Capacity building in Energy planning and management (ME) funded by EC co-financed by WB

Capacity building component. Address sector issue 3.

N.A.

Pipeline Mozambique Regional Transmission Project (WB (lead), Norway): support to the GoM to facilitate a transmission back bone for Mozambique with private sector participation

Least cost power production and transmission. Address sector issue 1. The back bone will help to facilitate electrification of the country. Address sector issue 2. Out of the project, its PPF and various TF capacity building and specialized consultancies will help to mitigate sector issue 3.

N.A.

Capacity building program for EdM (Sweden): focusing on financial management and rehabilitation of the hydro power plants in Mavuzi and Chicamba

Rehabilitation of power plants will help to address sector issue 1 The capacity building support to EdM will help to address sector issue 3.

N.A.

AFD Urban andPeri-urban Electrification (NEDAP)

Urban and Peri-urban electrification in Maputo and Cabo Delgado provinces.

N.A.

EIB Urban and Peri-urban Electrification (NEDAP)

Urban and peri-urban electrification in Maputo and Manica provinces.

N.A.

OFID Urban and Peri-urban Electrification (NEDAP)

Urban and peri-urban electrification in Maputo and Nampula provinces.

N.A.

Arab Funds Urban and Peri-urban Electrification and renewable Energy (NEDAP)

Pending definition of funding priorities among urban, peri-urban and rural electrification.

N.A.

Belgium Renewable Energy Project (FUNAE)

Dissemination of decentralized renewable energy technologies, particularly solar PV.

N.A.

40

Annex 3: Results Framework and Monitoring

MOZAMBIQUE: MZ-Energy Development and Access Project (APL-2)

PDO Project Outcome Indicators14

Use of Project Outcome Information

Increase access to electricity and modern energy services in peri-urban and rural areas in a sustainable and affordable manner.

(1) Number of people provided with access to electricity under the project by household connections. ( Power, Core 1) (2) Number of people provided with access to electricity under the project by household connections. (Renewable Energy, Core 1) (3) Number of community electricity connections under the project (Renewable Energy Core 2) (3.1) Number of health clinics electrified (3.2.) Number of schools electrified (4) Increased satisfaction reported in customer satisfaction survey.

Yr 1 & Yr2: Gauge implementation progress and Borrower commitment to project PDOs; Yr3: Inform MTR on adjustments that might be required to project design or implementation strategy; Yr 4 & Yr5: Monitor implementation to ensure PDO achievement by Closing (2014).

Intermediate Outcomes Intermediate Outcome Indicators

Use of Intermediate 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 the supply of electricity services in peri-urban areas. (1) Electricity grid reinforced (2) Electricity grid extended (3) Improved efficiency in electricity transmission.

(1) Transmission and distribution lines (KM) constructed or rehabilitated under the project. (Power, Core 5) (2) Number of new peri-urban connections established. (3.1) Electricity losses per year in the project area ( Power, Core 4) (3.2) Average interruption frequency per year in the project area (SAIFI) (

Yr 1: Evaluate progress on IBMS design and procurement thereof. Yr3 -5: Evaluate annual progress of implementation of physical investments to assist the Borrower to address any emerging implementation issues on a timely basis to ensure full implementation of physical investments by project Closing (2014).

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.

41

(4) Improved management capacity of EdM.

Power, Core 3) (4) IBMS deployed.

Component 2 – Investments on Rural and Renewable Energy. The objective of this component is to increase off-grid access to electricity and modern energy services in unserved rural areas through conventional and renewable energy resources and technologies (RETs). (1) Off-grid access to electricity and modern energy services in rural areas is increased. (2) Alternative methods for delivering modern energy services piloted.

(1.1) Number of systems installed in rural schools (1.2) Number of systems installed in rural health clinics. (1.3) Generation capacity (MW) of Renewable Energy constructed under the project. (Renewable Energy, Core 3) (2) Number of RET pilots successfully completed (f.x. biomass demonstrations, Multifunctional platforms, improved stoves and kilns, community solar systems).

This component pilots a range of RETs and will be evaluated by an impact assessment at the end of the project and the results framework reflects this demand-driven approach. Yr 1 & Yr2: Evaluate physical progress towards project outcomes/outputs. Yr3: Inform MTR one adjustments that might be required to project design or implementation strategy. Yr 4 & Yr5: Monitor implementation to ensure full achievement of intermediary outcomes/outputs by Closing (2014).

Component 3 – Energy Sector Planning, Policy and Institutional Development. The objective of the component is to improve the overall performance of the Ministry of Energy and CNELEC. (1) Institutional capacity to promote rural electrification and to mobilize new private sector and donor investment financing is improved; and, (2) Improved Energy Sector Management

(1) National Rural Electrification strategy and investment Program finalized by GoM. (2.1) Timely submission by CNELEC of monitoring reports on ME/EdM performance contract, (as per relevant legal mandate) (2.2) Energy sector/sub-sector flexible SWAp is established by 3rd year of project implementation.

Yr 1 & Yr2: Evaluate Borrower commitment and progress towards rural electrification, and evaluate progress on establishment of flexible SWAp. Yr3: Inform MTR on adjustments that might be required to project design or implementation strategy. Yr 4 & Yr5: Monitor implementation to ensure full achievement of intermediary outcomes/outputs by Closing (2014).

42

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45

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.

46

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

47

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.

48

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

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

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 EfficiencyPilot Program 1 1,200 1,200

"25 de Junho)

Rehab. & ReinforcementExisting 33/19kV 1 1,000 1,000

Chalange - Catuane

Installation of PowerTransformers 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

49

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

50

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

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

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

51

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;

52

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

53

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.

54

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56

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).

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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).

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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).

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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

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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

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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).

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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

Provinces

Improved Stoves28 Charcoal Kilns29

Multifunctional Platform

Promotional of Household

and SME Interfuel

Substitut.

Biomass Energy

Technologies Demonstratio

n Total (USD)

Number of Projects

Cost (USD) Number of Projects

Cost (USD) Number of Platforms

Cost (USD)

Cost (USD) Cost (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.

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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

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:

Description year 1 year 2 year 3 year 4 year 5 TotalBeneficiaries: 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 OperatorSystem 24,380 24,380 24,380 0 0 73,140

Support to private Sectorsupply/delivery systems

TDB TDB TDB TDB TDB TDB

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 Multifunctionalplatforms


Promotion of household and SMEinterfuel substitution


Power (kW) 260 260 260 165 165 1,110

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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).

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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

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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 surveys of public opinion

US $1,000,000

2. Monitoring system of EdM’s technical, commercial and financial performance

300,000

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).

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Annex 5: Project Costs


Mozambique: Energy Development and Access Project (EDAP APL2)

(Basis: US $000)

(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

10,050

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

6,300

2,450


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


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).

2.3 - Institutional Development & Capacity Building (*)

2.2 - Biomass Energy Systems

Project Component

Nampula Province

Tete Province

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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

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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

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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

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.

Ministry of Energy Component

UGEA (Procurement Unit)

Financial Management

Procurement Officer Accountant Officer

Procurement Assistants

Accountant Assistant

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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 RisksMacroeconomic Framework

Country Portfolio Implementation Assessment (CPIA) rating consistent at 4.2 for the past 4 years On track with International Monetary Fund (IMF) program since 1987. Fiscal and monetary policies pursue external and internal balance. Further improvements in macroeconomic management in 2007. Monetary Policy Committee introduced in 2007. Fiscal policy is consistent with macro stability and debt sustainability. Notwithstanding strong macro performance, there is risk related to the sharp increase in food and fuel prices. The Parliamentary, Presidential and Provincial elections in Mozambique are scheduled in late 2009. Approaching the elections, the Government will need to resist pressures for additional spending that are not sustainable, and prevent a reduction in the level of revenues collection (as happened in 2004).

Country teams and economists actively engage with Government on macro management. Country team engages with the Monetary Policy Committee. The macroeconomic impact of the shocks is expected to be manageable. The WB’s PRSC 5 operation will support the Government’s mitigation response package, focusing on the most vulnerable people. To mitigate the risks of fiscal slippage, the PRSC program (within the broader context of donor coordination) supports the efforts by the Government to strengthen Public Financial Management (PFM) systems (including the revenue collection systems), which increase transparency and reduce the country’s vulnerability to fiscal slippage. IDA’s overall satisfaction with the macroeconomic management and stability in Mozambique is further reflected by the ongoing processing of the new Poverty Reduction Support Credit (new PRSC series), PRSC-6.

Low

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Country Engagement With World Bank

Generally strong demand from Ministry of Planning & Development (MPD) and other ministries for WB support. Coordination between MPD and ministries is not optimal, however, as MPD has performed relatively weak oversight function and lacks full ownership. This requires continued and significant support from WB, as relevant MPD staff, structure, and processes remain weak and insufficient attention is given to WB program by MPD line management. Relationship with MPD Minister, however, is strong and generally effective in resolving problems. Ministry of Finance has succeeded in bringing most externally financed projects into the budget. Key challenge will be to bring externally-funded projects into single treasury account.

The Bank will continue to support MPD staff and coordinate closely on portfolio and other program issues. At the same time, will also reinforce message to MPD leadership of the need for strengthened MPD role as WB’s key counterpart. Introduction of new portfolio monitoring system continues to help address portfolio issues more systematically. Ministry of Finance has elaborated a multi-currency module for its integrated electronic expenditure system (e-SISTAFE), which will facilitate the use of the single treasury account by donors. WB has articulated a strategy (in collaboration with the government and donor partners) to move WB projects onto the single treasury account

Low

Country Governance

CPIA Rating of 3.0 for 2007 Law protects property rights in theory, but registries function poorly. Efforts to computerize property registries have largely stalled at the Ministry of Justice. According to the “Doing Business Report”, Mozambique ranks 149 out of 181 countries in terms of securing property rights. However with the appointment of a new Minister of Justice, it is expected that the pace of work will pick up. The judicial system is weak but there are efforts to strengthen it including hiring of 22 new judges and court administrators and the introduction of performance measurement of judges. While laws are not changed arbitrarily, they are not always publicly available nor are they enforced consistently. As a result of the above-mentioned reforms, Mozambique did improve its ranking on enforcing contracts in the “Doing Business” indicators. However, enforcing a contract takes 730 days and an average of 30 procedures. Government has made good progress in some preventive anti-corruption measures in the areas of PFM systems (e.g., improvements in financial management; procurement reform; civil service census; strengthening audit institutions).

The Bank, African Development Bank and NORAD to continue supporting computerization of property registries for a credit register, securities register for movable property, and companies register for immovable property. The Bank team to collaborate with the new Minister of Justice and encourage implementation and completion of reform initiatives that will improve the justice system. The Bank and other partners need to support enforcement of recently approved or amended laws related to property rights which include: 1. Code of Industrial Property approved in March 2007. 2. The Strategy for Intellectual Property Rights approved in May 2007 3. Support enactment of the law on Company Bankruptcy The Bank is working with donors and the IMF to support implementation of the ongoing reforms (as part of a broad PFM action plan), which are expected to improve transparency and accountability in public finances. As part of new Country Partnership Strategy, key pillar will be governance (improving voice and accountability; public sector reform).

Moderate

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Systemic Corruption

CPIA Rating of 3.0 for 2006 and 2007. According to the Transparency International 2007 Corruption Perceptions Index, Mozambique ranks 111 out of 179 countries with a CPI score of 2.8 out of 10. The Authority for Civil Service was upgraded to a ministry with a mandate to coordinate implementation of the Anti-Corruption Strategy in the public administration system. There have been determined efforts to crack down on administrative corruption with public servants but there has been less progress on prosecuting allegations of corruption against senior public figures. The Government has taken some steps such as the change of the Attorney General. The Constitutional Council struck down the Presidential decree establishing the AGO’s Anti-Corruption Office (GCCC), which has led to setbacks. Forceful implementation of the 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.

Fundamental institutional reforms are on-going to modernize the public procurement system, financial management, and the internal and external auditing. Significant progress has been achieved in last two years, and implementation of the reforms is broadly on-track with the Government’s multi-year action plan. This will mitigate the possibilities for systemic large scale abuse of public funds. Institutional strengthening of the Attorney General’s Office is underway with new leadership to assist in combating corruption and organized crime. The Country Partnership Strategy foresees a strengthening of civil society organizations to enhance demand for better accountability. Additional measures will be needed to strengthen the AC drive, and to increase transparency and accountability in the award of concessions and the exploitation of natural resources. The WB is providing technical support to this end.

Substantial

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Infectious Diseases

HIV/AIDS presents a considerable health threat (16% prevalence rate) with significant economic impact. Fall in productivity due to AIDS and economic costs associated with loss of labor as a result of deaths are very high.

The World Bank provides support to the Government through the HIV/AIDS Response SIL. The project's performance has recently deteriorated and the Bank is working with the 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).

Moderate

Country Fiduciary Management (FM)

Major weaknesses exist in the FM environment (staffing, operating system, reporting), resulting primarily from low capacity. While the Government’s reform program aims to strengthen accounting and audit capacity through the recruitment and training of FM specialists and accountants, this is still a long way from being achieved. Although the new integrated financial information management system (e-SISTAFE) has now been rolled out to all ministries at central level, it is still in the process of cascading down to provincial and district level as well as other government institutions. User training is uneven, meaning that it is not yet operating at its optimal level.

The government is committed to the reform program, and has introduced a new legal and regulatory framework that is underpinned by the introduction and roll out of the integrated financial management system (e-SISTAFE). Introduction of e-SISTAFE will contribute to improvements in budget execution and reduced off-budget expenditures. The process has the full support of the Development Partners, with WB support currently channeled through the ongoing Public Sector Reform Project, as well as the upcoming decentralization project (phase II), that will also strengthen financial planning and management at local levels.

Moderate

Country Procurement Systems

New procurement law and regulations, capacity building program has started and procurement system is more transparent with Ethics Code sanctions and appeal mechanisms included in the approved procurement law. Regulatory unit (UFSA) in Ministry of Finance (MoF) operational. Standard Bidding Documents (SBDs) issued acceptable with few reservations. Implementation of new law, however, remains very challenging due to limited capacity.

Capacity building program started countrywide. Procurement website operational. Need for more capacity building and assistance at the Functional Unit for Supervision of Acquisitions (UFSA). The government has started the development of a monitoring system for the assessment of the quality of procurement and enforcement of the Procurement Regulation. Bank teams will monitor how the new system works.

Moderate

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II. Sector Governance, Policies and InstitutionsSector Specific Risks

As evidenced by the early implementation of ERAP, the energy sector had a mixed track record in terms of policy consistency and government commitment. Reliability of Power Supplies. Delays in the development of generation projects in Mozambique, combined with the power crisis in Southern Africa (South Africa in particular), could limit power supplies and result in load shedding. The benefits of electrification through grid extensions would be limited in such a scenario, resulting in suppressed demand and slower than anticipated cost recovery.

Establishment of flexible SWAp. Improvement of GoM leadership and of GoM-Donor coordination and increased mobilization of donor financing for the energy sector is expected to result from the gradual mainstreaming of a flexible SWAp approach and process over the implementation cycle of EDAP (APL-2). There is a limited risk that alignment of GoM and Donors cannot be achieved on sector policy, strategy and/or procedural issues thus delaying the establishment of a sector-wide or sub-sector (Rural Electrification) flexible SWAp.

Low adoption of RET. Incomes/cost, technical, market barriers or operational constraints could limit the expected adoption of RETs in peri-urban and rural areas.

Since the restructuring of ERAP (APL-1) there has been a close alignment between GoM and the WB group (and other donors). GoM presently has a strong ownership over its new energy sector policy and strategy. EDAP (APL-2) is based on that new policy/strategy. New power generation projects that would mitigate that possible energy shortage are under preparation in the region (including in Mozambique: Mphanda Nkuwa, Moatize, Benga, Cahora Bassa North, Lurio, etc.). Additionally GoM and EdM have negotiated additional power purchase rights from Cahora Bassa (HCB), as the most reliable risk mitigation strategy in the short run. EDAP (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.

GoM and the main donor partners in the sector are interested in moving towards a flexible SWAp approach and process, especially regarding rural electrification. The Bank will continue to play a leadership role within the joint GoM-Donor “Energy Sector Working Group” in support of that objective. There is full agreement among the participating donors that a “Common Fund” mechanism for the energy sector will not be sought as part of the proposed flexible SWAp, until the existing differences between the Bank and other donors 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. The proposed dissemination strategy for RETs has been developed over the last 3 years by FUNAE in the context of ERAP (APL-1). In 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

Low Moderate Low Low

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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 Design

Mobilization of Donor co-financing for EDAP (APL-2). Mobilization of financing for energy sector projects has proven to be difficult in the past and as per the original APL series estimates IDA only had US $40 million available for the EDAP (APL-2).

As a result of the increase of IDA funding for the proposed EDAP (APL-2) project from US$40 million to US $80 million, no additional co-financing is required to implement it. 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.

Low

Implementation Capacity And Sustainability

Overall implementation capacity in non-PIU based projects in Mozambique is mixed. ERAP (APL-1) itself had significant implementation issues until it was restructured. The Ministry of Energy (ME) and EdM, in particular, have capacity and institutional limitations vis-à-vis their responsibilities and operational requirements.

After a difficult start for ERAP, the Borrower’s implementation track record has steadily improved since 2007. Essential capacities and processes have been built and are established. Since EDAP (APL-2) will be an extension of ERAP, it will bank and build on those capacities. Possible capacity limitation risks 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.

Low

Financial Analysis

EdM Financial sustainability. The last update of EdM’s financial model (June 2009) indicated that without any participation in the

EdM is aware of these issues and is committed to working with the Bank to address them. Options for how EDAP (APL-2) is expected to

Moderate

77

mega projects, with all the RE investment planned EdM could see its financial position deteriorate. Conversely, EdM’s role in large projects will have to be carefully structured to make sure that these do not imply major risks to the company.

help shore-up EdM financial sustainability were indentified during the project preparation process and were included in to the project’s design. The financial analysis section of the PAD contains the analysis and the specific 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 Management

EdM entity audits have been qualified for the past two financial years due, among other issues, to the following:



• 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.

EDAP resources will be segregated with a dedicated Designated Account, with normal protection of IDA resources from seizure by EdM creditors. Wherever possible, the bank will also provide necessary support and advice to address the more straight forward issues such as internal control and documentation management, while continuing to encourage both the government and the entity to take the steps recommended by the auditors to rectify the deeper issues.

Moderate

Procurement ERAP (APL-1) had significant procurement delays at the beginning of its implementation process. There is a high turn-around of qualified procurement staff in Mozambique, who can normally find higher paying

ME and EdM have over the last two years reinforced their procurement capabilities and procedures. However, additional capacity building and institutional development will be supported by EDAP (APL-2) under a vision

Low

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employment with the private sector after being training by donor supported projects. The scale-up of activities contemplated within EDAP (APL-2) will bring new procurement challenges to ME and EdM.

that the procurement function will be central to the EDAP (APL-2)’s success. Rather than minimal investment on this issue EDAP (APL-2) will seek to build-in a healthy redundancy in 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 Safeguards

Environmental Assessment and Involuntary Resettlement Safeguard Policies (B Rating). The construction of grid intensification infrastructure and/or the generation of electricity off-grid on small scale might modestly affect properties and the households. Batteries in renewable energy systems and other equipment might carry limited social and environmental risks.

The safeguards systems implemented under ERAP proved to be sufficiently robust and comprehensive being able to even detect the occurrence of small safeguards issues in non-IDA financed components of ERAP. Those issues were analyzed in detailed and the necessary corrective actions were immediately implemented. That experience showed that 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.

Low

IV. Overall Risk

The overall and reputational risk of the operation is rated as moderate. That rating relates to 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

Moderate

79

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.

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Annex 7: Financial Management and Disbursement Arrangements


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

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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

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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

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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.

84

Ris

k R

atin

g S

um

mar

y

Ris

k f

acto

rs

Des

crip

tio

n of

ris

k

Rat

ing

of

risk

Mit

igat

ion

mea

sure

s

Rat

ing

of

resi

dual

ri

sk

Co

ndit

ion

of

Eff

ecti

ven

ess,

B

oar

d o

r

Neg

oti

atio

n (Y

es

or

No

)

Rem

ark

s

Co

untr

y L

evel

1.

Maj

or

wea

knes

ses

exis

t in

th

e F

M

env

iron

men

t (s

taff

ing

, o

per

atin

g s

yste

m,

repo

rtin

g), r

esu

ltin

g

pri

mar

ily

fro

m l

ow

ca

pac

ity.

2. T

he

Gov

ernm

ent’

s re

form

pro

gram

aim

ed a

t

stre

ngth

enin

g a

cco

unti

ng

and

aud

it c

apac

ity

thro

ugh

th

e re

cru

itm

ent

and

trai

nin

g of

FM

sp

ecia

list

s an

d

acco

unta

nts

is

stil

l a

long

way

fro

m b

eing

ac

hie

ved

,

3.

Alt

hou

gh t

he n

ew

inte

gra

ted

fin

anci

al

info

rmat

ion

man

agem

ent

syst

em (

e-S

IST

AF

E)

has

n

ow b

een

ro

lled

ou

t to

al

l m

inis

trie

s at

cen

tral

le

vel

, as

wel

l as

to

all

p

rov

ince

s, i

t h

as n

ot

yet

Sub

stan

tial

Th

e go

ver

nm

ent

is c

om

mit

ted

to

the

refo

rm p

rog

ram

, an

d h

as

intr

odu

ced

a ne

w l

egal

and

re

gula

tory

fra

mew

ork

th

at i

s u

nder

pin

ned

by

the

intr

odu

ctio

n an

d ro

ll o

ut

of

the

inte

grat

ed

fin

anci

al m

anag

emen

t sy

stem

(e-

SIS

TA

FE

).

Th

e d

evel

opm

ent

par

tner

s co

nti

nue

to f

inan

ce t

he

acti

vit

ies

of

UT

RA

FE

, th

e b

ody

task

ed w

ith

th

e ro

ll o

ut

of,

an

d us

er t

rain

ing

on,

e-S

IST

SA

FE

.

Mo

der

ate

No

85

reac

hed

op

tim

al

per

form

ance

du

e to

u

nev

en u

ser

trai

nin

g.

En

tity

Lev

el

1. F

UN

AE

is

new

to

ban

k s

upp

ort

and

may

n

ot

hav

e su

ffic

ien

t F

M

cap

acit

y fo

r th

e F

M

rela

ted

tas

ks

ahea

d.

2. D

ue

to t

he

mu

ltip

lici

ty

of

agen

cies

, M

E m

ay n

ot

hav

e th

e ca

pac

ity

to

coor

din

ate

bo

th t

he

pro

ject

act

ivit

ies

and

B

ank

rep

orti

ng

requ

irem

ents

.

Sub

stan

tial

T

he

Ban

k w

ill

del

iver

wo

rksh

op

s o

n it

s F

M a

nd

Dis

burs

emen

t p

oli

cies

an

d pr

oce

dure

s as

a

trai

nin

g p

rogr

am a

nd

up

dat

e to

th

e F

M s

taff

of

the

exec

uti

ng

agen

cies

.

Th

e p

rop

osed

in

stit

uti

on

al

fram

ewo

rk s

upp

orts

pro

ject

o

ver

sigh

t an

d im

ple

men

tati

on

by

ME

. B

udg

etar

y co

ntr

ol

thro

ugh

e-S

IST

AF

E e

nh

ance

s co

st c

on

tro

l,

and

the

com

put

eriz

ed i

nfo

rmat

ion

sy

stem

fac

ilit

ates

th

e ti

mel

y p

rep

arat

ion

and

su

bm

issi

on

of

fin

anci

al r

epor

ts.

ME

wil

l h

ave

ov

eral

l re

spo

nsi

bil

ity

for

fin

anci

al

man

agem

ent,

co

nso

lid

atin

g i

ts

resu

lts

wit

h t

hose

of

FU

NA

E a

nd

Ed

M t

o pr

ov

ide

an o

ver

all

pro

ject

p

ictu

re.

Mo

der

ate

No

Pro

ject

Lev

el

Th

e m

ajo

r ri

sks

wil

l re

late

to

th

e U

se o

f C

oun

try

syst

ems

for

the

imp

lem

enta

tio

n o

f th

e p

roje

ct a

ctiv

itie

s. W

hil

e th

is i

s th

e fi

fth

pro

ject

to

g

o on

to t

he

CU

T, o

nly

o

ne

has

act

ual

ly s

tart

ed

imp

lem

enta

tio

n t

o co

nfir

m t

he

usa

bil

ity

of

the

syst

em f

or

man

agem

ent

of B

ank

fi

nan

ced

proj

ects

. In

ad

dit

ion

, Ed

M w

ill

Sub

stan

tial

1

. Eac

h of

th

e im

ple

men

tin

g

agen

cies

wil

l be

res

pon

sib

le f

or

ensu

ring

th

at t

he

fin

anci

al

man

agem

ent

arra

ngem

ents

for

th

eir

agen

cy r

emai

n a

deq

uat

e p

er

the

asse

ssm

ent

for

the

life

of

the

pro

ject

, es

pec

iall

y as

reg

ard

s h

um

an c

apac

ity

and

trai

nin

g.

2.

Mor

e fr

eque

nt

Ban

k

supe

rvis

ion

mis

sio

ns

wil

l b

e fi

eld

ed i

n t

he

earl

y st

ages

of

imp

lem

enta

tio

n t

o co

nfir

m t

he

Mo

der

ate

No.

S

uper

vis

ion

m

issi

on

s w

ill

asse

ss t

he

con

tinu

ing

ad

equ

acy

of

the

FM

ar

ran

gem

ents

an

d re

com

men

d

mea

sure

s to

b

e ta

ken

w

hen

ap

pro

pria

te.

86

op

erat

e o

n ad

van

ces

fro

m e

-SIS

TA

FE

as

it i

s n

ot

dir

ectl

y li

nked

to

th

e sy

stem

, in

crea

sin

g t

he

risk

of

bo

th e

rro

r an

d

man

ipu

lati

on.

pro

per

op

erat

ion

of

the

syst

em a

s d

escr

ibed

.

3.

Tra

nsf

ers

to E

dM

wil

l b

e li

mit

ed t

o a

ppr

ov

ed a

nd p

aid

in

voic

es a

s pr

oces

sed

in

to t

he

syst

em f

or

each

mo

nth

. O

ver

all

Inh

eren

t R

isk

Sub

stan

tial

Mo

der

ate

II. C

ontr

ol

Ris

k

B

udg

etin

g B

udg

etin

g, b

udg

etar

y co

ntr

ol,

and

bud

get

re

vis

ion

s m

ay n

ot

foll

ow

n

atio

nal

pro

ced

ures

.

M.

Use

of

e-S

IST

AF

E d

efin

es

arra

ng

emen

ts r

equ

ired

fo

r b

udg

etin

g, a

nd

req

uir

emen

ts f

or

bud

get

rev

isio

ns.

Yea

rly

proj

ect

bud

get

s w

ill

nee

d t

o b

e pr

epar

ed

in l

ine

wit

h t

he

pro

cure

men

t pl

an

and

the

app

rove

d w

ork

pla

n

M

No

Acc

oun

tin

g E

dM

bei

ng a

pu

bli

c co

mp

any,

app

lies

ac

cru

al a

ccou

ntin

g,

and

p

arti

cula

r at

tent

ion

wil

l n

eed

to b

e p

lace

d t

o en

sure

on

ly p

aid

‘e

xpen

dit

ure’

is

incl

uded

as

exp

end

itur

e fo

r E

dM

u

nder

th

e pr

ojec

t.

S.

1.

ME

and

FU

NA

E a

re a

lrea

dy

fam

ilia

rize

d w

ith

th

e g

over

nm

ent’

s ac

coun

ting

p

roce

dur

es, w

hich

are

do

cum

ente

d

in o

ffic

ial

gov

ern

men

t F

inan

cial

P

roce

dure

s an

d re

gu

lati

ons.

2.

ME

wil

l b

e re

spo

nsi

ble

fo

r th

e o

ver

all

acco

unti

ng

and

wil

l m

ake

use

of

one

add

itio

nal

FM

C

on

sult

ant

for

ov

erse

eing

and

co

ord

inat

ing

acc

oun

ting

in

eac

h o

f th

e th

ree

imp

lem

enti

ng

ag

enci

es.

Acc

oun

tin

g w

ill

be

on c

ash

basi

s in

acc

ord

ance

wit

h M

oza

mb

iqu

e g

over

nm

ent

req

uir

emen

ts,

wh

ich

ar

e sa

id t

o e

quat

e to

In

tern

atio

nal

A

ccou

nti

ng

Sta

nd

ard

s.

M

Yes

H

irin

g o

f an

F

M

Co

nsu

ltan

t fo

r th

e p

roje

ct w

ill

be

a co

ndit

ion

of

effe

ctiv

enes

s.

Inte

rnal

Co

ntr

ol

1. T

he

risk

th

at E

dM

’s

inte

rnal

con

tro

l p

roce

dur

es m

ay n

ot

be

subj

ect

to t

he

sam

e

S.

Ed

M h

as i

ts o

wn

acco

unti

ng

pro

ced

ures

man

ual

. Th

is w

ill

be

rev

iew

ed w

ith

a v

iew

to

en

suri

ng

it

s ad

equ

acy

fro

m t

he

Ban

k’s

M

Yes

A

ppro

val

of

the

Ed

M F

M

pro

ced

ures

m

anu

al,

and

87

scru

tin

y as

, no

r b

e as

ef

fect

ive

as t

hose

of

FU

NA

E a

nd M

E.

2. T

he

fix

ed a

sset

m

od

ule

of

e-S

IST

AF

E

has

no

t ye

t b

een

ac

tiv

ated

, ex

pos

ing

pro

ject

ass

ets

to t

he

risk

o

f lo

ss a

nd m

isal

loca

tio

n

in t

he

abse

nce

of

the

appr

ov

ed s

yste

m.

vie

wp

oin

t, a

nd

upd

ated

as

nec

essa

ry t

o i

nco

rpo

rate

pro

ject

ac

tiv

itie

s.

Eac

h a

gen

cy w

ill

be

req

uir

ed t

o

hav

e ac

cep

tab

le a

sset

man

agem

ent

pro

ced

ures

rec

ord

ing

all

rec

eip

ts

of

asse

ts,

ensu

rin

g a

uth

oriz

atio

n of

an

y m

ov

emen

t or

dis

posa

l, a

nd

ind

icat

ing

lo

cati

on

to

faci

lita

te

regu

lar

asse

t in

ven

tori

es. T

he

aud

itor

s w

ill

also

be

requ

ired

to

v

erif

y th

e ex

iste

nce

of

proj

ect

asse

ts d

uri

ng

thei

r an

nu

al a

udit

s.

adop

tion

of

an a

ppr

ov

ed

pro

ject

FM

p

roce

dur

es

man

ual

fo

r ea

ch o

f M

E

and

FU

NA

E

wil

l b

e an

ef

fect

iven

ess

cond

itio

n.

Fun

ds

Flo

w

1. T

her

e is

a r

isk

th

at

pro

ject

fu

nds

may

be

app

lied

tow

ards

oth

er

gov

ern

men

t co

mm

itm

ents

on

ce

cap

ture

d in

th

e C

UT

or

that

th

ere

may

del

ays

in

the

rele

ase

of f

und

s fr

om

th

e C

UT

tow

ard

s q

ual

ifyi

ng a

ctiv

itie

s.

.2. R

isk

th

at f

und

s tr

ansf

erre

d to

th

e E

dM

co

uld

be

use

d f

or

pur

po

ses

oth

er t

han

th

ose

in

tend

ed.

S.

A d

esig

nat

ed a

cco

unt

wil

l st

ill

be

reta

ined

to

car

ry f

und

s ad

van

ced

fo

r th

e si

x m

on

thly

for

ecas

ts b

ut

no

t re

qu

ired

im

med

iate

ly b

y th

e p

roje

ct.

A p

red

eter

min

ed m

inim

al

incu

bat

ion

per

iod

wil

l b

e al

low

ed

for

any

amo

un

ts t

rans

ferr

ed i

nto

th

e C

UT

, to

min

imiz

e th

e ti

me

that

th

ey a

re n

ot

avai

lab

le t

o t

he

ME

on

ce i

n th

e sy

stem

.

In

-bu

ilt

syst

em c

on

tro

ls p

rev

ent

the

fun

ds

in t

he r

elev

ant

bud

get

co

des

bei

ng s

pen

t on

lin

e it

ems

no

t ‘m

arri

ed’

to t

hose

in

com

e ac

coun

ts.

On

ly a

ppr

ov

ed i

nvo

ices

, pai

d

upf

ron

t b

y E

dM,

wil

l b

e re

imb

urs

ed f

rom

th

e C

UT

.

M.

No.

Fin

anci

al R

epor

tin

g 1

. Th

e ri

sk t

hat

th

e g

over

nm

ent

may

no

t b

e re

port

ing

in

ter

ms

of

S.

Gov

ern

men

t ac

coun

ting

sta

nda

rds

hav

e al

read

y be

en r

evie

wed

an

d d

eem

ed t

o e

qua

te t

o i

nte

rnat

ion

al

M.

Yes

IF

R f

orm

ats

and

the

form

ats

of

88

inte

rnat

ion

al a

cco

unti

ng

stan

dar

ds.

2. T

he

curr

ent

ER

AP

p

roje

ct h

as g

ener

ally

st

rug

gle

d t

o m

ake

the

aud

it s

ubm

issi

on

dea

dli

nes

, as

wel

l as

th

e IF

R r

epo

rt s

ubm

issi

on

d

ead

lin

es.

3. A

ud

its

hav

e al

so b

een

qu

alif

ied

an

d th

ere

is a

ri

sk t

hat

th

e n

ew p

roje

ct

may

su

ffer

th

e sa

me

fate

.

acco

unti

ng s

tan

dar

ds.

Cu

sto

m d

esig

ned

rep

ort

s to

mee

t th

e n

eed

s of

the

pro

ject

wil

l be

u

sed

to

ensu

re a

ll a

ctiv

itie

s ar

e co

ver

ed b

y on

e co

mp

reh

ensi

ve

repo

rt.

IFR

s ar

e no

w a

lso

bei

ng

sub

mit

ted

reg

ular

ly;

hen

ce t

his

ex

per

ien

ce i

s ex

pec

ted

to

bene

fit

the

new

pro

ject

.

Ass

ura

nce

s ar

e b

eing

giv

en t

hat

the

Dec

200

8 au

dit

wil

l b

e re

ceiv

ed o

n ti

me

Th

e re

port

ing

req

uir

emen

ts a

nd

form

ats

wil

l b

e d

escr

ibed

in

the

FM

man

ual

.

aud

ited

fi

nan

cial

st

atem

ents

w

ere

agre

ed

at

Neg

oti

atio

ns.

Aud

itin

g T

he

risk

th

at b

oth

th

e au

dit

co

ver

age

and

tech

nic

al q

ual

ity

may

n

ot

be

sati

sfac

tory

.

Aud

it w

ill

be

cond

uct

ed

by

the

TA

in

acc

ord

ance

w

ith

nat

iona

l re

quir

emen

ts a

nd

pro

ced

ures

. The

TA

is

stil

l re

lati

vel

y u

nder

-ca

pac

itat

ed.

S.

Th

e T

A w

ill

be

enco

urag

ed t

o

seek

th

e ad

dit

ion

al s

upp

ort

of

pri

vat

e au

dit

fir

ms

to c

ond

uct

sa

tisf

acto

ry a

udit

s, a

t le

ast

in t

he

earl

y st

ages

of

imp

lem

enta

tio

n.

Th

e au

dit

con

trac

t w

ill

incl

ude

the

acti

vit

ies

of

the

quas

i-g

over

nm

enta

l in

stit

uti

on

s. W

ith

im

pro

vin

g c

apac

ity,

th

e au

dit

s w

ill

in f

utu

re b

e ru

n b

y th

e T

A o

n it

s o

wn

.

M.

Yes

A

udit

TO

R

wer

e ag

reed

at

n

ego

tiat

ion

s.

Ov

eral

l C

ontr

ol

Ris

k

S

.

M.

OV

ER

AL

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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.

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Figure A.7.1: Flows for the funds channeled through CUT.

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.

World Bank

Banco de Mozambique DA (USD)

ME + FUNAE Expenditure Units

CUT (USD and MTn on demand) (ME and FUNAE)

Suppliers/Service Providers

EdM

Reimbursement of EdM expenditure EdM Vouchers

and receipts submitted to ME for reimbursement

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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.

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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

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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.

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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:



• 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

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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 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

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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

Financing Allocated (US $ Million)

Percentage of Expenditures to be

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 Project.

18.0

100%

(3) Part 3 of the Project:

(a) Goods, consultants’ services and Training.

(b) Operating Costs.

9.7

0.5

100%

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

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Annex 8: Procurement Arrangements


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

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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-

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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.

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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

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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.

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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 process shall be available on the file including for contract management

Continuous

2. Procedures for Procurement not laid properly

Update the ERAP (APL-1) Procurement Manual to incorporate applicable procedures under EDAP (APL-2) project.

Effectiveness

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

Expenditure Category Contract Value Threshold (US$)

Procurement Method Contracts Subject to Prior Review30

1. Works >5,000,000 100,000 - 5,000,000 <100,000

ICB NCB Shopping Direct Contracting

All None None All

2. Goods and Services (other than Consultants’ Services)

>500,000 75,000 - 500,000 <75,000

ICB NCB Shopping Direct Contracting

All None None 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

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Expenditure Category Contract Value Threshold (US$)

Procurement Method Contracts Subject to Prior Review30

3.Consultants’Services Firms 4. Individuals

>200,000 <200,000 >100,000 <100,000 All

QCBS, LCS, and CQS Single Source IC IC Single Source

All None All All None 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:

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EdM Component: GOODS

Ref. No.

Contract

(Description)

Estimated

Cost (USD) *1000

Procurement

Method

Pre -

Qualification (yes/no)

Domestic

Preference (yes/no)

Review by Bank (Prior / Post)

Expected

Bid-Opening

Date

Comments

9/1 Vehicles for PIU (4x4 DC)

120.00 NCB Yes No Prior Feb 10 Deducted from Sub comp. 1.1

9/2 Vehicles for PIU (4x4 SC)

330.00 NCB Yes No Prior Feb 10 Deducted from Sub comp 1.1

10/1 Office Equipment for PIU

50.00 Shopping No No Post Jan 10 Deducted from Sub comp 1.1

EdM Component: WORKS

Ref. No. Pac/Lot

Contract

(Description)

Estimated

Cost (USD) *1000

Procurement

Method

Prequalification (yes/no)

Domestic

Preference (yes/no)


Expected

Bid-Opening Date

Comments

1/1 Maputo Province: 1.2 MV Network Transmission Efficiency Improvement Pilot..

1,200.00 ICB No No Prior

Feb 11 Procurement under ERAP (APL 1)

2/1 Maputo Manica Province: 1.3 – Reh. & Reinf of Primary Network (A1 and A3) SEs Matola & Manica.

5,150.00 ICB Yes No Prior Feb 11

2/2 Maputo Province: 1.3 – Reh. & Reinf of Primary Network (A2) Upgrade Swear Chang.


2/3 Manica Province: 1.3 – Reh. & Reinf of Primary Network (A4) Upgrade OHL 6.6 to 22kV.


4/1 B - Nampula Province: 1.4 – Extension of Dist Networks & Customer connections (B1; B2; B3; B4; B5).


6/1 D – Tete Province: 1.4. D – Extension of Dist Networks & Customer connections (D1; D2; D3; D4; D5).


8/1 1.5.2 Supply, Installation & Training of Integrated Business System (IBMS).


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FUNAE Component: GOODS AND WORKS

Ref. Nr

CONTRACT DESCRIPTION Estimated Cost

ProcurementMethod

Bank Review (Prior/

Post Review)

Bid Opening

Comments

1 Vehicles 200,000.00 NCB Prior

review Feb 10

2 Office and field equipment

250,000.00 NCB Prior

review Feb 10

3 Institutional Solar Systems - Rural Schools

2,180,000.00 ICB Prior

review Feb 10

4 Institutional Solar Systems - Rural Clinics

2,070,000.00 ICB Prior

review Feb 10

5 Community/Local Operator Solar Systems

3,500,000.00 ICB Prior

review Feb 10

6 Support to Private Sector Supply/Delivery Systems

1,500,000.00 ICB Prior

review Mar 10

7 Multifunctional Platforms

2,000,000.00 ICB Prior

review Mar 10

8 Promotion of Households and SME Interfuel Substitution

1.500.000.00 ICB Prior

review Mar 10

9 Biomass Energy Tecnhology Demonstration Pilots

1,600,000.00 ICB Prior

review Mar 10

10 Biomass Improved Stoves

400,000.00 ICB Prior

review Mar 10

11 Charcoal Kilns 600,000.00 ICB Prior

review Mar 10

ME Component: GOODS

Ref. No.

Contract

(Description)

Estimated

Cost (USD)

Procurement

Method

Prequalification

(yes/no)

Domestic

Preference(yes/no)

Review

by Bank (Prior / Post)

Expected

Bid-Opening

Date

Comments

1. Office Equipment (IT, Photocopy Machine, Scanner, Software), for

120,000 NCB NO NO Post Review

Feb 10 The purchasing process will be by lots, accordingly

106

the ME 2 Office

equipment (Furniture), for the ME and CNELEC

140,000 NCB No No Post review


3 Office equipment (Consumables), for the ME and CNELEC.

20,000 Shopping No No Post review


4. Motor Vehicles for ME

250,000 NCB NO NO Post Review

Mar 10 The purchasing process will be by lots, accordingly

5. Office Equipment (IT, Photocopy machine, Scanner, Software) for CNELEC

70,000 Shopping NO NO Post Review


(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

Ref. No.

Description of Assignment

Estimated

Cost (USD)

*1000

Selection Method


Expected Proposals Submission Date

Comments

1

1.1 Consultancy Services for Design & Supervision for Rehabilitation and Reinforcement of Primary Network & Grid Extension

6,300.00 QCBS Prior Feb 10 $500.00

Transferred for Goods

2 1.5.1 Consultancy Services for Environmental Management Plan

1,000.00 QCBS Prior Feb 10

To be managed by EdM’s ESI-

Unit 3 1.5.3- Consultancy Services for 900.00 QCBS Prior Jul 11

107

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 Management System)


6 1.5.3.iii) IBMS - IRMS (Incidents recording and Manag. System)


7 1.5.3.iv) IBMS - ICS (Internal Communication System)


8 1.5.4. T. Assistance and C. Services for Network System Planning including update of the Master Plan and Training on O & M of Prepaid split-meters

1,300.00 QCBS Prior Mar 10

US$200.00 transferred for Section IV. Capacity. Building EdM’s PIU Staff

FUNAE Component: CONSULTING SERVICES

Ref. Nr Description

Estimated Cost

Selection Method

Bank Review (Prior/

Post Review)

Expected Proposals

Submission Date

Comments

1 Technical Assistance & Consultancy Services

760,000.00 QCBS Prior

Review Apr 10

2 Promotion of Household and SME interfuel substitution

200,000.00 QCBS Prior

review Feb 10

3 Environmental Management Plan 500.000.00 QCBS Prior

review Feb 10

4 Biomass Energy Technologies Demonstration Pilots

200,000.00 QCBS Post

review Feb 10

FUNAE Component: TRAINING AND SEMINARS

No.

Expected outcome / Activity Description

Estimated

Cost

Estimated Duration

Start Date

Comments

1 Environment 9,700.00 4 Weeks Jul 10

2 Monitoring and Evaluation 8,250.00

4 Weeks Jun 10

3 Financing of Projects (feasibility analysis)

8,300.00

4 Weeks Sep 10

4 New and Renewable

Energies 6,345.00

1 Week Jun 10

5 Protection Systems in Solar

Energy 1,500.00

4 weeks Aug 10

108

6 Biomass 11,180.00 4 Weeks May 2010

7

Training of trainers in installation, operation and

maintenance of photovoltaic systems

50,000.00

3 Weeks

March June

September 2010

8 Training of users in

operation and maintenance of photovoltaic systems

50,000.00

3 Weeks

March June

September 2010

Procurement 17.500.00 4 weeks September

2010

Financial Management 17.500.00 4 weeks September

2010

ME Component: CONSULTING SERVICES

Ref. No.

Estimated

Cost (USD)

Selection Method


Expected Proposals Submission Date

Comments

1. ME - Elaboration of Rural Electrification Strategy & Investment Program (RESIP)

500,000 QCBS Prior Review Jul 10

2. ME - TA on RESIP Consultation and Dissemination Process

200,000 QCBS Prior Review Oct 10

3. ME- TA on Promotion of New Energy Infrastructure

1,000,000 QCBS Prior Review Nov 10

4. ME - Study on energy policy and pricing

150,000 QCBS Post review Apr 10

5. ME – Elaboration of renewable energy strategies

200,000 QCBS Prior review May 10

6. TA on regulation for feeding tariff on renewable energy

50,000 CQS Post review May 10

7. ME - Study on regional energy integration protocols

100,000 QCBS Post review Dec 10

8. Audit services 150,000 QCBS Post review Mar 11 9. CNELEC - Consultant on Annual reviews of EdM Performance under future Performance Contracts

200,000 QCBS Prior review Sep 10

10. CNELEC - Consultant for establishment of monitoring systems for financial, technical and commercial performance

200,000 QCBS Prior review Feb 11

11. CNELEC - Establishment of costumer codes in several areas (connections, disconnections, metering and billing disputes)

150,000 QCBS Post review Jun 10

109

12. CNELEC - Consultant for Cost of service and tariff studies, regulatory accounting system and customer complain system

200,000 QCBS Prior review May 10

13. Technical assistance for the Renewable Energy Department

250,000 QCBS Prior review July 10

14. TA for the ME Environmental Management

250,000 QCBS Prior review Aug 10

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.

110

(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.

111

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

112

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

113

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).

114

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

Engineering 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 for the independent supervision of the implementation of the all electricity investments of the component.

Efficiency Investments

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 distribution efficiency pilot project in the “Bairro 25 de Junho” of the EdM component.

Rehabilitation & Reinforcement Investments

Includes all the costs, in millions of US dollars (US $M), for the procurement and installation of the hardware for the rehabilitation and reinforcement investments of the component.

Extension & Intensification Investments

Includes all the costs, in millions of US dollars (US $M), for the procurement and installation of the hardware for the extensification and intensification investments of the component.

Other Investment Costs

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 practice – not normally included in economic analysis exercises as their stream of benefits are extremely difficult to measure and valuate ex-ante.

EdM Incremental Power Purchase (MWh)

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 2009, by 5 percent as of 2014 to by 6 percent as of 2019. That increase was derived from the EdM’s historical pattern of increase in electricity consumption by newly connected household.

EdM Incremental Power Purchase (US $ M)

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 connected by the project. Cost of power purchase was assume to increase in value overtime from 20 USC/KWh in 2009 to 35 USC/KWh in 2014 to 40 USC/KWh in 2019, to account for inflation and increased generation costs.

Incremental O & M (US $ M)

Estimated Operation and Maintenance Costs (O&M), in millions of US dollars (US $M), directly associated to the physical investments undertaken by the project. Those O&M costs are expected to increase from 3 percent of the cost of incremental power purchase by EdM in 2009 to 5 percent in 2014

115

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

Incremental Sales (MWh)

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 calculated linearly on the basis of being equal to 80 percent of incremental power purchases by EdM, assuming an average rate of distribution losses of 20 percent.

IBMS Efficiency Benefit (US $M)

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 costs were projected based on EdM financial model (see Financial Analysis Section in Annex 7 of the EDAP APL-2 Project Appraisal Document).

Rehabilitation & Reinforcement Benefits (MWh)

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 assumptions would have to be made about the consumption profile of the existing customers that will come to benefit from the rehabilitation and reinforcement of the grid. That would unnecessarily complicate and introduce some level or “arbitrarity” to the framework of the analysis.

Tariff Projection (US $/KWh)

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 on the need to implement a gradual tariff increase over the next 10 years horizon. The referred Option 3 constitutes a conservative tariff increase scenario capable of fully meeting EdM financial needs and obligations.

Incremental Sales (US $ M)

Value, in millions of US dollars (US $M), of incremental power sales by EdM to the new customers that will be connected by the project.

116

Efficiency Benefits (US $ M)

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 distribution of electricity to customers. As indicated above, this benefit is very conservatively only associated to the electricity service to the new customers that will be connected by the project.

Socio-Economic Developmental Benefits (US $ M)

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 the higher income groups, starting with middle income households. From the above, the “socio-economic developmental benefits” included in this analysis was estimated to start at 40% of the value of sales in 2009, and was increased 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.

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00

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ost

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cre

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Rate

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PS

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o=

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ab

. E

ffic

ie. =

5%

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co

Ben

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rig

inal

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tmen

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5

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2

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51

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ost

$K

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0.0

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cre

. R

ate

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5%

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. O

&M

Rate

2 =

5%

Imp

l. lo

sses =

25%

S-E

co

Ben

2=

10%

12

%N

PV

=

55

.85

P C

ost

$K

Wh

3 =

0.0

40

PP

In

cre

. R

ate

3 =

6%

Incre

. O

&M

Rate

3 =

10

%S

-Eco

Ben

3=

15%

EIR

R =

29

%N

ote

s:

(a)

Inclu

de

s investm

en

ts f

or

the

Inte

gra

ted B

usin

ess M

an

ag

em

en

t S

yste

m (

US

$ 1

1 m

illio

n)

and

Dis

trib

utio

n E

ffic

ien

cy P

ilot

Pro

ject

(1.2

mill

ion

).

(b)

Inclu

de

s U

S $

4.2

1 m

illio

n in lo

cal costs

and t

axes.

To

tal in

ve

stm

ent

co

sts

exclu

de

all

soft

"In

stitu

tiona

l D

evelo

pm

ent"

in

vestm

ents

.

(c)

Volu

me (

MW

h)

of

incre

menta

l pow

er

purc

hase

by E

dM

to s

upply

new

custo

me

rs t

o b

e c

onn

ecte

d b

y t

he p

roje

ct.

(d)

Co

st

(US

$ M

) o

f in

cre

me

nta

l pow

er

purc

hase b

y E

dM

(M

Wh)

to s

upply

new

custo

me

rs t

o b

e c

onn

ecte

d b

y t

he p

roje

ct.

(e)

Estim

ate

d O

pera

tion

an

d m

ain

tenan

ce c

osts

(O

&M

) in

US

$ M

associa

ted t

o t

he

ph

ysic

al in

vestm

ents

und

ert

aken

by t

he p

roje

ct.

O

&M

co

sts

expe

cte

d t

o r

ais

e w

ith

tim

e f

rom

3%

of

incre

menta

l po

we

r p

urc

hase

to 5

% o

ve

r tim

e.

(f)

Volu

me (

MW

h)

of

incre

menta

l pow

er

sa

les b

y E

dM

to t

he n

ew

custo

me

rs c

onne

cte

d b

y t

he p

roje

ct.

(g)

Volu

me (

MW

h)

of

be

ne

fits

fro

m t

he r

eha

bili

tation

of

the g

rid ,

whic

h r

esult f

rom

low

er

ave

rag

e lo

sse

s t

o t

he n

ew

custo

me

rs c

onne

cte

d b

y t

he p

roje

ct.

(h)

Escala

ting

tari

ff p

roje

ction

estim

ate

d t

o b

e n

ecessa

ry u

nde

r optio

n 3

of

the f

ina

ncia

l an

aly

sis

of

Ed

M (

se

e F

inan

cia

l A

na

lysis

Section

of

An

ne

x 9

)

(i)

Valu

e (

US

$ M

) o

f in

cre

me

nta

l pow

er

sale

s b

y E

dM

to t

he n

ew

custo

me

rs c

on

ne

cte

d b

y t

he

pro

ject.

(j)

Valu

e (

US

$ M

) o

f 5 %

ann

ual re

duction o

f "T

ota

l O

pe

rating

Expen

ses"

as a

n e

ffic

iency b

en

efits

fro

m t

he in

tro

ductio

n o

f th

e "

Inte

gra

ted B

usin

ess M

an

ag

em

ent

Syste

m"

by t

he p

roje

ct.

(k)

Valu

e (

US

$ M

) o

f be

nefits

fro

m t

he

re

ha

bili

tation o

f th

e g

rid ,

wh

ich

re

sult f

rom

low

er

ave

rag

e losse

s t

o t

he n

ew

custo

me

rs c

on

ne

cte

d b

y t

he p

roje

ct.

(l)

Valu

e (

US

$ M

) o

f socio

-econ

om

ic b

en

efits

to t

he n

ew

cu

sto

me

rs c

onn

ecte

d b

y t

he p

roje

ct

du

e t

o t

he

access t

o e

lectr

icity s

erv

ice

s.

As e

lectr

icity c

onsum

ption

of

new

custo

me

rs n

orm

ally

incre

ases o

ve

rtim

e a

llow

ing

for

acce

ss t

o a

dditio

nal en

erg

y s

erv

ices "

co

nsum

er

surp

lus"

was e

stim

ate

d t

o r

ais

e

from

40

% o

f va

lue o

f sale

s t

o 5

0%

in 2

014

and

up

to 6

0%

as o

f 2

022

.

118

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

Figure A.9.2

-

5.0

10.0

15.0

20.0

25.0

30.0

1 3 5 7 9 11 13 15 17 19

US

$ M

illi

on

Years

EDAP - EdM: Breakdown of Investment Costs

O & M

Power Purchase

Other costs

Exten. & Intens.

Rehab/Reinforc.

Efficiency Inv.

Engineering Costs

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

US

$ M

illio

n

Years

EDAP - EdM: Composition of Benefits Stream

S-Eco. Ben.

Distrib.Effic.

IBMS Effic.

Elec. Sales

119

Figure A.9.3

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

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.

(30.00)

(20.00)

(10.00)

-

10.00

20.00

30.00

40.00

50.00

60.00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

US

$ M

illi

on

Years

EDAP - EdM Component: Cost & Benefits Stream

COSTS

BENEFITS

NET BENEFITS

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%

120

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;

121

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 CostsInstitutional PV Systems Rural School

Cost of PV systems in US $000 for Rural Schools. Rural School kits include: See Annex 4 for a description of the equipment in this solar PV kit.

Institutional PV Systems for Rural Clinics

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.

Community PV System

Cost of Community/District PV systems in US $000. Community/District kits description presented in Annex 4.

122

Support to Private Sector PV Dissemination

Private Sector PV systems. See Annex 4 for description of the equipment in this solar PV kit.

Other Investment Costs

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).

Operation and Maintenance Costs (O&M)

Operation and Maintenance costs include all items required to sustain the project investments.

Project BenefitsRural School PV Systems

Benefit of Rural Schools PV systems in Units installed, KWh of electricity service rendered and estimated monetary value of the service (US $000).

Rural Clinic PV Systems

Benefit of Rural Clinics PV systems in number of Units installed, KWh of electricity service rendered and estimated monetary value of the service (US $000).

Community/District PV Systems

Benefit of Community/District PV systems in number of Units installed, KWh of electricity service rendered and estimated monetary value of the service (US $000).

Support to Private Sector Dissemination of PV Systems

Benefit of Private Sector PV systems in number of Units installed, KWh of electricity service rendered and estimated monetary value of the service (US $000).

Total PV Service Installed (Kwh)

Value of PV electricity service calculated at realistic estimated tariff for off-grid rural electrification cost: US$ 0.21 p/KWh.

Total “Other Benefits” (US $000)

6-year stream of fees paid by beneficiaries to FUNAE as repayment for the initial capital investments. Each type of beneficiary has a different fixed monthly fee.

Total PV Service Value / Total PV Benefits ( US $000)

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. These total figures also include the 6-year stream of fees paid 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.

12

3

Tab

le A

.9.5

Mo

zam

biq

ue

En

erg

y D

evel

op

men

t an

d A

cces

s P

roje

ct (

ED

AP

AP

L-2

): E

CO

NO

MIC

AN

AL

YS

IS /

FU

NA

E S

ola

r C

om

po

nen

t

Rura

l Sc

hool

s Ru

ral C

linic

s C

omm

un.

Supp

ort P

SO

ther

O

&M

TOTA

L

Rur

al S

choo

ls

Rur

al C

linic

sCo

mm

./Di

stric

t

Sup

port

to P

rivat

eTo

tal P

VTo

tal P

VO

ther

Tota

l PV

NET

BEN

EFIT

PV S

yst.

(a)

PV S

yst.

(b)

PV S

yst.

(c)

PV S

yst.

(d)

Inv.

Cos

ts (e

)Co

sts (f)

Cost

PV

Syst

ems (g

)

P

V Sy

stem

s (i)

P

V Sy

stem

s (j)

P

V Sy

stem

s (k)

Serv

ice

Ser

vice

(L)

Bene

fits

Ben

efits

(m)

STRE

AM

YEAR

(US

$000

)(U

S $0

00)

(US

$000

)(U

S $0

00)

(US

$000

)(U

S $0

00)

(US

$000

)(#

)(K

Wh)

(US

000)

(h)

(#)

(KW

h)(U

S 00

0) (h

)(#

)(K

Wh)

(US

000)

(h)

(#)

(KW

h)(U

S 00

0) (h

)(k

Wh)

(US

$000

)(U

S 00

0) (h

)(U

S $0

00)

(US

$000

)

125

0.0

250.

0

1,

170.

0

100.

0

0.

3

0.

3

1,

770.

5

25

72,2

50

15

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50

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000

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300

58

4,73

0

44

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1,

103,

324

232

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324

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39.3

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124

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

Figure A.9.5

-4,000.0

-3,000.0

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-1,000.0

-

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2,000.0

3,000.0

4,000.0

5,000.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

US

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Years

EDAP - FUNAE: Cost-Benefit Analysis of Solar PV Investments

Costs

Benefits

Net Benefits

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EDAP - FUNAE: Breakdown of Solar PV Costs

O&M

Other Costs

Priv.Sec. PV

Commun. PV

Institut. PV

125

Figure A.9.6

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

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

-

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Years

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Private Sect.

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BASE LOWER HIGHER L-Benef & H-Cost COSTS Tarriff Incre.

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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%

126

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

127

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.

128

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

(50)

0

50

100

150

200

250

2006 2007 2008

Collected Revenues vs. Revenue Requirements in US$ millions

Operating costs excl depreciation & other provisions

Investments funded from own resources

Debt service requirements

Revenue surplus/(shortfall)

Collected electricity & other revenues

0.05

0.07

0.09

0.11

06 07 08

Average Mozambique Collected Revenue & Revenue Requirements in US$/kWh

Average collected revenue (Mozambique)

Average revenue requirement (net of export revenues)

129

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%

130

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

131

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.

Investment Plan in US$ millions

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009-18 2009-18

Investments:

Generation 7 18 26 18 3 0 0 0 0 0 71 5%

Transmission 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 investments 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 plan:

Own resources 26 26 26 27 27 28 29 29 30 31 279 21%

Borrowing 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%

132

(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.

(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.

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

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

133

44. The tables below summarize the financial impact of the above three Tariff Options:

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.

Option 1 - Maintain tariff at LRMC (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%

Option 2 - LRMC tariff indexed to US CPI,

from 2010 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009-18



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%


Option 3 (Base Case) - Tariff indexation

plus real increases as below, from 2010 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009-18



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$ million) (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%


134

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


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%

135

Demand and Supply

48. The following tables forecast EdM’s key financial indicators and the three financial statements31 through 2018 under Options 3.

31 2008 figures in the financial statements are slightly different from the audited financial statements because the extraordinary items are excluded.

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Peak demand (Mozambique) (MW) 445 489 538 581 628 678 732 791 854 922


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 Eskom (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 sent out (GWh) 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 supply from IPP's 372 412 487 508 554 536 590 627 689 756

Transmiss ion losses 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%

Bulk supply to dis tribution (GWh) 2,352 2,588 2,847 3,094 3,340 3,606 3,892 4,210 4,545 4,906

Distribution losses 21.1% 20.6% 20.1% 19.6% 18.9% 18.1% 17.1% 16.1% 15.1% 14.5%

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%

Mozambique + Exports 22.8% 22.7% 22.3% 21.5% 20.9% 20.3% 19.5% 18.6% 17.8% 17.4%

"Free" Electricity (GWh)

Public lighting 41 45 49 53 58 62 67 73 78 85

EdM consumption 6 7 8 8 9 10 10 11 12 13

Total free electricity (GWh) 47 52 57 62 66 72 77 84 90 98

Energy sales (GWh)

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 sales (GWh) 2,229 2,420 2,677 2,922 3,179 3,459 3,774 4,123 4,496 4,884

% growth in sales :

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%

Key Performance Indicators 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Covenant

Audited Audited Audited

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%

Debt service cover (times) 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

Forecast

13

6

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redi

tors

33

51

4

5 2

3 24

28

3

6 41

48

50

59

64

72

C

orp

ora

te t

ax p

aya

ble

3 1

0 0

0 0

0 0

0

0

4

4

7

D

ebt s

erv

ice

due

14

25

2

8 2

3 3

4 4

3

5

7

7

8

C

urr

ent

Por

tio

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f Lon

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16

20

18

25

23

22

21

21

20

19

19

18

18

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l cu

rren

t lia

bilit

ies

65

97

91

50

50

53

61

65

71

76

89

94

105

Net

cur

ren

t ass

ets/

(lia

bili

ties

) 4

(17)

(1

) 2

8 32

52

6

9 88

12

8

160

18

2

205

2

26

Tot

al a

sset

s le

ss c

urr

ent l

iabi

liti

es

444

545

604

690

792

925

1

07

91

231

1 40

11

466

1 4

701

443

1 4

02

Cre

dit

ors

(am

ount

s fa

llin

g d

ue a

fter

mor

e th

an

one

ye

ar)

L

ong

-ter

m lo

ans

1

90

236

27

9 36

4 4

45

553

69

7 83

8

982

1

022

1

002

95

2

882

L

ess:

Cur

ren

t po

rtio

n

(16

) (2

0)

(18)

(2

5)

(23

) (2

2)

(21)

(2

1)

(20

) (1

9)

(19)

(1

8)

(18

)

L

ong

-ter

m p

ort

ion

174

2

17

260

340

422

5

31

675

817

96

2

1 0

03

983

93

4

865

P

roje

ct l

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11

19

10

10

10

10

10

10

10

10

10

10

10

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pro

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ons

13

19

2

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3 40

48

5

6 64

73

81

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10

0

109

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6 7

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13

15

17

20

23

26

T

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edit

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(am

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ts f

alli

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mor

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206

2

64

306

391

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5

98

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1

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1

112

1

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1

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1

010

Net

ass

ets

em

plo

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2

38

281

29

8 29

9 3

13

327

32

7 32

7

341

3

54

366

37

6

392

Cap

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and

rese

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P

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up

cap

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1

16

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1 16

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120

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' equ

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238

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8

Ca

sh F

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no

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US

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2

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32

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5.1

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67

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0.0

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(11

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8.5

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4.8

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5.7

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3.9

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(1.5

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8.9

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eq

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(1

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(5

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(1.6

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2.4

1

4.1

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1 2

4.6

26

.1

25.6

2

7.0

9

2.7

Ca

sh a

nd

ca

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qui

val

ent

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beg

inni

ng

of y

ear

17

.5

15.

0 19

.4

28

.2

20

.8

18

.0

29

.7

42.5

5

3.5

87

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10

8.5

130

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151

.5

28

.2

Ca

sh a

nd

ca

sh e

qu

ival

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s at

en

d of

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r 15

.0

19.

4 28

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20

.8

18

.0

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42

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53.5

8

7.2

10

8.5

1

30.

6 1

51.5

17

3.0

1

08

.5

139

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.

140

2009-18

Downside Risks

Increase/Decrease in cash flows

(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

Upside Potential

Increase/Decrease in cash flows

(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)

141

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.

142

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

143

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.

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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.

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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.

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• 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.

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Annex 11: Project Preparation and Supervision


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

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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

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Annex 12: Documents in the Project File


• 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.

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Annex 13: Statement of Loans and Credits


Original Amount in US$ Millions

Difference between expected and actual 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

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Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00

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Annex 14: Country at a Glance


Sub-

POVERTY and SOCIAL Saharan Low-

Mozambique Africa income

2007

Population, mid-year (millions) 21.4 800 1,296

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

Labor force (%) 1.8 2.6 2.7

Most recent estimate (latest year available, 2001-07)

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 an improved water source (% of population) 42 58 68

Literacy (% of population age 15+) .. 59 61

Gross primary enrollment (% of school-age population) 105 94 94

Male 113 99 100

Female 97 88 89

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1987 1997 2006 2007

GDP (US$ billions) 2.4 3.8 7.0 7.8

Gross capital formation/GDP 17.0 20.6 19.0 19.2

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

Interest payments/GDP 0.8 1.1 0.4 ..

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 ..

1987-97 1997-07 2006 2007 2007-11

(average annual growth)GDP 4.2 7.7 8.5 7.3 7.0

GDP per capita 1.6 5.2 6.3 5.3 5.9

Exports of goods and services 12.6 18.9 8.0 -8.2 10.0

STRUCTURE of the ECONOMY

Mozambique

Low-income group

Development diamond*

Life expectancy

Access to improved water source

GNI

per

capita

Gross

primary

enrollment

Mozambique

Low-income group

Economic ratios*

Trade

Indebtedness

Domestic

savings

Capital

formation

153

1987 1997 2006 2007

(% of GDP)Agriculture 44.1 34.9 27.6 27.6

Industry 21.4 17.8 26.6 25.7

M anufacturing .. 9.8 16.3 15.2

Services 34.4 47.4 45.8 46.7

Household final consumption expenditure 96.7 83.9 76.1 75.6

General gov't final consumption expenditure 11.1 6.8 10.9 12.1

Imports of goods and services 31.4 24.6 46.6 45.6

1987-97 1997-07 2006 2007

(average annual growth)Agriculture 2.6 5.3 10.9 6.6

Industry 1.9 13.9 9.1 6.6

M anufacturing 4.5 13.7 6.0 5.0

Services 4.6 6.6 7.9 6.4

Household final consumption expenditure 3.0 5.1 8.4 8.6

General gov't final consumption expenditure -0.2 -1.8 8.4 17.2

Gross capital formation 5.3 7.2 13.1 4.2

Imports of goods and services 2.6 5.0 10.0 -2.1

Note: 2007 data are preliminary estimates.

This table was produced from the Development Economics LDB database.

* The diamonds show four key indicators in the country (in bo ld) compared with its income-group average. If data are missing, the diamond will

be incomplete.

-40

-20

0

20

40

02 03 04 05 06 07

GCF GDP

Gro wth o f capita l and GD P (%)

-40

-20

0

20

40

60

02 03 04 05 06 07

Exports Imports

Gro wth o f expo rts and impo rts (%)

Mozambique

P R IC ES and GOVER N M EN T F IN A N C E

1987 1997 2006 2007

D o mestic prices

(% change)Consumer prices 164.1 6.4 13.2 8.2

Implicit GDP deflator 181.4 9.0 7.4 6.2

Go vernment f inance

(% of GDP, includes current grants)Current revenue 11.4 14.4 20.7 20.4

Current budget balance -1.9 4.6 6.2 4.6

Overall surplus/deficit -11.8 -7.7 -7.1 -9.5

T R A D E

1987 1997 2006 2007

(US$ millions)Total exports (fob) 97 230 2,381 2,412

Cashew nuts, raw cashew and cashew o il 31 29 37 20

Prawn 38 85 88 63

M anufactures .. 20 25 28

Total imports (cif) 642 760 2,914 3,093

Food .. 30 184 195

Fuel and energy .. 78 430 526

Capital goods .. 154 869 916

Export price index (2000=100) 143 112 198 227

Import price index (2000=100) 90 106 146 161

Terms of trade (2000=100) 158 106 135 141

0

1,000

2,000

3,000

4,000

01 02 03 04 05 06 07

Exports Imports

Expo rt and impo rt levels (US$ mill.)

0

5

10

15

20

02 03 04 05 06 07

GDP def lator CPI

Inf lat io n (%)

B A LA N C E o f P A YM EN T S

1987 1997 2006 2007

(US$ millions)Exports o f goods and services 176 509 2,878 3,032

Imports o f goods and services 699 938 3,300 3,576

Resource balance -523 -429 -421 -544

Net income -170 -182 -692 -742

Net current transfers 0 0 0 0

Current account balance -693 -611 -1,113 -1,286

Financing items (net) 751 778 1,252 1,569

Changes in net reserves -58 -168 -139 -283

M emo :

Reserves including gold (US$ millions) 139 537 1,241 1,524

Conversion rate (DEC, local/US$) 290.7 11,722.6 25,400.0 25,858.4

EXT ER N A L D EB T and R ESOUR C E F LOWS

1987 1997 2006 2007

(US$ millions)Total debt outstanding and disbursed 4,125 7,632 3,265 ..

IBRD 0 0 0 0

IDA 87 1,160 655 902

Total debt service 55 110 55 ..

IBRD 0 0 1 0

IDA 0 9 17 6

Composition of net resource flows

Official grants 414 518 2,544 ..

Official creditors 284 215 343 ..

Private creditors 50 1 0 ..

Foreign direct investment (net inflows) 6 64 154 ..

Portfo lio equity (net inflows) 0 0 0 ..

World Bank program

Commitments 111 100 51 275

Disbursements 48 148 223 212

Principal repayments 0 2 8 0

Net flows 48 147 215 212

Interest payments 0 8 10 6

Net transfers 48 139 205 206

Note: This table was produced from the Development Economics LDB database. 9/24/08

-25

-20

-15

-10

-5

0

01 02 03 04 05 06 07

C urrent acco unt balance to GD P (%)

G: 744

D: 427

C: 10

B: 655

F: 2

E: 1,427

A - IBRD

B - IDA

C - IM F

D - Other mult ilateral

E - Bilateral

F - Private

G - Short-term

C o mpo sit io n o f 2006 debt (US$ mill.)

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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.

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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.

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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.

157

Table A.15.1

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.

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 EfficiencyPilot Program 1 1,200 1,200

"25 de Junho)

Rehab. & ReinforcementExisting 33/19kV 1 1,000 1,000

Chalange - Catuane

Installation of PowerTransformers 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


Total 2: 9,886

158

Table A.15.2

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:

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

159

Table A.15.3

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.

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 ServicesInstitutional Strength. 1 1,500 & Capacity Building

Sub-total 1: 11,500


Sub-Total 2: 12,075

Consultancy (10%) 1,208

Total 3: 13,283

160

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.

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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).

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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.

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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

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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).

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Table A.15.6

Provinces

Improved Stoves37 Charcoal Kilns38 Multifunctional

Platform

Promotional of Household

and SME Interfuel

Substitution

Biomass Energy

Technologies Demonstration

Total (USD '000)

Number of

Stoves

Cost (USD '000)

Number of

Charcoal Kilns

Cost (USD '000)

Number of

Platforms

Cost (USD '000)

Cost (USD '000)

Cost (USD '000)

Cabo Delgado

35,000 280 300 145 40 600 800 825 2,650

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 .

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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 (Schools)

20,000 20,000 20,000 20,000 10,000 90,000

Institutional Solar Systems (Clinics)

259,000 259,000 259,000 259,000 97,125 1,133,125

Community/Local Operator System

36,570 36,570 24,380 24,380 19,504 141,404

Support to private Sector supply/delivery systems

TBD(*) TBD(*) TBD(*) TBD(*) TBD(*) TBD(*)

Small/Micro Hydropower Systems

48,501 80,835 80,835 64,668 0 274,839

Promotion of Improved Stoves

125,000 175,000 175,000 175,000 175,000 825,000

Promotion of charcoal kilns 2,100 3,000 3,000 3,000 3,000 14,100

Promotion of Multifunctional platforms


Promotion of household and 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).

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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

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.

Total

Qty MUS$ Qty MUS$ Qty MUS$ Qty MUS$ Qty MUS$ MUS$

Institutional Solar Systemas - Rural

Schools900 200 1.75 200 1.75 200 1.75 200 1.75 100 0.84 7.83

Institutional Solar Systemas - Rural

Clinics875 200 1.66 200 1.66 200 1.66 200 1.66 75 0.53 7.17

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

systems0.50 0.50 0.50 0.50 0.00 2.00

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

Interfuel Substitution- - 0.80 - 0.80 - 0.80 - 0.80 - 0.80 4.00

Biomass Energy Technologies

Demonstration Pilots- - 0.83 - 0.75 - 0.83 - 0.75 - 0.85 4.00

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

plan

0.10 0.10 0.10 0.10 0.10 0.50

Technical

Assistance &

Consultancy

Services

0.50 0.50 0.50 0.00 0.00 1.50

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

Work Equipment0.25 0.25 0.10 0.00 0.00 0.60

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

Item Quantity

year 1 year 2 year 3

Institutional Development & Capacity

Building

year 4 year 5

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Table A.15.9

Provinces Number of Pico

and Small hydropower

Cost (USD)

Tete (Chizolomondo, Kazula, Lifidze and Ulóngue)

4 0,8

Manica (Chôa Mountains, Nhazónia, Chiurarue, Sembezeia, Rotanda II and Mafuia)

6 1,0

Niassa (Mbau, Congerenge, Luazite, Messalo, Ndirima, Luambala e Malanga)

7 1,2

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.

169

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

170

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.

171

Table A.15.10

Mozambique: National Energy Development and Access Program (NEDAP) / INDICATIVE FINANCING PLAN(Basis: US $000)

IDA OTHER PARALLEL FINANCING TOTAL PROGRAM

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.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.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.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.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.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

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).

1. Environm. Mangt. Plan & Funds for Implementation of RPF & RAPs (*)

Edm Project ComponentESTIMATED COSTS

C. Manica Province

A. Maputo Province

D Tete Province

E. Cabo Delgado Province

B. Nampula Province

172

Table A.15.10 (Continuation)

Table A.15.10 (Continuation)

Mozambique: National Energy Development and Access Program (NEDAP) / INDICATIVE FINANCING PLAN

(Basis: US $000) [Continuation]



2.- Investments on Rural and Renewable Energy GAP

2.1 - Solar Systems

3,000 15,000 18,000 3,000 4,250 9,600 16,850 -1,150

70 7,000 7,070 70 3,500 3,500 7,070 0

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

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

500 4,000 4,500 500 1,800 2,000 4,300 -200

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

200 500 700 200 500 700 0

200 1,500 1,700 200 750 750 1,700 0

50 1,000 1,050 50 500 500 1,050 0

150 350 500 150 200 150 500 0

150 600 750 150 250 350 750 0

500 500 250 250 500 0

280 280 280 280 0

1,030 4,450 5,480 1,030 2,450 0 0 0 2,000 5,480 0

2.2 - Small/Micro Hydropower Systems

500 1,500 2,000 500 0 1,500 2,000 0

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).

1. Environm. Mangt. Plan & Funds for Implementation of RPF & RAPs (*)

2. TA and Consulting Services

3. Training

Sub-total

1. Tete

1. Institutional Solar Systems (schools & Health Clinics)

2. Community/Local Operator solar systems

3. Support to private sector supply/delivery systems

2. Manica

1. Promotion of Improved stoves and Charcoal Kilns

5. Office and Field Work Equipment

4. Vehicles

4. Biomass Energy Technologies Demostration Pilots

7. Operating Costs

Sub-total

6. Travel

FUNAE Project ComponentESTIMATED COSTS

Mozambique: National Energy Development and Access Program (NEDAP) / INDICATIVE FINANCING PLAN(Basis: US $000) [Continuation]



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

ESTIMATED COSTS ME Project Component

173

Annex 16: MAP MAP(IBRD 32473)


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Caia

Cahora Bassa

Chokwe

Massingir60 MW

Corumana

MatolaCrude OilRefinery(Closed)

Nicuadala

Cuamba

Alto Molocué

Mocuba

Angoche

Moçambique

Nacala

Mocimboada Praia

Montepuez

Moatize

Inhambane

Chidengule

Catandica

Maxixe

Vilankulo

Inhassoro

Lionde

Xai-Xai

Macia

57 MW steam78 MW gas turbines

BeiraBuzi

ChimoioNhamatanda

ChibataMutare

DondoMafambica

Lamego

Marica

Messica

Chicamba38 MW

Mavuzi52 MW

Quelimane

LuaboMarromeu

Nampula

Gurué

Monapo

PembaAncuabe

Lichinga

Tete

2075 MW

400 kV Lineto Harare

110 kV Lineto Harare

1240 MW

MAPUTO400 kV Lineto Camden

400 kV Lineto Arnot

275 kV Lineto Komatipoort

Petroleum Pipelineto Zimbabwe

14 MW

12 MW gas (jet)

N O R T H E R N R E G I O N

C E N T R A L

R E G I O N

S O U T H E R N

R E G I O N

Limpopo

Zambeze River

Chire

Rive

r

LakeCahora Bassa

LAKE

MALAWI

Lugenda River

Rovuma River

Messalo River

Lurio River

River

RiverSave

M O Z A M B I Q U E

C H A N N E L

Z A M B I A

Z I M B A B W E

S O U T H

A F R I C A

M A L A W I

T A N Z A N I A

SWAZILAND

SOUTH AFRICA

34°

32°

12°

14°

16°

18°

20°

22°

24°

30° 34° 36° 38° 40°

26°

24°

22°

20°

18°

16°

14°

12°

26°

36° 38° 40°

INTERCONNECTED NETWORK:

±533 kV DC LINES

330 (400) kV LINES

275 kV LINES

220 kV LINES

110 kV LINES

66 kV LINES

THERMAL POWER PLANTS

HYDRO POWER PLANTS

SUBSTATIONS

RAILROADS

SELECTED CITIES

NATIONAL CAPITAL

REGION BOUNDARIES FOR POWER SUPPLY

INTERNATIONAL BOUNDARIES

WELLS WITH GAS DISCOVERY OR GAS SHOWS

COAL MINE

LPG STORAGE

KEROSENE STORAGE

IBRD 32473

MAY 2003

0 100 200 300

KILOMETERS

MOZAMBIQUE

ENERGY REFORM AND ACCESS PROJECTRURAL AND PERI-URBAN ELECTRIFICATION

PLANNED EXISTING

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This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

PROJECTPERI-URBAN ELECTRIFICATION

INDEPENDENT GRID ELECTRIFICATION

ZAIRE

ANGOLA

NAMBIA

SOUTHAFRICA

TANZANIA

BOTSWANA

LESOTHO

SWAZILAND

ZIMBABWE

ZAMBIAMALAWI

GABONCONGO

RWANDA

BURUNDI

COMOROS

Mayotte(Fr)

MA

DAG

ASC

AR

Moz

ambi

que

Chan

nel

INDIANOCEAN

ATLANTICOCEAN

MO

ZAM

BIQUE

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