Document of

The World Bank

FOR OFFICIAL USE ONLY

C-P Ao 33 - MQEReport No. 7611-MOZ

STAFF 4PPRAISAL REPORT

MOZAMBIQUE

URBAN HOUSEHOLD ENERGY PROJECT

MAY 12: 1989

Industry and Energy OperationsSouthern Africa Department

This document has a restrited distibuton and may be used by recipients only In the perfonnawu oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorzation.

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CURRE'.''Y EQUIVALENTS

(APRIL 1989)

US$ 1 - 700, Heticais (HT) - April 1989US$ 1 - 580 Heticais (MT) - at time of appraisal

MT 1 - US$0.002US$1 = 2.5 Rand (R)

ABBREVIATIONS AND ACRONYMS

BADEA Arab Bank for Economic Development in AfricaBDM Banco de MocambiqueBPD Banco Popular de DesenvolvimentocR Cents Rand (South African)DC Direct currentDCA Development Credit AgreementDN Direct NegotiationsDOE Department of EnergyEDM Electricidade de MocambiqueESCOM Electricity Supply Commission (RSA)ESMAP Energy Sector Management Assistant ProgramHCB Hidroelectrica de Cabora BassaICB International Competitive BiddingIS International ShoppingLCB Local Competitive BiddingLPG Liquified petroleum gasMIE Ministry of Industry and EnergyMOCACOR Mozambique LPG Distribution CompanyNORAD Norwegian Aid AgencyPETROGAL Portuguese National Oil CumpanyPETROMOC Empresa Nacional de Petroleos de MocambiquePPF IDA's Project Preparation FacilityPROLEC Urban Electrification ProgramR Rand (South African)RSA Republic of South AfricaSIDA Swedish International Development AuthorityUCPI Coordination Unit for Import Programs

WEIGHTS AND MEASURES

B/D barrels per dayGWh gigawatt hourha hectarekg kilogramkgoe kilograms of oil equivalentkm kilometerkV kilovoltkVA kilovolt amperekW kilowattkWh kilowatt hourMW megawatttoe tonnes ef oil equivalentv volt

FISCAL YEAR

Government and Public Enterprises: Calendar YearU.

FOR OMCIAL USE ONLY

MOZAMBIQUE

Urban Household >nnergy Pro3ect

Credit an-1 Project Summary

Borrower: The People's Republic of Mozambique

Beneficiaries: Electricidade de Mocamb.que (EDM), Empresa NacionalPetroleos de Mocambique E. E. (PETROhOC), Mocacor,Ministry of lndustry and Energy (MIE), Banco deMocambique (BDM)

Amounts IDA Credit SDR 17.1 million (US$22 million equivalent)

Terms: Standard, with 40 years maturity

Onlending Terms: SDR 1.55 million and SDR 0.55 million will be onlent toPETROMOC and Mocacor at 11OZ of the Bank loan rate(8.4Z), and SDR 3.35 million would be onlent to EDM atthe prevailing Bank loan rate (7.65Z). The funds onlentto EDM would be repaid over 20 years with five years'grace period. Funds lent to PETROMOC and Mocacor wouldbe repaid over 10 years with four years grace period.EDM, PETROMOC and Mocacor would carry the foreignexchange risk. The balance of the credit (SDR 11.65million) would be channelled through BdM forimplementation of the electrification component andimports of goods and materials for the electrificationand commercial energy programs, and to MIE and otherGovernment Departments for coal, woodfuel and co-ordination components. The credit includes SDR 2.17million not allocated to specific categories.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

ProiectDescription: The project consists of: (i) power system reinforcement

in Mozambique's cities together with connection of 40,000houses, provision of coal stoves to about 50,000households, reinforcement of kerosene and LPGdistribution facilities, improvements in woodfuel supplyand operations, provision of stoves, lamps, pots andpans, drums and cans etc; (ii) technical assistance andconsultancy support to reinforce the operations of EDM.PETROMOC and Mocacor, to support the project coordinationand implementation, and for the woodfuels and coalprograms. The project would be coordinated by the MIEwith support from a number of Mozambican institutions.The project would be executed by EDM, PETROMOC, Mocacorand a number of small Mozambique enterprises. Theproject will be complemented through commodity aidfinance of fuels.

ProiectTustificationand Riskss Economic benefits from the proposed project will accrue

primarily to participants from the lower and middleincome groups whose household fuel costs will be reducedby about one-third. Moreover, the shortfall in thepresent supplies of household fuels will be significantlyreduced. Additional benefits anclude a reduction indeforestation and environmental degradation around themain urban areas caused by present fuel gatheringactivities in a security constrained environment and asubstantial improvement in air quality in areas switchingto alternate fuels. The substitute commercial fuels tobe used are those which will be available at low cost inMozambique in the longer term. Since households are atpresent paying high prices for traditional fuels thelower costs of commercial substitutes should beaffordable. In the case of electricity, connection costswill be spread over about ten years through creditarrangements. Project benifits also includeinstitutional strengthening and rehabilitation of energyfacilities. The overall economic rate of return isestimated at 50Z. The major risks are that Governmentwill be unable to maintai. the high level of coordinationneeded to put the various elements of the project inplace at the same time. Technical assistance will beprovided under the project to reduce these risks, andGovernment has agreed to maintain the present level ofcoordination. When the security situation improves urbanconsumers are expected to continue using commercial fuelsfor reasons of both lower cost and convenience.

71

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Estimated Proiert Cost:

Foreign Local TotalUS$ million

EDM ComponentPower system reinforcement 12.0 2.0 14.0Vehicles and equipment 0.2 - 0.2Technical assistance 2.0 0.3 2.3

PETROMOC ComponentRehabilitation, vehicles, equipment 1.2 0.1 1.3Technical assistance 0.6 0.1 0.7

Mocacor ComponentRehabilitation, vehicles, equipment 0.45 0.1 0.55Technical assistance 0.15 - 0.15

DOE ComponentCoal program 0.9 1.0 1.9Woodfuels program 2.7 0.5 3.2Coordination and t.a. 0.9 0.1 1.0Industrial studies/cable rehabilitation 1.3 0.1 1.4

BdM ComponentElectrification program (Prolec) 7.1 2.2 9.3Commercial energy program 3.1 0.4 3.5

Base Costs 32.6 6.9 39.5Physical contingencies 3.3 0.7 4.0Price contingencies 4.8 1.0 5.8

Total, excluding interest 40.7 8.6 49.3Interest during implementation 0.5 1.0 1.5

Total Project Costs 41.2 9.6 50.8

Fuel imports 30.0 0.0 30.0

Total Financing Required 71.2 9.6 80.8

Proposed Financing Plan

IDA 22 - 22Government of Denmark 3 - 3Badea 10 - 10Nordic Development Fund 5.7 - 5.7Mozambican Companies 0.5 8.4 8.9Government of Mozambique - 1.2 1.2

Total Project Finance 41.2 9.6 50.8Parallel Finance:Commodity Aid Funds (SIDA, Norad) andIDA Rehabilitation II Credit 30.0 - 3.0

Total Financing 71.2 9.6 80.8

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Disbui.sement of IDA Credit

FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97US $ millions

Annual 3.8 2.2 4.9 4.0 3.5 2.3 1.2 0.1Cumulative 3.8 6.0 10.9 14.9 18.4 20.7 21.9 22.0

Economic Rate of Return: 502

Map: IBRD 21316 February 1989

MOZAMBIQUE

URBAN HOUSEHOLD ENERGY PROJECT

STAFF APPRAISAL REPORT

TABLE OF CONTENTS

I. THE ENERGY SECTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Introduction and Economic Context ... . . . . . . . . . . . . . 1Present Situation .... . . . . . . . . . . . . . . . . . . . . 2Energy Sector Issues .... . . . . . . . . . . . . . . . . . . . 2Energy Pricing .... . . . . . . . . . . . . . . . . . . . . . . 3Sector Priorities and Strategy ... . . . . . . . . . . . . . . . 4Energy Resources . . . . . . . . . . . . . . . . . . . . . . . . . 5Energy Supply and Consumption ...... . . .. . . .. . . . . 6Bank's Role in the Energy Sector . . . . . . . . . . . . . . . . . 8Experience with Past Lending ... . . . . . . . . . . . . . . . . 9

II. HOUSEHOLD ENERGY .... . . . . . . . . . . . . . . . . . . . . ... 9Background .... . . . . . . . . . . . ... g.... . . . . . . 9Cost of Household Fuels .... . . . . . . . ..... . . . . . 10Fuelwood and Charcoal .... . . . . . . . . ..... . . . . . 12Coal .... . . . . . . . . . . . . . ....... . . . . . . . 14Electricity . . .. . . . . . . . . . . . . . . . . . . . . . . . 15Liquified Petroleum Gas .................. . .5'Kerosene. . .... . . 17

III. THE BORROWER, THE SECTOR AND THE EXECUTING AGENCT . . . . . . . . . . 19The Borrower and the Executing Age-c_,s . . . . . . . . . . . . . 19Sectoral Arrangements . . . . . . . . . . . . . . . . . . . . 19Department of Energy .. . . . . . . . . . . . . . . . . . . . . . 20The Electricity Subsector ... . . . . . . . . . . . I . . . . . 20The Petroleum Subsector ... . . . . . . . . . . . . . . . . . . 21Accounts and Auditing . . . . . . . . . . . . . . 2 . . . . . . . 22Insurance .... . . . . . . . . . . . . . . . . . I . . . . . . 23

IV. THE PROJECT .... . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Project Preparation . . . . . . . . . . . . . . . . . . . . . . . 23Project Objectives . . . . . . . . . . . . . . . . . . . . . . . . 24Project Options and Design ... . . . . . . . . . . . . . . . . . 24Project Description .... . . . . . . . . . . . . . . . . . . . 26Project Implementation . . . . . . . . . . . . . . . . . . . . . . 27Project Cost Estimate . . . . . . . . . . . . . . . . . . . . . . 29Financing Plan .... . . . . . . . . . . . . . . . . . . . . . . 31Procurement .......................... . 32Disbursements .... . . . . . . . . . . . . . . . . . . . . . . 34Reporting Requirements .... I . . . . . . . . . . . . . . . . . 35Environment and Safety .... . . . . . . . . . . . . . . . . . . 35Project Risks . . . . . . . . . . . . . . . . . . . . . . . . . . 36

V. FINANCIAL ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . 36Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 36Electricidade de Mocambique (EDM) . . . . . . . . . . . . . . . . 37

Background . . . . . . . . . . . . . . . . . . . . . . . . . 37EDI's Present Financial Position . . . . . . . . . . . . . . . 38Power Tariffs . . .. . . . . .. . . . . . . .40

Empresa Nacional de Petroleos de Mocambique (PETROMOC) . . 43Existing Agreements . . . . . . . . . . . . . . . . . . . . . 43PETROMOC'S Financial Position . . . . . . . . . . . . . . . . 43

Mocacor's Financial Position . . . . . . . . . . . . . . . . . . . 46Petroleum Product Pricing . . . . . . . . . . . . . . . . . . . . 48

VI. PROJECT JUSTIFICAfION . . . . . . . . . . . . . . . . . . . . . . . . . . 48Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 48Financ al Comparison . . . . . . . . . . . . . . . . . . . . . . . 49Economic Comparison .... . . . . . . . . ..... . . . . . . 50

VII. AGREEMENTS REACHED AND RECOMMENDATIONS ... . . . . . . . . . . . . . . 51

ANNEXES

1.01 Production, Imports and Exports of Electricity1.02 Consumption of Energy Petroleum Products1.03 Energy Balance

2.01 Comparative Cost of Fuels

4.01 Project Description and Cost4.02 Technical Assistance and Studies4.03 Household Electrification Program4.04 Woodfuels Program4.05 Disbursement Schedule4.06 Procurement Schedule4.07 Project Monitoring Guidelines4.08 Project Schedule4.09 Project Coordination

5.01 Petroleum Product Pricing Structure5.02 Notes and Assumptions on Financial Projections5.03 PETROMOC Financial Projections5.04 Mocacor Financial Projections

6.01 Economic Benefits

7.01 Selected documents and data available in the Project File

Chart: Electrification Scheme

Map: IBRD No. 21316

MOZAMBIQUE

URBAN HOUSEHOLD ENERGY PROJECT

STAFF APPRAISAL REPORT

L. THE ENERGY SECTOR

Introduction and Economic Context

1.01 During the first half of the 1980s, Mozambique experienced a markedand sustained decline in output and an aggravation of economic distortionsand financial imbalances resulting from a combination of adverse exogenousfactors, internal disruptions caused by widespread armed attacks and failuresin economic p"licies. In the first six years of the decade, overallproduction fell by nearly 30 percent, exports declined by nearly 75 percentand imports were compressed by nearly one-third. In response to the growinginternal and external imbalances, and the limited impact of initialcorrective policy measures undertaken to address them, the Government, in1987, launched a far-reaching Economic Rehabilitation Program (ERP) intendedto deal comprehensively with the structural problems and severe distortionsin the economy. By the end of the first year, the ERP, which contains, interalia, measures to increase reliance on market signals, improve economicincentives and strer.gthen demand management through appropriate fiscalmonetary, exchange rate and external borrowing policies, had begun to reversethe economic decline of previous years. Now in its second year, the mainobjectives of the ERP have remained fundamentally unchanged -- namely: (a)to reverse the decline in production and restore a minimum level ofconsumption and income for the population; (b) to teduce substantiallydomestic financial imbalances and strengthen external accounts and reserves;(c) to enhance efficiency and establish conditions for a return to higherrates of economic growth; (') to reintegrate official and parallel markets;and (e) to restore orderly financial relationships with trading partners andcreditors. The Government is maintaining the momentum of policy reform, andconsolidating the encouraging results that have already been obtained.

1.02 While there can be little doubt as to the appropriateness of theERP's objectives (and the policy measures required to achieve them) forMozambique's goal of moving towards sustained economic growth ir the medium-to-longer-term, it should also be borne in mind that some adjustment measureshave considerable short-term costs for vulnerable population segments --costs which must be at least partially mitigated if the supporting socialconsensus for the ERP is to be maintained. The two major items of the familybudget, food and fuel, have risen strongly in price as controls have beenrelaxed, and their cost is causing obvious hardship in the urban areas.Government has decided to address these challenges as a matter of urgency,and has asked for IDA support both in nutriti3n and in household energy. Theproject proposed in this report aims to assist the Government in meetingthese challenges in urban household energy. The costs of fuelwood andcharcoal in the market-place are double the economic cost of commercialfuels, and the scope for reducing energy costs for the householder througha commercial energy program is significant. Accordingly the Government hasassigned priority status to the proposed project as a means of reducing thecost of cooking fuel for a large segment of the urban population.

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1.03 IDA is assisting Mozambique to rehabilitate its main energyfacilities through the Energy Technical Assistance and Rehabilitation Credit,which is also financing extensive technical assistance and a number ofstudies, including preparation of a household energy strategy, now expectedto be completed by March 31, 1990. While the full details of this strategywill not be finalized until 1990, the Government has decided to make an earlystart in introducing and implementing priority measures that have alreadybeen identified. When the strategy has been finalized, th project will bereviewed by Government and IDA (September 30, 1990) with a view to making anynecessary adjustment.

Present Situatiou

1.04 Recent trends in the energy sector of Mozambique reflect theprevailing conditions throughout the economy, particularly dieruption toeconomic activity by armed bands, acute scarcity of foreign exchange andtrained manpower, and shortcomings in management and operation capabilityand in financial performance. The continuous decline in economic activitybetween 1981 and 1984, as indicated in estimates of GDP, was both cause andeffect of a 402 drop iti the consumption of commercial energy (petroleumproducts, electricity and coal) between those years. GDP and commercialenergy use have recovered to their 1984 level. Mozambique's principal sourceof electric power, the Cahora Bassa hydro, has been unable to supply Maputosince 1981, forcing Mozambique to resort to imports. In turn this hasweakened the financial position of EDM (the power supplier). The generalfinancial weakness of EDM, and related problems in other parts of the sector,is one of the major energy issues. Energy for household use has been inshort supply through the 1980's, in part through reduced biomassavailability, in part through the consequences of armed attacks, and ir. partbecause of foreign exchange shortages. This shortage and the high price ofthe energy that is available are the principal energy problems facing theMozambican people.

Energy Sector Issues

1.05 Disruption to Energy Supply. Acts of sabotage by armed bands havesevereiy disrupted energy production and supply, especially for electricitytransmission since 1981 and for coal transportation since 1983.Consequently, the two major facilities for producing ener,y ir. Mozambique,the Cahora Bassa hydroelectLic power station and the coal mines at Moatize,are running at nominal capacity at present. The direct annual cost toMozambique of this disruption is about US$25 million in terms of foregoneearnings from exported energy and additional costs of imported energy. Theactivities of armed bands restrict the better management of woodlands and

limit the woodfuel options. In late 1988 Mozambique, Portugal and SouthAfrica reached agreement on steps to resume transmission of power from CahoraBassa by 1990. Electricidade de Mocambique (EDM) has rerouted part of oneof its transmission lines in central Mozambique to make it more defensibleand to permit more reliable supply to Beira from the hydro station and CahoraBassa.

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1.06 Backlog of Maintenance and Rel.abilitation. Lack of foreign exchangehas contributed to a decline in operational efficiency of power and petroleumfacilities by causing shortages of spare parts, materials and equipmentrequired for system operation, maintenance and rehabilitation. Th" powerdistribution systems have only been kept in operation thrcugh donor supportfor technical assistance particularly from Sweden and Portugal and forimported goods from Denmark, Norway, Sweden and Holland. The petroleumproduct handling and distribution facilities need to be rehabilitated as amatter of urgency. The transport fleets of EDM, PETROMOC and BP (Mocambique)Ltd need to be strengthened to enable fuels to reach the provincial citiesreliably. In the main urban areas there are frequent power outages andunreliable distribution of petroleum products, whilst many areas of thecountry do not receive any petroleum supplies. One of the results is lossof agroindustrial production and interruption of other productive activities.The backlog of maintenance and rehabilitation will be reduced under IDA'sEnergy Technical Assistance and Rehabilitation Project. Further support isplanned through the proposed project.

1.07 Institutional Weaknesses. The energy sector organizations werecreated after the general collapse of institutions that occurred in the mid1970s following the Portuguese exodus. They have suffered from the economicdifficulties that followed Independence, and thus have had to operate withshortages of skilled manpower and deteriorating physical facilities. Scarcemanagement resources are fully occupied in handling routine matters, oftenon the basis of crisis management, and they have little opportunity to tacklefundamental issues. Remuneration packages have been insufficient to motivateand retain skilled personnel. Consequently, the organizations haveencountered major obstacles to developing and maturing since their inception.Anty lasting solution to break the vicious circle of manpower and financialconstraints, weak administration and poor economic performance will requiremutually reinforcing improvements in all areas. Sustained improvement ineconomic performance also requires the resumption of peaceful conditions inthe countryside.

Energy Pricinj

1.08 Prior to the reform program Government emphasis was on pricestability at the expense of enterprise viability. Financial performance ofenergy enterprises, resource mobilization and market signals sufferedaccordingly. Current policy is to ensure the financial viability of theenterprises, avoid Government subsidies and cover long run marginal costs.

1.09 Electricity prices were not changed between the mid 1960s andJanuary 1986 when they were raised by an average of 120Z. Prices increasedsubsequwntly in January and July 1987, and were increased again in October1988 and April 1989. EDM has been receiving payments from both Governmentand foreign donors to offset the costs relating to the armed attacks, and isalso suffering from a high level of arrears in payments for electricity.These issues will be addressed under the project (see Chapter V). Petroleumproduct prices were not changed between 1979 and the increase of about six-fold that was announced on January 30, 1987. Petroleum product prices werefurthe.: increased in July 1987, October 1988 and April 1989, and are now

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generally in line with international prices. These recent price increasesmaintain the reasonable financial position of PETROMOC and Mocacor (the LPGdistribution company., except for a bad debt problem with a limited numberof PETROMOC's large customers (see Chapter V). Coal prices are based onimport cost plus distrtbution costs, with the result that local production,whose output is severely disrupted, operates at a loss. The prices ofwoodfuels are market determined and appear to be affected by transportconstraints and lack of alternative fuels.

Sector Priorities and Strategy

1.10 The recently completed report on the energy sector inMozambique 1/ identified the following priorities: (i) to increase thereliability of meeting essential demands for energy, particularly petroleumfuels to key economic consumers; (ii) to strengthen the institutionalperformance of the main energy supply agencies; (iii) to increase theavailability of household energy to urban areas; particularly woodfuels, andalso kerosene, LPG and electricity; (iv) to prepare sound investment programsto meet Mozambican energy needs, including exploitation of indigenous energyresources (hydroelectricity, forests, coal and natural gas) whereeconomically justified; and (v) to establish priorities for preparation workamong large export-oriented projects based on indigenous energy resources.Government agrees with these priorities which accord with Government's mainobjective of improving operational efficiency in the short and medium termfor the energy sector, and a parallel priority objective of making energyavailable and affordable.

1.11 The first priority in energy supply has been to re-establish thesupply and transmission of power from the Cahora Bassa hydro station so asto generate export earnings and avoid the need for Mozambique to import powerfrom South Africa. Agreement has been reached between South Africa, Portugaland Mozambique for repairs to the high tension transmission lines that hadbeen damaged by armed bands, and for minor rehabilitation at the hydrostation. The new operational arrangements will provide for formal securityarrangements for the transmission line, and the bulk power tariff includesan element to pay for this. The agreement provides for South Africa to investabout US$20 million on rerairing the transmission line within Mozambique.The part of the line passing through South Africa has not been attacked.Transmission from the C.hora Bassa system to southern Mozambique and SouthAfrica is planned to restart in 1990.

1.12 The second priority of Government in energy supply is to addressthe household energy shortages and prices with a view to making energy morereadily available in the urban areas and tc reducing the overall fuel costfor a large ntaber of households. The options for achieving this includeelectricity, petroleum, coal, charcoal and fuelwood, and are discussed moreftilly in Chapter II.

'Mozambique: Issues and Options in the Energy Sector", January 1987.Joint UNDP/World Bank Assessment Program

1.13 Other priorities include the development of Mozambique's energypotential, primarily through foreign entrepreneurs and private capital. Inresource development the Government launched a promotion to attract coalinvestment, but firm results from the promotion are fundamentally dependenton improved security. A number of international oil companies are alreadyexploring in Mozambique and are satisfied with the incentive package. Oildiscoveries have been small and gas discoveries cannot be exploited untilsecurity improves. This work forms part of Government's strategy to placeMozambique inT a position to exploit regional and international marketopportunities once the security situation improves and markets can be assuredat viable pricAs. 2/ Foreign investment is also being sought in projectsto make use of the energy resources already discovered. Some of theseprojects involve massive investments relative to the size of the economy. Thecombined investment for the larger projects exceeds US$2 billion in 1988prices. The economic viability of these projects will need to be carefullyassessed, and risk capital provided primarily by the foreign privateinvestors.

1.14 The energy investment program undertaken in recent years has beenmodest and in line with that recommended in the Energy Assessment Report,except that an additional hydro station is being developed (through grantfinance) to reinforce the supplies to Maputo and reduce the dependence of thecapital on a single transmission line. The Energy Technical Assistance andRehabilitation project included a review mechanism for IDA to comment on newinvestments not included in the agreed program to 1991 where theseinvestments exceed US$3 million. It is proposed under the Urban HouseholdEnergy project to modify this to review of any new single energy investmentproject expected to exceed US$10 million.

Enerrgy Resources

1.15 Mozambique is well endowed with a variety of primary energyresources. A noticeable feature is the concentration of these resources alongthe Zambezi Valley which is far (about 1,100 km) from the main consumptioncenter around Maputo.

(i) Hydroelectric power potential has been identified at over 100sites on the numerous rivers in Mozambique, with a combinedaverage energy output of about 75,000 GWhlyear for which anindicative total for installed capacity is about 14,000 MW.About 152 of this potential has been developed at Cahora Bassa(2,075 MW, 14,000 GWh/year of available energy).

21 The major energy developments being considered for the longer termare Cahora Eassa Stage 2 (US$512 million), Moatize Coal (USS979million for Phases 1 and 2 (to 6 million tonnes/year and includingassociated infrastructure), Pande Gas Field (US$20 million), anammonia plant (US$280 million) and an aluminum plant (US$360million).

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(ii) Coal deposits exist extensively throughout central-westernMozambique with estimates of total geological reservesexceeding 3 billion tonnes of run-of-mine coal, of which provenreserves amount to about 850 million tonnes. The only coalfieldpresently being mined is located at Moatize in the ZambeziValley with proven reserves of about 87 million tonnes.Expansion in coal production capacity to an annual level of 6million tonnes of saleable coal might be feasible,followingresolution of the security situation, and with this in mindGovernment is seeking to attract private entrepreneurs.

(iii) Oil and Gas exploration has been carried out extensively fordecades in Mozambique's large sedimentary basin, but thehyd,ocarbon potential of Mozambique is still re:ativelyunknown. An onshore commercial gas discovery at the Pande GasField, located 30 km inland and about 550 km north of Maputo,was made in 1961. Estimates of recoverable reserves are broad,lying in the range of 0.4 to 1.3 trillion cubic feet. There areindications of other substantial gas deposits. Government hasn';en carrying out intensive promotion activities for petroleum

exploration, and in recent years has signed exploration andproduction contracts with Exxon, Shell, Amoco and BritishPetroleum. ENH (the national oil exploration company) isexploring for gas with Russian assistance.

(iv) Forestry Reserves in Mozambique comprise 0.6 million ha offorests with high productive potential, 4 million ha withmedium productive potential, 15 million ha with low productivepotential and about 37 million ha of land with a minimalforestry potential. From rough estimates, the natural annualincrease in volume of the standing biomass balances the totalnational demand for forest products. However, there are majorimbalances at the regional level between demand and sustainableyield. There are critical shortfalls in woodfuel resourcesaround the main urban areas, particularly in Maputo, Beira andNampula, which can only be addressed through long-term programsfor increasing the supply of woodfuels, improving energyutilization efficiency and developing supplies of other formsof household energy.

Energy SUPPly and Consumption

1.16 In an average year of the early 1980's, the gross energy availableto Mozambique from all energy forms was about 3 million tonnes of oilequivalent (toe) or roughly 250 kgoe per capita, of which about 80Z was fromwoodfuels. Mozambique's per capita energy consumption was at the lower endof the average for Eastern Africa.31 Petroleum products accounted for about

3/ For comparison, per capita energy consumption in neighboring countrieswere about 760 kgoe for Zimbabwe, 560 kgoe for Malawi, 470 kgoe forTanzania, 350 kgoe for Uganda, and 270 kgoe for Ethiopia.

802 of non-woodfuel energy, primary electricity for about 152 and coal for5Z to 10Z. In the early 1980s, the distribution of consumption of these formsof energy was 27Z in industry, 27Z in transportation, 31Z in households andpublic institutions, and 15? in agriculture and other sectors. An energybalance for is given in Annex 1.03.

1.17 Energy Trade. Energy's role in the country's foreign trade hasdeclined. Power exports from the Cahora Bassa hydroelectric complex werereduced in 1981 and halted in 1984 due to sabotage of transmission lines ata cost to Mozambique in foregone foreign exchange earnings of about US$15million annually. National coal production is at a fraction of its level inthe late 1970's due to the severance of transport links from the coal mines,and the country is losing revenues from coal exports of about US$10 millionannually. The total volume and value of imported petroleum has declinedsubstantially since 1981. The annual deficit on the trade of petroleum andproducts fell from an average of USA150 million in the period 1980-82 toabout US$70 million in 1983 and has abilized at about US$60 million sincethen. The net cost of petroleum consumption (deficit) averaged about 1OZ oftotal imports in the period.

1.18 Electricity Supply and Consumption. The supply of power inHozambique excluding exports from Cahora Bassa has fluctuated around 600 GWhover the last 10 years with a low of about 550 GWh in 1985 and 1986,equivalent to a per capita consumption of 40 kWh/year, and recovery to about630 GWh in 1987 and 1988. The lack of availability in Southern Mozambiqueof power from Cahora Bassa has resulted in major imports from South Africa.EDM estimates that it serves about 75,000 households nationally, in whichcase only about 2.5Z of the total population and 17? of the urban populationhave access to electricity.

1.19 Petroleum Products Supply and Consumption of petroleum energyproducts fell by about 30? from 1978 to 1987, from 384,000 tonnes to270,000 tonnes. Consumption in 1988 recovered to 300,000 tons. The structureof supply, however, changed markedly in the early 1980s. Up to 1980,Mozambique refined sizeable quantities of imported crude oil, exported aboutone-third (mostly gasoline and heavy fuels), and imported gas oil (diesel)because of a mismatch between refinery yield and the pattern of demand forproducts. As a result of the refinery closure product imports rosesubstantially, from an average of about 100,000 tonnes/year in 1978-1980 toabout 300,000 tonnes in recent years. Notwithstanding this increase, therewere acute shortages of kerosene, LPG and gasoline from 1985 to 1987. Priceincreases have reduced gasoline demand and physical rationing ceased in 1988.To improve urban household energy supplies, Government has made concertedefforts in 1988 to make LPG and kerosene more available.

1.20 Coal Supply and Consumption. Mozambique's sole domestic supply ofcoal is from the Moatize underground coal mines near Tete which have beenactive since the 1940s. Production peaked in 1975 at 575,000 tonnes run ofmine and then declined to 3,000 tonnes in 1986, with recovery to 25,000 tons

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in 1987 and 1988. During the 1980s, hal.f of the production consisted ofcoking coal. Exports have accounted for about a quarter of total productionof which pri,.or to 1982 one-fifth was transported overland by rail and roadto Malawi, and the rest via the port of Beira. There have been no sea-goingexports through Beira since 1982, and major rehabilitation work is requiredto enable the railway line from the mine to carry substantial traffic, andsecurity will need to be enhanced. Exports by road to Malawi have continued,although at a reduced scale. Since 1983, most coal consumbd'in l4ozambique hasbeen imported by rall from South Africa at low costs by world price standardsfor use in power generation (Maputo), railway traction and cement production,and small quantities for test marketing of coal stoves for households.

1.21 Woodfuel supply, both as fuel wood and as charcoal, has been severelyconstrained by deforestation and by transport shortgges. There is noreliable quantified information that can give an accurate picture of supplyand consumption, the best information coming from partial surveys (Beijer1987, ETC 1987, Behrens 1988). Based on these surveys it is clear that thereare woodfuel shortages in both urban and rural areas. Wide ranging assistancein fuelwood and charcoaling will be provided under the Energy TechnicalAssistance and Rehabilitation Project. A firm is being selected for a studyon charcoal production technology, with a view to identifying relevanttechnology in other countries and adapting the more efficient charcoalingtechnology to Mozambique's needs. A woodfuels transport specialist willexamine ways of reducing the cost of transport and increasing transportcapacity. Other experts will review ways of increasing the wood supply,looking at various options such as woodlots, smallholder planting,plantations, better management of natural woodlands etc. An aerophotographicsurvey will be completed in 1989. These studies will feed into the householdenergy strategy.

Bank's Role in the Energy Sector

1.22 The priority for the Bank in the energy sector is to help maintainthe momentum of policy and institutional reform by assisting energy agenciesto develop appropriate strategies and for them to be able to improve thereliability of energy supplies. The Energy Technical Assistance andRehabilitation project is supporting wide ranging technical assistance andrehabilitation designed to improve the efficiency and reliability of energysupplies in EDM (electricity) and PETROMOC (the major petroleum products),and is supporting a number of studies to assist in strategy formulation. Thissupport needs to be taken further with a stronger and more immediate focuson the area where energy shortfalls are causing the greatest hardship, namelyurban household energy. The main thrust of the proposed project would be toincrease urban household energy supplies through introducing commercialenergy to the main cities, focussing on energy sources indigenous toMozambique and providing fuel choice to consumers in line with the policyexpected from the urban household energy strategy. Wide ranginginstitutional strengthening will be necessary for suppliers of fuels andappliances, as well as in financing mechanisms. The project would support theBank's overall country assistance strategy through helping to soften theimpact of the structural adjustment program on the low and middle income

segments of the population. Chapter II explains the household energy optionsand Chapter IV details the project.

ExDerience with Past LendinR

1.23 The project would be the Bank's second operation in the energy sectorqnd the eighth of any type in Mozambique. Implementation of the EnergyTechnical Assistance and Rehabilitation Project is progressingsatisfactorily, although behind the original schedule. The main componentsof the project were: (i) financing of priority facilities rehabilitationneeds of EDM and PETROMOC and connection of some 4,000 additional householdsto the electric power system; (ii) provision of special advisors to assistin operating power and petroleum facilities; and (iii) technical assistancefor financial strengthening, and upgrading of accounting, budgeting andplanning systems at EDM and PETROMOC. Preparation of financial statements forEDM and PETROMOC was completed in September/October 1988 reflecting a muchgreater task than originally envisaged. A review of pricing implications forEDM will commence in summer 1989 once the accounts have been refined further.Procurement for the project was delayed pending satisfaction of theconditions of disbursement; it is now proceeding actively. A number ofconsultancy contracts have been signed but it is too early for results to beavailable. The proposed project would re-enforce major economic andfinancial covenants in the previous project. Implementation of the first andsecond rehabilitation credits has also progres3ed well with no significantproblems. BADEA, the Nordic Development Fund and Denmark would collaboratein this project together with commodity aid support for petroleum fuels fromNorway and Sweden.

IL. HOUSEHOLD ENERGY

Background

2.01 Household energy needs are not being met and there are severe andgrowing shortages, particularly of wood. In Maputo the shortfall in supplyis tex.tatively estimated at 10 to 30Z and similar shortfalls are beingexperierced in other urban areas. Possible solutions based on a greatlyenhanced woodfuels program are impractical both because of the frequency ofarmed attacks and the unsuitable environment. The Government's objective inurban household energy is to encourage the use of the cheaper indigenouscommercial fuels, and at the same time to improve the efficiency in supplyand use of traditional fuels, with a view to satisfying urban householdenergy needs and eventually reducing urban demand for fuelwood and charcoalto a level that can be sustained naturally. Improved utilization ofwoodfuels in rural areas is also an jbjective. The strategy for achievingthe objectives includes a rapid increase in electrification of urban areas,testing and test-marketing of coal stoves, and improving the efficiency ofthe use of traditional fuels. For the short and medium term it will benecessary to supplement these measures with other commercial fuels,

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particularly kerosene, and make use of the existing facilities for supply anduse of LPG in Maputo.

2.02 The priorities established by Government follow from a number ofinternal studies on the cost of alternative fuels, the cost of appliances andappliance efficiencies, and studies on the foreign exchange content of eachoption. Subject to any special problems and costs due to !oration, the mostcost-effective fuels for cooking in the context of Mozambique are coal andelectricity, coal because of access to low cost imported coal and potentialaccess to good quality domestic coal, and electricity because of the vast lowcost hydro resources already developed. Further details of the cost of eachfuel are given in Annex 2.01. Both coal and electricity face importantconstraints. Coal is a new fuel for Mozambique's households, there is limitedexperience of coal for cooking, and the number of appliances is limited bymanufacturing and assembly capability currently at 300 per month. This ratewill increase as coal usage develops towards achieving its full potential.Electricity faces parallel constraints, appliances are in short supply andare expensive, (the current retail price of electric stoves - more thanUS$100 - is at least three times the level in the United States), the powerdistribution system needs reinforcement, and EDM will need staffreinforcement to manage larger numbers of new customers than achievedhistorically.

2.03 The Government's aim is to provide the maximum possible freedom ofchoice in fuels. There will be no restrictions on who uses kerosene or thetraditional fuels. A special effort will be made to ensure that kerosene isavailable throughout the urban areas. There will be constraints, electricityconnections will be have to be prioritized so as to focus on areas requiringlittle capital expenditure, LPG will be restricted to existing registeredconsumers, and the overall coal program will be limited by availability ofstoves and wider environmental and other factors. Apart from theseconstraints, the major determinants of fuel choice are likely to befamiliarity, acceptability and affordability.

Cost of Household Fuels

2.04 The Energy Assessment identified electricity and coal as the lowest(economic) cost fuels and their costs are known with reasonable certainty.Electricity supplies will initially come from South Africa (based on theESCOM bulk supply tariff) or, when available, in priority, from Cahora Bassa,for which a renovation and supply agreement was signed early in 1988. Coalsupplies will come from South Africa (at local prices), Swaziland (atinternational prices) or from domestic coal mines and stocks. The SouthAfrican price of electricity is currently low, although much higher than theprice of power from Cahora Bassa. South African coal prices are alsocurrently low, about 25Z below the level expected for Mozambique when itsmines can resume normal production. However, the advantage of the local coalis its high local currency content and its improved competitiveness inCentral Mozambique where rail lines (once reactivated) should enable it tobe cost-competitive. There is no reliable data on the economic cost of woodand charcoal. The last estimates - prepared by Beijer in 1985 - showed that

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the economic cost of both fuelvood and charcoal were about 5O0 of retailprice and that retail prices were effectively double that of kerosene.

Table 2.1

Economic Cost of Fuels

UnIt Cost Equivalent A pilance Effective Annualper t.o.e. !ffii-ty cosr _stper

X o.e household

Power - from Cohora Basso 1. cR/kWh 3 70 aS slOS i 8- from ESCOM 8.2 cR/kWh 8323 65 S498 340

(cost at Maputo city Gatt)

Coal - from South Africo 63 R/ton I go 20 *182 31S(cost at Maputo)

- local coal 48 USD/ton 3 76 20 $380 330(cost at Beira)

LPG - ex-distributor 8400/ton 3376 45 1836 *67Kerosene - ex-distributor 3235/ton 1238 2S *932 $76

Source: Ministry of Industry and EnergyMission estimates

Notes1. Annual cost based on use for cooking.2. Cost of power distribution/connection about US$40 p.a. extra.3. Costs based on Octobe: 1988 data.

2.05 Delivery costs of coal to households are estimated to average 4mt/kg($10/toe) and will have little impact oni comparative costs. By contrast, thecosts of delivering power to households will be an important cost item,sufficient to bring the economic cost of power close to the cost of othermodern fuels, and the proposed project aims to focus power connections wherethese costs can be miinimized. Financial costs of new power supplies will beslightly higher than petroleum fuels when allowance is made for connectioncosts.

2.06 Government has recently (October 1988) adjusted the retail prices forLPG and kerosene to bring them approximately into line with cost and toprovide an incentive to distributors. It has also established a price forcoal to cover import cost and contribute towards the cost of coal stoves.Electricity tariffs have also been reviewed (see Chapter V) with a view tocovering long term costs, and making a start in bringing domestic and generaltariffs closer into line.

2.07 The retail prices of wood and charcoal were decontrolled early in theadjustment program. Their level reflects the shortage of all fuels and thelack of sufficient appliances for use of cormercial fuels.

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Table 2.2

Flnancial Cost of Fuels

Unit Cost Equlv5lsnt Apliance Effective Annualper .o.s. efciency eoit per cost

Power 20.9 mt/kWh 0433 6S 3m 864(price at the household)*

Coal 20 mt/kg 86f 20 8280 122(delivered to the balrro)

LPG - ex-distributor 210 ut/kg 8834 46 1742 869Kerosene - ex-distributor 110 mt/liter 3238 25 3932 175

Wood - *x-distributor 22 mt/kg 397-125 8 81210-1560 890-125Charcoal - ox-distributor 107 mt/kg 8270-346 12 12236-2886 8180-280

Source: Ministry of Industry and EnergyESMAP studies

Notes1. Annual cost based on use for cooking.2. Cost of power distributlon/connection about US$40 pa. extra3. Costs based on October 1988 prices.

*excluding connection costs

2.08 Most households are multi-fuel users. Outside of the high-rise areain Maputo it is common for households to use both fuelwood and charcoal, andfrequently these households also have LPG and kerosene stoves. At the timeof appraisal the average monthly fuel bill for the Haputo shanty towns was13,000 to 14,000 meticais, the most important fuels being wood and charcoal.In Quelimane, which is more likely to be typical of other provincial cities,most households do not own any kind of stove, and wood plays a much moredominant role in energy use. The average monthly fuel bill for the Quelimaneshanty town was 5,000 to 7,500 meticais, reflecting slightly smallerfamilies, less use of energy in total and particularly less use of thehighest price fuel, charcoal.

2.09 The main determinant of fuel choice was shown by the Behrens surveyto be availability of fuel, and to counter the recurrent difficultieshouseholders have a variety of appliances to take advantage of whatever fuelis available. A second major constraint has been the availability ofappliances. The high incidence of wood and charcoal use is explained by theextreme shortage of kerosene and LPG in recent years and the nominalelectricity connection program.

Fuelwood and Charcoal

2.10 Overall Situation. Woodfuels provide about 80X of the gross supplyof energy in Mozambique, and similarly close to 80I of household energy. Bothurban and rural households are facing serious energy shortages. Shortages ofLPG and kerosene and disruptions to electricity supplies (especially outsideof Haputo) have forced households to use more woodfuels, at the same time thecontinuing rapid growth in population and numbers of families is adding tothe problem. More than half the rural households are in areas of fuelvood

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scarcity and people must devote increasing amounts of time and effort to thecollection of firewood. One of the Government's measures to ameliorate theurban situation has been to free the trade in firewood and charcoal (entirelyprivate sector) from official controls, which has resulted in increasedsupplies to urban areas.

2.11 The actions of armed bands have d.disrupted wood cutting and gathering,as well as charcoaling. The attacks also make trucking a more dangerous andrisky activity, limiting the number of trucks used for transport of wood.

2.12 Urban Fuelwood Supply. Areas around major cities have beendeforested, especially around Maputo, Beira and Nampula, as well as aroundsmaller urban centers. There is no practical way in which this can beremedied. Most of the cities are along the coast, which restricts the areaavailable for growing wood. The situation around Maputo, a city now of 1 to1.2 million people, is particularly difficult as the natural savannah has lowforestry potential and (apart from two plantations) trees for fuelwood arescarce within a 50 km radius. A recent study by the Beijer Institute showedthat within 120 km only 52Z of Maputo's current need could be supplied fromnatural forests. Attempts to develop plantations close to Maputo haveencountered a number of problems, in part because if soil conditions, and forthe short to medium term the Government's objective is to maintain theexisting plantations with only minor expansion. Beira receives its fuelwoodfrom a forest located at a distance of 25-3C km. Security has been aparticular issue in the rural areas around Beira, beyond the Beira corridor.Wood supplies for Quelimane, studied by ESMAP, are obtained from a localswamp. It is reported that the situation around Nampula is similar to thataround Maputo. The long term sustainable level of supply to M.puto isestimated by the Government to be about 200,000 tonnes per year.

2.13 'Jrban Fuelwood Demand and Costs. Based on cooking patterns and fuelefficiency, quantities needed in Maputo for fuelwood and charcoal are about400,000 tonnes/year, although supply is believed to be only 60-802 of this.More reliable figures are not available. In practice this shortfall isrepresented by reduced consumption in response to price, with consequentialadverse dietary changes. About 70? of the total supply is consumed asfuelwood and 302 as charcoal. The ESMAP household energy survey in mid-1988,showed that fuelwood prices have not kept pace with either devaluations orinflation, but prices continue to be high at 22 meticais per kg and charcoalprices 107 meticais per kg. Government plantations are not breaking even atthese prices, and officials do not expect prices to fall even when the armedattacks cease, because supplies are becoming increasingly scarce in thevicinity of the major cities and the road network is in very poor condition.

2.14 Health Issues. In the cold season the extensive use of %\elwood inMapiro's shanty towns produces smoke and smog similar to those in Europe inthe 1950's. Studies by Beijer in mid-1988 showed that atmospheric pollutionfrom woodburning was approximately three times the WHO (World HealthOrganization) standards. The impact of the coal program will be measuredagainst this benchmark.

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Coal

2.15 Overall Situation. Coal is not currently an important household fuelin Mozambique. The major industries consumed more than 9OZ of production forthe domestic market, and apart from the current test program in Maputo thereis almost no information on its use in households in Mozambi-ue. Evidentlyhouseholds in the areas with readily accessible coal supplies, such as thosearound Moatize, traditionally use coal for cooking.

2.16 Coal Supply. Proven domestic reserves of coal are considerable, withrecoverable reserves, even at peak production rateui included in earlierexpansion plans, for more than 100 years. Transport is the major problem,through the worn-out state of the railway and sabotage. Moatize coal is ofgood quality and no significant user problems are expected. Ample suppliesare available for local consumption, particularly in Tete, and there arelarge stocks at Beira. Mozambique has facilities for coal imports by railbut not for large scale imports by sea, with the result that the only sourcesof supply on competitive terms for the Maputo area are likely to beSwaziland, Zimbabwe and South Africa.

2.17 Coal costs and prices. Moatize coal is medium cost by internationalstandards. Based on 1/2 million tonnes/year, at the pithead the overall costis about $20/tonne, including allowance for the :osts of rehabilitating themine (1980 estimates). Transport costs by rail to Beira, together with porthandling costs, are high, bringing total costs ex-Beira (afterrehabilitation) to about $48/tonne. Large-scale exports are unlikely.However, for domestic use the high local currency element makes Moatize coala potentially attractive fuel, especially where rail connections are good.

2.18 Coal 3upplied from South Africa has increased in price over recentyears from 25 to 30 rand per tonne delivered Maputo in 1985 ($11 per tonne)to 53 rand per tonne in 1988 ($23/tonne). The border price set by SouthAfrica is the same as for domestic sales and as such it is substantiallybelow the opportunity cost of coal on the international market. Rail costs,15 rand per tonne included above, can be paid in meticais.

2.19 Government with the assistance of Carboval and Carbolard (twoMozambican companies) and Sweden's Beijer Institute, in 1988 commenced a coaltesting program to establish the acceptability of coal and coal stoves inurban households. The program included tests on the suitability anddurability of coal stoves, their cost, the appropriateness of the price ofcoal, the facilities with which the stoves are used, and their popularitywith householders. At the end of the testing period in February 1989 theprogram was yielding a very positive response from the 800 participatinghouseholds. It is expected that the completion report will supportcontinuance of the program.

2.20 During the pilot stage for coal stoves, coal for household use isbeing charged above cost at 20 meticais per Kg ($35/tonne) to allow fordistributors' costs and a contribution from the coal price to pay for thecoal stove.

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2.21 Subject to the completion report confirming the interim results,the major constraints on expanding the coal-use program are the speed atwhich coal stoves can be assembled (presently only :5 stoves per day) andthe atmospheric constraints (next paragraph). If the program is extended,additional merchants and stove assembly teams will be brought in, and theprogram will be extended to Tete.auid Beira.

2.22 Health and Safety Coal is not generally regarded as anenvironmentally benign fuel, but it is expected to improve air quality inMaputo. Coal produces dust, soot, sulfur and nitrogen oxide gases duringcombustion. A principal focus of the coal testing program has been thesafety in use of the coal stoves. They have been designed with a tall steelchimney to induce draft, give good consumption and draw the harmful fumes outof the house so that they can disperse. Tests on use of the stoves have notindicated any potential health problems. The Swedish consultants (Beijer)assisting with the coal testing program have advised that based on generalclimatic data, 50,000 households in Maputo could become regular coal userswithout disturbing environmental standards. At the same time they haveassisted DOE to establish regular monitoring of atmospheric conditions tomeasure the impact of the coal program, so that the overall environmentalimpact can be kept under control.

Electricity

2.23 Overall Situation. Electricity is an important part of the overallMozambican commercial energy balance but is only a minor part of householdenergy. Supplies are reasonably reliable in Maputo but, because of attacks,blackouts and brownouts are common in other areas. EDM is taking steps toimprove the reliability of supplies, both through rerouting of transmissionlines and installation of generators at secure sites. Total concurrent peakdemand for Mozambique is about 90 MW, compared with 200 MW entitlement fromCahora Bassa and a current availability from other sources of about 280 MW.Overall generation and transmission capacity is sufficient for foreseeableneeds.

2.24 Cost of Electricity. (a) Generation. Mozambique's cost of bulkelectricity supply from Cahora Bassa is low by international standards, witha bulk supply cost of 0.5 US c/kWh (as renegotiated in 1988). Cahora Bassahas the capacity for all of Mozambique's needs subject to the security issue.In addition EDM has available 67 MW of low cost hydro. Electricity from theSouth African grid - currently supplied to Maputo - is at ESCOM's standardbulk tariff and until recently was at very low cost; however a 502 increasein 1987 brought the price to 6.2 rand cents/kWh (2.7 US cents), still acompetitive price. Generation from the Maputo thermal plant, nominally 50MWcoal generation capacity, costs 1.5 US cents/kWh for fuel and about 0.65 UScents/kWh for other variable costs.

2.25 (b) Distribution. Connection costs for household electrieitysupplies must be contained to make the electricity supply affordable. TheESMAP household energy survey revealed cost of internal wiring ranging to$100 per household and detailed cost estimates suggest $150 per household.

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The ESMAP distribution survey (Swedpower, Sweden) showed expected low-voltagedistribution costs at about $200 per household for the Maputo shantytowns.Taken together with meter costs, overall costs for additional householdconsumers are about $400 to $450 per household for the low voltage system,and appear to be low enough to justify a household electrification program.Cost estimates will be prepared for other cities during 1989 as part ofongoing consultancy work, and priorities will be reviewed to take account ofthis work. 1

2.26 Electricity supplies to households. Growth in electricityconnections since 1970 have failed to keep pace with household formation,with only 60,000 new connections between 1970 and 1980 compared with 1million additional households over the same period. Of the 356,000 urbanhouseholds in 1980, only 83,000 (232) had a formal electricity connection(there is some unauthorized supply from house to house but on a small scale).Electricity had reached 50X of the houses defined as structurally suitablefor supplies, (according to inherited Portuguese standards, those made ofconcrete and brick, or of wood with corrugated zinc). Of 2.4 million ruralhouseholds only 1Z had an electricity connection (24X of houses defined asstructurally suitable). Consultants are reviewing these structural standardswith a view to further relaxation; and EPM proposes to publicize itsrequirements in this respect so that householders in non-eligible houses canmake appropriate modifications. Urban household formation has continued togrow through the 1980's because of rural families leaving the insecure areasfor the comparative safety of the cities, as well as natural populationgrowth. By contrast, the rate of connection to the electricity system hasfallen to one-sixth of the rate of the 1970's. The proposed project reducesthe role of EDM in new connections and relies more heavily on participationof several Mozambican companies. Together with technical assistance it should'De possible to increase the rate of new household connections to reach 9,000a year within 5 years, focused mainly on Maputo, Beira and Nampula. TheESMAP sponsored energy survey of urban households in Maputo and Quelimane,designed to identify and quantify the extent of potential power connections,has shown a large latent demand that is restrained by lack of localdistribution lines, the long lead time for EDM to make the link-ups, highconnection costs, lack of wire and fittings at reasonable prices, and thehigh retail price of appliances. Measures to deal with these issues areoutlined in Chapter 4.

2.27 Electricity Pricing for Households. The overall financial frameworkfor EDM was agreed with Government for the first Energy Technical Assistanceand Rehabilitation project. This provided for the preparation and audit ofaccounts, and for a review of the financial structure (expected to commencein 1989). Power tariffs are able to cover operating costs but, on theaccounting assumptions tentatively used by consultants, will need significantincreases to make EDM financially viable. For a typical small-scale user withlighting and cooking (only) by electricity (e.g. 120 kWh/month) the monthlycharge at the time of appraisal was about 2,300 meticais (US$4),substantially lesz than for most other fuels. The April 1989 tariff increaseraised this to the equivalent of US$5.

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Liguified Petroleum Gas

2.28 Overall situation. LPG has been available in nominal quantitiesduring the 1980's falling from 13,000 tonnes in 1980 to a low of 3,000 tonnesduring mid-decade. Supplies are currently at 7,000 tonnes annually. Theprincipal reasonF for this decline are the closure of the Hatola (Maputo)refinery with the consequent need to import all supplies by rail from SouthAfrica, and the lack -of spare parts for LPG fuelled appliances. TheGovernment has recently arranged for an increase in supplies with a view tomeasuring the size of the market. 33,000 LPG customers are currentlyregistered to receive supplies. It is believed that all have access toelectricity or kerosene as an alternative fuel. 90Z of LPG customers arelocated in and around Maputo.

2.29 Costs and Prices. LPG as a fuel is low cost but its handling iscostly at all stages. It is currently imported in pressurized rail wagonsfrom South Afrlca. A new unloading arm and pipe (to be financed by SIDA -$1,200,000) will enable supplies to be brought alternatively by pressurizedLPG barge. Both transportation methods yield about the same cost($260/tonne). Local bottling and distribution ($60) requires special fillingequipment and heavy steel containers for the gas, and LPG handling andretailing costs reflect the need to transport the containers. Total cost,including distributors margin is $400/tonne. This cost is competitive withkerosene provided that distribution costs within Mozambique are minimized,and this can be achieved if the LPG use is restricted to Maputo. LPGappliances in Maputo are sophisticated and expensive, and unless lower costappliances can be identified LPG use should be focussed on making the bestuse of the present bottling facilities and storage and the present stock ofsteel containers (bottles) and appliances. Mocacor intends to review some ofthe simpler LPG appliances used in other countries to see if suitable onescan be identified for Mozambique, so as to expand the market within Maputo.Because of the weight of a full LPG bottle (about 20 kg), Mocacor isinvestigating the physical and financial viability of a home deliveryservice.

2.30 Safety. There have been no accidents reported in the handling anduse of LPG, and the bottling arrangements via Mocacor minimize the risks.Government is using the price mechanism to minimize the one high-riskfeature, the transport of LPG bottles by sea from Maputo to Beira, as thecosts involved with improved safety are uneconomic in relation to thevolumes.

Kerosene

2.31 Overall situation. Frca the closure of the refinery (1984) untilearly 1988, Mozambique had available only nominal quantities of kerosene.Annual consumption, which averaged about 45 million liters in the earlyeighties, fell. to 4 million liters from 1984 to 1987. Government hasincreased availability by 502, meeting the needs in Maputo city center, butthe distribution system needs to be re-established to make the keroseneavailable to a wider area. The major use of the kerosene seems to be forlighting in houses not connected to the power supply, and a small amount is

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used as a cooking fuel. Since the refinery closure supplies havj been madeavailable from the degradation of jet kerosene, so that fuel no longersuitable for jet turbines was sold for household use. Some problems wereexperienced with this, and kerosene imports recommenced in 1988. 60Z ofkerosene customers are located in and around Maputo.

2.32 Distribution System. In the early eighties kerosene was distributedin bulk to about 8,000 retailers and cooperatives in Maputo. each.supplyingabout 25 tamilies. Many of the retailers sold the kerosene in cens of 1 to20 liters, which in practice were not returned. This led to a high usage ofcans and a high cost. The recent reintroduction of kerosene has been to 12of the gasoline service stations (i.e. about 752 of the service stations inthe Maputo area) where in each case the low gasoline demand has permitted theconversion of one pump to kerosene. Progress in bringing kerosene to theless-wealthy urban areas has been slow. One of the local manufacturers ofcans and drums has restarted manufacture of large (210 liter) drums for themerchants, and PETROMOC is cooperating by leasing hand pumps to enableretailers to fill customers' cans. These pumps are expensive (about $75 each,excluding tax and duties) and PETROMOC is investigating simpler fillingsystems.

2.33 Costs and prices. Kerosene has no special handling problems eitherin bulk or retail, and no special safety problems in transport anddistribution. Although one of the more expensive petroleum products ex-refinery (about $160/tonne), the ease and low cost of handling makes itpossible to retail without subsidy at 19 US cents/liter ($235/tonie). Costsof kerosene stoves ($15) and lamps ($l-$15) are similarly below comparableLPG costs, although the appliances are not as durable. This ease ofhandling, low capital and operation cost of distribution and 'low, cost ofappliances makes kerosene a suitable interim fuel while longer term fuels arebeing introduced.

2.34 Safety. A number of countries have experienced safet) problems withkerosene. In the United States freestanding kerosene space heaters haveproven unstable and when knocked over have quickly ignited clothing andfurnishings. Kerosene space heaters are not used in Mozambique, but therehave recently been similar tragic accidents with low price 'wick' kerosenelamps because of the ease with which they can be knocked over. These lampswere a special import under a foreign aid program and are no longer imported.Similar problems have arisen with home-made lamps. The Government's solutionis to encourage the import of safer lamps at affordable prices. Both thehigher priced kerosene lamps and the kerosene stoves in use in Mozambique aredesigned for stability and have not caused accidents.

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Ill. THE BORROWER, THE SECTOR

AND THE EXECUTING AGENCIES

The Borrower and th: Executing Agencies

3.01 The Government of the People's Republic of Mozambique would be theBorrower or the 17.1 million SDR IDA Credit (US$ 22 million). The proceedsof the credit would be onlent in SDR: to EDM SDR 3.35 million (US$ 4.3million), PETROMOC SDR 1.55 million (US$ 2.0 million) and Mocacor SDR 9.55million (US$ 0.7 million) as executing agencies for energy supply. Signedsubsidiary loan agreements will be conditions of effectiveness of the IDAcredit. The SDR 11.65 million (US$ 15 million) balance will be for theproject coordination and the wood, charcoal and coal components of theproject, and for the implementation unit and various other Mozambicancompanies for the purchases of equipment, parts and services required forthis project, and an amount to be allocated subsequently as the projectprogresses.

Sectoral Arrangements

3.02 The supply of commercial energy products (petroleum products,electricity, coal and gas) is primarily the responsibility of public sectoragencies. Coal and kerosene are also sold to consumers by private sectortraders and the supply of woodfuels is carried out by private producers andtraders. The Ministry of Industry and Energy (MIE) has overall responsibilityf..r implementing energy policies in Mozambique, and it is responsible for thetwo main operating enterprises in the electricity and petroleum supply sub-sectors, namely Electricidade de Mocambique (EDM) and the national petroleumsupply company (PETROMOC). MIE through PETROMOC is also responsible forMocacor, a PETROGAL/PETROMOC joint venture responsible for LPG. TheDepartment of Energy (DOE) in MIE is responsible for advice and coordinationon policy and overall sector development. The Ministry of Mineral Resources(MMR) is responsible for petroleum, gas and coal exploration, development andproduction through the operating enterprises, the National HydrocarbonsCompany (ENH) for petroleum and gas, and the National Coal Company (CARBOMOC)for coal production. The Ministry of Agxiculture is involved in woodfuelmatters through the Directorate of National Forestry and Wildlife.

3.03 Government organizations responsible for impj.ementing nationaleconomic policies affect the energy sector. The Ministry of Industry andEnergy is itself responsible for major manufacturing companies, includingCelmoque (manufacturer of copper cable), one of the key industrialenterprises supporting electrification. The Secretariat for Light Industryis responsible for promoting industrial development of the medium industries(e.g. appliance manufacturers) and for IDIL, the institute for thedevelopment of light industry. The Banco de Mocambique controls foreignexchange and domestic credit, the Ministry of Finance is responsible forbudgetary allocations, taxation and pricing policies, and the Ministry ofPlanning has formal responsibility for inter-sectoral priorities and resourcerequirements. The Ministry of Labor has an important bearing on the energysector through its responsibility for labor legislation, as do the Councilof Ministers and National Wages and Prices Commission who fix or regulate the