implementation completion report mozambique public

Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No: 19449

IMPLEMENTATION COMPLETION REPORT

MOZAMBIQUE

URBAN HOUSEHOLD ENERGY Project

(Credit No. 2033-MOZ)

June 17, 1999

Energy TeamInfrastructure GroupAfrica Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY EQUIVALENTS

(Currency Unit = Meticais (MT)(Annual average)

Year US$1.00 = MT.

1989 7941990 9321991 1,4501992 2,4331993 3,7231994 5,9181995 8,8901996 11,2941997 11,546

FISCAL YEAR OF BORROWERJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMS

BADEA Arab Bank for Economic Development in AfricaBDM Banco de MocambiqueBEU Biomass Energy UnitBPD Banco Popular de DesenvolvimentoDCA Development Credit AgreementDNE Direccao Nacional de EnergiaEDM Electricidade de MoanambiqueERR Economic Rate of ReturnGOM Government of MozambiqueICR Implementation Completion ReportLPG Liquefied Petroleum GasMocacor Distribuidora de Combustiveis, S.A.R.L.MIE Ministry of Industry and EnergyMMRE Ministry of Mineral Resources and EnergyNDF Nordic Development FundPETROMOC Empresa Nacional de Petroleos de MocambiqueProlec Urban Electrification ProgramRPTES Regional Program for Traditional Energy SectorSAR Staff Appraisal Report

Vice President : Mr. Callisto MadavoCountry Director : Ms. Phyllis PomerantzSector Manager : Mr. Mark TomlinsonTask Manager : Ms. Yuriko Sakairi


FOR OFFICL USE ONLYMOZAMBIQUE

URBAN HOUSEHOLD ENERGY PROJECT(Credit No. 2033-MOZ)

Table of ContentsPage No.

PrefaceEvaluation Summary ................................................................... i - Viii

Part I: PROJECT IMPLEMENTATION ASSESSMENT

A. Background and Sector Context .......................................................1B. Project Objectives ....................................................... 2C. Achievement of Objectives ....................................................... 3D. Summary of Project Implementation ....................................................... 6E. Major Factors Affecting the Project ...................................................... 11F. Project Sustainability ...................................................... 12G. Bank Performance ...................................................... 13H. Borrower Performance ...................................................... 15I. Assessment of Outcome ...................................................... 16J. Future Operations ...................................................... 17K. Key Lessons ...................................................... 17Annex 1: Implementation Record and Major Factors Affecting the Project ................................ 19

Part II: STATISTICAL ANNEXES

Table I Summary of Assessments .26Table 2 Related Bank Credits .28Table 3 Project Timetable .28Table 4 Credit Disbursements .29Table 5 Key Indicators for Project Implementation. 30-33Table 6 Key Indicators for Project Operation .34Table 7 Studies Included in Project. 35-40Table 8a Project Cost .41Table 8b Project Financing .42Table 9 Economic Costs and Benefits .43Table 10 Status of Legal Covenants .44Table I I Compliance with Operational Manual Statements .46Table 12 Bank Resources: Staff Input .46Table 13 Bank Resources: Missions .47

APPENDICES

A: ICR Mission Aide-Memoires .......................... 48-56B: Borrower's Contribution .......................... 57-72C: Co-financier's Comments .......................... 73

Map: IBRD 29786

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.


MOZAMBIQUE

URBAN HOUSEHOLD ENERGY PROJECT

(Credit No. 2033-MOZ)

Preface

1 This is the Implementation Completion Report (ICR) for the UrbanHousehold Energy Project, for which a Credit of SDR 17.1 million (US$22 millionequivalent) to the People's Republic of Mozambique was approved on June 8, 1989 andsigned on September 28, 1989. The Credit became effective on April 27, 1990. TheCredit was closed on April 30, 1998 after two extensions of the closing date. Last creditdisbursement took place on September 9, 1998 and US$2.3 million not disbursed wascanceled. Co-financing amnounting to US$16 million equivalent was provided by NDFand BADEA.

2. The ICR was prepared by Yuriko Sakairi, Economist, (AFTG1), EricDaffern, Principal Economist/Financial Analyst, (EMTOG), and Assefa Telahun, PowerEngineer, (AFTG1). It was reviewed by Messrs. Mark Tomlinson, Sector Manager,(AFTGI), Boris Utria, Sr. Economist, (AFTG1) and Joel Maweni, Sr. Financial Analyst,(AFTG1). The report was processed by Lily Wong, Team Assistant, (AFTG1).

3. The preparation of the ICR began in February 1998 followed by a missioncarried out by Yuriko Sakairi and Sunil Mathrani in April-May 1998 (Appendix A:Implementation Completion Missions). The ICR is based on the Staff Appraisal Report,the credit and project agreements, supervision reports, correspondence with the Borrower,internal Bank memoranda, and interviews with staff of the Borrower. The Borrower'scontribution on the ICR is attached, along with comments received from the co-financier.


MOZAMBIQUE


Evaluation Summary

Introduction

i. The Urban Household Energy Project (UHEP) was prepared during 1987-88in the midst of an armed conflict that showed little prospect of ending. The main urbancenters were practically 'cut off from the surrounding regions and suffered a massive inflowof refugees fleeing the fighting. This resulted in increased levels of biomass consumptionand rapid deforestation of the areas closest to the cities because of the difficulty of obtainingbiomass fuels from points further away. Disruption of transport routes made the supply ofcoal and petroleum products erratic. Moreover, electricity supply suffered frequent cutscaused by sabotage of power networks. A peace agreement was reached in 1992 and during1993 it became clear that peace would prevail. Accordingly, the attention of the Governmentof Mozambique (GOM) and the Bank slowly shifted from ensuring survival to reforming thesector (paras. 2-3).

Project Objectives and Components

ii. The physical objective of the project was to bring low-cost commercial fuelsto a large number of households in urban areas in an efficient and cost-effective manner. Theinstitutional development objective was to strengthen the government agencies and energysupply companies, managerially, operationally and financially. The broader projectobjectives were to slow down deforestation around urban areas, to improve air quality, toalleviate poverty through lowering the cost of fuel, to provide for testing of improved energyefficiency and management measures, to develop the use of indigenous natural resources, toencourage development of local institutions and provide opportunities for local industries(para 4).

iii. To achieve the physical objectives the project consisted of: (a) powerdistribution system rehabilitation, reinforcement and extension in Maputo and eight otherimportant cities; (b) commercial loans for house wiring and connection of 40,000 urbanhouseholds to the power distribution system (Prolec program); (c) provision of householdswith about 50,000 electric stoves, 60,000 kerosene stoves, 80,000 kerosene lamps, 200,000electric bulbs and a number of electric fans and solar panels for public buildings, as part of anenergy efficiency program; (d) provision of coal stoves to about 50,000 households inMaputo, Beira and Tete and other areas with access to coal; (e) reinforcement of keroseneand LPG storage and distribution facilities in Maputo and five other cities; (f) rehabilitationof the cable factory; and (g) improvements in efficiency of woodfuel utilization through

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development of improved charcoal production methods, improved wood stoves and charcoalstoves, and a woodfuel program for maintenance of plantations and forest inventory. Theproject also included commodity aid finance of fuels required to be imported during the 5-6years duration of the project (about 47,000 tons of coal, 75,000 tons of kerosene and 40,000tons of LPG), (paras. 5 and 7).

iv. To achieve the institutional development objective the project included theestablishing of a biomass energy unit in the Ministry of Agriculture, and technical assistanceto Electricidade de Mocambique (EDM), Empresa Nacional de Petroleos de Mocambique(PETROMOC) and Distribuidora de Combustiveis, S.A.R.L. (Mocacor) and to DNE tosupport project coordination and implementation, and woodfuel and coal programs.Additionally, standard IDA covenants in the credit and project agreements were intended tointroduce financial discipline in the energy sector (para. 6).

v. The project was restructured in 1994 following a project mid-term reviewcarried out in late 1992 at about the same time as the peace accord was signed. It alsoincluded a component to repair the damage inflicted to the northern power system by acyclone in 1994 (paras. 8 and 9).

vi. The project objectives were relevant to the conditions prevailing inMozambique at the time of appraisal and during the early years of project implementationand were congruent with both the GOM objectives and IDA's policy for the energy sector.However, support of individual household connections through a loan program was probablyill-conceived because of its administrative complexity. With the coming of peace in 1992,the policy and reform agenda of Mozambique developed far beyond that envisaged atappraisal, and at the same time IDA policy for the energy/power sector began to shift towardsa new paradigm -- enhanced private sector participation and less involvement of thegovernment in the commercial functions of the energy/power sector, and government incharge of policy making and regulation functions. In view of this, the restructured projectalso supported energy sector reforms (para. 10).

Implementation Experience and Results

vii. The physical objectives of the project were partially achieved. The Prolecprogram was to provide commercial loans to households for house-wiring and connection tothe distribution network, but did not perform as originally expected. Only about 500households benefited from loans, 2,500 new customers were connected and 1,300 existingcustomers were switched over to the grid extended under the Credit. The Prolec target had tobe reduced from 40,000 to 4,000 connections during the mid-term review. However, therehabilitation and reinforcement of the power distribution system helped EDM deliver a largenumber of connections (about 60,000) that made up for the meager achievements of theProlec program. Under the off-grid electrification project, 400 households were electrifiedand another 400 households will be electrified shortly. Also, about 5,000 prepaymentelectricity meters were installed under the project and another 15,000 meters are under

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installation. Kerosene supply increased by 80 percent since 1993 and is now sufficient tosupply 250,000 additional households. LPG usage for households fell in the early 1 990s buthas now recovered, surpassed the earlier usage level, and it is projected to increase sharply inthe short-tern. Cost of imported LPG by rail from Johannesburg fell by 20 percent as aresult of competition in imports (para. 11).

viii. The institutional objectives of the project were substantially achieved. Theproject laid the foundations for broader reforms in the energy sector to the point that theachievements in the electric and petroleum sub-sectors have placed the Mozambican energysector among the most reformed and open sectors in Africa (para. 12).

ix. EDM, PETROMOC and Mocacor are now in a more sustainable financialposition than they were in the past ten years, and none of them can rely anymore onmonopoly status. EDM showed its strongest ever financial position in 1998. Its three-yearperformance contract, agreed with GOM in 1997, is an important step towards achievingbetter operational and financial performance. Results can be judged by the reduced numberof black outs compared to ten years ago. PETROMOC is now profitable, and is competingwith major companies. Mocacor has diversified its business, and its non-LPG business isgrowing strongly. It is already succeeding as a gasoline marketer and as a retailer ofappliances and LPG bottles (paras. 13-16).

x. The reforms in the energy sector have been satisfactory. The technicalassistance provided by the project (paras. 31-33) succeeded in designing and implementingsector reforms. Legislation was enacted reforming both the power and petroleum sub-sectors. The elimination of EDM's monopoly over nationwide power supply was a majorbreakthrough and it has provided the basis for new decentralized initiatives to electrify smalltowns. EDM still has national electricity tariffs but the Government now realizes that tariffsbased on cost recovery are essential for increasing access to electricity in Mozambique. Oilprocurement has been made more cost-effective and transparent and the financing of importshas been rationalized. Specifications of petroleum products have been made compatible withthe competitive supply sources and have resulted in lower costs. The deregulation ofpetroleum products distribution has attracted new distributors and made existing distributorsinvest in the upgrading of their facilities (para. 17). Also the first step towards privatizationof PETROMOC, its conversion into a limited liability company governed by commerciallaw, was undertaken under the project.

xi. The broader project objectives were achieved, partly because of the project,but also as a result of the return to peace conditions. Significant progress can be seen interms of better air quality, low prices of commercial energy, improved energy efficiency andother factors. For example, the significant increase in the use of commercial fuels hasreplaced the use of large quantities of polluting woodfuels. Commercial energy prices forkerosene and for woodfuels have fallen in real terms. Electricity prices have risen. Pressureon the woodlands around the major cities has ceased as large numbers of people havereturned to the rural areas after the ending of the armed conflict. Also, local industry is being

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reinvigorated. For example, the cable factory was restored with help from the project andbegan to operate in a competitive manner (para. 19).

xii. Implementation organization. Overall project co-ordination was in the handsof the Direccao Nacional de Energia (DNE) with support from the Ministry of MineralResources and Energy (MMRE). Project execution was spread among many institutions.For the power sub-sector components: EDM, Prolec unit, DNE, Interelectra, with supportfrom Banco Popular de Desenvolvimento (BPD); for the petroleum sub-sector components:PETROMOC, DNE, Mo,acor (mainly LPG); for the biomass components: Ministry ofAgriculture; and other components: DNE. The complex project implementationarrangements and the diffusion of responsibilities made it very hard for DNE to exerciseauthority to ensure timely implementation of the project (para. 20).

xiii. Implementation time. Project implementation took nine years from June1989 (Board approval date) to April 1998 (project completion date), i.e. 22 months longerthan appraisal estimate. The physical components of the project financed by IDA werecompleted by April 1998, and the components financed by the Nordic Development Fund(NDF) and Arab Bank for Economic Development in Africa (BADEA) were to be completedonly by end-1998 (see para. 50). BADEA funded the power system strengthening in Maputo,Beira and a number of other towns, and NDF financed the power system strengthening andthe rehabilitation of the cable factory (paras. 22-30).

xiv. Credit disbursement and closing date. Credit disbursement was very slowduring the early years of project implementation. Only US$6.6 million (44.6 percent ofappraisal estimate) was disbursed until 1993, four years after credit approval. This wascaused by long delays in compliance with conditions of effectiveness and creditdisbursement. Later, weak banking sector and cumbersome and lengthy Government reviewand approval of procurement of goods and recruitment of consultants delayed creditdisbursement further. In addition to the 6 months allowed between estimated completiondate and Credit closing date, IDA had to extend the closing date twice for a total of 16months to allow for completion of the project. Thus, the project required 22 more months tocomplete than originally estimated at appraisal. Last credit disbursement took place onSeptember 9, 1998 and US$2.3 million was canceled (para. 35).

xv. Project cost andfinancing. The actual project cost is estimated to beUS$41.9 million or 16 percent less than the US$49.3 million estimated at appraisal,excluding interest during construction and fuel imports. IDA financed US$20.4 million andcatalyzed co-financing from BADEA (US$8.0 million), NDF (US$5.4 million) andMozambican companies (US$2.9 million). The GOM financed US$5.3 million. Noinformation is available about the actual cost of imported fuel financed by parallel financingby SIDA, NORAD and IDA. A co-financing pledge of US$3.0 million by the Governmentof Denmark did not materialize (paras. 36-37).

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xvi. Project economic performance. It was not possible to obtain actual data tomake an ex-post recalculation of the project ERR. However, based on very conservativeassumptions this ICR has calculated an ex-post ERR of 11 percent on the investment in thesmall town electrification program (para. 38), a small, but important component in terms ofintroducing cost-based tariffs and piloting an alternative mechanism for increasing access toelectricity. Further, it is important to note that in the re-estimation of the ERR, the benefitsare based on the current tariff and not the willingness to pay which, if used, could yield asignificantly higher ERR.

Major Factors Affecting Project Implementation

xvii. Factors Outside Government Control. The armed conflict was the majorfactor affecting project implementation during years 1989-92. Later, project implementationwas affected by the peace settlement in 1992, because the project had to be restructured toadapt it to a peace scenario. Also, the 1994 cyclone in northern Mozambique requiredmaking changes in the project (para. 39).

xviii. Factors subject to Government Control. For many years GOM failed to meetits obligations related to the financial position of EDM and PETROMOC. The GOM wastepid in timely approving electricity tariff increases to keep pace with inflation and foreignexchange variations and frequently deferred tariff increases for political reasons. Thisaffected the finances of EDM negatively. Further, the GOM (Ministry of Finance) limitedthe financial autonomy of EDM in the three-year performance contract agreed in 1997.Regarding PETROMOC, the GOM has never compensated it for the foreign exchange losseson oil imports caused by the initial pricing system imposed by GOM, and delayed proposalsfor the commercialization and restructuring of PETROMOC (para. 41).

xix. Factors subject to control by the implementing agencies. EDM did notdemonstrate commitment to the main project goal of increasing urban householdelectrification through Prolec. Until early 1997 it did not pay attention to financialmanagement and production of meaningful and reliable financial data, despite the amplesupport given by resident experts and consulting firms. Only towards the end of the project,the performance contract agreed in 1997 with the GOM moved EDM to prepare a medium-term investment plan and assess its financial feasibility. Mocacor made little effort topromote the use of LPG, even after adequate bulk supplies were assured, because pricecontrols left small profitability margins (paras. 43-45).

Project Sustainability

xx. Sustainability of the project is uncertain. Significant achievements havebeen made in terms of designing and implementing reforms for sustainable sector operationsand in terms of institutionalizing financial and operational performance standards for the keysector entities (EDM, PETROMOC and Mocacor). With regard to reforms, the legalframework for a competitive electricity market has been created, need for cost-based tariffs

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and for private sector participation has been recognized through the small scale ruralelectrification program, and the initial steps have been taken towards creating a modemregulatory system. In the petroleum sub-sector, PETROMOC is now operating in acommercial and competitive manner' and Mocacor is competing successfully in the retailmarket. With respect to financial and operational performance standards, EDM ismaintaining its power stations in accordance with accepted utility standards. The electricityprepayment meters, financed under the project, have proved to be a good and reliable optionfor reducing billing, collection costs and accounts receivable. EDM is conducting itsoperations so as to meet the requirements of its performance contract and reduced itsoperating losses substantially in 1998. However, because the institutional and sector reformscame only towards the end of the project's life and their implementation remain to becompleted, the environment for viable sector operations can only be considered fragile, hencethe "uncertain" rating for sustainability2 .

Bank Performance

xxi. Project design, preparation and appraisal was unsatisfactory 3. The projectdesign proved to be too complex. Many components (power, petroleum, coal, biomass,technical assistance), entities (EDM, Prolec, PETROMOC, Mocacor, BEU, DNE), and twoco-financiers (NDF, BADEA) were involved in project implementation. The conditionalityincluded in the IDA credit was not realistic. IDA did not realize that the poor quality andquantity of critical financial information available in EDM, compounded with the lowcommitment of GOM to increase electricity tariffs, could not help EDM prepare the financialviability plan that was a condition of credit disbursement (paras. 47-49).

xxii. Overall, supervision was unsatisfactory4, although it was satisfactory duringthe first and last few years of implementation. In the period 1993-1995 supervision was laxand the project drifted because two task managers lasted very short periods and the skill mixwas not appropriate. But since 1995 supervision improved significantly with continuity intask management and an appropriate staff skill mix (paras. 50-52).

Borrower's input to the ICR states that "The reforms introduced in the petroleum sector, mainly the removalof PETROMOC's import monopoly and price setting mechanism eased PETROMOC from a heavy financialburden with product imports and allowed a sustainable improvement of its financial results."(See section 5 of Appendix B).

2 Borrower's input to the ICR states that "The policy measures and market reforms introduced in thepetroleum and electricity sectors are sustainable and will develop further in line with the objectives ofincreasing access to modem forms of energy, in a safe and efficient manner to increased parts of thecountry." (See section 5 of Appendix B).

Borrower's input to the ICR states that "Performance by the Bank has been satisfactory but the supervisionduring the initial years of project implementation was not satisfactory." (See section 4 of Appendix B).

4 Borrower's input to the ICR states that "Performance by the Bank has been satisfactory but the supervisionduring the initial years of project implementation was not satisfactory." (See section 4 of Appendix B).

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Borrower Performance

xxiii. Overall borrower performance can be considered unsatisfactory, althoughseveral important accomplishments were made. On the positive side, the GOM supportedenergy sector reforms. BEU implemented the biomass components in a highly satisfactorymanner. It made judicious use of limited expatriate technical assistance and did not becomeover-dependent on IDA funding for local operational expenses. PETROMOC executed thekerosene distribution component satisfactorily, but after a long delay. PETROMOC focusedprimarily on oil supply and oil procurement issues rather than on product marketing anddistribution. PETROMOC is now operating well in a competitive environment without inputfrom foreign experts. On the negative side, the Ministry of Finance was not proactive onmatters affecting financial viability of the entities involved in this IDA project. DNE did notplay a dynamic role in reorienting the project to respond to changing priorities. Mocacor didnot succeed in promoting LPG sales and expanding the market timely. EDM did not paymuch attention to the UHEP project. It was understandably preoccupied with day to dayoperations, dealing with sabotage on its power system and trying to keep the power serviceon. Financial viability was an unfamiliar concept for EDM. Only towards the end of theproject did EDM's performance improve (paras. 53-59).

Assessment of Outcome

xxiv. Overall project outcome is considered unsatisfactory5 . This is because itsphysical objectives were only partially achieved, institutional and policy reform objectiveswere substantially achieved only toward the end of the project, and sustainability of the gainsremains uncertain. Further, while the original project objective of bringing low-costcommercial fuels to a large number of urban households was broadly achieved, this waspartly because of the project, but also because of the return to peace conditions whichresulted in an increased supply of these fuels. The outcome of the project's physicalcomponents was mixed and the failure to implement the Prolec component and the droppingof the coal pilot component tend to overshadow other achievements. On the positive sideimpressive gains were made in sector reforms for both the electricity and petroleum sub-sectors and in institutionalizing financial and operational performance standards for the keysector entities. A follow-up electrification project will continue to support the sector reform.Nevertheless, because the reforms came only towards the end of the project life and theirsustainability remains uncertain, the overall project outcome is considered unsatisfactory.

Borrower's input to the ICR states that "The general outcome of the project is satisfactory although sometargets set initially were not achieved." .(See section 5 of Appendix B).

Co-financier's comments state that "If the outcome is compared to the restructured project (as of 1994),the project, in our opinion, should be regarded as 'satisfactory'." (See Appendix C).

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Future Operation

xxv. Although the GOM has not submitted to IDA, a formal plan for futureoperation of the project, experience with this project suggests that the GOM has the capacityto develop and sustain a focussed energy sector strategy to meet the challenges of providingwider access to energy needs to rural and suburban population, including efficient utilizationof biomass fuels (paras. 61-62). Further, both EDM and PETROMOC have developed andare implementing utility operational standards which should help to reduce uncertainty aboutthe sustainability of the investments made under the project.

Key Lessons Learned

xxvi. The following lessons can be offered (para. 63):

* Projects should be designed with a simple institutional organization and few components.A complex multi component project implemented through many agencies risks to spreadresponsibilities, dilutes 'ownership' of the project among agencies, and makes projectcoordination very difficult.

* When the macroeconomic and political scenario in which a project was appraisedexperiences profound changes during project execution, a radical project redesign/re-appraisal may be required proactively as soon as it is clear that the changes arepermanent. A mere piecemeal modification of the project components should be avoided.

+ Standard financial performance covenants in Loan/Credit Agreements are meaningless ifthe underlying performance data is unavailable. Rather than requiring compliance withrate of return or other complex financial covenants difficult to monitor and sometimesunfamiliar for the incumbent entity, it is preferable to require compliance with simplerand less ambitious indicators, easy to monitor but necessary to achieve basic financialsurvival of the entity.

* By implementing natural resource management including cash generating activities to thecommunity, villagers get incentives to protect natural resources and to utilize theresources in a cost effective and sustainable manner.

* With timely and flexible intervention, it is possible to achieve some measure of success,even if initially the project has been poorly designed and managed.


MOZAMBIQUE


PART I: IMPLEMENTATION ASSESSMENT

A. Background and Sector Context

1. Mozambique has a population of about 16.9 million with a per capita incomeof US$210, i.e. one of the poorest countries of the world. It is well endowed with primaryenergy resources, particularly hydroelectricity, natural gas and coal. Yet, total commercialenergy consumption is extremely low, 40 kgoe per capita, and hardly 20% of the urbanpopulation and virtually none of the rural population have access to electricity.

2. The Urban Household Energy Project (UHEP) was the second lendingoperation of IDA in the energy sector of Mozambique. It was prepared during 1987-88 in themidst of an armed conflict that showed little prospect of ending. The main urban centerswere practically 'cut off' from their surrounding regions and suffered a massive inflow ofrefugees fleeing the fighting. This resulted in increased levels of biomass consumption andrapid deforestation of the areas closest to the cities because of the difficulty of obtainingbiomass fuels from points further away. Disruption of transport routes made the supply ofcoal and petroleum products erratic. Moreover, electricity supply suffered frequent cutscaused by sabotage of power networks. The combined supply scarcity and demand pressurehad doubled the economic cost of fuelwood, charcoal, kerosene, LPG and electricity.Consequently, the project was intended to diminish constraints on the urban residents' energysupply and to reduce the impact of war on the low income population.

3. A peace agreement was reached in 1992 and during 1993 it became clear thatpeace would prevail. Accordingly, the attention of the Government of Mozambique (GOM)and the Bank slowly shifted from ensuring survival to reform: policy, institutional, economicand financial. The project sought to respond to these evolving needs of the country.

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B. Project Objectives

Statement of Objectives

4. According to the Staff Appraisal Report, the main development objective ofthe project was to bring low-cost commercial fuels to a large number of households in urbanareas in an efficient and cost-effective manner. A second major objective was to strengthenthe government agencies and energy supply companies, managerially, operationally andfinancially. The broader project objectives were to slow down deforestation around urbanareas, to improve air quality, to alleviate poverty through lowering the cost of fuel, to providefor testing of improved energy efficiency and management measures, to develop the use ofindigenous natural resources, to encourage development of local institutions and provideopportunities for local industries, and to reduce demand on the limited transport capacity.

Project Description

5. The original physical components of the project consisted of: (a) powerdistribution system rehabilitation, reinforcement and extension in Maputo and eight otherimportant cities; (b) commercial loans for house wiring and connection of 40,000 urbanhouses to the power distribution system; (c) provision of households with about 50,000electric stoves, 60,000 kerosene stoves, 80,000 kerosene lamps, 200,000 electric bulbs and anumber of electric fans and solar panels for public buildings, as part of an energy efficiencyprogram; (d) provision of coal stoves to about 50,000 households in Maputo, Beira and Teteand other areas with access to coal; (e) reinforcement of kerosene and LPG storage anddistribution facilities in Maputo and five other cities; (f) rehabilitation of the cable factory;and (g) improvements in efficiency of woodfuel utilization through development of improvedcharcoal production methods, improved wood and charcoal stoves, and a woodfuel programfor maintenance of plantations and forest inventory.

6. The institutional development component of the project included theestablishing of a biomass energy unit in the Ministry of Agriculture, and technical assistanceto Electricidade de Mocambique (EDM), Empresa Nacional de Petroleos de Mocambique(PETROMOC) and Distribuidora de Combustiveis, S.A.R.L. (Mocacor) and to DNE tosupport the project coordination and implementation and the woodfuel and coal programs.Additionally, IDA covenants contained in the credit and project agreements were intended tointroduce financial discipline in the energy sector.

7. The project also included commodity aid finance of fuels required to beimported during the 5-6 years duration of the project (about 47,000 tons of coal, 75,000 tonsof kerosene and 40,000 tons of LPG).

8. The project was restructured in 1994. The project restructuring was donefollowing a project mid-term review carried out in late 1992 when the armed conflict wasresolved. The original project objectives did not change but priorities changed and theproject components were modified (para. 24).

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9. The project was to be coordinated by the Ministry of Industry and Energy(MIE) and executed by EDM, PETROMOC, Mocacor and a number of small Mozambiqueenterprises. In 1994, the energy functions -- and overall project coordination -- weretransferred to the Ministry of Mineral Resources and Energy (MMRE).

Evaluation of Objectives

10. The project objectives were relevant to the conditions prevailing inMozambique at the time of project appraisal, although support for individual householdconnections through a loan program was probably ill-conceived. They were also congruentwith the GOM objectives and the IDA policy for the energy sector valid at time of appraisaland during the early years of project implementation (OMS 3.72 and OMS 3.78 of 1978fostered a vertically integrated, centrally planned, state-owned power sub-sector, and privateparticipation in the petroleum and gas sub-sector). With the coming of peace in 1992, thepolicy and reform agenda of Mozambique developed far beyond that envisaged at appraisal.Major changes in the Mozambican macroeconomic and political environment took placemid-way through the project. At the same time IDA policy for the energy/power sectorshifted towards a new paradigm placing emphasis on enhanced private sector participationand less involvement of governments in the commercial functions of the energy/powersector, and reserving for governments the policy making and regulation functions.

C. Achievement of Objectives

11. The physical objectives of the project were partially achieved. The target of40,000 new connections set to the Prolec household electrification program was not met. TheProlec program provided commercial loans to the households for house-wiring andconnection, but did not perform as expected. About 4,300 households were connected to thegrid extended under the Prolec program: About 500 households benefited from loans, 2,500new customers were connected and 1,300 existing customers were switched over to theProlec grid. Under the off-grid electrification project, 400 households were electrified andanother 400 households will be electrified shortly. However, the rehabilitation andreinforcement of the power distribution system helped EDM deliver a large number ofconnections that made up for the meager achievements of the Prolec program. As a result,over the past decade EDM increased access to electricity to about 60,000 new residentialconsumers in the power sub-sector as a whole. This was a 50 percent increase in the numberof connections made over the previous decade and one of the highest connection rates inAfrica. Also, about 5,000 prepayment electricity meters were installed under the project andanother 15,000 meters are under installation. Regarding fuels, kerosene usage increased by80 percent since 1993 due to better procurement methods, better cooperation on imports, andadditional fuel distribution equipment supplied under the project. The higher availability ofkerosene is now sufficient to supply 250,000 additional households. LPG usage forhouseholds fell in the early 1990s but has now recovered, surpassed the earlier usage level,and it is projected to increase sharply in the short-term. Cost of imported LPG by rail fromJohannesburg fell by 20 percent as a result of competition in imports. New long-termcontracts have locked in this lower price.

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12. The institutional objectives of the project were substantially achieved. Theproject laid the foundations for broader reforms in the energy sector to the point that theachievements in the electric and petroleum sub-sectors have placed the Mozambican energysector among the most reformed and open sectors in Africa. The project achievement in thisfront are highlighted below.

(a) In the power sub-sector:

* The Electricity Law passed by Parliament in 1997 eliminated monopoly of EDM ingeneration transmission and distribution. Private companies can now compete withEDM.

* The electricity tariffs were changed to a simpler system.

* Cost recovery based tariffs have been set for off-grid electricity systems.

a The assets and liabilities of EDM have been defined. EDM has started to operate as acommercial entity.

• The accounting, billing and collection systems of the sector were decentralized andreformed.

* The pilot program testing prepayment electricity meter proved to be cost effective, toreduce non-technical losses substantially and to justify further investment in this type ofmeters.

• The basic house wiring designs and structural standards were redefined to accommodatetypical African shanty town and adobe houses.

(b) In the petroleum sub-sector:

* The petroleum market is largely liberalized. Following a 1997 Petroleum Decree theGOM and the oil marketing companies agreed to set up a jointly owned, private non-profit, oil import company to relieve PETROMOC of the financial burden and risk ofbeing the sole importer. Once the depth of the petroleum market has increasedsufficiently (at least twice its present size), petroleum imports would be fully liberalized.

* PETROMOC was converted to a limited liability company ruled by the commercial law.

* PETROMOC and Mo,acor are competing with international companies and survivingwithout subsidies.

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13. EDM, PETROMOC and Mocacor are now in a more sustainable financialposition than they were in the past ten years, and none of them can rely anymore on amonopoly position. EDM recorded its strongest ever financial position in 1998. Itsperformance contract is an important step towards achieving better operational and financialperformance. Results can be judged by the reduced black outs compared to those of ten yearsago. PETROMOC is profitable, and is competing against major companies. The survival ofPETROMOC in a competitive enterprise environment can be related to its managementimprovements. Mocacor has diversified its business, and its non-LPG business is growingstrongly. It is already succeeding as a gasoline marketer and as a retailer of appliances andLPG bottles.

14. EDMperformance contract has been successful. EDM is now operatingunder a three-year performance contract agreed in 1997, aimed at making it financiallyviable. EDM had consistently made losses over the past decade because of GOM'sreluctance to authorize tariff increases to compensate in a timely manner for high inflationand a rapidly depreciating currency. Until 1997, EDM did not service any of its debt and itsunbilled energy had decreased slightly to a still high and unacceptable 30 percent. Billingand collection accounts had been unreliable for auditing by external auditors, thus makingfinancial performance monitoring very difficult. However, over the past two years EDM hasundertaken a positive campaign to improve accounting, collections and cut non-technicalenergy losses. The prepayment electricity meters financed under the project are alsocontributing to this effort. Also, EDM should be able to meet its debt service obligations andclear the backlog of overdue debt service, provided the present weighted average retail tariffof US¢7.5/kWh is maintained in real terms.

15. PETROMOC performance was mixed. Its finances have deteriorated from1992, mainly because of delays by GOM in authorizing increases in domestic petroleumproduct prices to compensate for currency devaluation. Consequently, PETROMOC madelosses from 1993-95 and its internal cash generation was negative. However, sectoralreforms introduced under the project (and supported also by structural adjustment funding)have started to have a positive impact on PETROMOC's operational and financialperformance since 1997. A more responsive pricing mechanism and a more equitabledistribution of import costs and exchange risks amongst the oil distributors have helped toraise its gross margins and profitability. PETROMOC distribution is now operating in acompetitive market on a financially sustainable basis.

16. Mo!acor performance has improved. Operations of Mocacor aresignificantly smaller than those of the other energy companies. It remains small and sensitiveto the fortunes of the LPG business. It has diversified well its scope of activities by adding toit the supply of equipment, maintenance services and gasoline marketing through a sistercompany, and expanded its supply outlets.

17. Reforms in the energy sector have been satisfactory. The technicalassistance provided by the project has been successful in designing and implementing sectorreforms. Sector policies have improved considerably by enacting legislation reforming both

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the petroleum and the power sub-sectors. Oil procurement has been made more cost-effective and transparent and the financing of imports has been rationalized. Specificationsof petroleum products have been made compatible with the competitive supply sources andhave resulted in lower costs. The deregulation of petroleum products distribution hasattracted new distributors and made existing distributors invest in the upgrading of theirfacilities. This investment, among the highest in the African continent, has been achievedwith some of the lowest prices and low profit margins. The elimination of EDM's monopolyover nationwide power supply was a major breakthrough and it has provided the basis fornew decentralized initiatives to electrify small towns. EDM still has national electricitytariffs, but the Government now realizes that tariffs based on cost recovery and private sectorinvolvement in the sub-sector are essential for increasing access to electricity.

18. The community-managed woodfuels supply pilot project was successfuLThe biomass components of the project met project objectives fully as demonstrated by thesuccessful and significant development in institutional capacity in both the Biomass EnergyUnit (BEU, the project implementing agency) and the University. Community participationin cash generation activities has demonstrated to be a cost effective and sustainable way ofdoing natural resource management instead of plantation. It has also proved that communityparticipation is of paramount importance for rural development. Moreover, the capacity ofthe National Directorate of Energy (DNE) for doing energy policy and planning wasstrengthened by carrying out a staff training program, providing technical assistance, andsetting up a household energy data base.

19. The broader project objectives were met, partly because of the project, butalso, because of the return to peace conditions. Although comprehensive data is notavailable to support this judgement fully, significant progress can be seen in terms of betterair quality, low prices of commercial energy, improved energy efficiency and other factors.For example, the significant increase in the use of commercial fuels has replaced the use oflarge quantities of polluting woodfuels. Commercial energy prices for kerosene and forwoodfuels have fallen in real terms. Electricity prices have risen. Pressure on the woodlandsaround the major cities has ceased as large number of people have returned to the rural areasafter the ending of the armed conflict. Also, local industry is being reinvigorated. Forexample, the cable factory was restored with help from the project and began to operate in acompetitive manner.

D. Summary of Project Implementation

Implementation Organization

20. Overall co-ordination was in the hands of DNE with political support from theMMRE. The responsibilities for implementing the project components were assigned asindicated below. In particular, the responsibility for implementing the power sub-sectorcomponents was spread among several entities because EDM claimed to be unable toimplement all components.

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(a) Power sub-sector components: EDM, Prolec unit, DNE, Interelectra, with support fromBPD and UCPI;

(b) Petroleum sub-sector components: PETROMOC, DNE, Mocacor (mainly LPG);

(c) Biomass sub-sector components: BEU (Ministry of Agriculture); and

(d) Other components: DNE.

21. The complex project implementation arrangements and the diffusion ofresponsibility made it very hard for DNE to ensure timely implementation, even though thesearrangements had been devised by DNE itself. Since DNE could not exercise authority overthe implementing agencies like EDM, DNE played only a monitoring and coordination rolein project implementation.

Implementation Record (Supported by Annex 1)

22. Project implementation took nine years from June 1989 (Board approval date)to April 1998 (project completion date), i.e. 22 months longer than appraisal estimate.Meeting the effectiveness conditions took ten months because of the then slowbureaucratic/legal processing of credit approval in Mozambique. Moreover, meeting theconditions of credit disbursement was significantly delayed by EDM and PETROMOC.EDM had to implement a satisfactory tariff increase in the second half of 1989 and submit toIDA a satisfactory financial restructuring plan, and a satisfactory action plan for recoveringarrears and accounts receivable. Similarly, PETROMOC and Mocacor had to also submit toIDA a satisfactory action plan for recovering arrears and accounts receivable. In fact EDMwas able to present a plan for achieving financial viability only after the cessation ofhostilities permitted a valuation of its assets. This meant a prolonged delay in meeting thecondition for disbursement.

23. Project mid-term review. The project was restructured in 1994 following aproject mid-term review carried out in late 1992 at about the same time as the peace accordwas signed. The review was conducted jointly with other donors. This mid-term review didnot lead to a fundamental reevaluation of the project design. The reasons for the poorperformance of the Prolec household electrification component -- which was to be supportedby commercial loans for house-wiring and connection -- were examined, but the mid-termreview mission failed to identify that EDM had no intention to support the implementation ofthe Prolec component Instead the mid-term review mission accepted EDM and DNEassurances that they would do their part. EDM was to implement a wider connectionsprogram using mostly the same system reinforcement program that IDA and other donorswere financing. Also, with strong support by EDM, agreements were reached (but not kept)on inter-donor cooperation, and on the initiative of investigating the possibilities offered bythe use of modern pre-payment electricity meters.

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24. Project restructuring. By mid-1993 a supervision mission recommended torestructure the project due to the slow pace of implementation and to the new conditionscreated in the country by the peace settlement. Consequently, GOM and IDA agreedformally to introduce changes in the project as follows:

* The target for urban household electric connections under the Prolec program wasreduced from 40,000 to about 4,000 connections, but EDM's connection program wasexpanded through the power distribution system reinforcement.

* The financing of the import of 200,000 electric bulbs was eliminated from the project andthe financing of imported energy-using goods of the energy efficiency program such asstoves, lamps, and solar panels, was reduced by 50 percent because these goods could beobtained commercially.

* The coal program and provision of 50,000 coal stoves to households in Maputo, Beiraand Tete were eliminated from the project because after the peace agreement coal was nolonger brought to the Maputo area after the closing of the coal-fired plant near Maputo.

X The decentralized off-grid electrification of small towns was added as a pilot.

* The financing of prepayment electricity meters was added to the project.

* A one million dollar pilot community-managed, natural woodland resource managementprogram was included in 1995 to produce biofuel efficiently.

25. The 1994 cyclone. Soon after the agreement to amend the Credit and ProjectAgreements was reached, northern Mozambique was hit by a cyclone in March 1994 whichextensively damaged power system facilities of EDM in Nampula and Nacala districts.Consequently, the Credit and Project Agreements were amended in 1994 to also include inthe project a component to cover the rehabilitation needs of that part of the northern powersystem. The original project objectives were broad enough to accommodate the amendment.

26. The physical components of the project (supported by Annex 1). The physicalcomponents of the project financed by IDA were completed by April 1998, and the componentsfinanced by the Nordic Development Fund (NDF) and Arab Bank for Economic Developmentin Africa (BADEA) were to be completed only by end-1998. BADEA funded the powersystem strengthening in Maputo, Beira and a number of other towns, and NDF financed thepower system strengthening and the rehabilitation of the cable factory.

27. The extension of EDM' s distribution network to which the new consumersunder the Prolec program were to be connected, was delayed until 1992 (Phase I) and 1995(Phase II) because: (i) funds from the co-financier (BADEA) did not become available toEDM till late 1994, due to EDM's failure to meet the effectiveness conditions of theBADEA credit; and (ii) funds from the IDA Credit did not become available to EDM untilmeeting disbursement conditions of the credit requiring submittal of its financial viability

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plan. This plan depended on financial analysis for which EDM hired reputable consultantsunder bilateral aid. The consultants did not perform the assignment satisfactorily, therebycontributing to further implementation delays. Also, the armed conflict delayed thepreparation of an updated asset valuation, which the Government demanded as a preconditionfor reviewing EDM's finances. In parallel, the pilot off-grid electrification with the privatemanagement has been implemented.

28. The petroleum components were implemented satisfactorily within theoriginal project schedule. For example, PETROMOC's kerosene component, althoughdelayed because of the unexpected reduction in its skilled staff, was completed before creditclosing date. Mocacor chose to defer capital investments and adopted a wait-and-see strategyon how demand and prices evolved to decide on the timing and magnitude of investments.

29. Originally, the major woodfuel component was to rehabilitate the plantationsnear the main cities. This approach was reexamined when it became evident that thiscomponent would not be justified economically even at the high prevailing prices ofwoodfuel. Instead, in view of the peace conditions prevailing in 1993, a new approach waschosen, which focused on the resource management and development of a 70,000 ha. ruralarea. This pilot project was originally designed for a 24 month implementation period.Although the implementation period was reduced to only ten months due to delays in thestarting-up of the project, the pilot successfully demonstrated the enormous potential forcommunities to effectively and sustainably manage woodfuel resources when provided withproper guidance.

30. The coal pilot program was developed on the assumption that by addingincremental amounts of coal to the shipments for the coal-fired power plant existing nearMaputo, the coal merchants could supply coal to households. After the peace settlement theexpensive power plant was closed, and consequently coal shipments stopped. Since thequantities of coal demanded by the households was too small to justify coal shipments toMaputo for household use only, this component was dropped from the project.

31. The non-physical component of the project (supported by Tables 7 and 7a).Under this component 20 studies were completed, of which 4 studies were for EDM onaccounting, finances, auditing, and assets valuation; 3 studies were for PETROMOC onauditing, cathodic protection, and assets valuation; one study for Mocacor on auditing; 3studies for BEU on biomass inventory through satellite imagery, improved woodfuel stoves,and planning and policy formulation; and 10 studies for the DNE on householdelectrification, petroleum sector restructuring and related legislation, energy strategy plan,integrated energy planning, reform and regulation of the power sub-sector, review of a draftof the new electricity law, review of the finances of EDM, PETROMOC, and Mocacor;rehabilitation of the geology building; and LPG supply.

32. Technical assistance. Experts on many disciplines provided technicalassistance to EDM, PETROMOC, BEU and DNE. Two experts assisted EDM in powerdistribution maintenance, tariffs and billing for isolated systems, and 3 training courses were

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given to distribution engineers. One expert assisted BEU in biomass energy planning. A lawfirm assisted DNE in the drafting of the proposed new electricity law; an energy planner andan economist assisted DNE in energy planning, pricing policies, fiscal policies and financialmonitoring. A management consulting firm assisted DNE in establishing routines for stockcontrol, invoicing and billing.

33. Since 1996, most of the attention of the GOM and IDA has been focused on theimplementation of the recommendations on policy, institutional changes, and sector reformsderived from the studies and technical assistance, which are placing the energy sector ofMozambique among the most modem energy sector legal frameworks in Africa. The studiesand technical assistance to improve the operations and finances of EDM had a late impact andonly began to show positive results in 1997 and 1998.

34. As an example of progress made in bringing private participation into thepower sub-sector operations, it is worth mentioning the on-going negotiations of amanagement contract to operate the electricity supply systems in Vilankulo, Inhassoro, andMontepuez. This management contract is expected to be signed with a private operator andbecome effective in 1999.

35. Credit disbursement and closing date (Table 4). Credit disbursement wasvery slow during the early years of project implementation. Only US$6.6 million(44.6 percent of the appraisal estimate) was disbursed by 1993, four years after creditapproval. This slow disbursement was caused by irrecoverable delays in projecteffectiveness and compliance with conditions of credit disbursement. Also, theimplementation capacity was very limited in the early years of the project because effortswere concentrated on the execution of the previous IDA project6 that was being implementedconcurrently, as well as on projects funded by others. Factors external to the energy sectorcontributed to the slow pace of project implementation and credit disbursement such as theweak banking sector, the cumbersome and lengthy Government review and approvalprocedures for procurement of goods and recruitment of consultants. All these factors movedIDA to extend the credit closing date, first by 12 months to end-1997, and a second time byfour additional months to April 1998 to allow completion of all physical works. The lastcredit disbursement took place on September 9, 1998. A total of US$2.3 million notdisbursed was canceled from the credit.

36. Project cost (Table 8a). The actual project cost is estimated to be US$41.9million or 16 percent less than the US$49.3 million estimated at appraisal, excluding interestduring construction and the US$30 million in fuel imports. The major savings were made inthe EDM components for distribution rehabilitation and reinforcement, and institutionalstrengthening.

6 Energy TA and Rehabilitation Project (Cr. 1806-MZ), approved in mid-1987 and closed in December 1994.

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37. Projectfinancing (Table 8b). IDA financed US$20.4 million and catalyzedcofinancing from BADEA (US$8.0 million), NDF (US$5.4 million) and Mozambicancompanies (US$2.9 million). The GOM financed US$5.3 million. Additionally, anaggregate of US$30 million in parallel financing was pledged by SIDA, NORAD and IDA topay for fuel imports, but information on the actual amount financed is not known. A pledgeof US$3.0 million by the Government of Denmark did not materialize.

38. Project economic performance. For the project as a whole, the SARcalculated an economic rate of return (ERR) of 50 percent, assuming that the net economicbenefits of the project would be the savings to consumers arising from a replacement ofexpensive fuelwood by electricity, kerosene, LPG and coal. Because of the substantialchange in project components, it has not been possible to calculate an ex-post ERR on theproject as a whole. The same comments apply to an ex-post recalculation of the ERR for theelectrification, LPG and Kerosene programs. However, based on very conservativeassumptions (Annex 1, para. 7) this ICR has calculated an ex-post ERR of 11 percent on theinvestment in the small-town electrification program, a small but important component interms of introducing cost-based tariffs and piloting an alternative mechanism for increasingaccess to electricity. Further, it is important to note that in the re-estimation of the ERR, thebenefits are based on the current tariff and not the willingness to pay which, if used, couldyield a significantly higher ERR.

E. Major Factors Affecting the Project

39. Factors Outside Government Control. During the first three years of theproject (1989-92), Mozambique was torn by the armed conflict. Although the project wasdesigned for this scenario and sought to alleviate some of the adverse effects of the armedconflict on the urban population, its implementation suffered from the turnoil. Thetransmission lines were frequently sabotaged and EDM struggled to maintain continuity inthe power supply to Maputo. Understandably, the main daily preoccupation of EDM was tokeep the electricity flowing to its existing consumers, not to add new ones. The import ofLPG by rail from South Africa was also hazardous. The acute scarcity of foreign exchangeconstrained the procurement of adequate supplies of other petroleum products. BEU staffwere unable to undertake fields visits for many of the biomass components until recently.

40. After the peace settlement in 1992, the energy supply situation in the citiesimproved substantially both because the peace opened up the supply routes, and foreignassistance began to flow into the country. While increased access to electrification remaineda valid project objective, the project merited a full review to assess how to adapt it to the newpolitical and economic context. However, this was not carried out.

41. Factors subject to Government Control. For many years GOM failed to meetits obligations related to the financial position of EDM and PETROMOC. The GOM wastepid in timely approving electricity tariff increases to keep pace with inflation and foreignexchange variations and frequently deferred tariff increases for political reasons.Consequently the level of tariffs always lagged considerably behind inflation and foreign

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exchange variations. Also, GOM did not recognize depreciation cost to be part of the tariffs.Irregular settlements of cross-debts between GOM and state enterprises mainly resulted intemporary improvements. The credit would have been declared effective and disbursementstarted sooner if GOM had helped EDM and PETROMOC comply with credit conditionsThe GOM (Ministry of Finance) had limited the financial autonomy of EDM in the three-year performance contract agreed with GOM in 1997. Regarding PETROMOC, the GOMhas never compensated it for the foreign exchange losses on oil imports caused by the initialpricing system imposed by GOM. The GOM repeatedly delayed proposals for thecommercialization and restructuring of PETROMOC.

42. The situation has, however, improved enormously. Power tariffs are at aboutthe right average level of US¢7.5 per kWh. Petroleum prices are being adjusted efficiently.Payment issues are being settled during the privatization process.

43. Factors subject to control by the implementing agencies. Even after thearmed conflict ended, EDM did not demonstrate commitment to the main project goal ofincreasing household electrification through Prolec. EDM gave priority to large projects,particularly related to power transmission, and extended its distribution system regardless ofits commitment to support the Prolec program. Until early 1997, EDM did not give adequateimportance to financial management and could not regularize underlying accounting recordsin order to produce meaningful and reliable financial data, despite receiving ample supportfrom resident experts and consulting firms. EDM played off one donor against another, spentat a high rate, and could never afford to repay its borrowings. Only towards the end of theproject EDM was willing to prepare a medium-term investment plan and assess its financialfeasibility. These problems were recently overcome through the EDM/GOM performancecontract agreed in 1997.

44. BPD, the provider of commercial loans to households for electrification, didnot have adequate capacity for credit assessment and monitoring. Although lending andcustomer relations mechanisms were established with assistance of consultants to speed upthe processing of loans, the delays in grid extension by EDM, with BADEA financing, forcedmany households to wait for a long time until connections to electricity materialized. Thisdiscouraged potential customers to apply for electrification loans. Only about 500households received loans and paid for home wiring/connections. The repayment rate ofloans exceeded 95% initially, declined significantly as customers had to wait long for theconnection, but has now improved substantially after customers were connected to the grid.

45. Mocacor diversified strongly but always remained a minor player. It madelittle effort to promote the use of LPG, even after adequate bulk supplies were assured,because price controls left small profitability margins.

F. Project Sustainability

46. Sustainability of the project is uncertain. Significant achievements havebeen made in terms of designing and implementing reforms for sustainable sector operations

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and in terms of institutionalizing financial and operational performance standards for the keysector entities (EDM, PETROMOC and Mocacor). With regard to reforms, the legalframework for a competitive electricity market has been created, need for cost-based tariffsand for private sector participation has been recognized through the small scale ruralelectrification program, and the initial steps have been taken towards creating a modemregulatory system. In the petroleum sub-sector, PETROMOC is now operating in acommercial and competitive manner7 and Mo9acor is competing successfully in the retailmarket. With respect to financial and operational performance standards, EDM ismaintaining its power stations in accordance with accepted utility standards. The electricityprepayment meters, financed under the project, have proved to be a good and reliable optionfor reducing billing, collection costs and accounts receivable. EDM is conducting itsoperations so as to meet the requirements of its performance contract and is operating aprofitable service. However, because the institutional and sector reforms came only towardsthe end of the project's life and their implementation remain to be completed, theenvironment for viable sector operations can only be considered fragile, hence the"uncertain" rating for sustainability8 .

G. Bank Performance

47. Project design, preparation and appraisal was unsatisfactory.9 The projectdesign proved to be too complex. Many components (power, petroleum, coal, biomass,technical assistance), entities (EDM, Prolec, PETROMOC, Mocacor, BEU, DNE), and twoco-financiers (NDF, BADEA) were involved in project implementation. Project 'ownership'of project components was diffused across too many agencies. For example the success ofthe Prolec household electrification program depended critically on support by EDM, whichdid not appear to have fully subscribed to Prolec objectives. Both the implementationcapacity and the absorptive capacity of the Mozambican energy sector were dependent on alimited number of key individuals. Project preparation and appraisal took nine months.

48. The fact that EDM was not given a central role as the key implementingagency appears to have handicapped the Prolec household electrification program from thestart. The Bank did not have close involvement in all aspects of EDM's operations as itusually has in traditional power projects.

7 Borrower's input to the ICR states that "The reforms introduced in the petroleum sector mainly the removalof PETROMOC's import monopoly and price setting mechanism eased PETROMOC from a heavy financialburden with product imports and allowed a sustainable improvement of its financial results." (See section 5of Appendix B).

8 Borrower's input to the ICR states that "The policy measures and market reforms introduced in thepetroleum and electricity sectors are sustainable and will develop further in line with the objectives ofincreasing access to modem forms of energy, in a safe and efficient manner to increased parts of thecountry." (See section 5 of Appendix B).

9 Borrower's input to the ICR states that "Performance by the Bank has been satisfactory but the supervisionduring the initial years of project implementation was not satisfactory." (See section 4 of Appendix B).

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49. Regarding the design of the conditionality included in the IDA credit, itappears that, when narrowly interpreted, the disbursement condition (EDM's financialviability plan) was not realistic because the country conditions made it too difficult to obtainthe critical financial information needed by EDM to prepare such a plan. IDA staff shouldhave realized that this factor (later compounded with requests by the GOM to increase thelevel of detail of the projections) would impede EDM's ability to formulate a timely andcredible plan for restoring its financial viability. The condition of disbursement was only metin mid-1995 after a new tariff study was agreed. For the same reasons, monitoringcompliance with financial covenants was based on unreliable information.

50. Supervision was unsatisfactory"'. The project was supervised regularly andconcurrently with another project. This is reflected in less than 40 SW in project supervisioncost. The co-financier, NDF, delegated supervision responsibility to IDA until the NDFfinanced portion of the project is completed (expected in December 1999) (see para. 5 ofAnnex 1).

51. There was continuity of task management from project preparation andappraisal through the first four years of implementation. Unfortunately, in the period 1993-1995 supervision was lax and the project drifted because two task managers lasted very shortperiods and the staff skill mix supervising the project was not appropriate. Initially, theproject issues were financial and IDA supervision missions gave emphasis to this aspect.However, the project might have benefited from a better skill mix of supervision staff. Forexample, there was no participation by a biomass energy specialist in supervision missionsbetween late 1990 and mid-1995. No power engineer/power specialist visited Mozambiquefrom late 1992 to mid-1995 though extending electrification was a key project component.The overall performance rating of the project was correctly downgraded to '3' in mid-1 991,but a supervision mission upgraded it to '2' in early 1993, when GOM adopted a power tariffformula to adjust tariffs for exchange rate movements. Only since 1995, did supervisionimprove significantly with a stable task manager and an appropriate staff skill mix.

52. Once peace was restored in Mozarnbique and the isolation of the cities fromthe countryside ended, the urban woodfuels scarcity was substantially alleviated. Thisscenario, being completely different from the one existing at time of project appraisal shouldhave elicited a far-reaching reevaluation of the project design and justification. Instead, IDAconducted inadequate project supervision and exercised flexibility by modifying projectcomponents only when circumstances changed.

lO Borrower's input to the ICR states that "Performance by the Bank has been satisfactory but the supervisionduring the initial years of project implementation was not satisfactory." (See section 4 of Appendix B).

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H. Borrower Performance

53. Given the multiplicity of entities involved in the project and the longimplementation period, borrower performance has to be assessed on a one-by-one basisbecause performance varied from entity to entity and also over time within each entity. Forexample, all the entities had frequent turnover of key personnel, and the project objectiveswere not necessarily "owned" by every management change in the entities. Overallborrower performance can be considered unsatisfactory.

54. Ministry of Finance performance was unsatisfactory. The Ministry ofFinance was not proactive on matters affecting financial viability of EDM and PETROMOCand its slow decisions on procurement contributed to delays in project execution.

55. Ministry of Mineral Resources and Energy and DNE. Overall projectimplementation and coordination was entrusted to DNE, but it was not empowered to obtainfull collaboration from autonomous bodies such as EDM, BPD and BDM. Consequently,DNE could not play a more dynamic role in reorienting the project to respond to changedpriorities at an earlier stage in project implementation. Monitoring and reporting by DNEwas patchy during the period of low supervision by the Bank, but improved towards the endof the project. Overall performance of DNE is rated as marginally satisfactory becausefactors beyond its control impeded a better performance.

56. EDMperformance was unsatisfactory. During the early years of projectimplementation, EDM did not pay much attention to the UHEP project. EDM wasunderstandably preoccupied with day to day operations, dealing with sabotage on itstransmission lines and major projects in generation and transmission and trying to keep thepower service on. Also, financial viability was an unfamiliar concept for EDM. In 1992,IDA amended the Credit Agreement in order to release 20 percent of EDM's share to helpimplementation of the Prolec program, but this action did not create EDM commitment to theproject, even though there was a waiting list of several thousand households seeking to beconnected outside the Prolec program. In addition, during most of the projectimplementation period EDM was unwilling to prepare and share information with IDA onsuch an important matter as its multi-year investment program. Only towards the end ofproject implementation, did EDM's performance and cooperation with IDA improve,particularly on the occasion of the Nacala rehabilitation and the prepayment electricity metersprogram.

57. BEU performance was highly satisfactory. Considering the circumstancesprevailing in Mozambique during the early 1990s, BEU implemented the initial biomasscomponents in a satisfactory manner. Furthermore, it made judicious use of limitedexpatriate technical assistance and did not become dependent on only IDA funding for localoperational expenses. It is remarkable that BEU developed and implemented a usefulprogram of studies and prepared the Santaca community-managed pilot project.

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58. PETROMOC performance was marginally satisfactory. The kerosenedistribution component was executed satisfactorily, but after a long delay. PETROMOCexplored promoting the use of LPG through improved import arrangements and severalinitiatives in this area were rightly abandoned as this is an area where distributors can maketheir own arrangements. Until recently, PETROMOC focused primarily on oil supply and oilprocurement issues rather than on product marketing and distribution, which were morecentral to the objectives of the UHEP. This focus was appropriate at the time when supplieswere constrained overall. Financial performance was unsatisfactory until recently due toreasons outside its control, but has become satisfactory in recent years. PETROMOC is nowoperating well in a competitive environment.

59. Mo(!acor performance was marginally satisfactory. The company did notsucceed in promoting LPG sales and expanding the market, which were the central objectivesof the project. The funds under the UHEP were not fully utilized. Instead Mocacor focusedon supply diversification and its financial well-being. Because of price-resistance in its LPGmarket, continued risks from price controls and threats of competition, Mocacor proceededcautiously on priorities other than the project, and recently has become more energeticallycommercial. This behavior was appropriate.

1. Assessment of Outcome

60. Overall project outcome is considered unsatisfactory."1 This is because itsphysical objectives were only partially achieved, institutional and policy reform objectiveswere substantially achieved only toward the end of the project, and sustainability of the gainsremains uncertain. Further, while the original project objective of bringing low-costcommercial fuels to a large number of urban households was broadly achieved, this waspartly because of the project, but also because of the return to peace conditions whichresulted in an increased supply of these fuels. The record on the project's physicalcomponents shows that EDM failed to implement the important Prolec householdelectrification program and the coal pilot component was dropped. The failure of the Proleccomponent overshadows a wide range of other achievements. On the institutional side,financial and operational performance of EDM, PETROMOC and Mo,acor remained lowthroughout most of the project implementation period due to the GOM non-approval ofadequate prices and operational inefficiencies. Performance standards have since beenadopted by all three and improvements have been recorded in the last few years. Theproject's outcome on energy sector efficiency and policy development was almost fullysatisfactory. The project was instrumental in bringing about important reforms in thepetroleum sub-sector that improved its efficiency, reduced the country's oil import bill andthus had a positive impact on the balance of payments. The legal status of PETROMOCdistribution has changed from a state enterprise to a limited liability company ruled by the

" Borrower's input to the ICR states that "The general outcome of the project is satisfactory although sometargets set initially were not achieved." (See section 5 of Appendix B).

Co-financier's comments state that "If the outcome is compared to the restructured project (as of 1994),the project, in our opinion, should be regarded as "satisfactory". (See Appendix C).

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commercial law. Analytical work carried out under the project provided a framework for theinstitutional reform of the power sub-sector which has begun to be implemented.Significantly, the project also laid the basis for the first privately-run electricity supplyconcession in Mozambique, which could prove to be the precursor of numerous other suchschemes. The project put Mozambique in the forefront of sector reforms. The successfulcommunity-based biomass program, including cash generation activities, provided valuableexperience for the design of future rural development schemes that are now at the planningstage. At present it may be premature to assess the long-term effects of the energy sectorreform, and the sustainability of the performance standards adopted by the key sector entities.A follow-up electrification project will continue to support the sector reform. Also aproposed follow-up electrification project would consist of a policy component andinvestments to expand electricity access. Because of these uncertainties and the mixedoutcome of the physical components, the overall project outcome is rated unsatisfactory.

J. Future Operations

61. Although the GOM has not submitted to IDA a formal plan for futureoperation of the project, experience with this project suggests that the GOM has the capacityto develop and sustain a focussed energy sector strategy to meet the challenges of providingwider access to energy needs by the rural and suburban population, including efficientutilization of biomass fuels. In doing this, appropriate consideration should be given by theGOM to the abundance of Mozambique's energy resources which, while potentiallyimportant for the export market, should also assist in a wider and faster access to commercialenergy by the Mozambican people.

62. The Bank's Regional Program for the Traditional Energy Sector (RPTES) isproviding limited technical assistance to a biomass pilot project in the local community ofSantaca. Several donors have already indicated a willingness to finance the continuation oftechnical assistance to the local community during the commercial phase of the project. TheRPTES will also assist with the preparation of a national-level investment based on theSantaca experience. Also a proposed follow-up electrification project would consist of apolicy component and investments to expand electricity access.

K. Key Lessons

63. The following lessons can be offered:

* Projects should be designed with a simple institutional organization and few components.A complex multi component project implemented through many agencies risks spreadingresponsibilities, diluting 'ownership' of the project among agencies, and making projectcoordination very difficult.

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* When the macroeconomic and political conditions in which a project was appraisedchanges profoundly during project execution, a radical project redesign/re-appraisal maybe required proactively as soon as it is clear that the changes are permanent. A merepiecemeal modification of the project components should be avoided.

* Standard financial performance covenants in Loan/Credit Agreements are meaningless ifthe underlying performance data is unavailable. Rather than requiring compliance withrate of return or other complex financial covenants difficult to monitor and sometimesunfamiliar for the incumbent entity, it is preferable to require compliance with simplerand less ambitious indicators, easy to monitor but necessary to achieve basic financialsurvival of the incumbent entity.

* By implementing natural resource management including cash generating activities to thecommunity, villagers get incentives to protect natural resources and utilize the resourcesin a cost effective and sustainable manner.

* With timely and flexible intervention, it is possible to achieve some measure of success,even if initially the project had been poorly designed and managed.

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Annex 1

IMPLEMENTATION RECORDAND MAJOR FACTORS AFFECTING THE PROJECT

Household Electrification Program (Prolec)

1. The US$10 million Prolec household electrification program was a responseto the scarcity and high-cost of biomass fuels in urban areas, the burden of which felldisproportionately on lower-income families. It sought to massively increase access toelectricity by providing funds for the import of equipment required for service connections,house wiring and electrical fixtures. Concessionary loans (repayable in four years with onlya 10% interest rate), averaging US$300-400 were provided by a local bank (BPD) to low-income households seeking an electrical connection.

2. IDA funds were used for the purchase of materials and appliances and theconsulting and management costs of the program, while NDF and BADEA funds wereavailable for extension of EDM's distribution network. In the initial three years,implementation was severely delayed because: (i) donor funding remained blocked due tothe failure by GOM/EDM to meet the condition of effectiveness/disbursement, and (ii) thedifficulty in finalizing the financial arrangements between BPD and BDM for accessing thecounterpart funds and the interest rate subsidy. But even when these issues were resolved,the program did not proceed satisfactorily.

3. With hindsight it is clear that Prolec was administratively too complex andsuffered from coordination problems between EDM, BPD, Ministry of Finance/BDM,Interelectra (the equipment and materials procurement agency) and DNE. Responsibility forits implementation was diffused and even though the target was cut from 40,000 to 4,000households when the project was restructured, it did not meet the lower figure. This waspartly due to lack of commitment to it from EDM, which did not give the program adequatepriority in expanding its distribution network. Consequently the pace of implementation wasvery slow and in some cases Prolec loan beneficiaries who had completed the necessaryworks within their homes had to wait lengthy periods for EDM to hook them up. In total,about 500 households have directly benefited from loans granted under the program.However, a further 2,500 households were connected to the grid extended under the Prolecprogram.

4. Nevertheless, in overall terms during the 1988-97 period, EDM increased thetotal number of residential electricity consumers in Mozambique by nearly 60,000 fromabout 98,000 to 156,000. This has raised the access to electricity from under 4% of thepopulation in the late 1980s to about 6% today, based on a 6-person average household.

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Off-grid Electrification of Small Towns

5. Given the availability of natural gas from the Pande field the towns ofVilankulo and Inhassoro as a result of a prior investment in a gas pipeline by ENH, it wasdecided to give priority to electrification of these towns. The construction of the electricitydistribution network and installation of gas-fired power generators was completed in April1998 at a total cost of about US$1.6 million. Service connections were initially made toabout 200 consurners in Vilankulo and 40 in Inhassoro. The number of consumers increasedby 66% from 240 to 400 over the nine months of operation. Electricity demand has beenstrong. The growth in demand exceeded 50% despite the initial projection at 10% p.a. NDFagreed to support electrification of two more towns (Montepuez and Nova Mambone) andTA to DNE after the closure of the project until the end of 1999. NDF delegated supervisionresponsibilities to IDA until the electrification project is completed. NDF/GOM expects allthe work to be completed by the end of 1999. Electricity will be generated based on diesel inMontepuez and based on natural gas in Nova Mambone. DANIDA will finance thepipeline/supervision at the cost of US$500,000. The grid construction in Montepuez wascompleted and the generators have been installed. Initially about 400 households will beconnected to the grid and the average tariff would be set at about USc 20/kWh. Work inNova Mambone is expected to be started shortly.

6. Institutional Arrangements: A key objective of the electrification componentwas to facilitate sector strengthening and reforms, and as the project progressed thesefocussed on elimination of EDM monopoly, private sector involvement, cost recovery tariffs,and on introduction of competition. In order to implement this project, a set of newlaws/regulations had to be prepared to allow the new approach with the private sector. Theelectricity law was drafted by consultants financed under the project and was approved in1997. The draft management contract for the operation of the power supply systems by theprivate sector and tender documents for bidding were prepared under the project. The decreeto authorize a three-year 'concession' arrangement to manage the power supply in the twotowns as a combined operation was approved by the Council of Ministers. The tender wasissued in early June 1999. GOM plans to remunerate the private operator by means of amanagement fee which would represent about a 17% annual post-tax return on the initialoutlay of funds by the private operator. However, the proposed fee will be one of theselection criteria of the operator.

7. Pricing: To ensure the sustainability, the Government agreed to introduce costrecovery tariffs for these isolated non-EDM systems. The average electricity tariff toconsumers is estimated at MT 1,800 (US¢ 15.0)/kWh, which would generate revenuesadequate to cover all costs including the management fee and a financial return to theGovernment of about 8% on its capital investment. The ex-post economic rate of return ofthis electrification project was estimated at least at 11%, and a positive NPV of $50,000. Theeconomic rate of return was calculated conservatively based on the prevailing tariffs. It isdifficult to capture associated benefits in the rate of return calculation. However, improvedwater supply, new local small businesses, better school/hospital environment and improved

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safety due to street lighting have been observed after electrification. The principlesdetermining gas prices were agreed and approved by the Council of Ministers. ENH receivesUS$2.00/GJ for gas sales for power generation, which allows it to recover the cost of the gaspipeline from Pande and earn a reasonable return on this investment.

Biomass Components

8. A Biomass Energy Unit (BEU) was set up in 1989 under the National Forestryand Wildlife Department to implement a US$3.5 million woodfuels program. This programwas designed to address the urban woodfuels supply problem through therehabilitation/extension of three existing FAO-supported fuelwood plantations, improvedcarbonization techniques and stoves, carry out a biomass resource inventory through remotesensing and mapping and help build up the institutional capacity for biomass energy policyand planning.

9. Fire protection equipment for the plantations was procured and about2,000 ha. of new plantation was implemented out of the SAR target of 6,000 ha. Thiscomponent was correctly scaled back due to the high cost (US$500/ha.), compared to theexpected revenue from woodfuel sales, the unpopularity of eucalyptus charcoal among users,and the difficulty of putting in place a satisfactory commnercialization system, given thesecurity constraints due to the armed conflict. Experience elsewhere has also confinned theunsuitability and high cost of plantations as a response to fuelwood problems.

10. The remote sensing was carried out in 1992 and forest and biomass covermaps were produced and disseminated in 1993. However, given the rapid changes in land-use patterns and vegetation cover since the end of the armed conflict, it is now necessary toupdate this exercise through the purchase of new satellite images.

11. During the 1990-95 period, BEU successfully carried out a number of studies,research and capacity development activities to improve understanding of the traditionalenergy sector with minimal expatriate assistance and without IDA financing for operationalexpenses, for which it relied on GOM's budgetary allocations. Out of this research program,BEU prepared a pilot project for the sustainable management by local communities ofexisting forests for charcoal production. Following a rapid rural appraisal of the selected areain 1996, the Bank agreed to include the pilot within the scope of UHEP.

Community-Managed Woodfuel Supply Pilot Project

12. A US$1 million, community-based biomass pilot project covering 70,000 hain the Matutuine District of Maputo province (about 60 km south-west of the capital), wasimplemented in 1997. The original design of the pilot project was to be completed in 24months. However, due to the start-..up and implementation delays, the project period wasshortened to 10 months. It principally sought to introduce sustainable forest managementpractices by the rural population for woodfuel production. However, the project was multi-sectoral and in addition to introducing a natural resource management plan for sustainable

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charcoal production it set up diversified cash generating activities such as brick making,sunflower oil extraction and a tree nursery. Technology to improve efficiency andproductivity of charcoal production was also introduced to the community. As a result, theefficiency improved by 100%. (The output doubled and the carbonization efficiency alsodoubled.) Individuals selected by the local community were trained as forest/wildlifeinspectors to monitor illegal logging and poaching. Five associations of charcoal producersand a system of production licenses were set up to 'empower' producers and enhance theirnegotiating power with buyers.

13. This pilot project went beyond the confines of a conventional forestry and/orenergy sector activity. The pilot was designed as a rural development and sustainable naturalresource management project. The cost per hectare of this pilot was much lower than insimilar pilot projects in West Africa. R & D expenditures dominated the overall costs andthese will not have to be incurred to the same extent in future projects of this kind. BEU andthe University consultants who designed and implemented the pilot are confident that theSantaca pilot can be replicated in other regions of Mozambique at a unit cost of well underhalf of that incurred in the pilot project. Becauise of the success, two bilateral donors havepledged the follow-up funding.

14. The pilot project was designed and implemented entirely without foreign TA.The staff employed by the project team gained useful operational experience which can beutilized elsewhere. This component has had a strong institutional development impact. BEUhas been integrated under the Forestry Departrnent of the Ministry of Agriculture andFishery, when UHEP was closed. The Government has agreed to continue support theLicuati initiative through the Provincial Government and NDER is concluding necessaryarrangements with Maputo Province.

Power Sector Reforms

15. An Electricity law eliminating EDM's monopoly, providing the basis forgranting concessions to private operators and setting up a regulator, a quasi-independentelectricity council (CNELEC), was drafted by GOM and passed by Parliament in 1997. TheBank assisted in drafting and a review of the draft law by legal experts funded from theCredit. This was an important step in opening up the power sector to supply options that donot require an EDM participation, such as off-grid systems financed by the project inInhassoro and Vilankulo (paras. 5-7). Detailed regulations for the application of the Law arenow under preparation.

16. Performance targets were to be adopted by EDM under the project(para. 4.11 (d) of the DCA). EDM first prepared a business plan under its own initiative andthen negotiated a three-year Performance Contract with GOM, which was signed in early1997. However this is only a modest first step, because there are no incentive/penalties topromote achievement and no profits target. The removal of key financial clauses by theMinistry of Finance that committed GOM to grant EDM tariff increases etc. considerablydiluted the value of this document.

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17. Following passage of the Electricity Law, UHEP further promoted sectorrefonns by financing a study of the institutional arrangements. The consultantsrecommended unbundling EDM and the steps for setting up an independent industryregulator. These proposals now require further consideration amongst the interested partiesin Mozambique to reach a decision on their implementation.

EDM's Finances

18. Although tariff adjustment mechanisms were introduced early in the project,permitted electricity tariff increases did not keep up with the rapid inflation and currencydepreciation experienced in Mozambique during most of the project period. For severalyears prior the peace settlement, sabotage of power lines cut EDM's sales and it could notpay PETROMOC for its oil use. Arrears for oil were persistently in the US$8-lOm range inthe early/mid 1990s. For the mid-term review in late 1992, GOM carried out a cross-debtsclear-up that reduced about half of the arrears to PETROMOC, but they soon built up again.In late-1996 PETROMOC was owed US$24 million, of which US$16 million was accountedfor by parastatals and GOM. EDM's receivables, mainly from the water companies andgovernment bodies rose to over US$4 million in 1995. Excessive accounts receivablecontinued to burden both EDM and PETROMOC's finances throughout most of theremainder of the project implementation period.

19. Until 1998 EDM consistently made losses over the decade. Auditors havealways qualified the accounts. EDM was poorly served by the financial consultants recruitedunder the project in 1990-92. The performance of consultants to assist with accountingimprovements, financial analysis and the valuation of assets was unsatisfactory. Thishindered EDM's ability to meet the IDA disbursement condition. By the time of the mid-term review in late 1992, a complete and coherent picture of EDM's finances was notavailable. Ministry of Finance demanded a detailed asset valuation and this was somewhatunrealistic prior to the peace. A study of its financial viability was finally submitted to theBank in 1994 and only since 1995 has there been a realistic assessment of its financialposition. In part, this is the result of an ESMAP funded tariff study that entailed thepreparation of the first long-tern investment plan for EDM.

20. EDM itself was unwilling to analyze the impact on its finances of itsinvestment program, which in the early years of the project merely consisted of a shoppinglist of proposals to be presented to potential donors for financing. It was also unwilling toprovide the Bank with technical and economic feasibility studies of its investment program,even though at negotiations GOM had agreed to a prior review by the Bank of all newprojects in the sector with a value exceeding US$10 million.

- 24 -

21. Procurement of prepayment meters was first mooted at the mid-term review,but was slow to be put into practice as the meters needed further technical development.After a successful pilot experience, 15,000 meters were finally procured in 1997-98 at a costof US$1.6 million and are being installed in Nampula and Nacala with assistance from KfW.Experience to date has shown them to be reliable, with a high degree of consumer satisfactioncompared to the old billing system which was mistrusted. EDM has gained through adramatic improvement in collections in those pilot areas where these meters have beeninstalled. It is planning to purchase and install more prepayment meters using its ownresources, given their short payback period.

Petroleum Policy Reforms

22. Even though the project initially did not contain an explicit policy reformagenda, it turned out to be instrumental in bringing about important sectoral reforms. Itfinanced the studies and consulting services for deregulating and restructuring the sector.

Oil Procurement

23. In parallel with politically-arranged supplies from the Soviet Union,Mozambique's other foreign aid donors (including IDA) were financing a major portion ofthe country's oil imports during the late 1980s and early 1990s, but in an uncoordinatedmanner. The scarcity of foreign exchange was such that GOM contracted for oil in verysmall parcels which pushed up the delivered cost by 20%. Initially donors were unwilling topool financial resources, but the Bank succeeded in obtaining the agreement of GOM anddonors to the setting up of a Joint Oil Procurement Committee to launch competitive bidscovering six months requirements. This committee became fully operational in 1994 and hashelped to ensure transparency, standardization of procedures as well as bring down oilprocurement costs substantially.

24. Since PETROMOC was the only importer, the Bank argued for the separationof oil importing from its marketing activities to introduce a 'level playing field' among oilproduct distributors. Following ratification of a Petroleum Decree in early 1997, which theproject assisted in drafting, it has been agreed by GOM and the oil marketing companies toset up a jointly-owned, private non-profit, oil import company to relieve PETROMOC of thefinancial burden and risk of being the sole importer. This also removes the conflict ofinterest with its marketing operations. This arrangement is considered as an interim. Oncethe market becomes big (at least twice its present size) and the access to the foreign exchangeis improved, the petroleum imports should be liberalized.

- 25 -

Pricing Decontrol

25. Following a study undertaken as part of the project, a petroleum productpricing formula was introduced in 1997 to ensure automaticity in the adjustment of pumpprices in line with movement in CIF costs. Today GOM only sets a maximum ceiling pricein the three major cities, which ensures adequate distribution margins and leaves thedistributors free to set their own pump prices. New firms have entered the petroleumdistribution business and there has been a marked increase in investment in service stationfacilities by the existing distributors as well. PETROMOC's market share has dropped fromabout 75% ten years ago to under 50% of a substantially larger market. Price decontrolcurrently applies to the aviation fuels, and there is scope in the short-term for decontrollingfor some of the other fuels that do not directly impact the poor.

PETROMOC Restructuring

26. The project also financed consultants to assist with PETROMOC's assetvaluation prior to a program of disposal, internal reorganization, asset sale and staffredeployment necessitated by its reduced role in the sector. The legal status of PETROMOC,distribution, has changed from a state enterprise to that of an SARL (a limited liabilitycompany), which has brought it under normal commercial law. Asset disposal and right-sizing are expected to start in mid-1999.

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PART II: STATISTICAL ANNEXES

Table 1: Summary of Assessments

A. Achievement of Objectives Substantial Partial Negligible Not applicable

V/ / ) (V)

Macro Policies El E llSector Policies El E El

Financial Objectives 0l E ElInstitutional Development [2 El 0

Physical Objectives l X E E

Poverty Reduction l I3 E El

Gender Issues

Other Social Objectives E E El

Environmental Objectives El X E 2

Public Sector Management E ) E 1

Private Sector Development XE El E

Positive Balance of Payments E ) E EImnpact E

(Continued)

B. Project Sustainability Likely Unlikely Uncertain

(1) (1) 0)

El OEl2

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HiglC. Bank Performancel Satisfactory Satisfactory Deficient

(/) (V) (/)

Identification 1x I]

Preparation Assistance I D iAppraisal LD

Supervision El [mJ

HiglD. Borrower Performance Satisfactory Satisfactory Deficient

(") (/) (/)

Preparation l E E

Implementation [ El

Covenant Compliance E m

Operation (if applicable) El ai

E. Assessment of Outcome 2 Satisfactory Satisfactory Unsatisfactory unsatisfactory

Borrower's input to the ICR states that "Performance by the Bank has been satisfactory but the supervisionduring the initial years of project implementation was not satisfactory." (See section 4 of Appendix B).

2 Borrower's input to the ICR states that "The general outcome is satisfactory although some targets set initiallywere not achieved." (See section 5 of Appendix B).

Co-financier's comments state that "If the outcome is compared to the restructured project (as of 1994), theproject, in our opinion, should be regarded as "satisfactory." (See Appendix C).

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Table 2: Related Bank Loans/Credits

Loan/credit title Purpose Year of approval Status

Preceding operations

Energy Technical Improve the supply and 1987 ClosedAssistance and distribution of electricity andRehabilitation Project petroleum products in the(Cr.1806-MOZ) main urban areas.

Following operations

Pande Gas Undertake work necessary to 1994 OngoingEngineering Project enable the government, ENH(Cr. 2629-MOZ) and the private sector

investors to make a finndecision to develop thePande gas reserves forexport and domestic use.

Table 3: Project Timetable

Steps in Project Cycle Date Planned Date Actual/Latest Estimate

Identification (Executive Project Summary) December 1987

Preparation Jan. - Oct. 1988

Project Preparation Facility May 1988

Final Executive Project Summary September 1988

Appraisal December 1988 October 1988

Negotiations February 1989 April 1989

Board Presentation March 1989 June 1989

Signing June 1989 September 1989

Effectiveness December 1989 April 1990

Mid-terrn Review November 1992

Project Completion June 30, 1996 April 30, 1998

Loan Closing December 31, 1996 April 30, 1998

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Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual

(US$ millions)

FY FY FY FY FY FY FY FY FY FY1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Appraisal 3.8 5.9 10.8 14.8 18.3 20.6 21.8 22.0 -- --

estimate _

Revised 3.2 3.2 5.2 6.6 8.8 10.7 13.0 16.9 22.0 --

Actual 3.2 3.2 5.2 6.6 8.8 10.7 13.0 15.0 20.5 21.3

Actual as % 84 54 48 45 48 52 60 68 -- --

of estimate

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Table 5a: Financial and Operational IndicatorsEDM - Electricidade de Mocambiqu, E.P.

.______________________ _______ 1989 1990 1991 -1992 1993 1994 1995 1996 1997 1998FINANCIAL (forecast)

Working ratio 87%_ 92% 95% 79% 76% 68% 61%Operating ratio 107%_ 108% 110% 129% 121% 106%/o 95%Debt service coverage (times): ._ _ i

Excl interest during construction | 1.9 0.6 1.2 3.9 4.8 1 .9Exci interest financed during grace period ___ 1.0 0.8 4.9 26.7 9.6 2.2

Internal cash generation: I

Exci interest during construction __ 20% 20% -16% 42% 11% 27%Exci interest financed during grace period_ 15% 22% -8% 49% 17% 32%Return on assets:Revalued basis i -5.0% -5.5% -2.0% 1.8%Historical basis . -2.2% -3.7% -4.9% 8.7% 18.0% 35.2%~ 23.3%

Days' billing 159 222 173 174 198 179 170Current ratio (times) 1.9 1.6 0.9 2.o 1.4 1.4 1.6Debt/equity ratio _ . _ 14%i 25% 39% 28%1 35% 35%| 39%Capital investment (USS million) _ | . 1 15.2 17.1 25.4 49.2 19.3 38.8

OPERATIONAL | _ _ _ _ _ _ _ _

Sources and distribution of power (GWh) _ _ 2Production from Cahora Bassa:I | _ _ _ i _ ____ i_

-Delivered to RSA 0 0 °_l °i ° 0 0 0 0 0 0 5065- Transmission losses-Taken by EDM i | _ i 95 118 140 138 186 206 617

Production from EDM's stations: l lI II__-Maputo power station _ 531 171 1__Oj 0 0 00-Hydro stations _ j j_j _ 1 114 1 141 199 178 205 190 210-Isolated stations j j j_I _ i__ ! 311 -1 29 30 31 -1

Imports by EDM: I | i i i i i j j i _

-From RSA l _ I_l _ l_ 530 511st 559 600 597 683 385-from other countries j j j _ I I I 2 3 3 j-from private generators j j j_j _ j 0 0 0 0 0 0 0

Total supply to EDM systems | 831 818 899 947 1,020 1,113 1,211I_ I_ I_ II I _ _ [ ._ _I

Distributed to:62 60 66 59 64 ___

- Southern region j_I ___j__625_ 602j 666j 593_ 654j_j -

- Central region 2 115 154 166 241 242 j- Central-Northern (Tete) region 91 61 67 114 124- Isolated load centers I I I _ _ _ I _____

Electricity consumption of supply to EDM systems (GWh) ____li_

Sales: _ 2 _ _ _ _ _

Industry _______ 158 122 211 238 249 334Commercial 131 133 125 147 129 139Domestic l l I_ l_l_252 285 259 272 269 306Exports _ j j___|_9 1 0 0 2 0

Total sales _ | |__ ____ 551 542 596 656 649 778 843Transmission & distribution losses _ j j 279 268 296 263 340 301 333Own consumption . . n/a n/a n/a 10 it 13 13Public lighting _ _ _____ 2 8 7 18 191 20 22Total energy supply to EDM systems _ | __| __ 831 818 899 947 10207 1113 1211

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Table 5a: Financial and Operational Indicators (continued)EDM - Electricidade de Mocambiqu, E.P.

______________________ _______ 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Transmission & distribution losses (Y) 33.6% 32.7% 32.9% 27.8% 33.4% 27.1% 27.5%

Maximum demand (MW):Northern system 20 22 24 24 24.8 26Central system 31 32.9 31 43 48 39Southern system 98 86 98 103.5 111.9 125

Load factor (O/o)Northern system 0.52 0.64 0.67 0.72 0.64 0.64

Central system 0.44 0.48 0.62 0.47 0.37 0.40Southern system 0.63 0.65 0.66 0.66 0.61 0.66Power outages

Numbers of consumers 132,236 136,328 151,480 159,169 171,066 177,793 182,042

New connections (net) 5,075 4,092 15,152 7,689 11,897 6,727 4,249

Nos of new pre-paid meters installed in year 282 218 1000 3500

Nos of full time employees 3,200 3,028 2,736 2,642

Nos of consumers per employee 50 56 65 69

Consumption per capita (KWh) 44 54 55 52 52 52

Population having access to electricity 4.2% 4.2% 4.4% 4.5% 4.6% 5.0% 5.1% 5.5% 5.8%

Performance standards (as agreed): _ _ _____

Numbers of new connections target | _ 7,000 7,000

actual _ _ _ 5,075 4,092 15,152 7,689 11,897 6,727 4,249

Collection rate of elec bills target _ _ _ _ _______ 88% 90% 91%actual 89% 93%

Time cycle for meter reading, target ___ _ 45 45 45

billing & collection (max days actualAccounts receivable (days) target _ _ 107 103 101

actual 198 179 170Operation costs (Usc/kWh) target |______ 4.1 3.3 3.1

actual _______ I_____| 6.8 5.9 5.3

Clean audit report target _ _______ _______ yes yesactual no no no no no no no

Numbers of employees-full time target | _ _______| 2,917 2,816 2,719 2,615

actual | _ 3,200 3,028 2,736 2,642

Annual investments (max US$) target _ _ 20.0 20.0 20.0_actual _ _ 25.4 49.2 19.3 38.

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Table 5b: Financial and Operational Indicators____PETROMO-C - Empresa Nacional de Petroleos Mocambique, E.E.

_______________________ 1989 ~~~~~1990! 1991 1992 1993 19941 19951 1996 1997 1998

_________ _________ ~~~~~~~~~~~~~~~~(forecast) (forecast)FINANCIAL

Working ratio 90% 82%j 79%~ 92% 102% 95%. 94%1 90%. 87% 85%/Operating ratio 9% 83%1. 80% 94% 105% 97% 95% 95% 95% 94%Debt service coverage (times) ____ 13.0 31.1- 10.5 -8.7 -0.4 0.61 2.2 .Internal cash generation ____150% 58% 122% -955% -18%j -596%~ 771% -330%,.Return on assets: _ _-1_ _ _ _1_

Revalued basis ____-_______ ___ 7.4% 5.1%

Historical basis ____ 208.8% 627.9%~ 738.9% 95.9%I -98.3%! -9.2% -16.5% 172.7%____Days'billing 121~ 134 143 1601 199 125 1101 83 115 -__

Current ratio (timnes) 11.4 13 1. 13 10 .1 10 1. 11Bebtieuity rtio 3 4% 3 11%~ 38

0-______10~

Debt/equity rato 49/61 11% 38% 92% 12 6 %~ 301%1 24% 20%j ___

Capital investment (USS million) 13 08 6.4 1.6 1.71 1.9 1.6 1 .41 ___4__

OPERATIONAL

Petroleum products sold in Mozambique (m3):____

Gas oil I ___~_________222,317 218,551 226,750 253,079 1272,037 278,649 272,859-___Gasolene I41,716 42,381 43,054 48,228 52,932' 54,580 1 58,898Kerosene 15,626 13,967- 1-5,104 16,111 19,725 22,222 26,719 __

Jetfuel 45,286 34,503 43,633 54,208 22,820 26,780 31,652 ___

Fuel oil _______-17,423 16,391 14,1I07 12,344 12,063 8,471 10,615 __

All other 5,697 6,447 3,879 2,911 1,713 1,437 1,246 ___

Total petroleum products excl LPG 399,251 348,065 332,240 346,527 386,881 381,290 392,139 401,989 465,000LPG (sold entirely by Mocacor) (tonnes 4,726 4,859 3,574 3,9 3,772 3,668 4,066 5,002 ___

Petroleum products sold by Petromoc (m3): ________ IGas oil ___ ___'208,878 171,296 157,787 137,355 140,407 158,135 152,626 144,294 ___

Gasolene ____37,660 28,081 125,220 24,384 21,388 21,714 18,546 17,917 ___

Kerosene _____ 12,581 11,382 11,457 11,718 10,517 12,857 13,098 14,936Jetfuel _____ 14,669 12,128 ,3 ,54 7,991 6,973 6,415 6,204 ___

Fuel oil ._____ 7,038 10,865 9,583 !8,330 8,890 7,105 4,642 4,774 ___

All other - 646 0 623 54 97 189 146 206

Total petroleum products L3721{281,472 233,752 21,0 8,9 8,90 206,973 195,473 188,331 204,000

Petromoc's share of the market: _ ______ _

Gas oil ____ ____77.1% 72.2%. 60.6%W 55.5% 58.1% 0/ 54.8%1o 52.9%j ____

Gasolene _________67.3% 59.5% 56.6% 44.3% 41.0% 34.0%4. 30.4%1 __

Kerosene _____72.8% 82.0% 77.60/o 65.3% 65.2% 58.9%1 55.9%.4Jetfuel ____ .2.% 21.8% 15.5%~ 14.7% 30.6% 24.0% 19.6%Fuel oil 62_______ 4____ 58.5% 59.0% 72.0% 58.9% 54.8% 45.0% ____

All other 0.% 9.7%j 14.2%. 6.8% 11.1% 10.2% 16.5All Petromoc I7.% 70.5% 67.2%/i 63.9%1 54.6%~ 49.0%. 543 49.8% 46.8%1 43.9%

Share of the market of other companies:;____ ___ 4 ___ ___

BP 3 26.0% 29.5% 4.32.8% 31.9%1 38.3% 40.5%f 32 34.1%1 36.7%+/Mobil -r 0.0%~ 0.0%l 0.0% 4.2%~ 6.8% 9.1% 11.0% 11.6%~ 11.7%.

Total ~~~~~ ~~~~~ ~~~0.0% 0.0% 0.0% 0. 0%a 0.3% 1.4% 1.5% 4.5% 4. 4.8%_____________________ ~~~~~100.0% 100.0% 100.0% 10. % 100.0%1'0~ Iwo.% l00.0%f 100.0% ___

1 .. I ___~~~~92 43 _89_ 853 838

Numbers of employees 95~ 92 981 96 18 928{ ~ ~ 82 5 3

Performance standards (as agreed): [t____________

Provide no product to any client with outsanding arrears in excess of 90 days, after mid-98, 4 ___ ___ ___ ___

Throughput tobe noless than 4times by mid-98 and 6times by mid-99 storage capacity atall termninals &depots. 3___ ____7___

Product losses to be no more than 0.5% wt of product delivered to each terminal & depot (by end 98). ___ ___ 1.49%4Achieve product sales peremnployeeof303b202 3 229 206 204 220 219 221~ Achieve minimnum annual average of 40,000 revenue km (80,000 km return) per road tank wagon.-__Achive atverage monithly throughputs of 1 00 m3 at all outlets in Maputo & Beira, by mid-98.Achieve average receivable ratio of no more than 45dasPension reserves to be fully funded to meet obligations.Bad debts not to exceed 3% of annual sales revenue.

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Table 5c: Financial and Operational IndicatorsMocacor - Distribuidora de Combustiveis, S.A.R.l.

!1989l 19901 19911 1992 1993 1994 19956 1997 19981989 90 1992 _______ 1996~~~~~~~~~191~ 19________________________ 19 r__ _ _ 94 (est actual (forecast)

FINANCIAL

Working ratio 97%Operating ratio 100% _

Debt service coverage (times) Ratios would be misleading as no interest accounted forInternal cash generation _Ratios would be_misleading as no interest accounted for.Return on assets (historical basis) . -227.1% 83.9% 39.9% 68.1% 18.2% 12.3%Days' billing _ 2 3 7 3 2 17Current ratio (times) _ - [ [ 0.9 1.2 1.1 1.1 0.7 1.4Debt/equity ratio I I_ I___1 47% 28% 25% 53% 41% 8%Capital investment (US$ million) - _ 0.00 0.01 0.15 0.47 0.33 0.52

OPERATIONAL - _ 1 _ i |_|LPG sold IIn Maputo Itonnes; 4,407 | 4,641 3,390 | 3,578 | 3452 3337 3,690 458Elsewhere tonnes 319 218 184 215 320 331 376 485Total tonnes 4,726 4,859 3,574 3,793 3,772 3,668 4,066 5,002

I_ _ II_ I ._ I I_

Numbers of employees ______166, 1691 165] 1491 140 1331 139 134 139

Performance standards:In view of the disinvestiture of govemment shareholding (as envisaged at the time), IDA agreed to waive the setting of agreed performance standards.The target date of September 30, 1994, as set out in the DCA (Section 4.11 (d)), for the setting of performance standards was not met.

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Table 6: Key Indicators for Project Operation

No indicators were included in the SAR nor agreed with Borrower by the ICR mission.

,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

- 35 -

Table 7: Studies included in the ProjectTable 7 (page 1 of 6)

Study Purpose as defined Status Impact of Studyat Appraisal

EDM

1. Accounting * To provide accounting Completed Financial statements, which could be subjectassistance. assistance to enable to external audit, were produced for the first

EDM to prepare reliable time in 1992. The quality of accounting datafinancial statements. has improved steadily ever since. However,

the underlying records and accounting dataare still regarded as unreliable for the auditorsto continue to express any opinion on theannual financial statements. EDM has agreedto strengthen the finance department byappointment of experienced full-time staff athead office and in the area offices. A newbilling system will be installed to overcomeconsiderable accounting and managementreporting difficulties.

2. Financial viability * To assess current Completed Study concluded that average retail electricitystudy. financial status and tariffs should be gradually increased to reach

recommend measures to 9.5 USc/kWh. Current average retail tariff issecure future financial 7.5 USc/kWh; this level is now regarded as

l __________________ viability. adequate.3. External audit. To engage independent Completed External audits were financed for five years

external auditors. (1992 to 1996). EDM now finances auditexpenses frQm its own resources.

4. Valuation of fixed To define EDM Completed Financed by NDF. The valuation wasassets. patrimony. incorporated in the 1995 fnancial statements.

The underlying equity and profitability is nowmore accurately measured.

PETROMOC l1. External audit. To engage external Completed External audits were financed for five years

auditors. (1989 to 1993). PETROMOC now financesaudit expenses from own resources.

2. Cathodic Not included at Completed Assistance provided in preparing tenderprotection study. appraisal. documents for the design, installation and

rehabilitation of the cathodic protectionl__________________ ______________ system s.

3. Valuation of fixed To define PETROMOC Completed The valuation was incorporated in the 1996assets. patrimnony. financial statements. The underlying equity

and profitability is now more accuratelymeasured.

Mo,acor1. External audit. To engage independent Completed External audits were financed for three years

external auditors. (1991 to 1993). Mocacor now finances audit____________________l_______________________ J_____________ expenses from its own resources.

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Table 7 (page 2 of 6)

Biomass Energy Unit (BEU)1. Satellite imagery To acquire and interpret Completed BEU purchased two sets of satellite imagesand biomass an estimated 48 satellite covering the whole country at a cost ofinventory. images, to produce the US$58,870. These were used subsequently for

base data on the forest the production of forestry maps.cover and biomass The following studies were undertaken:inventory for the - time series of biomass stocks in the areacountry; undertake field around Maputo, Sofala, Manica andverification work in Nampula;critical areas; and - inventory of mangrove species in Maputo,preparation of maps Sofala and Nampula.containing the forestcover and biomassinventory information.

2. Improved wood Identify simple Completed Consumer surveys undertaken. The followingstoves. improved wood and partially. study was produced:

charcoal stoves relevant Abandoned in - assessment of existing woodfuelto the Mozambican the 1994 consumption data and information (1993).resources. amendment

in favor ofcommunitybasedresourcemanagement. l

3. General studies. Not defined at appraisal. Completed The following studies were undertaken:The purpose was to - on support activities in peri-urban land-useidentify design and and possible woodfuels cultivation optionsundertake research (1992);activities to improve the - woodfuels market structure (1993);overall understanding of - commercial and industrial use of biomassthe traditional energy fuels (1994);sector in order to - overview of strategies and policies ofenhance the biomass (1994);Government's - model for commercialization and financingcapabilities in energy systems for Licuati forest products (1998);policy formulation. - managing plan for sustainable exploitation

of forest and non-forest products fromLicuati forest (1998);

- on land potential for different activities andintroduction of cash crops in Licuati forestregion (1998);

- on land use and different options for Licuatiforest community interventions (1998);

- on improved technology for charcoalproduction and brick making in the Licuatiforest (1998).

- 37 -


DOE and Others1. Electrification & The electrification of Completed The studies led to a redefinition of housedistribution studies. 40,000 new households. structural standards for house wiring and to

The scope was reduced new design of internal wiring. Methodologyto 4,000 in the Sept. was developed for targeting profitable1994 amendment to connections.DCA.

2. Industrial studies. The objective was to Not executedpromote the country'sindustrial capabilities inthe energy sector.

3. Restructuring of Not included at Completed The Government issued in 1997 a new decreePetroleum sector. appraisal. Re: AD Little on petroleum products, which establishes a

Study. The purpose was level playing field for all distributors and anto introduce reforms in import parity pricing structure with morethe petroleum sector to effective price adjustments.increase its efficiency. Subsidies between products and for certain

geographic areas were removed.PETROMOC is undergoing incorporationunder private law, with state (80%)-workers(20%) ownership initially with a plan to invitea strategic partner.

4. Energy strategy Not included at Completed The study provided the Government with aplan. appraisal. The purpose reference document to guide investment

of the study was to decisions and introduction of institutional andprovide the govt. with a regulatory reforms in the sector.clearly defined long-term strategy for theenergy sector.

5. Integrated energy The purpose was to Completed. Mozambican investigators at the Universityplanning. develop the capacity of The local and other energy related institutions

energy planning and University completed several sub-sector reports and amanagement in worked with database on household energy supply andMozambican institutions. technical consumption. A synthesis report provides the

assistance characterization of supply and consumptionfrom and identifies problems and- strategies forUniversity of household energy.Cape Town,Energy andDevelopmentResearchCenter.

-38 -


Not included at Completed The government is considering the6. Reform and appraisal. The purpose recommendations of the study.regulation of the of the study was topower sector. advise the govt. on (a) A program for granting management contracts

the reform & regulation for operation of small scale distributionof the power sector, and installations with the involvement of the(b) the future structure private sector is under way.and levels of electricitytariffs and mechanismsfor their adjustment.

7. Review of the new Not included at Completed The report highlighted changes/additions thatdraft Electricity Law. appraisal. The purpose were needed in the proposed law whose aim

of the study was to was to establish a regulated, independent andadvise the govt. on the commercially oriented power sector.contents of the proposedlaw.

8. Financial review of Not included at Completed The govt. is informed of the present fimancialEDM, PETROMOC appraisal. The purpose position and the financial outlook of the three& Mocacor. of the study was to enterprises and their ability to service govt.

appraise the govt. on the debt and provide returns to stakeholders in thefinancial outlook of the future.three enterprises.

9. Rehabilitation of Not included at Completed Order of magnitude costs for rehabilitation ofthe geology building. appraisal. The purpose the building are known. The available budget

was to provide the for DNE is inadequate for the works required.concept design and order DNE is considering either to go ahead withof magnitude costs for the rehabilitation or the construction of a newnew installations to building after proper funds are secured.DNE, as part ofinstitutionalstrengthening followingadmission of new staff.

10. LPG supply Not included at Completed The potential market is appraised, the presentstudy. appraisal. The purpose supply route by rail tank cars from South

was to investigate the Africa is selected as the least cost supplypotential market for LPG option for the time being and PETROMOC isin Mozambique, evaluate considering the rehabilitation of the LPG tankthe least cost supply farm.options and providespecifications forrehabilitation of the LPG

l__________________ storage tanks in Matola.

| Not included at appraisal, but added in September 1994 amendment to DCA.

- 39 -

Table 7b: Technical Assistance included in the Project


Technical Purpose as defined Status Impact of Technical AssistanceAssistance at Appraisal

EDM1. Senior distribution (a) Support & coordinate Completed Manuals for the distribution maintenance andengineer (36 man- the household for inspection were formulated.months) & 3 Area electrification program, EDM has been following the manuals and hasdistribution engineers (b) advise on daily updated them periodically.(108 man-months). systems procedures &

practices, plan &propose distributionreinforcement &electrification projects.

2. Financial Not provided at Completed I financial consultant (36 man-months)consultant. appraisal. The purpose worked closely with Finance Director of

of the appointment was EDM. Provided advice & assisted in changesto generally assist the in structure & levels of tariffs, and institutedFinance Director of stand-alone billing systems for isolated areas.EDM.

3. Staff training (3 To provide standard Completed Standard training courses were formulated.courses for EDM courses for EDM's Courses are given to the distributiondistribution distribution engineers. engineers.engineers).

PETROMOC1. Distribution Work in close Completed Better control system for stock of parts forengineer (24 man- cooperation with fleet was introduced. Operating manuals formonths) & 3 sales PETROMOC's sales maintenance of petroleum installation,engineers (48 man- manager to: (a) design equipment, transportation, depots, andmonths). market strategies, loading/unloading were formulated.

prepare systems for cost Transport control for distribution and tankercontrol, and (b) provide utilization have been substantially improved.supervision & advice onquality control, legalmatters, pricing systems,retail network, marketsurveys, businesspromotion.

Mo,acor1. Operational Provide operational No assistancetechnical assistance. technical assistance. was provided.

Precise details were notdefined at appraisal.

- 40 -


Biomass Energy Unit (BEU)1. Senior energy Actively support all Started in The energy planner provided his advisory andplanner (60 man- tasks assigned to BEU in 1991 and was team leadership functions to full satisfaction,months) and design, planning & completed in making substantive contributions to thewoodfuel specialist implementation of January 1994. establishment of BEU. Today BEU has been(36 man-months). annual programs, data Only the working without expatriate staff.

banks, studies & senior energysurveys, and training. planner wasWork closely with local recruited.staff & provide generaltechnical assistance towoodfuel/charcoalmarketing & productionunits.

DOE and Others1. Law Firm. Drafted an electricity Completed. The electricity law was ratified in 1997.

law and relatedregulations, includingsetting-up a regulator,and concessionagreements.

2. Energy planner (20 (a) Assist in energy Completed. New legislation introduced for electricity,man-months) & planning at national National and pricing policy for petroleum productseconomist (20 man- level. (b) Assist in foreign reformulated. DNE today administers withmonths). pricing policies, consultants own local staff margin adjustments for

investment plans, recruited. petroleum products.monitoring of economic& financial performanceof energy agencies,fiscal policies relevant tothe energy sector.

3. Project Establishment of project Completed. The project coordination unit was established.coordination & coordination & National and Routines for monitoring disbursements andirnplementation. implementation unit to foreign compliance with procurement guidelines have

oversee the successful consultants been introduced.completion of the recruited.project.

4. Inter Electra - Assist Inter Electra on Completed. Inter Electra established routines for stockengagement of the design & Partex was control, invoicing and billing systems.managing consulting implementation of recruited.firm (40 man- required systems tomonths). enable the company to

meet their obligationsunder the project. _____

5. UCPI - Extension of ongoing Canceled in UCPI was a procurement agency. Afterengagement of assistance to UCPI Sept. 1994 GOM's decision to decentralize procurement,managing consulting sponsored by IDA, EEC. amendment this TA became no longer valid.firm. to DCA.

-41 -

Table 8a: Project Costs (in million US dollars)

Appraisal estimate Actual cost (est) at completionComponent Local Foreign Total Local Foreign Total

A( I) Distribution rehabilitation, reinforcement & extension:

Phase -I 0.20 4.48 4.68Phase II 0.33 7.44 7.77Total A(l) 2.49 14.98 17.48 0.53 11.91 12.45

A(2) Institutional strengthening:IICo'nsultants'services 0.00 0.25 0.25 0.02 4.24 4.26Vehicles, office equip, materials & supplies 0.37 2.50 2.87 0.00 0.00 0.00

Total A(2) 0.37 2.75 3.12 0.02 4.24 4.26sub-total (Part A) 2.87 17.73 20.60 0.55 16.16 16.71

B PETROMOC ..B(l) Reinforcement of kerosene distribution & storage facilities 0.12 1.50 1.62 2.26 3.28 5.54B(3) Institutional strengthening 0.12 0.75 0.87 0.02 0.69 0.71

sub-total (Part B) 0.25 2.25 2.50 2.28 3.97 6.24

C MOCACORC(l) Reinforcement of LPG distribution & storage facilities 0.12 0.56 0.69 0.28 0.28C(2) Institutional strengthening 0.00 0.19 0.19 0.05 0.05

sub-total (Part C) 0.12 0.75 0.87 0.00 0.33 0.33

D DOED(l) Woodfuels program 0.62 3.37 3.99 1.92 2.82 4.74

Coal program 1.25 1.12 2.37 0.00 0.00 0.00D(2) Strengthening of DOE projectmanagement & coordination capabilities 0.12 1.12 1.25 3.42 2.05 5.47D(3) Strengthening of MOI, MOE & DOEs capabilities 0.00 0.00 0.00D(4) Studies to promote GOM industrial capabilities in energy sector 0.12 1.62 1.75 0.00 2.01 2.01D(5) Rehabilitation & reinforcement of cable manufacturing I_0.001 0.91 0.91

sub-total (Part D) 2.12 7.24 9.36 5.341 7.80 13.14

E PROLECE(l) Electrification of urban householdsE(2) Provision of electric materials & electric stoves & pans _

E(3) Credit facilities to households for electrification

sub-total (Parts El-3) 0.05 0.92 0.97E(4) Institutional strengthening 0.00 2.60 2.60E(5) Rehab of small-scale district power systems 0.00 1.62 1.62

sub-total (Part E) 2.74 8.86 11.61 0.05 5.14 5.20

F COMMERCIAL ENERGY PROGRAMF(l) Provision of electric stoves & spare parts to households not included in PROI E 0.00 0.10 0.10F(2) |Provision ofkerosene stoves & spare parts I 0.00 0.21 0.21F(3) |Experimental energy efficiency program I 0.00 0.00 0.00F(4) Electrical equipment for rehabilitation of consumers' electrical systems , 0.00| 0.00 0.00

sub-total (Part F) 0.501 3.87' 4.3 0.00 0.30 0.30

ITotal, excluding interest 8.60 40.70 49.30 8.22 33.70 41.92

Interest during implementation 1.00 0.50 1.50 0.69 0 0.69

Total Project excluding fuel imports S60 4120 50.80 8.91 33.70 42.61B(2) lFuel imports °'0 30.009 30.00 0.00 °_0.00

Total Project including fuel imports l9.60I 71.20 80.80 8.91 33.70 42.61

In percentage terms excluding fuel imports 100% 100° 100% 104%1 82% 84%1

- 42 -

Table 8b: Project Financing (in million US$)

_________________ _______________ Appraisal estimate Actual cost (est) at completionLocal Foreign Total Local Foreign Total

IDA 0.00 22.00 22.00 0.00 20.35 20.35Government of Denmark 0.00 3.00 3.00 0.00 0.00 0.00Badea 0.00 10.00 10.00 0.00 7.99 7.99Nordic Development Fund (NDF) 0.00 5.70 5.70 0.00 5.35 5.35Mozambican companies 8.40 0.50 8.90 2.88 0.o- 2.88Government of Mozambique 1.20 0.00 1.20 5.34 0.00 5.34

Total project finance 9.60 41.20 50.80 8.22 33.70 41.92

Parallel finance:Commodity aid funds (SIDA, Norad & IDA) 0.00 30.00 30.00 information not available

Total fmancing 9.60 71.20 80.80 i =

Table 9: Economic Analysis _

MOZAMBIQUE: VILANKULO + INHASSORO ELECTRIFICATION PROJECT __ _

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

COSTS (in 000s USS) _ __

Investinent alt________ _____

5X160 kVA Genrator 546 ___ _ _

Distribution Network b/ 834

Supervision 30 _ __ ==_=__

Total Investment 1410

Fixed Op.& Maintenance c/ 77 130.0 130.0 130.0 130.0 130.0 130.0 130.0 130.0 130.0 130.0 130.0 130.0 130.0 130.0 130.0

Fuel dt 1 27.4 61.2 67.3 74.0 79.2 84.0 R8.2 92.6 92.6 92.6 92.6 92.6 92.6 92.6 92.6 92.6

TOTAL COSTS 1514.4 191.2 197.3 204.0 209.2 214.0 218.2 _222.6 222.6 222.6 222.6 222.6 222.6 222.6 222.6 222.6

BENEFITSEnergy Consumed (060-s -kWlh) e/ 850 2000.0 2200.0 2420.0 2589.4 2744.8 2882.0 3026.1 3026.1 3026.1 3026.1 3026.1 3026.1 3026.1 3026.1 3026.1

Total Revenues (in S 000s)U 127.5 300.0 330.0 363.0 388.4 411.7 432.3 453.9 453.9 453.9 453.9 453.9 453.9 453.9 453.9 453.9

Net Revenues -1386.9 108.8 132.7 159.0 179.2 197.8 214.1 231.3 231.3 231.3 231.3 231.3 231.3 231.3 231.3 231.3Ub.)

IRR 11% ===_ _ __ __ ____==__

Notes: ___

Figures for 1998 are actual.at excluding taxes. _ __ _

b/ includes public lighting. _ _ | _

c/ including personnel. I I

d/ based on a gas price of US$ 2.00/GJ and 14MJi'kWh in 1ael netof1l0%systemlossesand5%stelighting. Demandpjected to rise y 25%p.a.in199,10% in20 -, 7%in 02, 6%in2 03,5%in204-5,andconstantthereafter.

f/ net of public lighting (5% of total conupto)

- 44 -

Table 10: Status of Legal Covenants

Agreement Section Covenant Present Original Revised Description of Commentstype status fulfillment fulfill- covenant

date ment date

DCA 4.01 1 C Audited Project accounts.

DCA 4.02 13 C EDM, PETROMOC, Mocacorto fulfill obligations under PA.

DCA 4.03 2 CD 12190 Asset valuation of EDM & PETROMOC completed assetPETROMOC. valuation in 1996 and EDM in

1997.

DCA 4.04 13 C Submit studies on biomasscomponent.

DCA 4.05 5 C Adequate staff for projectcoordination.

| DCA 4.06 5 C Assign qualified staff

| DCA 4.07 9 CP from 9/90 Annual review of All covenants met exceptimplementation. annual revaluation of assets.

DCA 4.08 10 CD 9/90 Agree household energystrategy.

DCA 4.09 11 C continuous Review by IDA of all sector Did not prevent EDM frominvestments exceeding $10 m. undertaking uneconomic

investments.

DCA 4.10 13 C 12/91 Purchase insurance.

PA 2.06 2 C 9/90 PETROMOC to review its Financial performancefinancial position with IDA. deteriorated when

Govermment took over thesetting of prices.

PA 4.01 1 C EDM, PETROMOC, Mocacorto submit annual audited accts.within 9 months of year-end.

PA 4.02 2 CP FY90 EDM, PETROMOC, Mocacor EDM met this only in 1996 &to contribute 30% of its capex 1997; PETROMOC had aprogram from intemal sources. minimal capital expenditure

program.

PA 4.03 2 CP EDM, PETROMOC, Mocacor EDM met this only from 1995net revenue to be at least 1.5 onwards. PETROMOC'stimes max. debt service. long-term debt was IDA only.

PA 4.04 2 CP EDM, PETROMOC, Mocacor Public sector overdues remainto take measures to recover too high but improving andoverdues. issue being resolved.

PA 4.05 2 CD 5/90 6/95 EDM to submit satisfactory EDM's delay in meeting thisplan to resolve its financial covenant badly delayedsituation. physical works.

-45 -

Covenant types:1. = Accounts/audits2. = Financial performance/revenue generation from 8. = Indigenous people

beneficiaries 9. = Monitoring, review, and reporting3. = Flow and utilization of project funds 10. = Project implementation not covered by categories 1-94. = Counterpart funding 11. = Sectoral or cross-sectoral budgetary or other resource allocation5. = Management aspects of the project or executing 12. = Sectoral or cross-sectoral policy! regulatory/institutional action

agency 13. = Other6. = Enviromnental covenants7. = Involuntary resettlement

Present Status:C = covenant complied withCD = complied with after delayCP = complied with partiallyNC = not complied with

-46 -

Table 11: Compliance with Operational Manual Statements

Statement Number and Title Describe and comment on lack of compliance

None No significant lack of compliance noted.

Table 12: Bank Resources: Staff Inputs

ActualStage of Project Cycle I

Weeks US$000

Preparation and Appraisal 41 90

Appraisal to Board 6 14

Board to Effectiveness 12 34*/

Supervision 158 518

Completion 229 799

TOTAL 446 1455

*/ Due to the long delay in declaring the Credit effective; this could also have beenclassified as regular supervision.

-47 -

Table 13: Bank Resources: Supervision Missions

Performiance Rating

Number Specialized Implementation DevelopmentStage of Month/ of Staff Skills Status Objectives Types of

Project Cyc]e Year Persons Represented Problems

Supervision I 11/89 2 FA S S -

Supervision ll 5/90 3 FA, PE, RE S S

Supervision III 11/90 3 FA, EC, RE S S

Supervision IV 3/91 1 FA S S

Supervision V 10/91 3 FA, PtE, EC US S Financial

Supervision VI 8/92 1 FA US S Financial

Supervision Vll 11/92 2 FA, EC US S Financial

Supervision VIII 3/93 2 FA S S Financial,

InstitutionalSupervision IX 7193 I FA S S Financial

Supervision X 12193 I FA S S Financial

Supervision Xl 4194 I FA S S

Supervision Xn 12/94 2 FA, EC S S Financial

Supervision XIII 6/95 4 FA, EC, PtE, PE S S Financial

Supervision XIV 11/95 4 FA, EC, PE, RE S Financial

Supervision XV 3/96 3 FA, EC, PE S S

Supervision XVI 10/96 3 FA, EC, PE S S Financial

Supervision XVII 6/97 3 FA, EC, RE S S Financial

Supervision XVmI 2/98 2 EC, RE S S Institutional

Completion 5/98 3 FA, EC, RE S S Institutional

FA = Financial AnalystEC = EconomistPE = Power EngineerPtE = Petroleum EngineerRE = Renewable Energy specialist

- 48 -

APPENDIX A-1

MozambiqueUrban Household Energy Project (Credit No. 2033-MOZ)

Implementation Completion Mission (February 16-20, 1998)

Aide Memoire

1. Introduction

1.1 A World Bank mission visited Mozambique from February 16 to 20, 1998 tosupervise the ongoing activities under the Urban Household Energy Project (UHEP) andexplain the completion procedures to the borrower and the implementing agencies. Themission consisted of Yuriko Sakairi and Boris Utria. The mission conducted field trips toSantaka, Vilankulo and Inhassoro. The mission met with the officials of several governmentinstitutions, including Direccao Nacional de Energia (DNE) of the Ministry of MineralResources and Energy, PETROMOC, Electricidade de Mocambique (EDM), Mocacor, theBiomass Energy Unit (BEU) of the Ministry of Agriculture and Fishery, and InstitutoNacional de Desenvolvimento Rural (INDER). The mission expresses its sincereappreciation for the cooperation and hospitality extended by the Mozambican authorities. Alist of persons met is attached as Annex 1. The mission coordinated closely with otherenergy missions and the Resident Mission and liaised with the financial consultant withDNE.

2. Project Implementation Completion

2.1 The mission explained the Credit closing procedure to the borrower and theimplementing entities and provided support to the borrower for preparing its owncontribution to the implementation completion report (ICR). The mission requested theborrower to complete the evaluation of project implementation and transmit it to the Bank byMay 31, 1998.

3. Status of the Project Implementation

3.1 Revised Closing Date Most of the Project components were closed onDecember 31, 1997. The closing date for Categories 1 and 5 was extended to March 31 andthat for Category 4 was extended to April 30, 1998. Physical activities under implementationare Nacala network rehabilitation (Category 1), acquisition of prepayment meters (Category1), and rehabilitation of the small scale power supply systems (Category 5), which areexpected to be completed by the end of March 1998. Training and policy related programsconducted by DNE (Category 4) are expected to be completed by April 30, 1998.

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3.2 Nacala Network Rehabilitation The network rehabilitation work has beenproceeding according to the schedule and is expected to be completed by the end of March1998.

3.3 Pre-payment Meters The tender to acquire 15,000 pre-payment meters wasissued in September 1997. The Bank issued its no objection to the evaluated bidder onDecember 21, 1997. The necessary documents were submitted late December 1997 to CREEfor review and approval for signing the contract. The documents are expected to beconsidered by the Executive Committee of CREE. The mission pointed out that the Creditcould be disbursed only for goods and services rendered by the closing date. Due to the lackof time, the Credit cannot support the installation of meters. In late 1997, EDM approachedKfW for financing the installation/testing of the pre-payment meters and KfW has agreed tosupport this activity.

3.4 Small Scale Power Supply Systems The rehabilitation and construction of thenetwork and power generations in two towns, where natural gas is available, are almostcompleted. The service connection to 200 consumers in Vilankulo and 70 in Inhassoro isexpected to be completed in six weeks. Commissioning and testing are expected to be doneduring the last week of March. DNE is now finalizing the contract agreement for theoperation of the system and tender documents for bidding. However, an interim managementarrangement is urgently needed to supply electricity until the operator is in place.

3.5 The mission reviewed the economic and financial analysis for theelectrification program for Montepuez. IDA has previously agreed to finance the gas basedpilots at Inhassoro and Vilankulo, but the closure of the Urban Household Energy Creditmakes it impossible for IDA to support further towns under the existing funding. Theforecasts for Montepuez show a likelihood of commercial viability for the operator andeconomic viability for the state, and as it is the first non-gas pilot project, it is worthproceeding with this scheme as a means of opening up Mozambique's options for electrifyingsmall towns. The next steps involve firming up investor interest and it would be worthwhilegoing through a bid process for selecting an operator, based on the plans to date. This wouldenable the operator to be involved in the system design before the procurement biddocuments go out.

3.6 Policy Related Issues DNE is preparing with the consultants an energy sectorstrategy to formulate a framework for the sector development. The Government intends tohold a workshop to discuss the draft strategy with stakeholders in mid April. Under theCredit, DNE is also conducting a comprehensive review of the financial status ofimplementing agencies. The review is expected to be completed by the end of April. DNE iscurrently finalizing draft regulations governing the establishment and operation of anindustry regulator. External assistance may be required in establishing and making theregulator functional. The petroleum sector restructuring is under way. PETROMOC isexpected to be converted to SARL shortly. The oil marketing companies have hired aconsultant to finalize the legal procedures to establish a petroleum products import entity.The entity is expected to be established under the existing company law by the end of April.

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4. Traditional Energy Program

4.1 A pilot community participatory biomass program was completed by the endof December 1997. Upon the Government's request, the Bank has agreed to provide furtherassistance in the biomass sector through the Regional Program for Traditional Energy Sector(RPTES). A proposal for an RPTES program will be formulated based on the results of thepilot program. The mission noted that, in order to maintain the experience and knowledge ofthe BEU, the unit should be urgently integrated under the national budget.

February 20, 1998

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MozambiqueUrban Household Energy Project

List of Persons Met (Annex 1)

Ministry of Mineral Resources and EnergyCastigo J.C. Langa, Deputy Minister

DNECasimiro Francisco, National Director for EnergyArmando Rodrigues, Project Coordinator

Instituto Nacional de Desenvolvimento RuralJoao Z. Carrilho, President

PETROMOCL. King, Commercial Director

EDMVincente Veloso, ChairmanFatima Boene Mondjana, Board MemberEmesto Max Tonela, Finance DirectorCarlos Alberto Yum, Commercial Director

City Council, VilanduloPinto, Administrator

BEUOsvaldo Manso, Forest Engineer

UEMLidia A. Brito, Forest Engineer, Pilot Project Coordination team member

AviationKeith Baws, Director

Ernst YoungIbraimo Ibraimo, Managing PartnerNeil Durie, Partner

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APPENDIX A-2


Implementation Completion Mission (April 20 - May 6, 1998)2nd Phase

Aide Memoire

1. Introduction

1.1 A World Bank mission visited Mozambique from April 20 to May 6, 1998 tosupervise the remaining ongoing activities under the Urban Household Energy Project(UHEP) and to undertake a second phase of project implementation completion activities.The mission consisted of Yuriko Sakairi and Sunil Mathrani (consultant). The missionconducted field trips to Santaca, Vilankulo and Inhassoro. The coverage of this aidememoire is limited to those project components which were still under implementationduring the last supervision mission and those where outstanding issues still require action onthe part of the implementing agencies.

1.2 The mission met with the officials of several government institutions,including Direccao Nacional de Energia (DNE) of the Ministry of Mineral Resources andEnergy, PETROMOC, Electricidade de Mocambique (EDM), Mocacor, the Biomass EnergyUnit (BEU) of the Ministry of Agriculture and Fisheries, and Instituto Nacional deDesenvolvimento Rural (INDER). The mission expresses its sincere appreciation for thecooperation and hospitality extended by the Mozambican authorities. A list of persons met isattached as Annex 2. The mission coordinated closely with other energy missions visitingMozambique, with the Resident Mission and also liaised with DNE's financial consultantwho was assisting in the preparation of the Borrower's ICR.

2. Project Completion

2.1 The SDR 17.1 million Credit, which was approved in June 1989 and declaredeffective in April 1990 closed on April 30, 1998. About US$3 million is expected to becanceled from the Credit after the final disbursement has been made. The mission discussedwith the implementing agencies the completion procedures to ensure prompt payment of theoutstanding invoices and their reporting requirements. The mission reminded the borrower tocomplete its own evaluation of project implementation and transmit it to the Bank byJune 30, 1998.

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Electricidade de Mocambique Components

2.2 Nacala 33/1 lkV Network Rehabilitation The distribution networkrehabilitation was completed as scheduled in late April. The mission requested EDM toprovide a completion report on this component.

2.3 Pre-payment Meters The pre-payment meters for Nacala and Nampula havebeen received. EDM has started training staff in Nacala and Nampula to install these meters.The installation of 15,000 meters and the setting up of vending stations for the pre-paymentof electricity are expected to be completed within six months. The high level of non-technical losses in these towns is expected to be sharply reduced as a result. This activitywill be supported by KfW at a cost of about US$0.2 million. The mission encourages EDMto use its improving cash flow for the purchase of additional pre-payment meters in thefuture, given the short payback period on such investments through the reduction of losses.

Nordic Development Fund Financed Components

2.4 NDF is financing the consultancy services to supervise the EDM networkrehabilitation in Quelimane financed by BADEA. The work is expected to be completed bythe end of 1998. IDA has agreed to supervise the NDF financing component after the closureof Credit 2033. The mission expects DNE/EDM to provide quarterly progress reports on thiscomponent until physical completion.

2.5 GOM has requested NDF to agree to the use of about US$0.7 million from theunallocated portion of their Credit to finance the electrification of the town of Montepuez andfor assistance to DNE for the private management contracting process for the small-scalepower supply systems (see below).

Small Scale Power Supply Systems (DNE)

2.6 Physical Works: Pande natural gas is to be used commercially to generatepower in Vilankulo and Inhassoro. The construction of the distribution network andinstallation of gas-fired power generators in these towns has been completed at a cost ofabout US$1.6 million. Service connection have been made to about 200 consumers inVilankulo and 40 in Inhassoro. Commissioning/testing of the systems has been successful.The physical components have thus been completed by the closing date.

2.7 Institutional Arrangements: The draft management contract for the operationof the power supply systems by the private sector and tender documents for bidding havealready been prepared. The tender will be issued as soon as the decree to authorize a three-year 'concession' arrangement to manage the power supply in the two towns as a combinedoperation is approved by the Council of Ministers. This is expected in late May/early June.GOM plans to remunerate the private operator by means of a management fee which wouldrepresent about a 15% annual post-tax return on the initial outlay of funds by the privateoperator.

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2.8 Transitional Period: Negotiating and signing the management contract andmobilization of personnel may take five to six months. Thus an interim arrangement isessential to provide electricity supply until the private operator is in place. It has been agreedthat the construction contractor will retain staff for maintenance/operation of the facilities.DNE will provide through its budget personnel including a supervisor and an accountant totake care of billing/collection. These costs are expected to be covered by revenues collectedafter the start of commercial operations.

2.9 Pricing: The principles determining gas prices have been agreed betweenDNE and ENH and a decree formalizing these principles is to be presented to the Council ofMinisters shortly. ENH will receive about US$2.50/GJ for gas sales for power generation,which will allow it to recover the cost of the gas pipeline from Pande and earn a reasonablereturn on this investment. The electricity tariff to consumers is expected to be about2000 MT (IJS¢16.7)/kWh, which would generate revenues adequate to cover all costsincluding the management fee and a return to GOM of about 8% on its capital investment.

2.10 Technical Assistance: DNE needs external support to carry out the tenderingprocess for the selection of a private operator and for negotiation of a management contract.This is essential to ensure the success of this innovative pilot project that will bring privatemanagement into the power sector for the first time. The mission urged DNE to approachother donors with a funding request for this urgent, short-term support in the event that NDFis unable to provide the necessary financing.

Policy Reform

2.11 Energy Sector Strategy DNE is preparing (with assistance from consultants)an energy sector strategy for sector development as well as a sector policy statement. TheGovernment held a workshop to discuss the draft strategy with stakeholders on April 23. Thefinal draft is expected to be ready by mid May 1998.

2.12 Electricity Sector Reforms DNE is currently finalizing detailed regulationsfor the application of the Electricity Act. DNE needs continuing outside assistance to betterassess the implications of the ongoing reforms, take appropriate steps to avoid pitfalls andaccelerate their implementation.

2.13 Establishment and Operation of an Industry Regulator DNE is trying toobtain donor support in designing an appropriate regulator. In the short-term, DNE'scapacity to deal with regulatory issues needs to be strengthened.

2.14 Petroleum Sector Restructuring The restructuring is proceeding, althoughmore slowly than expected. PETROMOC is expected to be converted to a SARL shortly. Aprivate oil import entity is expected to be established within the next few months. Themission expressed its concerns about the slow pace of implementation and encouraged DNEto accelerate the restructuring process. It also reiterated the importance of divestingPETROMOC's shares in Mocacor, a recommendation that the Bank has repeatedly madesince late-1994.

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Community-based Biomass Pilot Project (BEU)

2.15 Project Outcome: A completion report on the comnmunity-based biomass pilotproject was submitted to the mission. This US$1 million, multi-sector project successfullyintroduced to the Santaca community a natural resource management plan for sustainablecharcoal production and new diversified cash generating activities such as brick making,sunflower oil extraction and a tree nursery. Technology to improve efficiency andproductivity of charcoal production was also introduced to the community. This pilot projectwent beyond the confines of the energy sector in its approach and the results are pertinent forrural development projects in general. However, given that the pilot project has just beencompleted, the commercialization of the project's 'outputs' is only just commencing. Thelocal community will require close support during the commercial phase to ensure that thebenefits from these activities are reaped.

2.16 Sustainability: An arrangement to provide continuous support to thecommunity (estimated at about $25,000 per month) from the project personnel over the next6-12 months is critical to ensure its sustainability, but cannot be financed by IDA due to theclosing of the project. For example, the local association to run the tree nursery is not yetoperational and the charcoal producers association has encountered some marketingdifficulties. DANIDA has expressed interest in financing the necessary technical assistanceto the local community from the University.

2.17 Replicability: The knowledge and experience gained from the Santaca pilotproject have a broader applicability in Mozambique. The project staff believe that similarinitiatives can now be attempted in other regions at a substantially lower cost, because theinvestment requirements are modest and the bulk of the costs of the Santaca pilot were forstudies and consulting services, which will not have to be repeated on the same scale infuture. Upon the Government's request, the Bank has agreed to provide further assistance inthe biomass sector through the Regional Program for Traditional Energy Sector (RPTES). Aproposal for RPTES support was formulated by BEU/UEM based on the experience/resultsof the Santaca pilot program.

Prolec Household Electrification Program

2.18 A substantial quantity (over US$400,000) of unused household wiringmaterials and domestic appliances (e.g. more than 3000 electric stoves) funded by the Creditand imported by Interelectra prior to the cutback in the size of the Prolec program have beenin storage for the past several years. Interelectra is the legal owner of these items, although ithas not been servicing the debt to GOM incurred when these items were procured. Some ofthese materials such as cables, sockets etc. could be used in future district electrificationprojects. However, the excess stocks, particularly the electric stoves need to be disposed ofin the local market, possibly by means of an auction.

May 6, 1998

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MozambiqueUrban Household Energy ProjectList of Persons Met (Annex 2)

Ministry of Mineral Resources and EnergyCastigo J.C. Langa, Deputy Minister

DNECasimiro Francisco, National Director for EnergyArmando Rodrigues, Project CoordinatorManuel Retagi, Electrification Adviser

Instituto Nacional de Desenvolvimento RuralJoao Z. Carrilho, President

PETROMOCManuel Viola, Managing DirectorTeresa Morreila, Financial DirectorAires Viola, Technical Director

EDMVicente Veloso, ChairmanEmesto Fernandes, Member of BoardEmesto Max Tonela, Finance DirectorCarlos Alberto Yum, Commercial DirectorManuel Cuamba, Technical Director

BEUOsvaldo Manso, Forest Engineer

UEMLidia A. Brito, Forest Engineer, Pilot Project Coordination team member

InterelectraP. Cuche, Director General

MocacorA. Cereja, General Manager

Danish EmbassyEsther Lonstrup, Advisor

Norwegian EmbassyJohan Olav Bjerke, Second Secretary

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APPENDIX B


BORROWER'S PROJECT EVALUATION

INTRODUCTION

1.1 This report reflects the views of the Government of Mozambique (GOM) on theproject achievements and implementation. It concentrates on a qualitative evaluationof the project.

1.2 In accordance with the Development Credit Agreement for Credit IDA 2033-MOZ,the Borrower shall prepare and furnish to the Association a report on the executionand initial operation of the Project, its costs and benefits derived and to be drivenfrom it, the performance by the Borrower and the Association of their respectiveobligations and the accomplishment of the purpose of the Credit.

1.3 This report is prepared as the Government's contribution to the Bank'sImplementation Completion Report (ICR). The Borrower cooperated with the Bankin the preparation of data and information needed for the ICR.

2. PROJECT EXECUTION AND INITIAL OPERATION

2.1 In 1988 the Government of Mozambique agreed on the need to promote an energyprogram aiming at alleviating the burden of energy costs faced by low-incomepopulation and, to the possible extent, improve their living standards. At the time ofproject preparation the country was subject to widespread war destabilization, theeconomy was collapsing, foreign currency was scarce and the macro economicrestructuring program, on its inception, was likely to cause social aggravation.

2.2 The main Project objective was to bring low cost commercial fuels to a large numberof households in urban areas, in an efficient and cost effective manner, through,among other measures, acceleration of electricity connections, improved supply of arange of fuels and appliances, improved end-use fuel efficiency in households,establishment of small-scale credit facilities for electricity connections, fittings andappliances and provision of choice in fuel use. A second main objective was tostrengthen the operational, management, financial and planning capabilities of theagencies and energy supply companies, through, among other measures, extensivetechnical assistance and reform of pricing and financial policies.

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2.3 In parallel the Project aimed at some en-route objectives such as: (i) slowing downdeforestation around urban areas; (ii) alleviating poverty by reducing the cost of fuels;(iii) testing of improved energy efficiency and management measures; (iv) developingthe use of indigenous natural resources; and (v) encouraging the development of localinstitutions and provide opportunities for local industries.

2.4 The Project consisted of the following components:

a) Power distribution system rehabilitation, reinforcement and extension primarily inMaputo, Beira Nampula and Nacala, and also in other cities. (EDM Component).

b) Reinforcement of kerosene and LPG storage and distribution facilities,particularly in Maputo, Xai-Xai, Inhambane, Manica, Mocuba and Lichinga andprovision of kerosene and LPG. (PETROMOC and Mo9acor Components).

c) Improve efficiency of woodfuel utilization through development of improvedwoodfuel plantations, charcoaling methods and commercialization systems,improved wood and charcoal stoves, improved maintenance and management ofplantations, forest inventory, etc.. (Woodfuels program - Ministry of AgricultureComponent).

d) Provision of coal stoves and coal to about 50,000 households, subject toevaluation of a coal testing program (coal program - Ministry of MineralResources Component).

e) Connection of 40,000 urban houses to the power network, through provision ofmaterials for house wiring, stoves, bulbs, etc., provision of credit to house wiringcontractors and to households. (PROLEC - DNE/EDM/Interelectra/BPDComponent).

f) Provision of about 10,000 electric stoves, 60,000 kerosene stoves, 80,000kerosene lamps, spares and electrical equipment for rehabilitation of consumers'installations, provision of capacitors, electric fans and solar panels for publicbuildings as part of an experimental energy efficiency program. Rehabilitation ofcable manufacturing plant and related industrial studies. (Commercial EnergyProgram - DNE Component).

g) Institutional support for project coordination and implementation within theMinistry of Industry and Energy, establishment of the Biomass Energy Unit in theMinistry of Agriculture, technical assistance to EDM, PETROMOC, Mocacor,etc.

h) Policy measures to facilitate financial soundness of energy suppliers, and toprovide incentives, encourage affordability, ensure safety, and ensure fuel andappliance availability and freedom of choice.

2.4.1 Revised Project: In 1994 an amendment to the Project was made to take intoaccount the prevailing conditions in the country, resulting from the Peace Accord, thenew economic situation and implementation experience. The major changes covered bythis amendment were:

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(i) The number of households to be wired under PROLEC reduced from 40,000 to4,000 in recognition of the over ambitious target set initially (an increase of 50%of EDM's residential customers - at the time of project preparation only about90,000 residential customers were connected by EDM).

(ii) The coal program has been eliminated because evaluation of a coal testingprogram in Maputo evidenced the difficulties in maintaining an effectivecommercial retailing operation of coal, concerns on aggravation of air pollutionand difficulties to construct adequate stoves from indigenous materials.

(iii) The commercial energy program has been reduced to about half of its originalsize because of the improved availability of foreign exchange for imports of thegoods.

(iv) A program of electrification/rehabilitation of district level small-scale powersystems was introduced; and

(v) The woodfuels program changed emphasis from plantation and management ofwoodland by government departments into building a Mozambican experienceon community based biomass supply management.

2.5 Overall coordination of the project was done at the Department of Energy (DOE) ofthe Ministry of Industry and Energy that in 1995 evolved into the National Directorateof Energy (DNE) of the Ministry of Mineral Resources and Energy.

2.6 The UHEP closing date for the IDA Credit 2033-MOZ (SDR 17.1 million) was onApril 30, 1998. The co-financing by the Arab Bank for Economic Development inAfrica (BADEA) (US$ 10 million) and the Nordic Development Fund (NDF)(SDR 4.4 million) was extended to December 31, 1999. The Swedish InternationalDevelopment Agency (SIDA) contributed with a Grant of SEK 1,354,500 fullydisbursed in 1997. The three Credit Agreements were signed in 1989/90, and theproject was originally designed for completion by December 31, 1996. However, thesubsidiary loan between the Government and EDM with respect to BADEA financingwas not signed until 1994 and EDM's disbursements from IDA Credit wereconditioned to the presentation by EDM of a plan to solve its financial problems.This resulted in significant delays in the implementation of a major part of EDM'srehabilitation program. The slow start-up of the project, weak institutional capacity,together with various other external factors such as the disruptions caused by thecyclone in 1994, delays brought about by inefficient and ineffective bureaucraticprocedures, financing constraints from the State budget and the general weakness ofthe national economy contributed to delays in project implementation.

2.7 Under the project, EDM, PETROMOC, DNE and the Biomass Energy Unit (BEU)have benefited considerably both in terms of operations and/or institutional capability.Mocacor, on the other hand; did not derive the full benefits as envisaged under theproject, as it did not avail itself to more than 60% the privileged financing under theCredit. The technical, operational and financial performance of EDM, PETROMOCand Mocacor have improved considerably although not matched the targets set underthe project.

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2.8 In the biomass sector, operations have improved and new concepts tested incommunity managed supply of biomass fuels. In addition to its sector coordination,advisory and policy formulation functions BEU executed two specific studies:"Biomass Resource Inventory" and "Improved fuelwood and charcoal kilns". BEUidentified, designed and undertook additional research activities aiming at improvingthe overall understanding of the traditional energy sector and enhancing theGovernment's energy policy formulation capabilities. BEU was integrated in theForestry Department of the Ministry of Agriculture and Fisheries.

2.9 DNE benefited in terms of training, technical assistance for coordination planning andimplementation of specific programs, studies in the commercial energy sector etc.aiming at improving its knowledge of the issues facing the energy sector andintroduction of policy measures, improved regulation and legal environment.However continued assistance is required for DNE mainly to develop the reforms inthe electricity and natural gas sectors.

3. PROJECT COSTS AND BENEFITS

The total external cost of the project is US$36 million from: Credit IDA 2033-MOZ(US$22 million), Credit NDF 1/89 (US$5.9 million), BADEA Loan (US$8 million), andSIDA Grant (US$200,000).

In addition funds from several agencies were used for petroleum imports, including fromIDA, DFID (ex-ODA), Government of Japan, USAID, Government of Holland, EuropeanUnion.

The GOM and state companies contributed an amount estimated at about US$5 million.

3.1 EDM's components

Reinforcement/rehabilitation of distribution networks:

Pilot Project Matola: EDM and DNE undertook a pilot project in Matola in 1992 to test themechanisms involving Prolec. About 150 customers were connected (included in the 500PROLEC clients mentioned in the following paragraph.). The cable and accessories for thisproject and for rehabilitation of other distribution facilities amounted to US$990,000financed by credit IDA 2033-MOZ.

EDM concluded in the beginning of 1997 the extension of the distribution networks inMaputo, Matola, Beira and Chimoio with the main objective of the connection of PROLECcustomers, and also other direct EDM clients. The works started in early 1995 by SPIE(French company) that subcontracted a local contractor, Electrobeira. The contract price wasUS$3,491,500 financed by the BADEA Loan. This work allowed the connection of about3,000 new customers (about 500 via PROLEC). EDM transferred to the new network about1,300 existing customers that increased the total number of connections to the new networkto about 4,300.

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EDM completed the Nacala 33/11 kV network rehabilitation works in late April 1998 withIDA financing. The contractor was the French company ETDE. The contract was signed inMay 1997 and the works started in the 3 rd quarter of 1997. The total amount of this contractwas about US$1,900,000. This represented about 40% of the works planned for Nacala. Therehabilitation/extension activities will continue under KfW financing.

The works for rehabilitation of the MT Quelimane network started in January 1998. Thetotal amount of the adjudicated contract to Siemens South Africa is about US$4,500,000 andis financed by BADEA. There was a delay in the Quelimane network rehabilitation worksthat are expect to be concluded by the end of 1999.

The NDF credit covered technical assistance and supervision needed for the works in Nacalaand Quelimane. The total amount of the contract signed with SwedPower for this purpose isabout US$1,000,000 and their assistance will continue until August 1999 for supervision ofthe Quelimane rehabilitation works.

EDM is proceeding with acquisition of miscellaneous distribution equipment in 1999 toreinforce and rehabilitate its networks, using about US$580,000 from the NDF Credit. Thisequipment will be installed during the year 2000 using own fimds.

* Introduction of prepayment meters giving domestic consumers access to electricityaccording to their financial means:

EDM acquired 15,000 pre-payment meters to be installed in Nampula and Nacala. Theobjective is to reduce non-technical losses of the company in the northern region of thecountry that represents the biggest amount in losses in the EDM accounts. The contract withABB/Conglog (South Africa) was signed in February 1998 in the total amount ofUS$1,590,000 and the meters were delivered to EDM Nacala by end April 1998. Theinstallation will be done during 1999/2000 with financing of KfW (Germany).

* Support in the financial area, particularly in accounting systems:

Under the Credit IDA 2033-MOZ, EDM paid the following activities:

- Audit Reports (1992, 1993/94/95 and 1996) by Ernest & Young in the totalamount of US$512,000.

- Participation in the ESAMI training of two disbursement officers (US$18,000).

- Study of EDM Financial restructuring by Coopers & Lybrand (US$60,000).

- Financial assistance to EDM management by Coopers & Lybrand (US$310,000).

NDF financed technical assistance contracts for the evaluation of fixed assets withNorconsult (US$480,000) and for institutional assistance focusing on marketing and financialsystems with SwedPower (US$560,000).

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EDM's operational and financial performance improved considerably. The project allowedEDM to concentrate in the urgent needs for rehabilitation of the distribution power systemsdestroyed during the war and helped to mobilize additional funds from internationaldevelopment agencies to rehabilitate and expand its transmission and distribution systems.The financial auditor's reports have reduced the number of limitations to express an opinionon the accounts over the years. Today EDM is better prepared to connect new customers.The number of EDM's residential customers increased by over 60%, from 99,928 in 1990 to160,938 at the end of 1998. The total losses on the energy available reduced from 40% in1995 to 30% in 1998 and the collection rate versus invoiced energy increased from 84% in1995 to 92% in 1998. Future prospects are encouraging and EDM is proceeding with thefollowing initiatives:

* Reduce the high non-technical losses through expansion of the on-going loss reductionprogram ("Projecto Nova Imagem") and extension of prepayment metering program(partially financed by the UHEP) from own resources.

* Further improve the collection performance by provision of incentives and installation ofa reliable and efficient billing system.

D Rehabilitate and strengthen the system network in urban areas to enable the expansion ofthe consumer base.

* Introduction of a simplified tariff system in 1999 for the small consumers in low voltageby eliminating the capacity charge (in line with recommendations from tariff studiesundertaken under the UHEP).

The 1998 average retail tariff was USc7.5/kWh, which is considered adequate to make EDMfinancially viable with a strong and healthy cash flow. EDM should be in a position to meetits debt service obligations and clear the past backlog of overdue and unpaid debt serviceover the next three years. The expected improvement in financial performance is partly dueto the availability of cheaper recall power from HCB starting July 1998, and the receipt ofwheeling charges from Zimbabwe since late 1997.

3.2 PETROMOC's components

This component closed in December 1997:

* LPG tank rehabilitation: SIDA financed an independent security/safety survey of thetanks in Matola undertaken by SGS. PETROMOC proceeded with partial rehabilitationof the storage facility using equipment and materials acquired under the SIDA trust fund.The total amount disbursed from the SIDA grant was about US$200,000. Following therevision of Thompson & Van Eck's LPG supply study and draft tender document forrehabilitation of the 3 LPG storage tanks, (US$36,000 financed by IDA), PETROMOCdecided to hire an independent surveyor to define the new scope of rehabilitation andpursue the LPG storage facilities rehabilitation work using own funds.

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* Storage and Distribution of kerosene: PETROMOC used IDA funds to acquireequipment for depot rehabilitation and increasing the kerosene availability inMozambique at a total cost of US$3,00,000. Fire fighting systems, pumps andmiscellaneous storage rehabilitation equipment was purchased and installed at a cost ofabout US$1,800,000. In 1996, PETROMOC purchased 5,000 drums, 500 manual pumps,50 tank trailers with 1,500 liters each, 3 pick-ups, 10 tank-trucks, 17 centrifugal pumpsand 18 meters for distribution under contract to traders or resellers operating in varioustowns and villages. PETROMOC continue with distribution of this equipment in order toincrease the number of resellers. This program is being very successful where tradershave participated. However, until 1998 a part of the equipment was not in use because ofdifficulties PETROMOC has to find traders with capital to pay the down payment.

Commercialization of kerosene by PETROMOC increased 36% since implementation ofthis component, from 13,000 tons in 1996 to 17,800 tons in 1998.

* PETROMOC's capacity building: the company benefited from the following activitiesin the total amount of US$686,000 from IDA Credit:

- Consulting service of Profabril experts for the tender documents for design andinstallation/rehabilitation of the cathodic protection systems (US$31,000).

- Payment of the expert from Petroleum India International (PII) to assist inoperations management (US$105,000).

- Assets evaluation by Taverner & Associates (US$89,500).

- Audit reports (1991/92, 1993, 1994) by Ernst & Young (US$461,000).

PETROMOC's sole petroleum importer status came to an end in early 1997, since when thecosts of import and exchange risks have been equitably shared amongst the oil companiesoperating in Mozambique. Over the years, PETROMOC has lost its dominance in the market,and now accounts for about 44% of the petroleum products market. The status ofPETROMOC changed to a limited liability company incorporated under commercial law. Astrategic business alliance with an oil company and selling of non-core assets, e.g. the refineryprocess units are planned for 1999.

3.3 MOIACOR's components

* Reinforcement of LPG storage and distribution facilities: Mocacor decided to useown funds for rehabilitation of their storage tanks. Under the IDA credit, Mocacoracquired 2 pick-up, 2 trucks, computers, 1 compressor and 1 after cooler in the totalamount of US$276,761.

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MOCACOR's capacity building:

- The audit reports of 1990/91, 1992 and 1993 in the total amount of US$49,500have been also paid under the Credit IDA 2033-MOZ.

- Mocacor didn't benefit from any relevant technical assistance activity.

Mocacor has made attempts to exploit the market potential during the last years of theproject. Volumes in LPG sales increased by 65% from 3,700 tons in 1995 to over 6,000 tonsin 1998. A considerable part of this increase is in the domestic sector (an increase of 100%in domestic sales over the same period). New entrants in the LPG business could beexpected in the near future.

3.4 Ministry of Mineral Resources & Energy (DNE) components

*Woodfuels program

The Biomass Energy Unit (BEU) acquired vehicles, general equipment and materials,amounting to US$1.4 million with the purpose of re-establishing operational andmaintenance capacities including anti-fire warning and response systems in existingwoodfuel forests in Maputo, Beira and Nampula.

Community managed woodfuel supply - pilot project: The BEU (Biomass EnergyUnit) concentrated the activities of this pilot project in Licuati forest in Maputo Provincefollowing a Rapid Rural Appraisal study of the region undertaken by the department ofAgronomy of the University Eduardo Mondulane (US$60,000). The departments ofEngineering and Agronomy of University Eduardo Mondulane were contracted for therealization of project activities in the total amount of US$1.0 million that were completedin December 1997.

This project introduced to Santaca Community a natural resource management plan forsustainable charcoal production and new diversified cash generating activities such asbrick making, sunflower oil extraction, tree nursery and technology to improve efficiencyand productivity of charcoal production. These actions' main objectives were theintroduction of new income sources for the community as a means to reduce the pressurefrom the forest exploration for the production of woodfuels. UEM also installed aresidential center in Tinonganine where the researchers have been based during theproject implementation, allowing them and the community to benefit from direct contact.

This pilot project went beyond'the confines of the energy sector on its approach and theresults are pertinent for rural development projects in general. However, given that thepilot project has just been completed and that the commercialization of the projectoutputs is only just commencing, it is early to evaluate project impact and sustainability.

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* Integrated Household Energy planning Project: DNE contracted Eduardo MondulaneUniversity to undertake a characterization study of the supply and demand of householdenergy in Mozambique. The Energy Development and Research Center of the Universityof Cape Town gave the technical assistance. The total amount of the signed contractswas US$425,000. During the first phase a database was developed and sector studieswere undertaken. Partial reports of this phase were presented in a workshop in Maputowith the presence of the various energy stakeholders. The second phase consisted in thepreparation of scenarios for the future development of the energy sector in Mozambique.The discussion of the results achieved took place during a workshop in Maputo in August1997. The third phase consisted in the preparation of the draft Synthesis Document witha recommendation of the national strategy for the household energy sector that wascompleted in December 1997. This activity was very important for strengthening thecapacity of local researchers in energy planning.

* Ministry of Mineral Resources & Energy capacity building and studies to promotethe Borrower's industrial capabilities in the energy sector: In addition to theconsultants working directly in the project coordination, DNE benefited from technicalassistance financed by IDA for the reform of the energy sector and for specific studies.

A consultant helped DNE in restructuring PETROMOC and the petroleum sector. ALegal Adviser was contracted for the preparation of the initial versions of the decree andstatutes for PETROMOC SARL and for the draft management contract for distributionpower systems.

A consultant elaborated the market study of LPG for Mozambique (including therehabilitation of PETROMOC's LPG tanks).

DNE contracted London Economics for technical assistance in restructuring the powersector. They prepared a study with recommendations about institutional reforms andtariffs regulation. They also assisted in the preparation of the preliminary versions of thelegislation for the management contracts for small-scale power distribution systems in thedistricts, for the electricity tariffs, for the concession contract with MOTRACO, for theCabora Bassa negotiations and the draft of the Government energy strategy note.

DNE contracted E & G Africa (South Africa) for the design, preparation of the tenderdocuments and selection of contractors for electrification works for Vilankulo, Inhassoro,Montepuez and Mueda.

SADELEC prepared a strategic energy plan after various meetings involving variousenergy sector stakeholders.

IDA financed the participation 'of DNE staff from the departments of planification, oil,renewables and legal in various seminars and courses abroad.

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DNE needs continuing external support to carry out the preparation of the necessary legalframework for the operationalization of the electricity act and introduction of reforms inthe energy sector.

The total cost of technical assistance, consulting services, audit reports, etc. amounted toUS$2 million. The training activities and seminars in Mozambique and abroad usedabout US$200,000 from the IDA credit.

DNE acquired under the credit vehicles, office furniture, photocopy machines, airconditioners, computers in the total amount of US$588,000. BEU also acquired underthe credit computers and vehicles in the total amount of US$1,117,300. IDA financed astudy of rehabilitation of the National Directorate of Geology building as a possiblefuture DNE office.

Under NDF financing (about US$300,000) DNE benefits from consulting services fromlocal consultants and Nordic Consulting Group in supervision of district electrification(Montepuez and Nova Mambone), tender for management contracts for small scale powersystems, coordination of activities, planning and accounting.

* CELMOQUE: From 1991 to 1993, US$914,500 were utilized for the rehabilitation andstart-up of the cable manufacturing plant (US$698,600) and strengthening of theoperational, managerial and financial planning capabilities (US$215,900).

* Electrification of the districts:

A contract with E & G (South Africa) was signed in 1995 for a study of electrification in 4district capitals (cost US$294,000). The works for the electrification of Vilankulo andInhassoro using natural gas was successfully concluded by the closing date at a cost of aboutUS$1.4 million. The contractor, Massana Aviation (South Africa) started the works inNovember 1997. New service connections were made to about 150 consumers in Vilankuloand 45 in Inhassoro. Commissioning/testing of the systems was successful. DNE continuedto operate the systems until a concessionaire is selected under a tender procedure. The totalnumber of connections at the end of 1998 increased to about 400.

The electrification of Montepuez is in progress financed by NDF (US$594,000) and theworks are expected to conclude in July 1999. About 200 new connections will be madeinitially adding to the existing about 200 connections. Because the study results based ondata of 1995 didn't guarantee a commercial feasibility a revision has been done in Novemberand December 1997 including new consumers and the new results showed the possibility ofcommercial feasibility for the operator and for the state. However, due to the closing date ofCredit IDA 2033-MOZ in April 30, 1998, it was not possible to carry out with this activitywith the financing of the World Bank.

The draft management contract for the operation of the power supply systems by the privatesector and tender documents have been prepared.

A tender document was issued in April 1999 for electrification of Nova Mambone. Thisactivity is expected to be finalized in 1999 at a cost of US$880,000, financed by the NDF.About 100 connections will be made initially.

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PROLEC (Household Electrification Program):

The original objective of this project was to electrify 40,000 houses by the end of theproject. In 1994, this number has been revised to 4,000. Apart from bureaucraticproblems, the reasons that have led to the connection target being revised were:

- The fact that only about 65% of the population within reticulated areas have beenfound to be interested in participating in the project as opposed to the 100%assumed in the original project formulation.

- The reluctance of EDM to electrify areas which have not been formally plannedby the urban authorities.

- The erosion of real household incomes.

- The decrease in the competitiveness of electricity in relation to other householdenergy source; and

- The financial institution's inability to deal in time with credit applications.

This program will provide electricity to households in Maputo, Zambezia, Sofala andManica provinces. The activities of the project were concentrated in Maputo and Matolacity due to institutional problems and lack of infrastructure. After a considerable delay,the works for construction of the distribution lines finally started in Maputo, Beira andChimoio and finished in 1997. This delay and the delay in obtaining the serviceconnection caused the abandonment and lack of interest in the PROLEC by manypotential clients.

A contract was signed with VKE (South Africa) in 1990 to act as the ProjectImplementation Unit at a total cost of US$2.1 million.

Interelectra acquired electric house wiring material, lamps, stoves, etc. at a cost of aboutUS$900,000 to be supplied under the credit arrangements with BPD to PROLEC clients.A contract was signed with Partex (US$328,000) to provide assistance to Interelectra inthe stock management.

Over US$400,000 of unused materials have been stored for the past several years.Interelectra is the legal owner of these items, although it has not been servicing the debtto GOM incurred when these items were procured. Interelectra will be privatized andthese materials have been transferred to DNE for use in district electrification.

BPD used about US$160,000 to purchase computers and office equipment.

Disbursements for power distribution systems rehabilitation and expansion works havebeen conditional to the submission of EDM' s viability plan for solving its financialproblems. This resulted in significant delays in the implementation of a critical part ofEDM's program and contributed to the non-achievement of the target connections. Thefact that PROLEC was implemented outside t he control of EDM also contributed to its

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failure. It is important to mention that EDM managed to connect about 4,300 customers,(of which only 500 PROLEC customers and about 1,300 customers from the old grid), tothe grid constructed for PROLEC.

For various reasons beyond the control of the Prolec Implementation Unit, only about500 houses were connected under the PROLEC, e.g. the decision by the bank (BPD) tocancel new credit applications for PROLEC, in June 1996; the selected contractor did notcomplete the agreed number of households. During the first quarter of 1998 DNEselected a new company for the internal wiring of the remaining households (26households in Maputo and Matola).

i Commercial program (Provision of about 10,000 electric stoves, 60,000 kerosenestoves, spare parts for stoves and about 80,000 kerosene lamps for households notparticipating in PROLEC).

Only US$302,863 were disbursed under this component in 1990 and 1991. The projectdidn't carry on because the importers were not interested with the provision through thecredit of foreign exchange for the importation of this type of materials.

Using state budget funds DNE distributed about 200 Compact Fluorescent Lamps (CFLs) ofwhich 13 and 15 W in Vilankulo and Inhassoro, where about 400 consumers are connected,at a cost of US$8 each lamp. About 50 ready boards were also installed costing aboutUS$80 each. The consumers were offered the possibility to pay the lamps in 3 to 12 monthlyinstallments but many opted to pay immediately. The attractiveness of using CFL lamps hasbeen high given the high cost of electricity (on average 14.3 USc/kWh in 1998).

The stoves and other materials purchased by Interelectra for the electrification program arebeing sold to the general public under tender organized by DNE or will be used forexpanding electrification to district capitals (part has already been used in Vilankulo,Inhassoro and Montepuez).

There were ilo activities developed under the component for electric fans and solar panels forpublic buildings.

4. PERFORMANCE BY THE BORROWER AND THE BANK

Performance of the Borrower

Performance by the Borrower was characterized by delays in delivering of its obligationsunder the DCA, mainly because of the lack of staff capacity in the middle level ofmanagement.

Regular progress reports started to be produced only in 1995. The performance standardsthat were due to be agreed with the implementing agencies by September 1994 wereapproved for EDM in 1996 in the form of a Performance Contract and with PETROMOC in1997.

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The main problems identified in the Government procedures are:

- Authorization of contracts: the process for the authorization of the contracts by theMinistry of Planning and Finance is very bureaucratic and takes a long time.Such delays caused several times delays in the start of activities.

- Obligation of the Government in providing funds in local currency for thepayment of 30% of the local expenses: the project faced problems due to the nonavailability of sufficient funds from the Government Budget for the payment oflocal expenses needed for the normal execution.

- The implementing agencies having difficulties in getting accurate debt paymentplans. This is due to the separation between the commercial bank (BancoComercial de Mo,ambique) and the central bank (Banco de Mo,cambique).

- Delays in customs to process the paperwork for imports caused delays in theimplementation of activities.

Performance by the Bank

Perfonnance by the Bank has been satisfactory but the supervision during the initial years ofproject implementation was not satisfactory. The insistence on conditioning disbursement byEDM for the initial rehabilitation and expansion of the distribution networks to thesubmission of a plan by EDM to resolve its financial difficulties proved to be a major setbackin the implementation of PROLEC.

5. ACCOMPLISHMENT OF THE PURPOSE OF THE PROJECT

The general outcome of the project is satisfactory although some targets set initially werenot achieved.

EDM is today better prepared to make connections to new customers as a result of theproject. The project allowed EDM to attract further finance from other development agenciesfor the rehabilitation and expansion of the power distribution networks and increasing theconnection rates.

PETROMOC is better prepared to tight an eventual fire in the depots in Matola, Beira andNacala.

Kerosene is now available throughout the country in a joint effort between PETROMOC andprivate retailers resulting from this project.

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The import cost of petroleum products decreased as a result of better freight prices obtainedwith the introduction of long-term purchase contracts from 1993/1994 in substitution of theprevious imports in small quantities. This achievement was possible because of the efforts inpooling financial resources from various organizations for oil imports. Better procurementprocedures caused a substantial reduction in the price of imported LPG.

LPG availability continues limited to the main cities, Maputo and Beira. Although anincrease in sales is taking place it is not a direct outcome of the project. A better way toincrease the availability of LPG throughout the country would be through the participation ofmore companies.

The financial results of the energy implementing agencies improved considerably. To thisoutcome contributed the financial discipline introduced by the project activities, e.g. the needto provide audited reports. The project contributed also towards adoption of disciplinedprocedures for procurement in the agencies that had to deal with it. Today, the Bank'sstandard tender documents are widely used for current activities. Procurement of petroleumproducts is based on the Bank's standard documents.

On policy reform issues considerable progress was achieve toward a more efficient energysupply and consumption and increased energy availability and choice of fuels. Thegovernment has defined its policy objectives for the energy sector and is in the course offormulating a strategy for achieving the long-term aims and aspirations, in the form of astrategy document. Parliament approved in 1997 a new electricity law whose aim is toestablish a regulated, independent and commercially oriented power sector. The petroleummarket was liberalized in early 1997 and PETROMOC was incorporated under commerciallaw as a limited liability company participated by the State (80%) and Staff (20%) in early1999. Efforts are being undertaken by the Government to establish the rules for acompetitive environment and participation of the private sector in the Electricity SupplyIndustry. Draft regulations of the electricity sector have been prepared and will be discussedand finalized in 1999/2000. The participation of the private sector in electricity distributionthrough management concessions was regulated at the end of 1998 and the first tenders forVilankulo, Inhassoro, Nova Mambone and Montepuez have been issued in May 1999. Themanagement contracts covering these villages will be awarded in 1999. Performancestandards have been agreed with EDM and PETROMOC.

The reforms introduced in the petroleum sector, mainly the removal of PETROMOC'simport monopoly and price setting mechanism eased PETROMOC from a heavy financialburden with product imports and allowed a sustainable improvement of its financial results.

The policy measures and market reforms introduced in the petroleum and electricity sectorsare sustainable, will develop further in line with the objectives of increasing access to modemforms of energy, in a safe and efficient manner to increased parts of the country.

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The Santaca project provided a valuable experience and training opportunity for local staff inthe University, DNE, BEU, etc. to expand the concept of community managed supply ofbiomass fuels to other regions in danger of deforestation. This prograrn is continuing underthe RPTES.

BEU carried out its activities in accordance with the project definition in an efficient anddiligent manner. BEU accumulated considerable knowledge on the traditional energy sectorsituation in Mozambique.

A pool of competent staff in energy matters has emerged in the energy sector agencies andalso in the University Eduardo Mondulane, as a major outcome of this project. This staff hasbeen involved in various areas of activity from operations to policy formulation, planning,investigations, management, etc.

Maputo, June 1999

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DN Energia

PRICES OF HOUSEHOLD ENERGYNatural Woodfuel - Woodfuel - Electric. -

1999 June Gas LPG Kerosene Charcoal Coal - min. Coal mix. min. mix. EDMunit kWh kg lit kg kg kg kg kg kWhAverage consumpt. unitmonth 208 227Price MT/unid 424 5,652 2,120 5,000 250 300 1,429 1,571 681Heating Value MJ/unid 45.6 35.0 29.0 25.0 25.0 13.0 13.0End use Eficiency % 50% 50% 25% 12% 20% 20% 8% 8% 65%Useful energy price Mt/Mjused 236 248 242 1,437 50 60 1,374 1,511 291

MJ/kWh 3.6 3.6exchange rate 12,450 12,450 12,450 12,450 12,450 12,450 12,450 12,450 12,450

Natural Woodfuel - Woodfuel - Electric. -1989 May Gas LPG Kerosene Charcoal Coal - min. Coal mix. min. mix. EDM

unit kWh kg lit kg kg kg kg kg kWhAverage consumpt. unit/month 208 227Price MT/unid 344 175 200 20 30 33 35 22Heating Value MJ/unid 45.6 35 29 25 25 13 13End use Eficiency % 50% 50% 25% 12% 20% 20% 8% 8% 65%Useful energy price Mt/Mjused 15 20 57 4 6 32 34 10

MJ/kWh 3.6 3.6exchange rate 700 700 700 700 700 700 700 700 700

Cost of Household Energy

120.0-_

100.0

80.0

60.0 -_ - _ Woodfuel - max.

CharcoalWoodfuel - min.

40.0 Electric. - EDM

_ 0;30 i | - LPGKerosene

Natural Gas

Coal maxWnCoal - min.

1999 1989

comparacao dos pregos de energia.xls/Sheetl

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APPENDIX C


CO-FINANCIER'S COMMENT (NORDIC DEVELOPMENT FUND)

1. I want to thank you for the very comprehensive completion report you haveprepared. The description of achievements and problems strikes a note with us and webasically agree on your findings. If the outcome is compared to the restructured project (as of1994) the project, in our opinion, should be regarded as "satisfactory". Many of the "new"components implemented during the last years or still to be implemented are results of theproject and the "chosen path" for the sector in the future.

2. We appreciate the opportunity to comment on the report, which we also willuse as an input into our own assessment of this particular project and of similar interventions.

3. We think the very difficult circumstances under which the project wasimplemented, and the profound social changes that took place during that period, might behighlighted a bit more, as mitigating circumstances.

4. It would be appropriate to have a specific mention of the rehabilitation of thecable factory in the objectives and components description, even if the World Bank did notfinance that part.

5. We furthermore do not find that all of the components are described includingthe restructuring in 1994 and may be the outcome in relation to this effect. It might beconsidered for the future to add an annex with the project components and planned financingcompared to the outcome, to give an overview of the total integrated project and the outcome.

6. In addition to mentioning NDF as a co-financing institution, it would beappreciated if you could include a sentence or two on your experience with NDF as a partner.Was NDF helpful, flexible, did it contribute to solving problems or did it add to them?

7. The NDF financed components are not yet implemented though you state end1998 (page iv point xiii). End 1999 should be the likely time of completed implementation.

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