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Document o f

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Report No: 36474-MG

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PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT

I THE AMOUNT OF SDR 6.8 MILLION N ( U S $ l O MILLION EQUIVALENT)

TO THE REPUBLIC OF MADAGASCAR FOR A POWEWWATER SECTORS RECOVERY AND RESTRUCTURINGPROJECT IN SUPPORT OF THE FIRST PHASE OF THE POWEWWATER SECTORS RECOVERY AND RESTRUCTURING PROGRAM

Public Disclosure Authorized

Public Disclosure Authorized

June 14,2006

Energy Team Infrastructure Group Africa Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without W o r l d B a n k authorization.

CURRENCY EQUIVALENTS (Exchange Rate Effective June 7,2006)

Currency Unit 2169.00

= =

Malagasy Ariary US$1

F I S C A L YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ACCT Agence Comptable Centrale du Tresor (Central Accounting Agency o f the Treasury) Agence de Developpement de 1Electrification Rurale (Agency for Rural Electrification) Agence Franqaise de Dtveloppement (French Development Agency) African Development Bank Adaptable Program Loan Banque arabe pour le developpement tconomique de 1Afrique (Arab Bank for Economic Development in Africa) Country Assistance Strategy Country Financial Accountability Assessment Country Procurement Assessment Report Cellule de Coordination Direction de 1Equipement Electricit6 (Department o f Electricity Equipment and Installations) Directorate o f Finance and Budget Earning Before Interests, Taxes, Depreciation and Amortization European Investment Bank Economic Internal Rate o f Return Environmental and Social Impact Management Framework Environmental and Social Impact Assessment Environment Management Plan Foreign Direct Investment FCdCration Internationale des Experts Comptables Francophones (International Federation o f Francophone Accountants) Financial Monitoring Reports Gross Domestic Product Government o f Madagascar Heavy Fuel Oil

ADER AFD AfDB A L P BADEA

CAS CFAA CPAR CELCO DEEL DFB EBITDA EIB EIRR ESMF ESIA EMP FDI FIDEF FMRs GDP GOM HFO

IFC IG2P IHP INTEC IPP ISR JlRAMA LSDP MEM NCB OP ORE PCB POP PRG PRGF PRSP RAP ROSC SOEs UGMP UNEP

International Finance Corporation Integrated Growth Poles Project Independent Hydropower Projects Institut National des Techniques Economiques et Comptables (National Institute o f Economy and Accounting) Independent Power Producer Implementation Status Report Jiro Sy Ran0 Malagasy Letter of Sector Development Policy Ministry o f Energy and Mines National Competitive Bidding Operational Policy Electricity sector regulator Polychlorinated Biphenyl Persistent Organic Pollutants Partial Risk Guarantee Partial Risk Guarantee Facility Poverty Reduction Strategy Paper Resettlement Action Plan Reports on the Observance o f Standards and Codes Statement of Expenses Unite de Gestion des Marches Publics (Unit for Public Procurement) United Nations Environment Programme

Vice President: Country Director: Sector Manager: Task Team Leader: Program Assistant:

Gobind Nankani James Bond S. Vij ay Iyer Stephan Gamier Lily Wong

MADAGASCAR M G Power/Water Sectors Recovery and RestructuringProject CONTENTS Page A

STRATEGIC CONTEXT AND RATIONALE

2.

1.

Country and Sector Issues ................................................................................................... Higher Level Objectives to which the Project Contributes ................................................

.................................................................

Rationale for Bank Involvement .........................................................................................

5
7

3.

PROJECT DESCRIPTION

1.

Lending Instrument .............................................................................................................

.................................................................................................

7
7 7 9

2.

3.

Program Development Objectives ...................................................................................... Project Components ............................................................................................................ Lessons Learned and Reflected in the Project Design ...................................................... Alternatives Considered and Reasons for Rejection.........................................................
IMPLEMENTATION

4.

11
12
13 13

5. 1.

2. 4.
3.

5.

6.

......................................................................... Institutional and Implementation Arrangements .............................................................. Monitoring and Evaluation o f OutcomesResults ............................................................. . . . Sustainability..................................................................................................................... Critical Risks and Possible Controversial Aspects ........................................................... Credit Conditions and Covenants .....................................................................................
Partnership Arrangements (if applicable)
APPRAISAL SUMMARY

........................................................................................................

14
15 15 17

18
20 20 23 24 25

2. 3. 4.

1.

Economic and Financial Analyses .................................................................................... Technical ...........................................................................................................................

.................................................................................................

Fiduciary ........................................................................................................................... Environmental and Social ................................................................................................. Safeguard Policies ............................................................................................................. Policy Exceptions and Readiness......................................................................................

5.
6.

26
27

.......................................................... 28 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies .................36
Annex 1: Electricity Sector and Program Background

Annex 3: Results Framework and Monitoring

........................................................................ Annex 4: Detailed Project Description...................................................................................... Annex 5: Project Costs .............................................................................................................. Annex 6: Implementation Arrangements .................................................................................
Annex 7: Financial Management and Disbursement Arrangements Annex 8: Procurement Arrangements

37 43 56 57 59 66 72 92 97 98 100 101 102 104

...................................................................................... Annex 9: Economic and Financial Analysis .............................................................................

Annex 10: Safeguard Policy Issues

....................................

............................................................................................ Annex 11: L e t t e r o f Electricity Sector Development Policy (Abstract) ................................. Annex 12: Project Preparation and Supervision ..................................................................... Annex 13: Documents in the Project F i l e .............................................................................. Annex 14: Statement o f Loans and Credits ............................................................................
Annex 15: Country at a Glance

............................................................................................... Annex 16: M a p IBRD 34815 ....................................................................................................

MADAGASCAR P O W E W A T E R SECTORS RECOVERY AND RESTRUCTURING PROJECT PROJECT APPRAISAL DOCUMENT

AFRICA AFTEG Date: June 14,2006 Country Director: James P. Bond Sector Manager: S. Vij ay Iyer Project ID: PO95240 Team Leader: Stephan Claude Frederic G Sectors: Power (100%) Themes: Infrastructure services for private sector development (P) Environmental screening category: Partial
Assessment

Lending Instrument: Adaptable Program Lending Project Financing Data [ ] Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 10.00

ASSOCIATION Total:
Borrower: Government o f Madagascar

0.84

9.16

10.00

Responsible Agency: Ministry o f Energy and Mining and JIFUMA

I

Cumulative1 4.0 I 9.0 I 10.0 I 10.0 I Project implementation period: Start: September 1, 2006 End: December 31,2008 Expected effectiveness date: September 1, 2006 Expected closing date: April 30, 2009 Does the project depart from the CAS in content or other significant respects? [ ]Yes [XI N o

Does the project require any exceptions from Bank policies? 1 [ ]Yes [XINO Re$ P A D D. 7 Have these been approved by Bank management? [ ]Yes [ IN0 [s approval for any policy exception sought from the Board? [ ]Yes [ IN0 Does the project include any critical risks rated substantial or high? [XIYes [ ] N o Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ] N o Re$ PAD D. 7 Project development objective Re$ P A D B.2, Technical Annex 3 The aim o f the program i s to restore an adequate public utility service for electricity and water in urban areas o f Madagascar and to create the foundation for a sustainable expansion o f a commercially-oriented service in the most cost-efficient way. f Project description [one-sentence summary o each component] Re$ P A D B.3.a, Technical Annex 4 Component A: Investments for: (Al) Power generation reinforcement (rehabilitation); (A2) Reduction o f transmission and distribution technical losses; and (A3) Revenue management and Modernization o f Information Systems and IT equipment. Component B: Funding and technical assistance for: (Bl) close cooperation with the I F C transaction advisors team in the process o f selecting and contracting a new private operator and communication; (B2) prolongation o f the current management contract; (B3) preparation o f future generation projects in coordination with IFCs (second) IPP mandate; (B4) strengthening of the Ministry o f Energy and Mining; (B5) feasibility and environmental studies for APL-2 investments; (B6) monitoring and evaluation; and (B7) project implementation. Which safeguard policies are triggered, if any? Re$ PAD 0.6, Technical Annex 10 OP 4.01 Environmental Assessment OP 4.3 7 Safety o dams f Significant, non-standard conditions, if any, for: Re$ PAD C. 7 Board presentation: July 13, 2006 Loadcredit effectiveness: The Subsidiary Agreement between GOM and J I R A M A has been duly authorized or (a) ratified. MEM has adopted the Project Manual and J I R A M A has adopted JIRAMAs Project (b) Manual all in form and substance satisfactory to the Association. For the purpose of Part B o f the Project, MEM has elaborated i t s accounting manual o f (c) procedures and upgraded i t s accounting and financial management and monitoring and evaluation system (capable o f producing FMRs) in a manner satisfactory to the Association; and has appointed an accountant specialist and a procurement officer within the MEM acceptable to the Association.

(d) For the purpose of Part A o f the Project, JIRAMA (DEEL) has upgraded its accounting and financial management and monitoring and evaluation system (capable o f producing FMRs) in a manner satisfactory to the Association. T w o special accounts have been opened (for DEEL and MEM) in the Central Bank under (e) conditions acceptable to the Association.

Auditors satisfactory to the Association have been recruited for the purpose o f (f) Component A and Component B o f the Project Covenants applicable to project implementation:
Credit Covenants are likely to be:

Dated covenants regarding tariffs (a) N o later than November 30,2006, GOM shall have adopted the Electricity Tariff Indexation Formula.

(b) N o later than April 1,2007, GOM shall have publicly disclosed the Electricity Tariff Indexation Formula and adjusted electricity tariffs in accordance with said formula, and shall subsequently adjust said tariffs in accordance with the Electricity Tariff Indexation Formula every 6 months. Dated covenants (Milestones) regarding the process o f recruiting the long-term private partner for JIRAMA N o later than December 3 1,2006, GOM shall have established terms and conditions to be (c) used in the contracting of JIRAMAs private partner satisfactory to the Association and have launched the prequalification process. N o later than April 1,2007, GOM shall have launched the bidding process for the (d) recruitment o f a new private operator for the management o f JIRAMAs operations.
Financial covenants (a) Beginning with the first quarter o f C Y 2007, J I R A M A to produce a quarterly management report (including relevant technical, commercial and financial parameters for the monitoring o f the company and to communicate this reporting to the Bank less than 60 days after the end o f the quarter. Accounts receivable not to exceed 3 months billings by the beginning o f FY 2008 and (b) onwards. GOM shall define in agreement with the Association, no later than September 30 o f each (c) year during Project implementation amounts to be injected as need be into J I R A M A during the following calendar year so as to allow normal operations o f the company.
Specific condition o disbursements would be: f

(a) Credit disbursement for Component B would be permitted only after recruitment by MEM o f a technical advisor acceptable to the Association. (b) Credit disbursement for the rehabilitation o f the c i v i l works o f the Vatomandry hydroelectric plant (to satisfy the requirements o f the safeguard policy OP 4.37 o n D a m Safety) would be permitted only after JIRAMA has submitted a report satisfactory to the Association on the condition o f the Vatomandry dam and the proposed safety measures to be implemented.

A. STRATEGIC CONTEXT AND RATIONALE 1. Country and Sector Issues

Sector Issues

Madagascar has a population o f over 17 million, a third o f which is urbanized. Average 1.1 per capita income i s about US$290. In 2004, 72.1% o f the population was deemed to be at or below the poverty line. The primary sector o f the economy accounts for a third o f GDP but 80% o f employment. Despite some macroeconomic instability in 2003-2004, characterized by high inflation and a rapidly depreciating currency, the real economy grew by over 5.3% in 2004 and by 4.6% in 2005. The overall macroeconomic situation has stabilized and in the medium-term, real GDP growth i s expected to average 5%. This implies robust growth in the demand for electricity. Unfortunately, power shortages have become a bottleneck to growth as the demand for electricity recovered strongly in 2003-2004, without any accompanying increase in supply capacity. The majority o f enterprises in the Export Processing Zones, which employ over 100,000 workers (mainly in garment manufacturing) were not equipped with standby generators, so the adverse impact on output was acutely felt when power cuts began in mid-2005. Load shedding i s estimated to have cut 0.5% o f f last years economic growth rate. These shortages also adversely affect the overall investment climate and discourage Foreign Direct Investments (FDI). Power i s an essential input to the success o f the Government o f Madagascar (GOM) economic growth agenda.
Electricity Sector

1.2 At present, with the exception o f a handful o f private power producers, electricity supply and distribution i s entirely in the hands o f JIRAMA, the state-owned power and water utility company. JIRAMA, with 6,500 staff, supplies about 400,000 electricity consumers in 112 urban centers and 125,000 water consumers across 65 urban centers. Access to electricity outside the capital i s l o w (about 15% nationwide, but far less in rural areas). There i s no interconnected national electricity grid and J I R A M A operates small grids in and around three major urban centers, while the rest o f the country i s served by stand-alone systems, mostly supplied by highcost diesel generators. Madagascar has a very large hydroelectric resource potential, about 6,000 MW, which has barely begun to be tapped. 1.3 The presently installed capacity o f the grid serving Antananarivo (140 MW) i s inadequate and load shedding o f at least 10 M W occurs at times o f peak demand. This grid supplies 70% o f Madagascars electricity consumption. An additional 40 MW o f fuel-oil fired generation capacity i s expected to enter service in mid-2007, which will ease the supply constraints in the Antananarivo grid. 1.4 JTRAMAs total installed generating capacity i s about 300 MW, over 35% o f which i s hydroelectric. Electricity sales in 2005 were 754 GWh. Sales have increased at an annual average rate o f almost 7% since 1996, somewhat above the average increase in GDP over the same period. Hydroelectricity accounted for 65% o f production in 2005. Total energy losses in 2005 were about 24%.

A new agency for rural electrification (ADER) operating outside the areas covered by 1.5 JIRAMAs concession was set up in late 2002, along with a national electrification fund. ADER began operating in mid 2004 and has as i t s mandate the objective o f electrifying all 7,300 villages with more than 400 inhabitants over the next 15 years. I t has an annual target o f 30,000 new rural connections over the next five years, but has yet to raise the necessary financing.
Legislation creating an electricity sector regulator (ORE) was passed in 2001, but for 1.6 practical purposes it only began operating in mid 2004. I t i s s t i l l in the early stages o f establishing itself as a full-fledged institution capable o f exercising i t s legal mandate. More details about the electricity sector are given in Annex 1.
Water Sector

Access to public water supply in those areas served by J I R A M A i s about 50%, but i s only 1.7 about 20% nationwide. In 2005 J I R A M A produced about 95 million cubic meters o f treated water, over 50% o f which was in the capital. Unaccounted for water represents a third o f total production. J I R A M A has uniform water charges nationwide. In 2006 the average revenue from water sales i s expected to be about USc30 per cu.m. Legislation setting up a water and sewage regulatory agency has been passed, but not yet implemented.
Financial Issues

J I R A M A has been under severe financial stress for the past t w o years. Tariffs remained .1.8 frozen from 2001 to mid-2005, even though this was a period o f high inflation, sharp devaluation of the local currency and rising world o i l prices. Furthermore, electricity production costs also rose because all additional demand in the past few years has had to be met by using expensive diesel-powered plants. The inaction on the part o f the GOM, due to political reluctance to raise tariffs, directly contributed to the financial insolvency o f JIRAMA. The latter was forced to build up large arrears to i t s fuel suppliers and was incapable o f servicing its debts. The inability even to pay for fuel to run i t s power plants and the resulting power cuts brought matters to a head in mid-2005. GOM was obliged to intervene and bail out JIRAMA with a cash injection to pay for fuel, to help ease the power shortages, which lasted from May-September 2005. These shortages badly hurt the manufacturing and export-oriented industries such as 1.9 garments, seafood processing etc. which were unprepared to deal with load shedding due to a lack o f standby generators. This crisis brought an end to the complacency and neglect o f the power sector on the part of the authorities, as i t was a sharp warning o f the vulnerability o f the entire economic recovery and growth program to disruptions arising from a lack o f electricity. 1.10 Very limited new investment has taken place in recent years to increase power supply, while demand has increased substantially as the economy recovered from the political crisis o f 2002. Most o f JIRAMAs power plants are now inadequate to meet demand in their service areas. Over 6,000 requests for new connections in the capital (backed by down payments) are currently frozen, due to the lack o f materials to connect them and the capacity to supply them. Additional generation capacity has been added o n an ad hoc basis in the past few years through expensive quasi-IPP/leasing contracts awarded o n a non-competitive basis. JIRAMAs operational performance i s unsatisfactory, with high losses and poor maintenance. Thermal

plants are generally in a very poor condition. Billing, metering and revenue collection practices are weak. Unpaid arrears o f large consumers, both public (like universities) and private (numerous manufacturing enterprises), exceeded three months billings at end-2005.
Recent Reforms

1.11 After an extended stalemate on institutional reforms o f the sector in 2003, the new government decided against privatization o f JIRAMAs assets. A diagnostic study and management audit o f JIRAMA carried out at that time revealed the severity o f the problems facing JIRAMA. This study led to GOMs decision to opt for a two-year management contract as a first step towards raising JIRAMAs performance to a level where it can carry out i t s mandate of providing satisfactory service to electricity and water consumers. Given the changed international investment climate in the early years o f this decade and the lessons from privatizations o f other developing country utilities, the Bank concurred with this approach. As a result, J I R A M A has been under private management since April 2005 (paras. 1.16- 1.17) and GOM has decided that the present short-term management contract will be succeeded by a longer-term solution based o n a public-private partnership. 1.12 Two belated but large electricity tariff increases were introduced in 2005, amounting to a cumulative rise o f 75%. A further 10% rise in tariffs took place in April 2006, consistent with the GOM sector reform program. Average revenue this year should therefore be about UScl3/kWh. Average water tariffs were also raised by a third in 2005 and by 20% in April 2006. JIRAMA does not have a policy o f pan-territorial pricing for electricity, and tariffs charged in areas supplied entirely by thermal energy are substantially more than in those with access to hydroelectricity. Time o f day pricing i s applied to medium and high voltage customers.
Government Objectives, Policies, and Commitment
Linkages to Macroeconomic Policies

1.13 The GOMs Poverty Reduction Strategy Paper (PRSP) states the overall objective o f the government as the reduction o f poverty by half in ten years. The three k e y priorities set out by the PRSP are: (i) improving governance; (ii) promoting broad based growth; and ( i ) i iproviding human and material security. Achieving rapid economic growth requires improved infrastructure, particularly improved transport links and the availability o f a reliable electricity supply. The absence o f the latter i s both an additional cost to existing businesses as w e l l as an impediment to attracting inflows o f new foreign investment. The provision o f potable water i s also a key element in achieving the goal o f providing human and material security. 1.14 GOM has decided to stimulate private sector l e d economic growth in three distinct geographical poles, Nosy B e (for tourism) in the north, Antsirabe-Antananarivo (for export processing) in the center and Taolagnaro, formerly Fort Dauphin, (for minerals) in the south. I t i s indispensable for the success o f the growth poles strategy that the recent electricity supply problems do not recur.

Sectoral Policies

1.15 Restoring and improving electricity supply to acceptable levels necessarily requires both substantial new investment and major reforms to the power sector. The first major step in reforming the power sector took place in 1999, with the passage o f a law abolishing JIRAMAs monopoly and creating a regulatory body. This opened the door to private investment in generation for sale to JIRAMA, as well as to the creation o f new generation and distribution enterprises outside JIRAMAs current operating areas. New legislation was also passed for the water sector. 1.16 JIRAMAs top management was replaced in early 2005 and the utility i s currently being run under a two-year, IDA-funded management contract, which has already brought positive results. Better generation plant dispatching, optimization o f plant operations, enhanced revenue collection and cost control measures, have all contributed to improved cash flow and reduced financial losses. Financial recovery from a situation o f near-bankruptcy i s n o w under way. JIRAMAs balance sheet has also been restructured through a mix o f write-offs and debt-equity conversions (Annex 9).

1.17 JIRAMAs recovery process is fully supported by GOM, as shown by the measures already taken, and by high-level commitments publicly made to the donor community at a round table conference on the sector held in January 2006. A task force with wide representation from outside GOM was set up in 2005 to study and advise o n the best long-term structure for the power and water sectors. I t s work i s close to completion and GOM has indicated that i t will follow the Task Forces proposal that JIRAMA be retained as a combined power and water utility under state ownership but with operations delegated to a private firm. JIRAMA will be offered to the private sector to manage o n a long-term basis under affermage- type contractual terms that are in the process o f being defined. I t i s expected that recruitment o f the long-term partner would b e finalized in mid 2007. IFC has already been retained by GOM to act as its transaction adviser to guide and manage the selection and contractual process. Figure 1 illustrates the ongoing sector reform process.

GOM would remain the owner o f the assets and be financially responsible for all major asset renewals or system expansion. The operator would have a long-term operating contract and pay an annual rental fee to GOM for the use of the assets. I t s remuneration would not be guaranteed, but would have to be generated from the cashflow o f JIRAMA.

Figure I: JIRAMA's Reform Program

1.18 The Government's letter o f sector policy (Annex 11) reflects the progress made in the reform agenda and the future role o f the energy and water sector as engines o f growth. The government's strategy articulates inter alia, the main goals o f the reform program, GOM's commitment to the public-private partnership model and the implementation o f cost-reflective tariffs .

2. Rationale for Bank Involvement

2.1 The Bank has been engaged in the power sector in Madagascar for several decades, with m i x e d results. However, after years o f resistance to fundamental sector reforms, the Bank was able to convince the government to consider far-reaching reforms, going beyond the interim step o f a management contract, and viewed as the only way to resolve the utility's poor and declining performance. The Bank has established a constant dialogue with the Government o f Madagascar over the last three years, and i s therefore considered as the lead donor in the sector.
Donor assistance would continue to be needed to finance long-term sector investments, even when JIRAMA i s under private management. In reality, given prevailing conditions in the international utility business, combined with Madagascar's handicaps o f small market size, remote location, political history, lack o f a convertible currency, etc., a firm and explicit donor commitment to participate in financing long-term investments appears to b e a precondition for attracting any private sector interest in operating JIRAMA.

2.2

2.3 The Banks close involvement with GOMs rescue o f J I R A M A in 2005 and the design o f i t s financial and operational recovery program over the past year is showing signs o f success. In order to maintain the momentum o f sector reforms, it i s essential that the Bank remains fully engaged. Bank support of the recovery program was clearly an important signal to other donors at the recent roundtable conference to back GOMs reform efforts. They n o w expect the Bank to continue to lead external assistance to the sector reforms. A s clearly identified in the World Banks Africa Action Plan, better power supply i s vital 2.4 to promote growth and i t i s an essential input for the success o f other Bank-supported projects. While the IDA supported Integrated Growth Poles Project (IG2P) will address the most immediate barriers to accelerated growth in three key regions, the allocation in the IG2P project for electricity i s necessarily limited. The importance o f a reliable power supply cannot be understated, particularly at a time when Malgache garment exports to the U S A and EU are facing severe competition from Chinese suppliers. IG2P does not have the means to tackle the very large needs o f upgrading JIRAMAs main grid.
The proposed operation i s a logical follow-on to the Energy Sector Development Project 2.5 (ESDP) that closed on December 3 1,2005, but which left a large agenda o f unfinished business that still needs to be tackled, particularly the short-term recovery program for JIRAMA and the transition to a sustainable long-term arrangement for managing the utility. With the GOM decision to put JIRAMA under an operations & maintenance (0 & M) contract (uffeermage), it is clear that there will continue to be a need for public funds for investment in system rehabilitation and expansion. N o international private operator ready to run JIRAMA will, however, be willing to commit substantial risk capital o n a long-term basis to the utility. GOM will therefore necessarily turn to the donor community to help finance JIRAMAs capital investment program. Further external support i s also needed to reduce the degree o f risk faced by foreign private investors considering generation IPPs in Madagascar and/or taking over JIRAMAs operations. Instrument o f credit enhancements such as IDA PRG, I F C A & B loans or MIGA guarantees could be employed as necessary.

2.6 The primary objective of providing IDA guarantee support would b e to help make JIRAMAs O&M contract appealing to prospective operators by mitigating those critical sovereign and political risks which have kept private operators and investors away from the power sector in Madagascar. 2.7 The attractiveness of JIRAMAs O&M contract and o f small private hydropower generation investment program will be greatly enhanced by the PRG backing o f government commitments under the project. A fraction o f the PRGF amount would b e used to issue a partial risk guarantee covering selected GOM obligations towards the O&M contractor. Tentatively, the main risks that could be covered by an IDA guarantee would be: (i) regulatory risk i.e., the the risk that the G O M and/or JIRAMA do not abide by the countrys regulatory framework; (ii) the risk that GOM and/or J I R A M A breach their contractual obligations under agreements signed with the private operator; and (iii) change in law, political force majeure, or currency convertibility risks.

3. Higher Level Objectives to which the Project Contributes

The GOM i s currently preparing i t s second-generation PRSP called the Madagascar 3.1 Action Plan (MAP) that sets out the roadmap aiming to produce a quantum leap in the countrys development process. The Bank i s currently preparing i t s new C A S in parallel which will support the implementation o f the MAP. The CAS will reflect the GOMs focus o n infrastructure provision to underpin growth and private sector development. The proposed project i s thus a core element in the Banks support to the MAP because i t addresses a critical gap in infrastructure and a key constraint for private sector development in the Madagascar economy. Growth and job creation in the modem sectors are vulnerable to inadequacies in the public electricity supply system. B. PROJECT DESCRIPTION 1. Lending Instrument
1.1 The proposed lending instrument for this operation would be a two-phase, six year A L P (mid-CY 2006 - mid-CY 2012). Only Phase 1 (mid-CY 2006 to mid C Y 2008) o f the proposed A L i s presented here. IDA funding o f U S $ 10 m i l l i o n via APL- 1 i s described in depth in this P report. An adjustable program loan provides the GOM with the necessary flexibility o f content and timing it needs to reform the sector and facilitate an orderly commercial transition o f J I R A M A . The GOM intends to commercialize JIRAMA through private operations. The search and recruitment o f a new private operator to run J I R A M A has yet to commence, and the terms o f the PPP under which G O M and i t s donors would fund long-term investments for the new JIRAMA, have yet to be defined. These actions are expected to be undertaken with APL 1.
This operation (APL-1) aims to assist the Government to prepare J l R A M A for enhanced 1.2 operations and private participation. The content o f APL-2 has yet to be defined in detail, but components will be selected from a well-defined Government investment program to be presented at the next donors round table, planned for September 2006. The two phases A L P provides the Bank the possibility to introduce appropriate triggers that would be linked with satisfactory progress on the agreed recovery o f JIRAMA and i t s future sustainable operation.
2. Program Development Objectives

2.1 The aim o f the program i s to restore an adequate public utility service for electricity and water in urban areas o f Madagascar and to create the foundation for a sustainable expansion o f a commercially-oriented service in the most cost-efficient way.

A successful outcome for the initial phase o f the program would be for a financially 2.2 solvent J I R A M A to be in the hands o f private managers on a long-term basis. (See figure 2). This outcome appears to offer the best prospects for efficiency and sustainability and i s a necessary precondition for addressing the huge unmet needs for electricity and water outside the main urban centres of Madagascar. I t i s also the considered and agreed choice o f the Task Force appointed to advise GOM on i t s options for the long-term future o f J I R A M A .
7

Figure 2: JlRAMKs Financial Restructuring

At the conclusion o f APL-2, the expectation i s that J I R A M A w o u l d have become an 2.3 efficient, profit-making and creditworthy enterprise, providing good-quality services, to an expanded customer base, and be able to finance a reasonable portion o f new sector investments.

3. P r o j e c t Components

T o address immediate technical shortcomings in the utility, JIRAMA has identified a 3.1 short-term investment plan estimated to cost approximately US$ 100 million for electricity and US$100 million for water, to lower the cost and improve the performance o f i t s generation plants, cut technical losses and improve commercial performance. The Bank, in coordination with other donors, would finance some o f the most pressing and high-priority investments o f this recovery plan. This i s the centerpiece o f APL-1. Specifically, the program would assist with:
(a) reduction ofgeneration costs: rehabilitation o f existing hydroelectric and thermal units, as well as conversion o f some diesel generators to heavy fuel oil;

(b) reduction o technical losses in transmission and distribution: upgrading o f k e y sections f of MV lines, replacement o f overloaded transformers and undersized distribution lines and cables;
(c) improvements to metering, billing and revenue collection: meter verification and replacement, high-value customer management, updating o f customer records, introduction o f prepayment meters and spot metering techniques in selected clusters;

(d) modernization o JIRAMA s information systems and IT equipment: installation o f a f company-wide computer network and associated hardware and software.
Only the most pressing needs o f the electricity sector would be covered by APL-1, which 3.2 is entirely focused o n restoring JlRAMA to a minimum acceptable level o f operational and financial performance, an essential precondition to attracting a private firm. The specific investments to b e financed have been selected on the basis o f their short payback periods and high impact o n JIRAMAs earnings. 3.3 APL-1 would also support the long-term objectives o f improving the electricity and water sectors performance by assisting Madagascar in providing funds: (a) for complementary actions and communication activities needed to accompany the transaction advisor (IFC) in the process of selecting and contracting a new private operator to take over JTRAMA; (b) for prolongation o f the current management contract to avoid any hiatus before the takeover by the selected strategic partner; (c) TA for preparation o f future generation projects in coordination with IFCs IPP mandate; (d) TA to the Ministry o f Energy (MEM) to steer the above process to a successful outcome and for capacity building within MEM including environmental and social safeguards issues; and (e) the technical and safeguard studies required for APL-2 as w e l l as the due diligence requirements for private hydro generation investments.

Table 1: Project Costs by Component (in US$ 000s)

IDA Sehcoinpotienr A1.w Puwei yeiieialioii reiiifoiceiiiiil (lelial~iiitalioiil Sulvxwipoiieiit A1.b Retlailctive tinaiiciiig Siihcoiiipoiieiir A2: Reduclioii of lraiisiiiissloii alld dinrltiiilioii tecliiiicai l a n e s Sulicoiiipoiieiit PJ: Reveiirie i~i.iildgeliIeil1dlld iiiodeiiiIzd11oii of Iiiloiiiiatioii Systeiii aiid IT eqiiiliinent U~uffocared

AFD

JIRAYA

2 000 1 000 1,300 2,300 400

4 155
tbd

1700 500 tbd 400

Total Component A
~

7.000

tbd

tbd

nand PrOlBctlmDlement;ltlOn
Subcampoiieiit B1: Sirhcoiripoiieiit 82: Subcoinpoiicnt 83: Siilicoiiipoiient B I : Sribcoiiipoiieiit 05: Tecliiilcdl OsdStaiiCe 8nil colliliillliicatioii - Coiilianiiig irrlvale npeiarnrs to lake over JIRAMA Prnioiigarloii oftlie ciiireiit inaiiageineiit CoiitracI Preparstloii Of hilllie gelierallnii projects hi coordiiiatioii with IFC IPP i i i m i h l e Stieiigtlieiiiiig oftlie lvlinisliy of Energy aiid Irlliiliiy Piepararloii of APL2 and eiiviioiiiiieiifd stridles for APL2 ilivestiiieiin

IDA

AFD

JIRAMA

400 150

250 900 600

tbd tbd

Siihcoinpoiieiil BG: Moi~iroiililj ai111 evalllaliuii Sulicoiiipoiieiit 87: Pioject iiiipletiieiitatioii Umfloc.?recl

150 150 400

Total Coimonent B
______

3 000

tbd

tbd

Total APL.11

10.000

tbd

tbd

Phase I1 (or APL-2) o f the Program

The funding needs for APL-2 (FY 2009 - FY 2012) from IDA would tentatively be about 3.4 US$30 million, covering investments in generation, transmission and distribution system expansion, as w e l l as capacity building and consulting services for implementation o f the institutional reform of the sector. A significant part o f APL-2 funding could be allocated to a credit enhancement facility (such as partial risk guarantee facility) to attract foreign investors. The second phase would be conditioned o n satisfactory progress towards financial recovery o f JIRAMA and a signed PPP agreement for the long-term management o f the utility by a private firm.
The content o f APL-2 has yet to be defined in detail, but components will be selected 3.5 from a well-defined Government investment program to be presented at the next donors round table, planned for September 2006. Additional funding i s expected to be secured from AfDB, bilateral donors and the private sector.

3.6

Further details on APL-2 can be found in the table in Attachment 4.2 o f Annex 4.

Financing Requirements and Financing Plan

3.7 The GOMs energy/water sector recovery plan estimates a need for US$lOO m i l l i o n o f short-term investment financing for the years 2006-2009 for the Electricity and Water sectors respectively. These estimates do not include the developments o f Hydro Generation facilities that, although offered for private sector financing as PPs, are likely to require significant public sector support.

10

A L 1 & APL-2 would together cover approximately 25% o f JIRAMAs priority P 3.8 investments during the period 2006 - 20 11. US$125 million o f donor support (including the combined US$40 million from IDA) are already committed. Further financing for long-term investments are expected to be pledged at a second donors conference to be held in September 2006. 4. Lessons Learned and Reflected in the Project Design
The recently-closed Energy Sector Development Project (ESDP, Cr. 2844), implemented 4.1 between 1996 - 2005, was over-ambitious, too complex and too broad in its scope. Within a single project it simultaneously attempted to improve service to existing consumers, extend access to electricity in rural and urban areas, undertake fundamental sector reforms to facilitate private sector entry, promote energy efficiency and conservation and improve management o f woodfuel supply and usage. The lesson learnt from ESDP and applied here i s that the proposed project i s much more narrowly focused and does not attempt to address broader issues in the energy sector. ESDP did not adequately address weak corporate governance in JIRAMA, including non4.2 transparent and non-competitive contracting, abuse o f privileges by staff, lax management and poor customer service. These problems have now been sufficiently exposed to public scrutiny and the transfer o f J l R A M A to a private operator will serve to keep a check o n costs, improve revenue collection and inculcate higher standards o f service. Transparency and accountability are also expected to be enhanced. 4.3 The early years o f ESDP (pre-2003) were also characterized by an excessively dogmatic approach to institutional reform by the Bank, which led to stalemate. The proposed project has avoided repeating this error by i t s consultative and participatory approach to reforms, as illustrated by the importance attached to the role and recommendations o f the Task Force on reforms. M u c h more attention has been given to keeping the labour unions fully abreast o f all matters affecting J I R A M A staff, and regular press briefings have also been given to inform public opinion.

4.4 The experience under ESDP also shows that there i s a need to be more vigilant with respect to tariffs during inflationary times. The failure by GOM to address the erosion o f tariffs caused by devaluation and rising world o i l prices, contributed to the financial insolvency o f JIRAMA. The conditionality o f the proposed project reflects this lesson by front-loading actions expected o f GoM.
4.5 Experience and the lessons learned from similar projects elsewhere shows that attracting private operators to run African utilities i s fraught with difficulties. Recent cases also illustrate that even in instances where long-term contracts were entered into private firms are ready to revoke them if the operating environment turns unfavourable. The proposed project will therefore seek to minimize such risks by ensuring that the ground rules and contractual arrangements are drawn up as clearly as possible, by providing GOM with suitably experienced international financial and legal advisers.

11

5. Alternatives Considered and Reasons for Rejection 5.1 A number o f strong arguments favor an A L rather than a SIL. In the current context o f P a utility emerging from near-bankruptcy, in a period o f transition involving changes to its corporate culture and business practices, some flexibility o f actions and their timing are felt to be needed and these are more easily accommodated in an A L structure than in a SIL. P 5.2 I t w o u l d have been possible to continue with the existing JIRAMA management contract o n an open ended basis period, however this would have not incentivized the operator to improve performance. It would also be expensive, and require donor or GOM financing, since JIRAMAs o w n internal resources would be insufficient to cover i t s cost.
The option o f separating o f water from electricity activities was examined in detail by the 5.3 consultants hired to assist GOM in deciding on JIRAMAs long-tern structure. The consultant recommended that a separation was inappropriate for a company o f relatively modest size. Vertical and horizontal unbundling o f JIRAMAs electricity operations was also studied by the same consultants and advised against for the same reason. The most extreme option could be called the do-nothing scenario, i.e. allow the current 5.4 management contract to lapse and then leave J R A M A to struggle o n as best as i t could. This would have been a recipe for rapid collapse, widespread damage to the modem export-oriented sector o f the economy and a repeat o f the expensive 2005 G O M bailout for the sector.

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C. IMPLEMENTATION 1. Partnership Arrangements (if applicable)

All donors involved in the sector are closely coordinating their interventions for 1.1 maximum effectiveness. This has been clearly expressed in the joint aide memoire o f the January 2006 Paris donors' round table. The aide mCmoire set forth a common set o f conditionalities requested by the donors to commit financing to support GOM's recovery plan for JIRAMA, as w e l l as for the sector's medium-termexpansion requirements. (See figure 3).
Figure 3: Medium Term Power Generation & Investment Plan .......................

............

.................

.....................

1.2 The European Investment Bank (EIB) i s very active in water supply and .as alreac .y approved a project o f 47 million in mid-2006. The Dutch government is contributing grant funds towards the construction o f a 40 M W fuel-oil power plant (expected in service in mid2007) that will help relieve the current supply shortages as w e l l as substitute for higher-cost diesel generation. Agence Franqaise de DCveloppement (AFD) has indicated that i t will support implementation of the JIRAMA recovery program with a contribution in 2006 o f about US$lO 12 million. A third 30 M W generator at the existing Andekaleka hydro plant i s about to begin, with financing from the Banque Arabe pour le DCveloppement Economique de 1'Afrique (BADEA). The African Development Bank (AfDB) has indicated its potential sector financial support in 2008. Since the financing plan for APL-2 i s still to be completed, the involvement o f other donors will be needed and firm pledges obtained early enough to be included in the information and guidance to potential private partners for JIRAMA.
Within the WBG, there i s close cooperation between I F C and the Bank. I F C has already 1.3 been hired by GOM to act as a transaction adviser for a series o f hydro generation projects that are to be offered to private investors to develop as PPs. In response to the difficult climate for

13

attracting FDI to t h e power sector in Madagascar, an IDA-supported PRG is also being prepared to complement IFCs efforts to attract potential investors and to attempt to lower the risk premium (and hence the cost) in a bulk supply contract to JIRAMA.
In addition, IFC will also be the GOMs investment adviser and lead the process o f hiring 1.4 a private partner to manage JIRAMA. In order for I F C to successfully carry out its two mandates it requires the close collaboration o f the Bank and other donors to provide financing for the preparatory work such as feasibility and environmental impact studies for the generation IPPS.

2. Institutional and ImplementationArrangements The project would have two distinct implementation entities. One would be an integral 2.1 part o f JIRAMAs DEEL (Direction de 1Equipement Electricitk), and would deal with hardware, procurement and physical implementation by J I R A M A o f its rehabilitation sub-proj ects. The other would be a small coordination and advisory group responsible for the policy and institutional reform components as well as for monitoring and evaluation o f the project in its entirety that would be attached to the office o f the Minister o f Energy and Mining.
The physical rehabilitation works do not present any significant technical difficulty for 2.2 JIRAMA, and the implementation cell would predominantly deal with procurement-related matters. Adequate expertise for this exists within JIRAMA, backed up by local consultants o n a short-term basis as required.

MEM, however, has a serious problem o f lack o f adequate capacity to lead the process o f 2.3 selecting a new private operator and carry through sector reforms. Despite GOMs decision to recruit I F C as its investment adviser to manage the selection process from start to finish, the MEM interface with IFC will need to be strengthened, and for this purpose i t i s envisaged that the project will finance the services o f a resident expatriate adviser in MEM for about t w o years. The adviser would also be responsible for managing the small coordination and advisory group (Cellule de coordination-CELCO) attached to the office o f the MEM (see above).
MEM and the DEEL (JIRAMA) will maintain separate accounts for all transactions 2.4 related to each component for which they have overall implementation responsibility and will produce their individual annual financial statements in accordance with internationally accepted accounting principles. The consolidation o f project accounts if necessary, the production o f quarterly Financial Monitoring Reports (FMRs) in compliance with international accounting standards and IDA requirements and the monitoring o f the project progress will be assured by MEM.

While the capacity of JIRAMADEEL i s deemed adequate, the capacity o f 2.5 M E M K E L C O to deal with financial and accounting matters will need to be strengthened by: (i) improving the fiduciary system in place to ensure timely delivery o f data o n project activities; and ( irecruiting a qualified and experienced accountant to assist the MEM accounting staff in i)

14

performing financial management tasks including budgeting, accounting, financial reporting, and disbursement operations.
3. Monitoring and Evaluation o f Outcomes/Results

The implementation o f the project will be monitored through quarterly progress reports 3.1 that the Project coordinators (both at JIRAMA and MEM) will prepare and submit to IDA. This will provide a way o f tracking actual project execution against implementation milestones established at the time o f the project launch. These are the key performance indicators and project outcomes that are detailed in Annex 3. 3.2 Further, in order to assess impacts that the project i s expected to have o n the quantity and quality o f electricity and water supplied, i t is envisaged that several surveys will be carried out at different points on JIRAMAs network. Monitoring o f revenue enhancement measures will be facilitated by the ring-fencing of clusters where these are to be introduced. Baseline data will be collected in these clusters prior to introduction o f the new customer management techniques. Other indicators of JIRAMAs overall performance, their baseline values and targets have 3.3 been agreed during negotiations. These indicators are given in Annex 3.

4. Sustainability
Thefollowing topics are relevant to long-term sustainability: Policy framework: The 1999 sector legislation is basically sound but will probably need 4.1 to be revised to reflect Governments decision regarding JIRAMAs institutional reform. Some topics also need to be defined with greater clarity and precision and these will be addressed under IFCs mandate as transaction adviser, which includes the provision o f legal support. The electricity sector regulator (ORE) i s operational and has established some initial credibility in the recent round o f tariff increases. The Letter o f Sector Development Policy (LSDP) clearly spells out GOMs vision of the sector for the next 5 - 10 years and presents a good basis for both private and donor participation in sector development.

4.2 Technical: I t i s expected that the future private operator o f J I R A M A will ensure that maintenance i s carried out according to good operational practice. The remuneration o f the future operator will depend on maximizing revenue and plant availability, which in turn creates a strong incentive for sound 0 & M practices. I t i s also expected that JIRAMA under a private management would better assist the government in making strategic future electricity generation choices by providing a more reliable long-term planning and data o n expected load growth.
Financial: The 1999 law makes a provision for indexation o f tariffs, but this was 4.3 ignored. N o cast-iron assurance can be obtained that history will not repeat itself in future, but the lessons appear to have been learnt from the economic damage to the country and the financial cost to the budget of bailing out J W A in 2005. The GOM has agreed to introduce a Credit

15

covenant under t h e proposed project that will permit J I R A M A to apply tariffs that ensure full cost recovery (para. 6 - Credit conditions and covenants). In addition, the introduction of private management in JIRAMA will provide the necessary stimulus to improve revenue collection particularly from large industrial users, cut down on electricity and fuel theft and inject greater all-round cost consciousness within JIRAMA.

4.4 Fiscal: T h e GOMs budgetary support to J I R A M A in 2006 i s expected to exceed AR 70 billion (roughly US$30 million), in order for it to continue operating and to help i t meet payment obligations, predominantly to fuel suppliers (over AR 180 billion). Depending upon the evolution of w o r l d o i l prices, further budgetary support will be needed from G o M in 2007, although o n a greatly reduced scale. The project seeks to ensure that from 2008, J I R A M A will no longer need to rely on budgetary support for its operating expenditures. However, i t must be recognized that t h i s turnaround i s vulnerable to further rises in world o i l prices andor unforeseen major delays in commissioning o f the 40 M W fuel o i l power plant in mid-2007. I t i s thus proposed as a trigger for the second phase o f the A L that JIRAMA should break even in terms P of EBITDA (Earning Before Interests, Taxes, Depreciation and Amortization) in 2007. Such a target might not seem very demanding for a power and water utility with a majority o f its generation derived from hydroelectric units. However, it would represent a major improvement compared to the situation that prevailed in 2004 and 2005. Also given, the projected efficiency improvements that will begin to have a full year effect only in 2008, and provided an adequate tariff indexing formula i s effectively applied, JIRAMAs profitability should significantly improve in 2008 and 2009. By the end o f the decade, J I R A M A should be expected to generate enough cash-flow from internal sources to fund the investments required to adequately maintain its assets. In these respects, the project will have a positive fiscal impact. Nevertheless, it has to be recognized that public funds through international loans or grants will still be required to fund the bulk of JIRAMAs long-term-investments required to increase significantly the rates o f access to electricity and water in Madagascar, but these will not have any budgetary impact.

16

5. Critical R i s k s and Possible Controversial Aspects

Main Risks Mitigation Measures

Macro-economic problems: high inflation, currency devaluation, rising o i l prices. Uncertain whether GOM i s able to stay the course on reform process. Reforms stalled due to forthcoming elections. Political opposition to higher tariffs.
~~~

Labor union resistance to internal J I R A M A reforms. Weak institutional and implementation capacity Insufficient interest by foreign utilities in taking over JIRAMA.

Proposed Guarantee facility will protect private operator against tariff erosion and ensure currency convertibility. Bank and IMF macro-economic programs with GOM; but some risk will remain, especially if o i l prices remain high. Dated covenants, APL-2 triggers and Guarantee facility provide some assurance o f coverage o f political and regulatory risks. APL-1 investments to be committed prior to elections. APL-2 will proceed only after selection o f private operator (post-elections). G O M will commit to preserving real level o f tariffs by indexation (FA covenant), but some element o f risk will remain. Unions participate in Task Force on long-term future o f JIRAMA. Will be kept informed in selection process for private operator. TA to assist Ministry o f Energy to implement sector reforms, but some slippage risk will remain. IFCs appointed as transaction adviser to GOM to guide

RiskRating

M
S M M M

Project transactions may not be properly accounted by MEM, and financial reports not timely produced.

be in place end-2006 to mitigate risks. Recruitment o f a qualified accountant in conformity with Bank procedures, to assist the MEM accounting staff in performing FM tasks. Elaboration and implementation o f an accounting manual o f procedures. Adjustment o f the accounting software acquired within the context o f the Energy Sector Development Project and users training. Recruitment o f an international auditing firm acceptable The quality o f the audit may not be acceptable and to IDA to carry out the annual audit o f the project the report not delivered in financial statements o f the Project. time due to weak capacity o f the accounting profession.
T h e overall risk of the program has been assessed as moderate.

17

6. Credit Conditions and Covenants

6.1
Effectiveness conditions would be:

The Subsidiary Agreement between G O M and JIRAMA has been duly authorized or ratified.

MEM has adopted the Project Manual and JIRAMA has adopted JIRAMAs Project Manual all in form and substance satisfactory to the Association.
For the purpose o f Part B o f the Project, MEM has elaborated i t s accounting manual o f procedures and upgraded i t s accounting and financial management and monitoring and evaluation system (capable o f producing FMRs) in a manner satisfactory to the Association; and has appointed an accountant specialist and a procurement officer within the MEM acceptable to the Association.

For the purpose o f Part A o f the Project, JIRAMA (DEEL) has upgraded i t s accounting and financial management and monitoring and evaluation system (capable o f producing FMRs) in a manner satisfactory to the Association.
Two special accounts have been opened (for DEEL and MEM) in the Central Bank under conditions acceptable to the Association.

Auditors satisfactory to the Association have been recruited for the purpose o f Component A and Component B o f the Project. 6.2
The main Credit Covenants are likely to be:

Dated covenants regarding tariffs N o later than November 30,2006, G O M shall have adopted the Electricity Tariff (a) Indexation Formula.
N o later than April 1,2007, G O M shall have publicly disclosed the Electricity (b) Tariff Indexation Formula and adjusted electricity tariffs in accordance with said formula, and shall subsequently adjust said tariffs in accordance with the Electricity Tariff Indexation Formula every 6 months.

Dated covenants (Milestones) regarding the process o f recruiting the long-term private partner for JIRAMA
N o later than December 3 1,2006, G O M shall have established terms and (c) conditions to be used in the contracting o f JIRAMAs private partner satisfactory to the Association and have launched the prequalification process.

18

No later than April 1, 2007, G O M shall have launched the bidding process for the (d) recruitment o f a new private operator for the management o f JIRAMAs operations.

Financial covenants Beginning with the first quarter o f C Y 2007, J I R A M A to produce a quarterly (b) management report (including relevant technical, commercial and financial parameters for the monitoring o f the company and to communicate this reporting to the Bank less than 60 days after the end o f the quarter. Accounts receivable not to exceed 3 months billings by the beginning o f FY 2008 (c) and onwards.

GOM shall define in agreement with the Association, no later than September 30 of each year during Project implementation amounts to be injected as need be into JIRAMA during the following calendar year so as to allow normal operations o f the company.

(d)

Other covenants (Financial management and audits) DEEL/MEM shall maintain records and accounts in accordance with sound (a) accounting practices.

DEEL/MEM shall prepare and f i n i s h to the Association not later than 45 days (b) after the end o f each calendar semester, interim un-audited financial reports for the Project covering the semester, in form and substance satisfactory to the Association.
DEEL/MEM shall have its Financial Statements audited in accordance with the (c) provisions of Section 4.09 (b) o f the General Conditions. Each audit o f the Financial Statements shall cover the period o f one fiscal year o f the Recipient. The audited Financial Statements for each such period shall be furnished to the Association not later than six months after the end o f such period. 6.3
Specific condition o disbursements would be: f

Credit disbursement for Component B would be permitted only after recruitment (a) by MEM o f a technical advisor acceptable to the Association. Credit disbursement for the rehabilitation o f the c i v i l works o f the Vatomandry (b) hydroelectric plant (to satisfy the requirements o f the safeguard policy OP 4.37 on Dam Safety) would be permitted only after JIRAMA has submitted a report satisfactory to the Association o n the condition o f the Vatomandry dam and the proposed safety measures to be implemented.

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6.4

Triggersfor Initiating APL-2

I n order to proceed with APL-2, GOM would need to demonstrate:

(a)

Satisfactory implementation o f APL- 1 investments;

Sufficient progress on the J M A financial restructuring as per the agreed (b) financial covenants o f the FA for APL-1; Regulatory agencies (water and electricity) fully operational with clearly defined (c) and implemented tariffs indexation formulas; and Completion o f the recruitment o f the long-term private partner for JIRAMA up to (d) contract signature.

D. APPRAISAL SUMMARY 1. Economic and Financial Analyses

Economic Analysis

1.1 System expansion plan: The recent o i l price hikes have turned JIRAMAs stop-gap and suboptimal choice o f diesel generators into a severe financial burden for its consumers and also for GOM. The success o f the proposed recovery program for JIRAMA i s predicated upon a rapid move away from diesel generation, initially to Heavy Fuel Oil (HFO) and then in the medium- to long-term to hydroelectricity. Unfortunately, in the short- to medium-term, despite Madagascars evident hydroelectric resource potential, the scope for rapidly developing new hydro power sources i s rather limited. Work o n the addition o f a third 30 M W generator at the existing Andekaleka hydro plant i s about to begin, with financing from BADEA. Under normal hydrological conditions i t will produce 200 GWh per year, representing a massive cost saving to JIRAMA. T w o minor sites (Sahanivotry and Lily) are at a sufficiently advanced stage o f preparation by private developers to contribute a further 80 GWh o f hydro power by 2009 2010. Due to a lack o f preparatory studies, other small to medium term hydro prospects are unlikely to be commissioned before 2010 - 201 1. 1.2 In the near term, major fuel savings can therefore only be achieved through substitution of heavy fuel o i l burning plants in place o f diesel generators (financed under APL-1). Implementation o f a 40 M W HFO plant (with financing from Dutch Government) to be sited in the capital has begun and i t i s expected to be in service in mid-2007. This plant will permit J I R A M A to greatly reduce i t s use o f diesel, since the plant i s capable o f producing 200-250 GWh annually. All of the above new generation projects have been delayed by several years and should already have been in service. They produce substantial economic benefits and delays in completing them would be very costly to JIRAMA.

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Economic Rate o f Return: Given the diverse nature o f the physical investments 1.3 envisaged under the recovery program and i t s nature as a two-part APL, the economic analysis i s based o n a 5-year time-slice (2006-2010) o f the electricity sectors total investment program, which has been reviewed and found to be least-cost in nature. Details are contained in Annex 9. Assigning specific benefits to particular project components would have been both arbitrary and nearly impossible. The base case estimate o f the EIRR i s 14.4%. 1.4 The physical benefits from these investments that have been quantified here are twofold: first, (and most important) the incremental electricity supplied to consumers; second, the reduction in high-cost diesel fuel consumption arising from the replacement o f diesel generators by more economical ones using heavy fuel o i l (HFO). The incremental demand that can be met as a result o f investments made possible by the 1.5 program i s based on the variant o f the load forecast prepared by JIRAMAs consultants, HQI. For the purposes of the economic analysis, only five years (2007 - 201 1) o f cumulative load growth have been considered as benefits directly attributable to the 2006 - 2010 investment program. Total electricity demand i s projected to increase at an annual average rate o f 7.6%. However, demand growth in 2006-2007 is severely constrained to only 2% - 4%, due to a deliberate attempt by J I R A M A to restrain consumption prior to the entry in service o f a large, new HFO plant. 1.6 The minimum value o f the incremental sales has been taken to b e the average tariff across all customer categories charged by JIRAMA in 2006, i.e. UScl3/kWh. This does not represent the full value o f benefits to users from this electricity, but in the absence o f an estimate of the consumer surplus i t i s a minimum measure o f benefits that has been used as a proxy. I t i s w e l l below the JIRAMA tariff charged to LV consumers in Zone 3 (isolated centers served entirely by diesel), o f USc 19-20/kWh. Fuel savings to J I R A M A have been estimated at the difference between the cost o f generation using HFO in the new HFO power plant and diesel fuel that i t would otherwise have to use in i t s existing generators, about USclO/kWh at current o i l prices.
Full details of the analysis and the parameters used in estimating the ERR are given in 1.7 Annex 9. The EIRR i s particularly sensitive to variations in o i l prices, the size and timing o f the investment program, delays in completing more efficient plants, and to assumptions about demand growth. As can be seen in Annex 9, depending on the combination o f negative factors assumed, the EIRR varies from 10.3% to 13.7%.
Financial Financial Analysis o JIRAMA f

1.8

The following conclusions can be drawn from the financial forecasts presented in Annex 9:
In spite o f the large funds injected in the company by the government and donors, (a) the ongoing conversion o f debt into company equity, and the successive tariff increases for electricity and water, JIRAMA remains in a precarious financial situation.

21

(b) With most o f i t s debts cancelled or rescheduled, JIRAMA has been given a fresh start financially; however its most immediate problem remains an insufficient generation of funds from internal sources: cash-flow from current operations i s likely to remain negative in 2006 and 2007. This i s the result o f JIRAMAs unfavorable generation mix, with too m u c h diesel fired capacity, and the ever-rising world price o f oil.
Electricity tariffs have been raised by nearly 100% over the past year, bringing the (c) expected average revenue this year to U S c l 3 per kilowatt-hour, a level that i s similar to i t s value in 2002 and 2003. However, o i l prices are much higher today than they were then, and the current level o f tariff remains below what would be adequate to achieve cost-recovery. Further hikes during the next 12 months are politically and socially difficult to envisage. As a result, JIRAMA cash position is bound to deteriorate again over the period to 2008, especially i f the company reduces its payment arrears to its suppliers, as envisioned in the January 2006 plan de redressement. Therefore, a new injection o f liquidity from GOM will probably be needed in mid-2007.

(d) The financial forecast presented in Annex 9 assumes several internal efficiency improvements, but the biggest source o f potential savings is the reduction o f generation costs, which will occur from mid-2007 onwards.
Tariff discipline i s essential if J I R A M A i s to become financially viable o n a (e) sustainable basis. An updated tariff indexation formula needs to be defined and scrupulously followed. A FA covenant that would impose the consistent application o f a tariff indexing procedure from April 2007 onwards i s thus proposed. In addition to this procedural aspect, the level o f the tariff should be set adequately (it is thus proposed to retain it as a trigger for the second phase o f the A L that JIRAMA should break even in P terms o f EBITDA in 2007).

Situation o JIRAMA at the Beginning o the Management Contract f f

1.09 A diagnostic study o f JIRAMAs operations carried out in 2003 revealed the severity o f the problems the company had to face. The management contract, which has been in place since April 2005, shed further light on the true extent o f JIRAMAs financial difficulties. I summary, n the situation in mid-2005 can be described as follows: 1.10 Extreme financial unsustainabilitv o f current operations: during the first semester o f 2005, the variable costs associated with thermal generation alone (fuel expenses and energy purchase costs) were superior to the total revenues o f the company leaving no source o f funds to pay for other current expenses (maintenance, personnel etc), let alone new investments or debt repayment.

1.11 Rapidly accumulating arrears to suppliers: given the structural disconnect between current expenses and revenues, J I R A M A could not continue to operate without increasing i t s level o f debt and arrears to suppliers. This practice merely postponed the liquidity crisis facing JIRAMA until after the management contract took effect.

22

1.12 Lack o f effective and reliable financial reDorting and internal controls: Illustrations o f these deficiencies are the absence o f reliable and audited annual accounts, the lack o f monitoring o f the cash position of the company, incomplete and late reporting o f financial information from the many remote outlying J I R A M A centers. The management contractor i s already addressing most o f these issues.
The Financial Recovety Process Supported by APL-1
f 1.13 Financial restructuring o JIRAMA: JIRAMA cannot realistically service the debt it has accumulated. The financial restructuring entails substantial debt cancellation by the GOM, as F w e l l as an injection o f cash. Overall, the plan entails significant budgetary costs in excess o f A t 75 billion for GOM in 2006. I t is likely that an additional injection o f liquidity in J I R A M A will be necessary again in mid-2007, depending upon the trend o f world o i l prices.

1.14 Tariff increases: While further increases o f tariffs in real terms might be necessary in the future, if o i l prices do not decrease, the bulk o f the adjustment effort in this respect has already been done, especially taking into account expected reduction in generation costs thanks to planned investments. I t is, however, vital that the current level o f tariffs be at least preserved in real terms. The definition o f an indexing formula for electricity and water tariffs and a streamlined decision-making process to apply the formula and implement the necessary tariff adjustment will provide protection against the volatility o f the currency and o f o i l prices. 1.15 Additional Support from GOM: Under the assumption laid out in Table 9 o f Annex 9, J I R A M A would start to generate a positive cash-flow in 2008, due to a combination o f moderate tariff increases, a better generation mix, and improved operational performance. J I R A M A will nevertheless remain in a difficult situation with insufficient liquidity up to the end o f 2008 (current ratio below 1 and increase o f short-term financial debt) without fresh injections o f cash from GOM in 2007. Provision for continuing cash injections to JIRAMA needs to be made in the GOM budget for 2007.

2. Technical
The investments under the APL-1 have been designed to meet Madagascar's near term 2.1 electricity sector objectives and to enable a swift financial turnaround o f JIRAMA, viz.:

' ' ' '

Reduce technical and non-technical losses; Improve revenue management and collections; and Encourage development o f cost effective generation sources, e.g. small hydro plants.

Convert costly diesel generation to HFO, resulting in savings o f U S c l O k W h o n every unit o f electricity produced; Assure a minimum level o f maintenance o f key power plants to maintain existing capacity and reduce the number o f power cuts;

The investments were chosen among a list o f candidates totaling about US$lOO m i l l i o n 2.2 identified by J I R A M A as necessary for the success o f its financial restructuring plan presented to

23

the donors round table meeting in January 2006. The first phase o f the APL focuses on immediate critical generation needs and investments with high returns to urgently mitigate the severe financial problems o f JIRAMA. For these investments the bidding documents are already w e l l advanced. For some, advance procurement is already ongoing and J I R A M A plans to quickly utilize the IDA funding by means o f retroactive financing right after Credit effectiveness.

3. Fiduciary
Financial Management

The financial management systems both at the DEEL in J I R A M A and MEM need to be 3.1 strengthened to address some deficiencies and build their capacity to produce quarterly Financial Monitoring Reports (FMRs). The main measures to be taken are the following:
0

For MEM: (i) recruitment, under terms and conditions acceptable to IDA, o f a qualified and experienced accountant to assist the MEM accounting staff in place in performing FM tasks; (ii) elaboration o f a chart o f accounts to ensure the availability o f all relevant information for financial reporting; ( i ) i ielaboration and implementation o f written operating instructions to ensure proper record keeping and adequate safeguarding o f assets; (iv) design and implementation o f an accounting system to ensure timely production o f financial information required for managing and monitoring activities to be implemented by the MEM.
For DEEL: (i) review o f the DEEL chart o f accounts to reflect components and update o f the activities outlined in the P A D to satisfy reporting requirements; (ii) current accounting manuals o f procedures in order to include all necessary changes requiredby this new project, facilitate adequate record keeping and the maintenance review and adjustment o f the accounting software of proper control over assets; (iii) acquired within the context o f the Energy Sector Development Project in order to satisfy DEEL requirements and ensure timely production of financial statements and FMRs required by IDA. All these recommendations should be implemented prior to credit effectiveness. The content and formats o f financial statements and F M R s have been determined during appraisal mission and agreed at negotiations.

0.

3.2 The project financial statements (CELCO and DEEL) will be audited annually by independent and qualified auditors acceptable to IDA in accordance with International Standards of Auditing. The auditors should be recruited prior to credit effectiveness. The audit report will be submitted to IDA not later than 6 months after the end o f each fiscal year.
Procurement

A new Malagasy procurement code was enacted in July 2004 but, since then, the texts for 3.3 their application have recently been approved but it will take some time before entering in effectiveness and thus the existing Procurement Code o f 1998 will continue to be used at least until early 2007. The Bank has ascertained that deficiencies identified in the 1995 CPAR have
24

been properly addressed. IDA standard bidding documents (SBDs) are widely used in Madagascar. However, an area o f concern i s the cumbersome and overly bureaucratic approval process for contract signing by GOM, which causes unnecessary delays. In addition, insufficient programming and procurement planning contribute to delays in project implementation which result in slow disbursement. T o mitigate risks o f delays for the proposed project, proper prerequisites for the use of Bank SBDs, including evaluation reports for National Competitive Bidding procedures (NCB) have been agreed upon with Government during negotiations. The procedures manual will be updated as a part o f the Project Implementation Plan. 3.4 A Procurement Capacity Assessment o f J I R A M A was not conducted during appraisal because it was agreed with JIRAMAs management that the same team will b e maintained in place as the one which dealt with the recently-closed ESDP. On the basis o f the experience acquired by the JIRAMA procurement team, an action plan was drafted to address areas where capacity needs to be strengthened. The action plan includes (i)specific section on procurement a in the Project Implementation Manual to be finalized or updated before Credit effectiveness; (ii) improvement o f record keeping o f procurement-related documents; and ( i ) i irefresher procurement training sessions for project staff.
Unit during appraisal. The assessment reviewed the organizational structure for the unit. The key issues and risks concerning procurement by MEM have been identified. Corrective recruitment, under terms and conditions acceptable to measures which have been agreed are: (i)

3.5

A separate Procurement Capacity Assessment was conducted for the MEM procurement

IDA, o f a qualified and experienced procurement expert; and (ii) close follow-up o f the the agreed procurement plan and activity scheduling. A procurement action plan will be fine-tuned quarterly and the main procurement plan will be updated accordingly. 4. Environmental and Social

APL- 1 will finance generation rehabilitation, disti-ibution reinforcement and 4.1 rehabilitation o f the existing transmission lines and substations in various towns in Madagascar. The investments are entirely aimed at upgrading existing installations. N o new greenfield sites will be developed or human resettlement undertaken.
J I R A M A has undertaken an Environmental and Social Impact Management Framework 4.2 for phase 1 o f the proposed APL. Phase 2 o f the APL will be the subject o f a complete study (ESIA) during the execution o f phase 1. The JIRAMA subprojects envisaged in APL Phase 1 comprise 3 distinct groups:

- Group 1: Rehabilitation o f thermal power stations. - Group 2: Rehabilitation o f hydroelectric power stations. - Group 3 : Rehabilitation o f transmission and distribution networks.
4.3 The rehabilitation o f thermal power stations in Ambohimanambola, Mahajanga, Toamasina, Toliary, Antsiranana includes the rehabilitation o f the existing Power Plants. The environmental examination o f the projects related to the rehabilitation o f the power stations

25

showed that the environmental impacts are generally neutral. However, the impacts of the investments alone cannot be considered independently from the totality o f the installations and the current environmental situation in the site in which they are located. The main impacts are noise, the atmospheric emissions, pollution o f ground and water due to non efficient management o f effluents, and poor risk management including absence o f an emergency plan. The m a i n mitigation measures to address these issues along with the action plans are available in the Environmental and Social impact Management Framework for phase 1. The rehabilitation o f the hydroelectric power stations o f Antelomita 1, Ankazobe, 4.4 Tsiazompaniry, Vatomandry, Andekaleka and Volobe, consist o f replacement o f used turbine and alternator parts, turbine cooling equipment, general revision o f plant, and rehabilitation of the c i v i l engineering works. The investments will not alter the current design o f the dam, existing water levels nor surpass the original capacity o f the turbines. The main environmental impact identified concern the safety o f the sites (e.g. the transformer Switchyards are not locked and the fire fighting equipment is outdated) and the silting up o f the reservoirs because o f the soil erosion on the basin slopes. The review o f the environmental impact o f these subprojects concluded that they are non significant and reversible, with the exception o f the environmental impacts o f the c i v i l engineering works planned for the hydroelectric station in Vatomandry (192 KW). For this plant, J I R A M A must meet the requirements o f the Bank safeguard policy OP 4.37 o n dam safety. This rehabilitation will not be implemented until a review o f the dams safety, carried out by an independent expert, has been judged satisfactory by IDA. 4.5 The transmission and distribution rehabilitation subprojects present very minor environmental issues. Specific attention i s given to the rehabilitation o f transformers in which the PCB (Polychlorinated Biphenyl) represents an environmental risk. J I R A M A has agreed to comply with the action plan for the elimination o f Persistent Organic Pollutants (POP), elaborated in collaboration with the Malagasy Environmental Administration, the coordination committee o f POP and supported by UNEP. JIRAMA will therefore ensure safe storage of the old transformers in accordance with the recommendations o f the action plan.

5. Safeguard Policies
Safeguard Policies Triggered by the Project Environmental Assessment (OPBP 4.01) Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Cultural Property (OPN 11.03, being revised as OP 4.11) Involuntary Resettlement (OPBP 4.12) Indigenous Peoples (OP/BP 4.10) Forests (OP/BP 4.36) Safety o f Dams (OPBP 4.37) Projects in Disputed Areas (OP/BP 7.60)* Projects on International Waterways (OP/BP 7.50)

Yes [XI [I [I [I

[I [XI [I [I

[I [I

No [I [XI [XI [XI [XI [XI [XI

[XI [XI

[I

* By supporting the proposed project, the Bank does not intend to prejudice the final determination o the parties claims on the f disputed areas

26

The environmental classification o f APL-1 i s Category B. The approach to safeguards is 5.1 presented below, and the results are summarized in Annex 10.
5.2 OP 4.01 Environmental Assessment: J I R A M A has hired consultants to prepare an Environmental and Social Impact Management Framework (ESMF) that guides the screening, analysis o f the existing environmental conditions and the environmental liabilities and impacts o f the present operations in APL phase 1. The consultants have elaborated guidelines with mitigation measures and action plans to reduce the existing negatives impacts. The Government will prepare relevant safeguard studies (ESIAs with EMPs and RAPs, as applicable) for Phase 2 and these will be conducted and submitted to ASPEN for review and clearance.

5.3 OP 4.12 Involuntay Resettlement: I t is unlikely that this Operational Policy (OP) will be triggered for phase 1, since land acquisition or displacement i s not necessary for this stage. Only under APL Phase 2, this Operational Policy may be triggered. In that event, ESIAs with R A P s will be conducted and submitted to ASPEN for review and clearance.

OP 4.3 7 Safely o Dams: For the civil engineering works planned for the hydroelectric f 5.4 power station in Vatomandry, an expert review o f the safety o f the structure will be available just before the implementation o f the project and submitted to ASPEN for review and clearance. 6. Policy Exceptions and Readiness
N o exceptions to Bank policies are requested.

27

Annex 1: Electricity Sector and P r o g r a m Background M A D A G A S C A R : Power/Water Sectors. Recovery and Restructuring Project E n e r g y resources

1. Despite a substantial hydroelectric potential in excess o f 7,000 MW, Madagascar has so far only developed under 100 M W o f generating capacity using this resource. Access to electricity is extremely l o w (less than 5% in rural areas) and the vast majority o f the population relies o n petroleum products and wood fuel for cooking and lighting. Little has been done so far
to develop alternative energy sources like bagasse, solar or wind power.
Electricity consumption

One o f the notable features o f Madagascar's electricity supply system i s i t s fragmentation 2. and the absence o f a national high-voltage transmission grid. Because o f the l o w levels o f demand, and the large distances separating load centres; local supply systems still represent the least-cost solution for supply in the majority o f cases. There are only three urban interconnected networks in Madagascar, serving Antananarivo-Antsirabe, (representing 70% o f national electricity sales), Toamasina and Fianarantsoa, which together account for 80% o f total sales. For the remainder o f the country JIRAMA has 112 separate supply systems serving other small urban areas, not all o f which provide 24-hour service. Electricity production by J I R A M A 2 was 988 GWh in 2005, with total sales o f 754 GWh. JIRAMA's electricity losses were about 24% in 2005, o f which h a l f are estimated to be technical.
Existing generation facilities

Electricity production in Madagascar i s based on a mix o f hydro and thermal plants for 3. base load. Currently production capacity i s 292 M W with 105 M W (or 36%) o f hydro capacity and 187 M W o f thermal capacity, which are capable o f producing about 1,000 GWh per year. A further 40 M W belongs to private auto producers. The largest hydro plant, Andekaleka (2 X 29 MW) was built with IDA assistance in 1982. Due to recent modifications o f the operating regime that was formerly extremely conservative, the plant i s n o w capable o f delivering 10% additional power - i.e. 64 MW.
In general terms, Madagascar's generation facilities are very old. As a consequence, a 4. large number o f the existing thermal units need to be retired before year 2010. W h i l e the hydro production facilities are in relatively good shape, mainly due to donor support, some o f the power plants also need substantial maintenance o f their turbines in order to continue to function at nameplate capacity.

Including purchases o f 24 GWh f r o m private producers.

28

5. The state of the thermal plants i s generally poor due to lack o f preventive maintenance, spare parts and fimding for new generators, especially in the areas served exclusively by thermal diesel plants. JIRAMA's recent financial crisis has accelerated the problem to a point where if considerable investment resources are not provided, regions could be completely deprived of supply for sustained periods of time. Poorly managed and maintained thermal power plants have further led to an increase in diesel consumption that o n average i s 20% above benchmark values.
Evolution o f Demand

L o w voltage users accounted for 63% o f JIRAMA's electricity sales o f 754 GWh in 2005. 6. As shown in Figure 1, demand growth during the period 1995-2005 was 7% annually, markedly faster than the previous decade, when i t barely averaged 3% p.a. The last three years since the end of the political crisis in 2002 exhibited unprecedented double-digit growth o f 12%, albeit after a 9% decline in demand in 2002. The strong demand growth can be attributed in part to the sharp decline in the real cost of electricity to consumers, resulting from a four-year tariff freeze (2001-2005) at a time of high inflation and depreciating exchange rate. Peak demand in the Antananarivo network was 148 M W in 2005, which does not reflect the true level o f demand due to load shedding arising from a shortage o f generating capacity.

7. The number of consumers increased from about 190,000 in 1994 to 402,000 in 2005, an average annual growth rate o f 7%. The distribution o f consumers i s highly concentrated: Only 30 JIRAMA supply centres have over 1,000 clients, while there are under 10 sites with 5,000 or more consumers.
Figure 1: Electricity demand growth in Madagascar, 1987-2004
GWh

I Evolution de la consommation 1987-20041

800 700
600

500 400
300

200 100

Source: Etude de marche et prkvision de la demande, HQIAug. 2005.

29

Tariff policy

8. Madagascar i s unusual in n o t having a pan-territorial pricing policy for electricity. To reflect differences in costs (particularly fuel), and in factors such as load density and load factor, JIRAMA has classified its networks in three "tariff zones", with prices being lowest for zone 1 and highest for zone 3. Zone 1 comprises three o f the larger systems, where generation comes mainly from hydropower. Zone 2, including Mahajanga and Toliary, corresponds to larger thermal systems that use mainly heavy fuel oil. Zone 3 covers the rest o f the systems, which generate power from plants using only diesel. The general l o w voltage residential tariff in zone 3 i s presently 2.4 times than the one paid by consumers in zone 1. For high and medium-voltage consumers, rates are differentiated by time o f day (peak, day, and night). The peak price in zone 1 i s over v times the night rate, in an attempt to flatten JIRAMA's evening peak. ie f
In 1992, GOM passed an important decree (No. 7800-92) which introduced the principle 9. of automatic tariff adjustments, based on an indexation o f tariffs to the exchange rate, the price o f oil, and the local consumer price index. However in practice this indexation policy has never been systematically applied. The current JIRAMA tariff schedule i s presented at the end o f Annex 9.

F u t u r e d e m a n d f o r electricity

Demand for electricity i s projected to increase at an average o f 6.5% to 7.5% annually, 10. according to the load forecast undertaken as part o f the Least Cost Generation Master plan prepared in 2005-2006 by Hydro Quebec International. The study forecasted electricity demand up to 2030. The increase i s primarily fuelled by an increase in the number o f consumers and could be further accelerated if GDP per capita growth figures increase more than projected. As seen in the chart below, the difference in the forecasts between the high and l o w case scenarios is highly dependent on the construction o f a small number o f large industrial/mining projects.
F i g u r e 2: Scenarios o f future electricity d e m a n d
1
6000 ,
I

5000
4000

(3

3000 2000
1000

Source: Etude de marche etprevision de la demande, HQIAug. 2005. Low case (GDPgrowth 3.5%, Population growth 2.0%, major industrial projects delayed), Base case (GDP growth 5.6 %, Popn. growth 2.3%), High Case (GDP growth 7.6 %, Popn. growth 2.5%, Major industrial/mining projects advanced).

30

In the short- to medium-term, however, it i s expected that demand growth will be much lower (2% - 4%) over the period 2006-2007, due to supply constraints, but once these are eliminated, there will be a rapid catch up period (2008-2009) when demand i s expected to increase by 8% - 10% p.a.

11.

The Madagascar grid i s highly dispersed across the country, with a large number o f small 12. unconnected grid systems. Peak energy demand projections for investment purposes are therefore unsuitable o n an aggregate basis for the country as a whole, since the type o f load and amount o f commercial use vary greatly between the regions and the various grids. I t i s o f greater relevance to study the main growth centres such as the Antananarivo network, that represents 70% o f the electricity consumption and half o f the total medium and high voltage loads in the country. Peak demand here has been projected to rise from 147 M W to 594 MW, or over 300% in the 25 years between 2005 and 2030. 13. This massive increase opens up the possibility o f interconnections between the three main load centres o f Antananarivo, Toamasina and Fianarantsoa, to make better use o f untapped hydro resources and achieve economies of scale in generation expansion that would otherwise be difficult to justify if intended solely for one o f these grids taken alone. The interconnections are expected to cost U S 7 5 m i l l i o n for the Antananarivo - Fianarantsoa interconnection and US$47 m i l l i o n for the Antananarivo - Toamasina transmission line3 and will enable JIRAMA to save about US$400 m i l l i o n o n fuel during the 2006-2029 period compared to the scenario o f having three independent, unconnected systems. These transmission l i n k s will also enable JIRAMA to connect the future hydro generation sites o f Volobe and Antetezambato with the main grid.

according to HQIestimates in the 2005 m a s t e r plan.

31

Medium- and Long-Term supply options

Medium Term Supply 2006-2010

The Supply/Demand Balance for the Antananarivo networ-- (R Tana) over the next 5 14. years i s largely dependent on an ambitious investment program and JIRAMAs ability to keep the old plants going long enough prior to the entry in service o f new plants. (see Figure 3).
Figure 3: Antananarivo Grid Electricity Supply -Demand Balance
RI TANA Demand/ Supply Balance
260

240
220 200 180 160

Peak Supply (MW)

140 120
100

2006

2007

2008

2009

2010

2011

15. As shown in Table 1, peak supply i s barely keeping up with demand during the wet season. Load shedding o f 10% o f the supply during the dry season occurs at present, since hydro output i s reduced. Several o f the old thermal plants are in a poor state or at the end o f their estimated lifetime, causing breakdowns and further interruptions in supply. This precarious situation i s likely to persist until the commissioning o f the first batch o f generation investments in mid/late 2007.

32

Hydro HFO Diesel IPP Existing supply

Peak Demand (MW)

147

95 9 27 18 149

153

95 14 27 18 154

168

95 14 27 18 154
86

182

95 14 27 18 154
86

196

95 14 27 18 154
86

212

95 14 15 18 142
101

New Generation

iource: JIRAMA.

Peak Supply (MW)

149

154

240

240

240

243

In order to meet the increasing demand and put an end to the current supply shortages, 16. the government has identified the most urgent generation investments for the medium-term. These are geared towards increasing supply and lowering the cost o f production o f existing plants, while investments will be made in new HFO plants with quick returns on investment largely replacing more expensive diesel alternatives. These investments can be clustered as follows:
0

Rehabilitation and conversion

Rehabilitation and conversion o f the thermal power plants in Ambohimanambola, Antsirabe, Antsiranana, Mahajanga, Toliara. The investments o f about USSl.7 million would save around US$lmillion per year in fuel costs while improving reliability and increasing production by 27 GWh.
New Production

A new 40 M W HFO thermal power plant for the Antananarivo grid. This will be able to produce 200-250 GWh annually at base load. o The addition o f a third turbine in Aizdekaleka hydro plant to increase production capacity by 30 M W and 200 GWWyear under normal hydrological conditions. o Construction o f small sized hydro plants as IPPs, notably Sahanivotry and Lily adding 12+4 M W o f base load capacity and total average energy o f 80 GWh. o Leasing or IPPs for a number o f smaller power plants for the regional centers o f Antsiranana, Mahajanga, Toliary.
o

33

1 400 000

1 200 000 1 000 000 1

800 000 1

-.. - . .

--

-.-

600000
400 000

-._

200000
0

The least cost Generation Master Plan identifies the following hydroelectric candidates 19. for the main grid5for the long-term.

Project Talaviana Lohavanana Volobe Amont Phase 1 Phase 2 Antetezambato Phase 1 Phase 2 Phase 3

Commissioning Year

Capacity in M W

2009 2012 2015 2018 2019 2020 2023

15 120

Guaranteed Energy (GWh)

Approx. Cost US$m

7 56

26 194 107 23 180 26 26

60 30
60 60 60

38

60 90

The ranking and sequencing o f the principal hydro investments shown in Table 3 are 20. dependent o n development o f various grid interconnection projects as well as the possibilities o f co financing with proximate large-scale mining operations, as in the case o f the Volobe Amont project.

The Antananrivo and Taomasina grids would also be interconnected in parallel.

35

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies MADAGASCAR: Power/Water Sectors Recovery and RestructuringProject Ratings (Bank-financed projects only) ED Rating! Outcome SustainID Impact ability

Sector Issue zompleted Projects

Project

Hydro-generation, Development

Rehabilitation and maintenance o f the power system and institutional strengthening Increased generation capacity, rehabilitation o f the power system and institutional strengthening Improved Access to Water supply and Sanitation services in Rural areas Improved Urban Infrastructure and Job creation
~

Andekaleka Hydroelectric Project (Approved 1978), Credit 08 17 Energy Project (approved 1987), Credit 1787

su

Energy Sector Development Project (approved 1996), Credit 2844 Rural Water Supply and Sanitation Pilot (approved 1997), Credit 30250 Urban Infrastructure Project [approved 1997), Credit 29680

I C R not completed (Rating N/A) S

I C R not I C R not completed completed

L L

s u
s u

Latest Supervii on Implementation Development Objective (DO) Progress (IP) S S

Ongoing Projects

Transport Sector Development Stimulate Economic growth and Job creation Note: M S S U MU

Transport Infrastructure Investment Project (approved 2003), Credit 38360 Integrated Growth Poles (approved 2005), Credit 41010

Unsatisfactory Marginally Unsatisfactory

Marginally Satisfactory Satisfactory

36

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h h

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Annex 4: Detailed Project Description MADAGASCAR: Power/Water Sectors Recovery and Restructuring Project Introduction

The proposed lending instrument for this operation is a two-phase, five year 1. Adaptable Program Lending (APL). The APL program i s conceived as a 6 year effort (mid-CY 2006/mid-CY 2012) to be implemented in two phases. Only Phase 1 o f the P proposed A L (mid-CY 2006 to mid-CY 2008) i s presented in detailed in this annex with a detailed cost table presented in Attachment 1. A preliminary description o f APL-2 i s presented in Attachment 2 o f the present annex. IDAScontribution to the first phase (APL-1) i s expected to be U S 1 0 million and for the second phase (APL-2) is expected to be about US$30 million and should provide resources to implement critical investments and guarantees for investments to be made by the private sector. Through a programmatic approach, the proposed project aims at supporting the 2. most pressing needs o f the electricity sector. Hence APL-1 i s entirely focused on restoring J I R A M A to a minimum acceptable level o f operational and financial performance. This restoration i s an essential precondition to attracting a private firm to operate JIRAMA under an affermage contract. APL-1 would inter alia, provide funds for TA to GOM to facilitate close cooperation with the I F C transaction advisors team in the process o f selecting and contracting a new private operator to take over JIRAMA at the end o f the current management contract, as w e l l as for prolongation o f the current management contract to avoid any hiatus before the takeover by the selected strategic partner. APL-1 will also provide funds for some preparatory studies needed to build up a pipeline o f APL-2 investments and Guarantees. 3.

APL-1 comprises two components:

Component A: Investments for: (Ala) Power generation reinforcement (rehabilitation); (Alb) retroactive financing; (A2) Reduction o transmission and f distribution technical losses; and (A3) Revenue management and Modernization o f Information Systems and I T equipment. Component B: Funding and technical assistance for: (Bl) close cooperation with the IFC transaction advisors team in the process o f selecting and contracting a new private operator and communication; (B2) prolongation o f the current management contract; (B3) preparation o f future generation projects in coordination with IFCs (second) IPP mandate; (B4) strengthening o f the Ministry of Energy and Mining; (B5) feasibility and environmental studies for APL-2 investments; (B6) monitoring and evaluation; and (B7) project implementation.

43

Component A: Short-term investments (including;continpencies: IDA: US$7.0 million)

T o address the immediate technical shortcomings o f the utility, JIRAMA has 4. drawn up a medium-term (2006 - 2010) investment plan estimated to cost US$200 million (for both electricity and water), to improve the performance o f costly and poorly performing generation plants, reduce high technical losses and introduce improvements in revenue management. The Bank, in coordination with other donors, would finance some of the highest priority and most urgent investments o f this plan. This i s the centerpiece of APL-1. This component will be executed by JIRAMA. Bid packages for these projects are under preparation.
Subcomponent A l a : Power generation reinforcement (rehabilitation) (IDA: US$2 million)

This subcomponent supports the project objective o f restoring and improving 5. electricity supply and contributing to JIRAMAs financial recovery. I t includes rehabilitation of existing hydroelectric and thermal units, and conversion o f generation units from diesel to heavy fuel o i l (HFO).

(a) Replacement o f hydro-refrigerants system for the ANDEKALEKA hydropower plant (2 x 32 MW): The project proposes to finance the replacement (6) and rehabilitation (7) o f those hydro-refrigerants.

(b) Rehabilitation o f unit No3 o f the ANTELOMITA 1 hydropower plant (0.8 MW): The current state o f Antelomita 1 does not allow using its energy to full capacity. The project proposes to finance the acquisition o f components to rehabilitate the plant. The project will also finance some training in system control and protection.
(c) Renovation works in the VOLOBE hydropower plant (6.7 MW) The present condition o f Volobe does not allow i t s energy potential to be fully used. The project proposes to finance acquisition o f components to rehabilitate and restore the plant. General rehabilitation o f some equipment (turbine wheels, alternators, etc.) o f the plant will also be done under the proposed project.

(d) Rehabilitation o f small hydropower plants o f ANKAZOBE, TSIAZOMPANIRY, A M B O D I R I A N A and VATOMANDRY: The project proposes to finance the rehabilitation o f these small hydropower plants to reduce JIRAMAs dependence on thermal generation in its isolated system.
(e) Rehabilitation o f mechanical auxiliaries o f the AMBOHIMANAMBOLA thermal power plant (3 x 6 MW): Most o f the mechanical auxiliaries are in poor condition. The plant cannot be run on a permanent basis with HFO. A first tranche of rehabilitation i s already ongoing, and this will be completed under the

project by replacement o f some mechanical auxiliaries such as boilers, re-heaters and exchangers.

44

(0

Rehabilitation of thermal plants in M A H A J A N G A (Unit 1303), T O A M A S I N A (2 x 8 MW) and TOLIARY (Unit 1305) are expected to be financed by the Agence Franqaise de Dkveloppement (AFD).

Subcomponent A 1b: Retroactivef i n ancing (IDA: US$l rn illion)

6. Some of the urgent works needed to rehabilitate JIRAMAs thermal plants were to have been financed under the previous IDA Credit for ESDP that closed in December 2005. A s these could not be finished prior to the closing date, JIRAMA has had to finance them from i t s own resources. Some o f these expenditures meet the requirements o f OP 12.10 on Retroactive Financing; in particular because (i) represent less than they

they 10% o f the Credit amount; (ii) have been paid for within 12 months o f Credit signing; and (iii) followed Banks procurement processes. An amount o f up to they US$1 m i l l i o n would be eligible for retroactive financing under the proposed project. The concerned contracts for the following works w i l l be reviewed for eligibility: (a) Rehabilitation of the Ambohimanambola thermal power plant (3 x 6 MW) (tranche 1): Contract C1190/ 91 1823/T0501A with SEMT PIELSTICK. (b) Rehabilitation of the Antsirabe thermal power plant: Contract C1200/91824/T0502A with SEMT PIELSTICK. (c) Rehabilitation o f the Mahaianga thermal power plant: Contract C1210/91825/T0503A with MAN B & W Diesel.

(d) Rehabilitation of the Ambohimanambola thermal power plant (3 x 6 MW) (tranche 2): Contract C 1220/9 1826/T0504A with POLYRESINE.

(e) Rehabilitation of the Ambohimanambola thermal power plant (3 x 6 MW)

(tranche 3): Contrat C1240/91828/T0506A with SEMT PIELSTICK.

45

Detailed cost table for subcomponent A1

ConlaonenrA
Pe ow r
I .

.. .

IDA

AFD

JIRAMA

a Replacement of hydro-refrigerants system for the ANDEUALEUA hydropower plant b Rehabilitation of unit N 3 ofthe ANTELOMITA 1 hydropower plant

260 710 750

25 84

c Renovation works in the VOLOBE hydropower plant

d Rehabilitation of small hydropower plants ofANK9ZOBE TSIAZOMPANIRY, AMBODIRIANA and VATOMANDRY

76
20

e Rehabllitatlon of mechanical auxillaries Olihe AMBOHIMANAMBOLAthermal power plant

80
200

Total IDA(Sub)omponentAl.aI
AFD - Rehabilitation ofthermal plants in MAHAJANGA (Unit 1303) AFD. Rehabilitation ofthermal plants in TOAMASINA (2x8 M W AFD- Rehabilitation ofthermal plants inTOLLARY (Unit 1305)

2,000

0
1,081 2,234 840

205
215 113 1167

Total AFD (ncwprojccts)/ Recroactlve financing Total retroactive financing A1.b

I
TOTAL Subcomponent A I

4.155

1,000

I
4,155

1.495

1.000

500
~~

3 .OOO

2.200

Subcomponent A2: Reduction o traizsmission and distribution technical losses f (IDA: US$I.3 million)

Reduction o f losses: rehabilitation o f transmission networks (APL-1: US$0.3 7. million): Reliability o f the transmission system i s poor arising from a combination o f factors like old equipment, lack o f protection and control equipment and inaccurate metering. High voltage networks in Madagascar need to be strengthened and rehabilitated; this upgrade will result in increased power reliability with a reduction o f significant outages in the network to be rehabilitated. The project proposes to finance the rehabilitation o f the AmbohimanambolaNandraka transmission line, which serves Antananarivo.
of JIRAMAs distribution transformers and lines are already saturated, which leads to voltage drops, high technical losses, low reliability and load shedding. The project would

8.

Reduction o f losses: rehabilitation o f distribution (APL-1: US$lmillion): M a n y

finance the acquisition o f distribution materials and equipment to rehabilitate and reinforce networks in the R I TANA (peak demand o f 136 M W l 6 9 8 GWh in 2004) and in some other centers such as MORONDAVA (1.375 k W l 5 MWh), MANAKARA (890 k W l 3 MWh), A N T S I R A N A N A (7.083 k W l 3 2 MWh), S A M B A V A (1.680 k W l 7 MWh), ANTALAHA (1.3 15 k W l 5 MWh), AMBANJA (735 k W l 3 MWh) and T O A M A S I N A (13.250 kWl59 MWh). Specific subprojects are being finalized and would be financed in part by APL-1 and by AFD.

46

Detailed cost table for Subcomponent A2

2: Redtmion of Tra?sm&uona&
New projects

. .

IDA

AFV

JlRAlulA

a Rehabilitation ottransmlsslon networks b Rehabilitation ofdlstrlbuti0n neiworks

j
I
Total Subcomponent A2

1 no0

tbd tbd

1
1

85 130

1.300

tbd

215

Subcomponent A3 Revenue management and Modernization o Information Systems f f and acquisition o I T equipment (IDA - US$2.3 million)

Revenue management (APL-1: US$1.35 million and JIRAMA: US$0.385 9. million): W h i l e the overall revenue collection performance o f JIRAMA is reasonable, there is s t i l l considerable scope for improvement, particularly as regards industrial clients. The Project will support targeted investments that aim at improving the commercial side o f the distribution business as measured by enhanced billing and increased revenues. The main rationale o f these investments is to create value in the Madagascar electricity business and demonstrate the returns on such investments so that they can be replicated on a larger scale. 10. Given the large investment requirements compared to the available IDA financing, the desired developmental impact would not be achieved if investments are thinly spread and if they are not directed to achieve specific outcomes in identified areas. In order to address this concern, it i s proposed to adopt a cluster approach in implementation o f the Project. Investments would be implemented in these clusters to P create islands o f excellence to be replicated in the Second Phase o f the A L or by the J I R A M A operational budget. The results would thus be improved revenues, reduced losses and reduced billing complaints. The choice o f clusters will be made in close cooperation with J I R A M A following specific criteria. The rationale behind such an approach is: (a) spreading activities thinly across 11. JIRAMA may not demonstrate clear impact; (b) i t i s easy and practical to establish a baseline for key performance indicators at a cluster level, or for a specific type o f customer; and (iii) measurement o f impacts will b e facilitated.

A set o f activities i s proposed to be financed under APL-1, some o f which will be 12. comprehensive, as for industrial customers, while others will be more o n a trial basis that may be extended under APL-2, if good results are obtained.
(a) OrganizatiodManagement: The revision and implementation o f a standard flowchart for commercial teams will be carried out during the Management Contract, in order to revise and improve commercial procedures and to improve the circulation o f information. Tasks and responsibilities will be better assigned

47

and job descriptions made more appropriate. This action does not require any financing, but i s part o f the accompanying actions in the JIRAMA recovery program.

(b) Improvement o f invoicing: Increasing the ratio o f meter readerdcustomers and o f the number and qualification o f supervisors will reinforce internal controls and will improve billing. This action does not require any financing through APL-1.
(c) Fight against fraud - adiustment o f the penalties: Another aspect o f the reduction o f costs and the improvement o f efficiency i s the revision and the upward adjustment o f the penalties applied to fraudulent customers. This action does not require specific financing.

(d) M e t e r and residential customer records verification program: This program carrying out, in conjunction with local covers the following activities: (i) authorities, a technical and administrative check o f the meterdcustomers, by neighborhood (cluster level); (ii) identifying and dealing with frauds and

abnormalities and updating the meter/customer databases, both for electricity and creating and training anti-fraud units; (iv) carrying out technical and water; (iii) commercial adjustments such as replacement/normalization o f connections and meters; and (v) acquiring metering tools, I T equipment and GPS. The project proposes to finance an exhaustive verification program in pre-identified zones (clusters). IDA financing will be intended for the purchase o f metering tools and implementation o f the program.

(e) Purchase and installation o f prepayment meters: In order to address problems o f payment recovery in some o f the more difficult service areas, Prepaid Systems (prepayment meters) in a predefined cluster area will be implemented. This trial at the level o f an entire zone will be spread to administrative customers and t o some specific customers with high consumption. The project proposes to finance the purchase and installation o f these prepayment meters.

(f) Investments in Spot Metering Equipment and Systems: Better cash flow management and revenue control by introduction o f spot billing which involves hand-held terminals, printers, modems and associated accessories. In this method, bills are printed and delivered o n the spot at the customers premises when their meters are read, and the utilitys customer database i s updated electronically. Customers have the additional advantage o f staggered payment due dates, thus reducing crowding at cash collection centers o n or near the due date. Apart from improving customer service, this intervention also compresses the cash flow cycle, and introduces electronic data recording, facilitating diligence o n this critical revenue generating part o f the business. I t is proposed that 100 Meter readers in a defined distribution cluster o f Antananarivo would be equipped with spot billing equipment.
The project will also finance consultant support for training and capacity building of JIRAMA staff in the application o f spot metering and pre-payment metering techniques in the selected clusters. The component will include on-the-job

48

training in use o f spot billing equipment by meter readers so as to fully benefit from the new technology as well as training in software applications to use the customer data made available. The project will further assist in establishing a suitable framework for pre-payment metering o f residential consumers. such as arrangements for card sales licensing, meter verification procedures, suitable client interface etc.
(g) Systematic verification o f installations in Premises o f all 800 industrial customers: About 800 industrial subscribers represent more than 30% o f total electricity consumption; because o f lack o f resources, industrial installations are verified and checked by specialized JIRAMA staff only every 5 years. The systematic verification o f these HV/MV installations is an absolute priority. The results o f these verifications and the necessary corrective actions need to be implemented without delay, given the potential loss o f revenue to JIRAMA. The project proposes to contribute to the financing o f the corrective actions.

(h) Purchase and installation o f electronic meters for all 800 industrial customers: In order to improve demand management, to have a better knowledge o f HV and MV customers and for a better understanding and monitoring o f their consumption (daily load), it i s essential to replace the traditional mechanical and electro-mechanical meters by electronic meters. This action was started under the previous IDA Credit and will be completed with J I R A M A financing.
Modernization o f information systems and acquisition o f I T equipment: (APL-1 13. US$0.95 million)
(a) Interconnexion o f all J I R A M A premises: The objective o f this action is: (i) to to open up the Inter-Regionals Services; (ii) reduce time for data processing

i ito transfers, to accelerate the exchange o f local information; ( i ) reduce the various expenses (transport, computer supplies) linked to present non-networked exchanges o f information; (iv) to improve customer satisfaction (internal and external) by the reduction o f response times; (v) to facilitate monitoring o f connections reliability; and (vi) reduce telephone costs within JIRAMA. The project proposes to finance the introduction o f an internal I T ((backbone)) for all JIRAMAs site. The progressive installation o f adequate communication support will allow more reliable data transfer and analysis and in real time.

(b) Acquisition o f I T equipment and training o f JIRAMA staff in their use: JIRAMA is clearly under equipped regarding I T equipment. The project proposes to finance the acquisition o f equipment and software such as: computers, related software, and various office equipment such as printers, video-proj ectors, scanners. Due to limited resources, only a part o f the needs will be financed through APL-1. The project also proposes to finance training programs o f users and I T staff.

49

Detailed cost table for Subcomponent A3

IDA

AFD

JIRAMA

OrganizationlManagement Improvemenlofthe invoice function Fight against the fraud- adjustmentofthe penalties Meter and resldentlal customer recordsverlflcatlon program Purchase and installation of prepayment meters f Investments in Spot Metering Equipment and systems g Systematicverification of installations in premises ofthe all 800 industrial customers h Purchase and installation ofeletronic Meters for all 800 industrial customers

a b c d e

4 m

150

0 0 0 85

500 300 Total -revenue Manaaemend

1350

mn
385

a lnterconnexion ofall JlRAMApremises b Acquisition of IT equipment and training ofJlRAMA staff in their use
~~

Modernization of Information System and IT equipments

Total Modernization of InformationSystem and IT equipmentsl

I 1

400 550 950

1 I

I
0

15

7 E

Total Subcomponent A3

2.300

400

Cost table for Component A

IDA Siihcoiiiponeiit A1.a: Powei yeiieiatioii ieiiifotceiriit (ieliaiiililaiioii) Siilconipoiieiit A1.L: Retioactive fiiidiiciiig Suhcninpoiieiit p2: Retliictioii of lidiisiiiissioii mid ilistiihtioii tecliiiicsl losses iil Siibcoiiipoiieiit A 3 Reveiiiie iiimdgeiiieiit diid iiinileiiiiz.itioii of iiiloiiiidtioii Systeiii .ii IT eyiripiiieiit Ufwllowted

AFD

JIRAMA

2,000 1,000 1,300 2,300 400

4 155

tbd

1.700 500 tbd 400

Total Component A

7.000

tbd

tbd

50

Component B: Technical Assistance and Capacity BuildinP (IDA US$3 million, includine contingencies)
Subcomponent B l : Technical Assistance and Communication - Contracting a private operator to take over JIRAMA ( I D A US$0.25 million)

The project proposes to finance technical assistance to assist the Government and 14. IFC in the process o f selecting and contractirlg a new private operator to take over JTRAMA at the end o f the current management contract.

15. Through this subcomponent, the project will intend to strengthen the transparency and the credibility o f the proposed reform agenda through consultation and information on the objectives o f the reform. I t i s therefore essential for the MEM t o formulate, adopt and implement a strategic communication plan targeting a l l interested groups and parties. To prepare and implement such plan, the MEM should benefit from specialized technical assistance.
Subcomponent B2: Extension o the current management contract (IDA US$0.9 f million)

The project proposes to provide funds for the prolongation o f the current 16. management contract by 6 - 9 months to avoid any hiatus before the take over by the selected strategic partner. (see provisional timetable below).

Subcomponent B3: Preparation o future generation projects in coordination with f IFCs IPP mandate (IDA: US$O.6 million)

The project proposes to finance some studies (pre-feasibility, environmental 17. studies etc.) in order to assist the Government and I F C to have sufficient project documentation available for a selection o f small t o medium size hydroelectric generation projects to attract investor interest.

51

Subcomponent B4: Strengthening o the Ministry o Energy and Mining, (IDA: f f US$O.4 million)

18. The Minister o f Energy and Mining (MEM) has requested the services o f an international consultant to advise him on activities linked to the reform process and the IPP program (mandates 1 & 2 o f IFC). The Consultant will report directly to the Minister of Energy and Mining. The Advisor will also have to ensure project coordination and will lead the mini project implementation team (CELCO) in MEM. The project proposes to finance the services o f an individual resident expatriate advisor for a period o f 12 - 24 months. 19. The project also proposes to finance a Technical Assistance to perform a capacity analysis and core competence strategy for the MEM future mission. This will include an assessment o f environmental and social safeguard capacity within the Ministry to handle future investments.
Subcomponent B5: Preparation o APL-2 feasibility and environmental studiesfor f APL-2 investments, (US$0.15 million)

In order to confirm the feasibility, carry out detailed engineering, secure the 20. relevant financing (andor guarantee) and obtained the required approvals, the technical, environmental, social and commercial feasibility and the engineering o f Phase I1 investments will need to be assessed and the relevant bidding documents prepared. The project will provide resources for JIRAMA and MEM to be able to hire the necessary consulting services to carry out some o f this preparatory work.
Subcomponent B6: Program monitoring and evaluation (US$O.l5 million)

P The project will support monitoring and evaluation o f the A L program by 21. providing resources to design a Monitoring and Evaluation System for the Ministry o f Energy and Mining and J I R A M A to be able to follow and report progress, track performance in line with the indicators agreed at negotiations (Annex 3), and assess the impacts o f the activities supported by the Project. C E L C O / M E M will have overall responsibility for meeting Bank M & E reporting requirements.
Subcomponent B 7 Assistance to MEM in project implementation (US$O.lS million) :

22. Component B o f the project will be implemented through a mini Coordination Cell (CELCO) to be located in the MEM. The project proposes to finance the services of an accountant and procurement officer for CELCO. This component will also finance project related external audits by auditors acceptable to IDA.

52

IDA Siibcoiiipoiieiit 81: Teclinlcrl Assistaiice .1nd coiiiiiiiiiiic~itioii- Contractiiig pibate operators to take ovei JlRAlrlA Siilleomponent 82: Prnloiiyatioil of the ciirient inanageinelit contian Siihcoiiipniient 83: Prepaiation of liltlire yeiieratioii piojecn in cooidilialion with IFC iPP iiianclate Sulcoiayonent 81: Stieiigtlieiiiiiy oftlie hlinistiy of Eneigy aiitl Mining Siihcoiiieoiieiit 85: Pievaiatioii of APL2 and enviioiiiiieiital studies foi APL.2 investiiieiits (campleiiei?Ied by A t i n s ; PPR Subcoiiipoiieiit 86: Yoiiitoiilig aiid evaluitioii Siibcoiiipoiient 87: Ploject iiilyleineiitdtinii Ulwllowad

AFD

JIRAMA

250 900 600 400 150 150 150 40 0

ibd tbd

Total Component B

3.000

tbd

tbd

53

Attachment 4.1 APL-1 - Cost table

ConlDonenrA
? A i : Pe ow r
IDA AF[I JIRAMA

a Replacement of hydro refrigerants systpm for the ANDEKALEKA hydropower plant b Rehabilitation ofunit N' 3 oftheANTELOMlTA1 hydropower plant

260

25
84

710
750

c Renovation works In the VOLOBE hydropower Plant

d Rehabilitation of small hydropower plants o f A N W O B E TSIAZOMPANIRY AMBODIRIANA and VATOMANDRY
e Rehabilitation of mechanical auxiliaries Ofthe AMBOHlMANAMBOL4thermal power plant

76
20

80
200

Total IDA (Sub)omponent A1.a

AFD- Rehabilitation ofthermal Plants in MAHPJANGA(Unit1303) AFD Rehabilitation ofthermal plants in TOAMASINA(Zx8 MW AFD Rehabilitation ofthermal plants in TOLIARY (Unit 1305)

2.000

0
1081 2,234 E40

205
215

113

1167

Total AFD (new projects)

Retroactive financing Total retroactive financing A1.b
~

0 1 000

4,155

1,195

TOTAL Subcomponent A I

I I

1.000

500

3.000

4,155

2.200

of TranNew projects

. .

IDA

AFD

JIRAUA

a Rehabilitation oftransmission networks b Rehabilitation of distribution networks

1 I
Total Subcomponent A2

300 1000

1 1

tbd tbd

1 I

85 130

1,300

tbd

215

Total Component A (

7.000

I
I

tbd

2.81 5

ConlDonenrs

& Fvoluau120and-P r

Inn

AFD

JlRAlrlA

(complemented by a future PPF] Subcomponent 86 Prooram monitoring and evaluation Subcomponent B7 Assistance in MEM to project implementation

150
150

Unwllocated

400

Total Component B / Total APL-1

3000

tbd tbd

0 2,215
I

1~.000

54

Attachment 4.2: APL-2 - Description and Cost Table

23. The second phase o f the APL would be conditioned on satisfactory progress towards financial recovery of J I R A M A and a signed affermage contract for the long-term management o f the utility by a private firm. 24. APL-2 would seek to lay the foundation for a sustainable expansion o f a commerciallyoriented utility in the most cost-efficient way by investing in strategically important areas such HV preparation o f the next large scale hydro as: (i) interconnections o f the main load-centres; (ii) i iinvestments and TA necessary to make JIRAMA raise its performance to facility; and ( i ) developing world utility best practice.

25. APL-2 funding (mid-2008 - mid-2012) from IDA would tentatively b e about US$30 million. A significant part o f APL-2 funding will be allocated to a partial risk guarantee facility to attract private investors for large scale PPP hydro operation. Additional funding i s expected to
be secured from AfDB, bilateral donors and the private sector. Further definition o f the investment component will be funded by the TA component o f 26. APL-1. The table below proposes indicative areas o f investments to be included in APL-2.
Tentative cost tab for APL-2

3 1 Prep h t u r e large scale hydro project

3 2 Reform and S t r e n g t h e m g o f MEM

3 3 Cotrunurucataoq Momtotonng and evaluataon 3 4 Project unplementatlon

TOTAL
Undoeated

I
114 70

I
~

APL-2 -TOTAL

10

20

204

APL-2 -TOTAL IDA (10 + 20)

30

55

Annex 5: Project Costs MADAGASCAR: PowerWater Sectors Recovery and Restructuring Project

Project Cost By Component and/or Activity

Component A Subcomponent A 1 Subcomponent A2 Subcomponent A3 Component B Subcomponent B1 Subcomponent B 2 Subcomponent B3 Subcomponent B 4 Subcomponent B5 Subcomponent B6 Subcomponent B 7

Foreign Total Local U S $ million U S $ million U S $ million 150 65 115 140 2,850 1,235 2,185 110 900 600 400 100 50 8,430 365 365 9,160
3,000 1,300 2,300 250 900 600 400 150 150 150

50 100 150 770 35 35 840

Total Baseline Cost Physical Contingencies Price Contingencies

Total Project Costs Interest during construction Front-end Fee Total Financing Required

9,200 400 400 10,000

840

9,160

10,000

56

Annex 6: ImplementationArrangements MADAGASCAR: Power/Water Sectors Recovery and Restructuring Project

de 1Equipement Electricitk), and would be responsible for implementation o f Component A, Equipment and services related to JIRAMA. The other would be a small coordination and advisory group (Cellule de coordination-CELCO) responsible for the policy and institutional reform components, Component B, as well as for monitoring and evaluation o f the project in i t s entirety. C E L C O would be attached to the office o f the Minister o f Energy and Mining.
Implementing agencies

distinct implementation entities. One would be an integral part o f JIRAMAs DEEL (Direction

1.

The proposed Power/Water Sectors Recovery and Restructuring Project would have two

2. JIRAMAs DEEL: DEEL (Direction de 1Equipement Electricitk) i s a department within JlRAMA in charge o f project Management activities for J I R A M A electricity sector investments. DEEL was within JIRAMA, in charge o f the implementation o f related components o f the former energy project PDSE. Financial management and procurement procedures and staffing expertise were found to be adequate.
M E M s CELCO: MEMs o w n assessment has demonstrated that there i s a lack o f 3. adequate capacity within the ministry and that therefore a small coordination and advisory group (Cellule de coordination-CELCO) attached to the ministry would be responsible to implement Component B o f the project. The CELCO i s composed o f (i)resident expatriate advisor who a will manage the unit; (ii) qualified and experienced accountant to assist MEM accounting staff a in performing financial management tasks including budgeting, accounting, financial reporting, i ia and disbursement operation; and ( i )qualified and experienced procurement officer familiar with World Bank procurement procedures to assist MEM in all procurement activities. Incremental costs of the unit will be supported by the project.
Project Reporting, Monitoring and Evaluation
Project implementation manual

Both DEEL and CELCO will prepare a Project Implementation Manual. The PlMs will 4. set forth all operational and procedural steps regarding activities evaluation, reviews and approval, flow o f information, procurement and financial management arrangements.
Financial management

5. CELCO (MEM) and DEEL (JIRAMA) will maintain separate accounts for all transactions related to each component for which they have overall implementation responsibility and will produce their individual annual financial statements in accordance with internationally accepted accounting principles. The consolidation o f project accounts if necessary, the production o f quarterly Financial Monitoring Reports (FMRs) in compliance with international accounting standards and IDA requirements and the monitoring o f the project
57

progress will be assured by CELCO (MEM). They will also need to upgrade the fiduciary systems already in place to ensure timely delivery o f data on project activities.
Audits

CELCO and J I R A M A financial statements will be audited annually by an international 6. private accounting firm acceptable to IDA in accordance with International Standards o f Auditing and the FM Practices in World Bank-financed Investment Operations issued by the FM Sector Board o n November 3,2005. The auditors will be required to: (i) express an opinion on the project financial statements; (ii) carry out a comprehensive review o f the internal control procedures and provide a management report outlining any recommendations for their improvement. The audit reports will be submitted to IDA not later than six months after the end o f each fiscal year. The auditors should be recruited prior to credit effectiveness. The terms o f reference o f the audit will be reviewed by the financial management specialist o f the Bank/IDA to ensure the adequacy o f the audit scope, drawing special attention to particular risk areas identified during project preparation.
Monitoring and evaluation

7. The implementation o f the project will be monitored through quarterly progress reports which the Project coordinators (both at J I R A M A and MEM) will prepare and submit to IDA. This will provide a way o f tracking actual project execution against implementation milestones established at the time o f the project launch. These are the key performance indicators and project outcomes that are contained in Annex 3.
8. Further, in order to assess impacts that the project i s expected to deliver o n the quantity and quality o f electricity and water supplied, it i s envisaged that several surveys will be carried out at different points on JIRAMAs network. Monitoring o f revenue enhancement measures will be facilitated by the ring-fencing o f clusters where these are to be introduced. Baseline data will be collected in these clusters prior to introduction o f the new customer management techniques, Other indicators o f JIRAMAs overall performance, their baseline values and targets have 9. been agreed during negotiations. These indicators are given in Annex 3.

58

Annex 7: Financial Management and DisbursementArrangements MADAGASCAR: PowerrWater Sectors Recovery and Restructuring Project

Introduction

1. In accordance with Bank policy and procedures, the financial management arrangements o f the DEEL (Direction de I'Equipement Electricitk, a department o f JIRAMA) and the MEM (Ministry o f Energy and Mines) respectively responsible for the implementation o f the components A (Investments) and B (TA, studies etc.) o f the proposed Credit (Power/Water Sectors Recovery and Restructuring Project) have been reviewed to determine whether they are acceptable to the Bank.
This review is rather an update for the DEEL (JIRAMA) since the FM systems of this 2. entity have already been assessed in the context o f the previous Energy Sector Development Project closed in December 2005. The conclusions o f this review are given in Section D (Appraisal Summary) o f the main body o f this P A D and not repeated here. 3. With regard to MEM, no FM assessment has been carried out yet since the Coordination Unit (CELCO) in charge o f implementation o f component B is s t i l l not in place. However, we have started to define with the MEM the characteristics o f the FM system(s) to be implemented, and developed an agreed action plan to ensure that the ingredients for sound project financial management are in place prior to Credit effectiveness.
Country issues

4. The World Bank's CFANCPAR, completed in 2003, and some diagnostic works carried out over the last three years by the Bank and other donors, identified a range o f weaknesses and issues hampering the performance o f Madagascar's budget and expenditure management system. To address these issues, the Government has developed in 2004 and 2005, in conjunction with all key development partners, a priority action plan for public finance reform. The main adoption o f a new organic public finance law; (ii) achievements encountered so far include: (i) introduction o f program budgets to improve the presentation o f the budget and i t s alignment with policy priorities of the government as specified in the PRSP; (iii) reinforcement o f the Treasury internal control system by recruiting additional staff and improving the operational efficiency o f the "Brigade du Tresor"; (iv) simplification o f the expenditure management process by integrating the functions o f "sous- ordonnateurs" and credit managers; (v) creation o f an internal control mechanism (IGF: General Finance Inspection) at the level o f the Ministry o f Finance; (vi) review o f the legal framework for the control institutions (IGF, Brigade du TrCsor, Auditor general) and implementation o f capacity building measures to improve their efficiency; (vii) development and implementation o f a computerized integrated financial management system in six main treasuries, capturing the different phases o f the expenditure process. The reinforcement of the Treasury internal control and the implementation o f the integrated financial management system (IFMS) in six treasuries have improved timeliness and quality o f financial information.

59

5. The Auditor General has also cleared the backlog o f accounts and completed the examination o f the draft budget execution laws for the years 1998 until 2003. The oversight function o f Parliament has been strengthened through capacity building and training o f the Public Finance Committee.
6. While overall implementation progress o f the reform program i s encouraging, significant actions remain to be done, including the following: (i) improvement o f budget execution rate in priority sectors; ( ireinforcement o f the capacity o f the l i n e ministries in public financial i) management, especially in the implementation o f the new program budget structure; ( i ) ii strengthening o f cash management; (iv) production o f the treasury accounts within the legal timeframe; and (v) reinforcement o f control over state owned companies and national public institutions. The strategic coordination o f the multiple reforms and the monitoring & evaluation system also need to be improved. To mitigate risks in public expenditure management, the W o r l d Bank, through the Governance and Institutional Development Program (PGDI), and a number o f donors continue to support Governments public finance reforms reflected in i t s annual priority action plan for 2006.

7. Regarding the accounting profession, some positive developments have been noted over the last three years through assistance provided by the FIDEF (Fbdbration Internationale des Experts Comptables Francophones) and I N T E C (Institut National des Techniques Economiques et Comptables). However, a number o f local accounting firms continue to operate below the international standards due to the lack o f proper auditing standards, clearly defined guidelines and procedures for systematic peer reviews, quality control mechanisms to harmonize methodology. To improve the capacity and the competitiveness o f local auditing firms, the following measures have been taken while auditing Bank/IDA financed projects: (i) obligation effective for local auditors to enter into partnership with international accounting firms; and (ii) participation o f the international accounting firm in audit fieldworks and submission o f audit report jointly signed by the local and international audit firms. An accounting and auditing ROSC (Reports o n the Observance o f Standards and Codes) would be certainly helpful to identify clearly both issues and actions to be taken to strengthen the capacity o f the accounting profession in Madagascar.
Budgeting

Budgeting arrangements for the MEM and J I R A M A are clearly documented. The 8. budgeting needs o f the project will be fulfilled by the DFB (MEM- Directorate o f Finance & Budget) regarding component B and by the JIRAMA Directorate o f Finance regarding component A. The accounting software actually in place (at the MEM and DEEL) can adequately cater for the budgeting arrangements o f the project.
Accounting

9. The DEEL accounting system i s in compliance with generally accepted accounting standards. I t uses standard book accounts (journals, ledgers and trial balances) to enter and summarize transactions and operates on a double entry accrual principle. The accounting system to be used by CELCO will present exactly the same characteristics. However, regarding budgetary execution procedures, CELCO will apply the procedures actually used within the 60

MEM (Le, preparation o f expense commitment form by the DFB, verification o f this request by the Expenditure Commitments Oversight Directorate, execution o f the transactions by the project, determination o f the exact amount to be paid upon reception o f final bills, preparation o f payment order and payment after appropriate verification o f the validity o f the transactions) and will provide the Budget Directorate o f the Ministry o f Finance with monthly statement o f commitment and payment drawn under the project credit lines.

DEEL w i l l maintain separate financial records for all transactions under its responsibility 10. and will send, o n a monthly basis, the balance sheet to CELCO for consolidation. CELCO will be in charge o f timely production o f monthly trial balances for the A C C T (Agence Comptable Centrale du TrCsor), and quarterly FMRs.
1 1. To ensure better understanding and proper application o f policies and procedures by the project staff (DEEL and JIRAMA), appropriate accounting manuals o f procedures will be prepared and implemented both at the MEM and JIRAMA. This manual will describe inter alia the outline o f the project accounting system, the accounting policies to be followed, the formats of books and records, the Chart of accounts, the financial reporting, and relevant information to facilitate record keeping and maintenance o f proper control over assets. The consultant in charge of this implementation will also provide adequate training to project staff. 12. DEEL and CELCO will use the integrated computerized system acquired within the context o f the previous Energy Sector Development Project, which in particular facilitates annual programming o f activities and project resources, record-keeping (general accounting and cost accounting), financial and budgetary management and preparation o f project financial statements. However, this software needs to be adjusted to meet DEEL and MEM requirements, especially to allow for procurement management, fixed assets management, timely production o f quarterly FMRs required for managing and monitoring project activities, and follow-up o n project implementation progress. The consultant in charge o f this update will also provide training for users to ensure efficient use o f all modules offered by the software. The TORSfor this consultant will be reviewed by the Bank Financial Management Specialist. The new computerized system will be fully functional before project implementation begins.
Internal Control & Internal Auditing

13. DEELs accounting staff i s qualified and has relevant experience to b e fully successful in carrying out their functions. For CELCO, the recruitment o f a qualified and experienced accountant will be required to assist the MEM accounting staff in place in performing FM tasks. The recruitment o f this accountant is a condition o f effectiveness. T o ensure efficient use o f credit funds for the purposes intended and consistent application o f procedures o n procurement, financial management, disbursement, the IGF/IGE in close collaboration with the J I R A M A Internal Audit Department will play the role o f internal auditors. They will report directly to the Minister o f Finance, the Minister o f Energy and Mines, and the J I R A M A Board o f Directors. All issues identified during internal audit should be addressed quickly to improve the project performance.

61

Funds Flow and Disbursement arrangements

14.

The flow o f funds from IDA and Government i s presented as follows:

Designated acct. A

Designated acct. B

Contractors, suppliers of goods and services

Disbursement from I D A credit and Government counterpart funds

For the implementation o f the Power/Water Sector Recovery and Restructuring Project 15. the following bank accounts will be opened in a commercial bank under conditions satisfactory to IDA:

.
16.

Designated Account A to be managed by DEEL (JIRAMA): Denominated in U S dollars, disbursements from IDA credit will be deposited in this account opened in a local commercial bank to finance project activities under component A, in accordance with the disbursement percentage indicated in the FA; Designated Account B to be managed by CELCO (MEM): Denominated in U S dollars, disbursements from IDA credit will be deposited o n this account opened in a local finance project activities under component B in accordance with commercial bank to (i) the disbursement percentage indicated in the FA;

Funds deposited in these accounts will be used to ensure timely payments o f contractors and suppliers o f goods and services. The project implementation and accounting manuals will describe in details a l l procedural aspects regarding financial management and disbursements from the designated account(s), and project account (payments, replenishment, accounting, reporting and internal controls).

62

Method o f Disbursement

During the first year o f project implementation, DEEL and CELCO would follow the 17. transaction-based disbursements procedures (traditional mode) outlined in the Bank's Disbursement Handbook. The use o f report-based disbursements could be possible if requested by the borrower and if the following criteria are met: (i) FM rating (both at DEEL and the CELCO) has been maintained at satisfactory level; and (ii) submission o f at least three the quarterly satisfactory FMRs that could be relied upon for purposes o f disbursement. Detailed disbursement procedures will be described in the project accounting manual o f procedures.
Minimum Application Size

The minimum application size for direct payments, and special commitments i s 20% o f 18. the amount advanced to the related special account.
Use o f Statements o f Expenses (SOEs)

Disbursements would be made against Statement o f Expenses (SOEs) for contracts and 19. goods not requiring the Bank's prior review. Therefore disbursements for all contracts for:

. . . .

Contracts for equipments and goods in an amount inferior to US$200,000; Contracts for consulting services, training by f i r m s o f less than US$lOO,OOO; Contracts for consulting services, training by individual o f less than US$50,000; Training not subject to contract and all incremental operating expenses; would be made on the basis o f SOEs and certified by the DEEL concerning the component A, and CELCO with regard to component B. SOE statements would be audited semi annually by independent auditors acceptable to the Bank. All SOEs supporting documentation would be kept therefore by the executing agencies and made available for review by donor supervision missions, and internal and external auditors.

Designated Accounts

20. T o ensure that finds will be available when needed, two designated accounts in US$ will be established in a local commercial bank under conditions satisfactory to IDA. The designated account A will be opened in the name o f DEEL whereas the designated account B will be in the name o f the CELCO. The authorized allocation for the designated accounts A and B covering IDA's contribution would be respectively US$500,000 and US$350,000 covering IDA's share o f four (4) months o f estimated expenditures. CELCO and DEEL would be responsible for preparing disbursement requests for components under their responsibility. The designated accounts would finance all project eligible expenditures inferior to 20% o f the authorized allocation, and replenishment applications would ,be submitted at least on a monthly basis. The designated accounts would be replenished on the basis o f documentary evidence o f 2 1. payments required by IDA, made from the designated accounts, eligible for financing under IDA Credit. All SOEs supporting documentation will be kept by the executing agencies and made available for review by bank supervision missions and external auditors.

63

Financial Reporting

T o monitor project implementation, J I R A M A and MEM will produce respectively the 22. following reports in compliance with international accounting standards:
(a) JIRlMA .

.
.

JIRAMAs audited annual financial statements

(b) DEEL:
Projectfinancial statements related to component A : (i) Summary o f

Sources and Uses o f Funds (by components/activities/credit category and showing all sources o f funds); (ii) Accounting Policies Adopted and the i ia Explanatory Notes; and ( i )Management Assertion.

FMRs related to component under its responsibility: The FMRs to be prepared by DEEL will include financial reports, physical progress reports and procurement reports related to component A. The F M R s should be submitted to the CELCO within 30 days o f the end o f the reporting period (on a six month basis) for consolidation.

(e) M E M (CELCO):
Projectfinancial statements related to component B: (i) Summary o f Sources and Uses o f Funds (by components/activities/credit category and Project Balance Sheet; (iii) Accounting the showing all sources o f funds); (ii) Policies Adopted and Explanatory Notes; and (iv) a Management Assertion. Quarterly FMRs: The F M R s to be prepared by C E L C O will include financial reports, physical progress reports and procurement reports related to all project components to facilitate project monitoring. The project FMRs should be submitted to IDA within 45 days o f the end o f the reporting period (on a six month basis).

The form and content o f FMRs and annual financial statements were determined during 23. appraisal and agreed at negotiations. Models o f these reports will be presented in the project accounting manual o f procedures.
Auditing During the first phase o f the project, CELCO and JlRAMA financial statements will be 24. audited annually by an international private accounting firm acceptable to IDA in accordance with International Standards o f Auditing and the FM Practices in W o r l d Bank-financed Investment Operations issued by the FM Sector Board o n November 3, 2005. The auditors will be required to: (i) express an opinion o n the project financial statements; ( icarry out a i)

64

comprehensive review o f the internal control procedures and provide a management report outlining any recommendations for their improvement. The audit reports will be submitted to IDA not later than six months after the end o f each fiscal year. The auditors should be recruited prior to credit effectiveness. The terms o f reference o f the audit will be reviewed by the financial management specialist o f the Bank/IDA to ensure the adequacy o f the audit scope, drawing special attention to particular risk areas identified during project preparation.
Audit Report 1. Continuing entity financial statements
I

(JR4MA) 2. Project financial statements related to component implemented by DEEL 3. Project financial statements related to component implemented by CELCO.
Supervision Plan

Due Date Within six months after the end o f each financial year. Within six months after the end o f each financial year. Within six months after the end o f each financial year.

A supervision mission will be conducted at least once every year based on the risk 25. assessment o f the project. The missions objectives will include that o f ensuring that strong financial management systems are maintained for the project throughout its life. A review will be carried out regularly to ensure that expenditures incurred by the project remain eligible for IDA funding. The Implementation Status Report (ISR) will include a financial management rating for the component.

65

Annex 8: Procurement Arrangements MADAGASCAR: Power/Water Sectors Recovery and Restructuring Project

A. General

Procurement for the proposed project would be carried out in accordance with World 1. Banks Guidelines: Procurement Under IBRD Loans and IDA Credits dated M a y 2004; and Guidelines: Selection and Employment o f Consultants by World Bank Borrowers dated M a y 2004, and the provisions stipulated in the Legal Agreement. The general description o f various items under different expenditure category is described below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame have been agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.
Advertisement: A General Procurement Notice will be published in UN Development 2. Business and Development Gateway Market (dgMarket) and will show all International Competitive Bidding (ICB) for goods and works and major consulting service requirements. Specific Procurement Notices will be issued in Development Business and dgMarket and at least one newspaper with nationwide circulation for I C B contracts and before preparation o f short lists with respect to consulting contracts above US$200,000, in accordance with the Guidelines. Procurement o f Works: There will not be any specific procurement o f works. 3. Complementary works in relation to goods contracts will be procured within those goods contracts.

4. Procurement o f Goods: Goods procured under this project would include: spare parts for rehabilitation and maintenance o f generator units, equipment for rehabilitation o f distribution networks, pre-payment meters, spot metering equipment, and computer hardware and software. The procurement will be done using Banks SBD for all I C B and National S B D agreed with or satisfactory to the Bank. The project will also finance expenditures which meet the requirement of OP 12.10 o n retroactive financing. 5. Direct Contracting for goods may b e used in exceptional cases, such as for the extension o f an existing contract, standardization, proprietary items, spare parts for existing equipment, and urgent repairs and emergency situations, according to paragraphs 3.6 and 3.7 o f the Guidelines. The items to be procured through Direct Contracting would be agreed o n in the procurement plan.
Selection o f Consultants: The Project will finance the contracting o f consultancy 6. services for improvement o f the commercial aspects o f the electricity distribution business in terms of, improving inter-alia the billling system, financial management controls, fraud prevention, technical controls, modernization o f information systems and I T equipment, revenue management and project monitoring and evaluation. The project i s also expected to finance the

66

extension o f the existing management contract for JIRAMA in case o f a delay in the process o f selecting the long-term strategic partner. The project is further expected to finance prefeasibility and detailed engineering studies including studies o f environmental and social safeguard aspects with regard to future generation projects. As part o f Component B the project will finance technical assistance for MEM covering the preparatory work for APL-2 including advisory services during the reform process. Specialized advisory services would be procured through Individual Consultants Selection (ICs).
O p e r a t i o n a l Costs: These relate to the functioning o f C E L C O N E M and would be 7. procured using M E M s administrative procedures, which were reviewed and found acceptable to the Bank. The Project will finance some operating expenditures under component B. Review by the B a n k o f Procurement Decisions. The thresholds for prior review by 8. Bank are specified in the procurement plan. Table A shows (a) the proposed thresholds for the different procurement methods; and (b) the proposed initially-agreed thresholds for prior review by the Bank. The Bank will preview procurement arrangements proposed by the Borrower for the items specified in the procurement plans for their conformity with the Financing Agreement and the applicable Guidelines. Any procurement item not specified for prior review m a y be subjected to a post-review o f the procurement process.

T a b l e A: Thresholds for Procurement Methods and P r i o r Review Expenditure Category Works Goods

Contract Value Threshold (US$)

Procurement Method

Contracts Subject to Prior Review (US$)

No major specific works are expected

Consultant Services Firms

200,000 or more 30,000 or more and less than 200,000 Less than 30,000
100,000 or more

ICB NCB
Shopping

All

QCBS CQS LCS

All

Consultant Services Individuals

sss

50,000 or more

ICs

All

67

B.

Assessment of the agencys capacity to implement procurement

Procurement activities will be carried out by JIRAMA for component A and by MEM 9. through CELCO in collaboration with the Unit for Public Procurement (UGMP) for component B. JIRAMA i s properly staffed and i t s Procurement unit consists o f proficient procurement officers and procurement assistants. MOEMAJGMP is staffed with a procurement officer who will be further supported by an initial procurement officer to be recruited by CELCO. 10. An assessment o f the capacity o f J I R A M A to implement procurement actions for the project has not been carried out because i t s procedures and staffing were already found to be satisfactory during the implementation o f the former Project PDSE and has since then not substantially changed. An assessment o f the capacity o f MOEMAJGMP was carried during the appraisal mission o f M a y 2006. The assessment reviewed the organizational structure for implementing the project and the interaction between the project staff responsible for procurement and the Ministrys central unit for administration and finance.

11. Most o f the issues/risks concerning the procurement component for implementation o f the project have been identified. Identified issues and corrective measures which have been agreed are described in the table below. Considering the lack o f capacity within the MEM, the overall project risk for procurement is considered high.
Table B: Procurement Risk Assessment and Risk Mitigation Component B, Implemented by M E M
~

Designation Planning and budgeting

Concerns Lack o f budget planning

Execution and monitoring Staffing

Lack o f internal Audit Competent but insufficient Lack o f advertisement

Competition among private sector Project management

Lack o f definition o f responsibilities

Risk mitigation Due date - Capacity building on - At Project budgeting effectiveness - Recruitment o f an experienced - At Project Procurement officer to effectiveness CELCO Development o f cost - At Project and contract effectiveness management control -Recruitment o f an - A t Project effectiveness experienced Procurement officer to CELCO U s e o f GPN at national - A t Project level effectiveness U s e o f Bank procedure for advertising Development o f - At Project project implementation effectiveness manual

68

C.

Procurement Plan

The Projects detailed activities for the first 18 months o f implementation are detailed in 12. the procurement plan which was discussed and agreed between IDA and the borrower on June 2, 2006 and i s available at MEM and JIRAMA Headquarters. I t will also be available in the Projects database and in the Banks external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.
D.
Frequency o f Procurement Supervision

13. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f the Implementing Agency has recommended bi-annual supervision missions to visit the field to carry out post review o f procurement actions.

69

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Annex 9 : Economic and Financial Analysis MADAGASCAR: Powerwater Sectors Recovery and RestructuringProject

A. Economic analysis o f the Prowam

Introduction

The proposed program offers the prospect o f high economic returns to the economy o f 1. Madagascar, which i s clearly suffering from inadequate electricity supply. Lack o f power severely hurt the modem, garment manufacturing sector in 2005, with adverse consequences on output, lost orders and lower exports than would otherwise have been possible. GDP growth i s estimated to have been lower by 0.5% simply as a result o f the load shedding imposed by JIRAMA o n i t s clients. Even before the 2005 financial crisis, the service rendered by J I R A M A was inadequate and declining due to insufficient investment and neglected maintenance. Finally, resource constraints meant that J I R A M A was not in a position to either extend service or to increase i t s generating capacity in a timely, least-cost manner. M a n y sizeable urban centers outside JIRAMAs main grids have long had daily power cuts and supply interruptions due to lack o f fuel and/or equipment breakdowns. These issues are all being addressed under the 5-year restructuring and recovery program for the power sector.
2. In addition, the program also put in place the necessary conditions and operating environment needed to attract private investors to the sector. The sectors large investment backlog i s beyond the limited budgetary resources o f GoM. Putting in place a private operator to manage J I R A M A will provide both potential IPP investors as well as Madagascars development partners with the assurance that JIRAMA will be professionally managed, internal efficiency will be raised and service quality to consumers improved. A solvent JIRAMA with a healthy cash flow and good payments record is an essential precondition to private participation in developing Madagascars plentiful hydroelectric potential.
Least-cost generation plan

JIRAMAs current mix o f generation plant reflects sub-optimal choices made over the 3. past decade. Poor management, delayed decision making and o f late, lack o f funds have led to an excessive reliance on diesel generators, even in sites where hydroelectric or heavy-fuel generators would have produced cheaper electricity. For reasons o f expediency and rapidity several high-cost diesel generators have been acquired o n a rental/leasing basis, without competitive tendering. The recent o i l price hikes have turned the choice o f diesel generators into a severe financial burden for JIRAMA, its consumers and also for GoM. The success o f the proposed recovery program for J I R A M A is predicated upon a rapid move away from diesel generation, initially to HFO and then in the medium- to long-term to hydroelectricity.

72

4. In the short- to medium-term, despite Madagascars evident hydroelectric resource potential, the scope for rapidly developing new hydro power sources i s rather limited. Work on the addition o f a third 30 M generator at the existing Andekaleka hydro plant i s about to begin, W with financing from BADEA. Under normal hydrological conditions i t will produce 200 GWh per year, representing a massive cost saving to JIRAMA. Two minor sites (Sahnivotry and Lily) are at a sufficiently advanced stage o f preparation by private developers to contribute a further 80 GWh o f hydro power by 2009-2010. Due to a lack o f preparatory studies, other small to medium-term hydro prospects are unlikely to be commissioned before 20 10-201 1. Nor has there been sufficient technical investigation or pre-feasibility work done on the larger hydro sites (Lohavanana, Volobe and Antetezambato) that have been identified as the least-cost options for 2012 onwards.

5. In the near term, major fuel savings can therefore only be achieved through substitution o f H F O plants for high-cost diesel generators. Implementation o f a 40 MW HFO plant to be sited in the capital has begun and it is expected to be in service in mid-2007. This plant will permit JIRAMA to greatly reduce its use o f diesel, since the plant i s capable o f producing 200250 GWh annually. Andekalela 3, has been delayed by several years and should already have been in service. I t produces even greater economic benefits and delays in completing these two projects would be very costly to JIRAMA.
Economic Rate o Return f

Given the diverse nature o f the physical investments envisaged as part o f the program, 6. the economic analysis is based o n a 5-year time-slice (2006-2010) o f the electricity sectors total investment program, which has been reviewed and found to be least-cost in nature (see table 3). Assigning specific benefits to particular project components would have been both arbitrary and nearly impossible.
The physical benefits from these investments that have been quantified are twofold: first, 7. (and most important) the incremental electricity supplied to consumers; second, the reduction in high-cost diesel fuel consumption arising from the replacement o f diesel generators by more economical ones using heavy fuel o i l (HFO). Benefits from reduced technical losses and improved reliability o f service have not been quantified in the economic analysis presented here (Table 2). The base case estimate o f the EIRR is 14.4%.

8. The incremental demand that can be met as a result o f the investment program i s based o n a variant o f the load forecast prepared by JIRAMAs consultants, HQI. For the purposes o f the economic analysis, only five years (2007-201 1) o f cumulative load growth have been considered as benefits directly attributable to the 2006-20 10 investment program. Total electricity demand is projected to increase from about 770 GWh in 2006 to 1,110 GWh in 20 11, equivalent to an annual average increase o f 7.6%. However, demand growth in 2006-2007 is severely constrained to only 2% - 4%, due to a deliberate attempt by JIRAMA to restrain consumption prior to the entry in service o f a large, new HFO plant. By w a y o f comparison, during the period 1995-2005, electricity demand rose at an average o f 7% annually, despite the minimal investment in the sector to expand service.

73

9. The minimum value o f the incremental sales has been taken to be the average tariff across all customer categories charged by JIRAMA in 2006, Le. USc13kWh. This does not represent the full value o f benefits to users from this electricity, but in the absence o f an estimate o f the consumer surplus i t i s a minimummeasure o f benefits that has been used as a proxy. I t i s well below the JIRAMA tariff charged to LV consumers in Zone 3 (isolated centers served entirely by diesel), o f UScl9-20/kWh.
Fuel savings to JIRAMA have been estimated at the difference between the cost o f 10. generation using HFO in the new HFO power plant due in service in mid-2007 and diesel fuel that i t would otherwise have to use in i t s existing generators. This works out at about USclO/kWh at current o i l prices6.

Full details o f the analysis and the parameters used in estimating the EIRR are given in 11. the tables below. The EIRR i s particularly sensitive to variations in o i l prices, the size and timing o f the investment program, delays in completing more efficient plants, and to assumptions about demand growth. As can be seen from Table 1, depending o n the combination o f negative factors assumed, the EIRR varies from 10.3% to 13.7%. Table 1: Results o f EIRR Sensitivity Analysis Parameter

EIRR (in %) 13.7 13.1 12.7 11.7 11.8 11.3 10.3

Fuel costs 20% higher 1 Year delav in Andekalela Unit 3 6 month deiay in HFO plant Lower demand growth (5% p.a.) Higher fuel costs+lower demand Investment costs 20% higher Higher fuel+lower D+HFO plant delay

In April 2006 spot prices FOB Singapore were US$52/barrel for HFO and US$SO/bbl for diesel. In addition, HFO engines consume less fuel per unit o f electricity (220 gm vs, 250 gm/kWh).

74

Table 2: E I R R Analvsis - Base case

8, M = 4 5 UScentsIkWh to cover G+T+D operating costs Fuel costs o f 2 l c e n t s l k W h for diesel and 12c/kWh for HFO = April 2006 CIF Anatananrivo price (excl taxes) equates t o $80/bbl diesel and $52/bbl HFO Singapore F O B spot price+$30/ton sea freight+$l20/ton land transport to tana Prices assumed to decline per WB crude oil price fcast Sales assumed t o rise by 2% in U 6 , 4 % in 07, 10% in 138 and 8% thereaffer No incremental fuel cost in 2008 due to Andekaleka3 hydro startup - supply greater than sales increase Fuel savings of 10c/kWh between diesel and HFO in 2007 on 80 G W h due t o change in generation mix Due to start ofAndekalela3 in 2008, the fuel savings are 62GWh of diesel and 42 G W h of HFO production avoided Incremental sales valued at 13c/kWh, which is the current average revenue earned by Jirama in 2006

Notes

75

Table 3: Electricity Sector Investment Program

l v l AD AGASGAR ELECTRIGIW SECT0 R INVESTfvlENT P ROGRAfvl

Table 4: Sales and production forecast

SALES AND PRODN. FORECAST

2005 754 23 7 988
650 338 296
2006 769 24 1012

JlRAfvlA TOTAL ELEC SALES (Gwh) Losses % Prnrii irtinn fcwhl of which Hydro Thermal

2007 800 24 1052

680 372 112

2008 880 23 1143

2009 924 22 5 1192

925 267 60

2010 970 22 1244

975269 60

2011 1019 21 5 1297

680 332
202

875
268 50

1025 272 70

Notes Load fcast 2% in 06,4% in 07,10% in 08,8% thereafter Andekalela 111- 150 GWh in 2008,200 GWh thereafter Sahnivotry 60 GWh, Lily 20GWh ORET prodn rises from 100 GWh in 2007 t o 200 GWh in 201 1 New hvdo IPP exaected in setvice in 2009-10 with 100 GWhlvr arodn

76

B. Financial Internal Rate o f Return Analysis o f the Project

The Project proposes a blend o f investments in technical facilities (rehabilitation o f hydro 12. and HFO generation, transmission network rehabilitation and/or reinforcements, reinforcement of distribution facilities), as well as a support to commercial activities (loss reduction, IT.. .). The following financial analysis o f the Project i s based o n an aggregate cost-benefit 13. analysis o f i t s main components for the first phase o f the A L (including the costs that will b e P supported by the client). The scope o f this rate o f return analysis i s therefore much narrower than for the EIRR analysis presented above which considers the whole investment program o f JIRAMA o f which only a fraction i s financed by the Bank (for a financial analysis o f JIRAMA as a whole, see part C o f this annex).
Generation, Transmissioq

VdUe

BaseCase

51

.O%l

Lmvcase

38.3%

Revenue Management and IT Total Base case

24.8%
412%

17.7%
46.1 %

cost m S D S

73

7.8

The project investments yield the following distinct benefits: reduction o f generation 14. costs, additional revenue from incremental electricity supply, reduction o f T & D technical losses, reduction o f commercial losses. Other economic benefits o f the project such as an improved reliability o f supply are not considered because the main beneficiaries will be JIRAMAs customers rather than the company itself. The Base Case and L o w case FIRR calculation are given in the table below. The 15. calculation is based o n a total costs o f 7.3 M i l l i o n USD for the components o f the project included in the analysis (retroactive financing and technical assistance are not included, and 15% of contingency costs are added to Bank costs). 16. The Low Case scenario i s based o n more pessimistic assumptions for the profitability o f the Project (Le., h e l s prices 20% lower, electricity tariffs 20% lower, contingency costs o f 25% instead o f 15%). The profitability o f the activities supported by the Project remains high under the l o w case, reflecting past under-investment by JIRAMA. 17. The FIRR for technical investments i s based o n technical parameters that are relatively straightforward. The forecasting for the revenue management activities is fraught with greater uncertainties (our assumptions are much more conservative than JIRAMAs). Beyond their direct impact, the revenue management activities have an experimental value. On the basis o f their results that will be carefully monitored, i t should b e possible to base future investment decisions on more reliable forecasts (regarding, for instance, the decision to invest in the generalization o f prepaid meters).

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C. Financial analvsis o f JIRAMA

Introduction
18. The Project strategy i s centered on: (a) Rescuing the company from financial and technical collapse;

Implementing small but highly profitable investments to rehabilitate existing generation, transmission and distribution facilities, and increase revenues;

(b)

Creating the adequate organizational, institutional, technical and financial (c) conditions that will allow in the medium-term to pursue a more ambitious policy o f access expansion based o n larger investments notably in additional hydro generation capacity.

(d) The Project will complement the restructuring plan that has been initiated, including activities Key actions to be accomplished: Recreating the basic process and procedures necessary to efficiently manage JIRAMA, restructuring o f JIRAMA balance sheet, (financial restructuring o f liabilities, re-capitalization o f the company). A financial restructuring exercise is currently underway and this summary analysis incorporates the measures that have been decided.
The present annex describes and analyzes succinctly (i) recent financial history o f the 19. JIRAMA; (ii) situation o f the company in 2005 when the full extent o f its difficulties became the i ithe apparent with the beginning o f the management contract; ( i ) restructuring plan o f the company that i s underway and the medium-term financial prospects o f the company.

20.

Among the conclusions that can be drawn from this forecasting exercise, the following stand out:
In spite o f the large h n d s injected in the company by the government and donors, (a) the projected conversion o f debt into company equity, and the successive tariff increases o n electricity and more recently o n water, JIRAMA remains in a precarious financial situation.

(b) With most o f i t s debts cancelled or rescheduled, JIRAMA has been given a fresh start financially, however i t s most immediate problem remains an insufficient generation o f funds from internal sources: cash-flow from current operations i s l i k e l y to remain negative in 2006 and 2007, given JIRAMAs unfavorable generation mix (new HFO and hydro plants not yet in operation, Andekaleka will not be operating at full capacity during rehabilitation works).
(c) As a result, JIRAMA cash position i s bound to deteriorate again over the next two years (especially if company reduces i t s arrears towards suppliers as envisioned in the the plan de redressement), and will probably need a new injection o f liquidity before 2008.

78

(d) Our financial forecast assumes several efficiency improvements (reduced transmission and distribution losses, improved revenue collections, better management o f personnel costs). The biggest source o f potential savings is however the reduction o f generation costs. The Project includes several activities components precisely devoted to the rehabilitation o f hydroelectric installations. These activities have an extremely very high rate o f return. (e) However, once these low-hanging fruits are harvested (the small investments that should have been made years ago), a further reduction in average generation costs can only b e achieved by following a disciplined investment planning approach, based on the least-cost expansion plan. Given the lead time o f large hydroelectric projects, this approach will take several years before its benefits are felt in terms o f increased supply and/or lower tariffs.

(f) Tariff discipline i s essential if J I R A M A i s to become financially viable again: an updated indexing formula should be defined and scrupulously followed. Our financial forecast assumes yearly tariff adjustments (the next one being scheduled for April 2007) slightly above the rate o f local inflation. The average tariff per kWh expressed in USD i s currently similar to i t s value in 2002 and 2003, and o i l prices are much higher today than they were then.
There is a trade-off between the expansion o f access and the affordability o f tariff (g) for existing users that needs to be acknowledged. T o be able to invest, with donor support, in access expansion, J I R A M A needs to generate a positive cash-flow from current operations. A way to address this issue i s through the sequencing o f activities and investments. An ambitious policy to increase access to electricity can only be based o n the availability o f new sources o f generation at an affordable price because as long as J I R A M A meets extra demand at the margin with thermal generation, any effort to increase supply will directly deteriorate i t s cash position.

(h) J I R A M A needs to better prioritize i t s investment program: after years o f neglect and under-investment, all domains o f JIRAMAs operations (generation, transmission, distribution, commercial, administrative, IT. ..) seem to require significant investments. However, financing has yet to be found for a large portion o f the investment program that J I R A M A initially has presented for the years 2006 - 2009. This initial program seemed extremely over-ambitious financially, but probably also in operational terms. The current project attempts to address this need for a more prioritized and better sequenced investing approach. Therefore, during the first phase o f the APL, the project targets the most profitable investments. Also, concerning revenue management activities, i t will allow the experimentation o f several approaches in order to facilitate future decisions regarding larger scale investments. For the next phase o f the APL, the use o f a PRG guarantee should bring an important leverage and allow the financing o f large scale expansion investments.

79

Recent Financial History o f JIRAMA

F r o m 2001 to 2005, the financial performance o f J I R A M A has severely deteriorated, 21. primarily on account o f increasingly inadequate electricity and water tariffs. Tariffs have remained unchanged in local currency from July 2001 to July 2005. Over this period, Madagascar has experienced political troubles in 2002 and a significant domestic rate o f price inflation. This has been accompanied by a substantial depreciation o f the national currency against the U S dollar from 2003 onwards. 22. Throughout the period, for various reasons including the political instability, the lack o f financial resources, and a systematic preference by decision-makers for solutions yielding quick results, no rigorous planning process o f investments was followed. Given their short lead time and l o w investment costs, diesel generators were systematically preferred to hydroelectric generation or even to HFO-powered generators. Also, in 2003 and 2004, JIRAMA entered into contracts with Independent Power Producers. Usually negotiated in a situation o f emergency given the risk o f disruption o f supply created by the lack o f advanced planning, the contracts with IPP were usually costly because (i) were based on thermal generation; (ii) were they they i ithe not always tendered on a competitive basis; ( i ) independent producers rationally demanded a large risk premium on their investment given the uncertainties attached to JIRAMAs signature. The choice o f thermal generation with diesel o i l proved disastrous. The combination o f a 23. depreciating national currency and o f rising o i l prices in U S D on international markets logically increased the cost o f thermal generation. In 2001, fuel costs represented 48% o f the revenues derived by J I R A M A from electricity sales, an already high proportion given that thermal generation made up less than a third o f the generation mix o f J I R A M A at the time. F r o m 2001 to 2005, the volume o f thermal generation rose by 35%, but the corresponding fuel costs increased by 280%. As a result, in 2005, fuel costs alone were significantly above the revenues derived from electricity sales. J I R A M A was in fact selling each kWh largely below i t s variable cost o f generation. The decline in the profitability o f the company goes back to at least the year 2001, but 24. became really acute in 2004. In 2002, the operations o f the company suffered from the consequences o f the political situation but J W A paradoxically benefited fi-om reduced demand that allowed a significant reduction in the volume o f thermal generation. In 2003, a further deterioration o f operating profitability was masked in the annual accounts by a change in the accounting rules governing the depreciation o f assets. This accounting change, though without impact on cash-flow, allowed JIRAMA to show an operating profit in 2003, in spite o f a barely positive EBITDA. 25. Over the course o f the FY2004, the price o f D i e s e l Oil in local currency more than doubled, provoking severe cash-outflows. The magnitude o f the operating losses should have prompted a large tariff increase, primarily in order to prevent a bankruptcy o f JIRAMA, but also to recreate an adequate economic signal (due to non-reevaluated tariffs, electricity had become extremely cheap compared to o i l and natural gas).

80

26. Instead, JIRAMAs management did not attempt to address the structural inadequacy o f revenues but chose to continue to operate as long as possible within the existing tariffs, by implementing short-term solutions. A positive step that was undertaken is the improvement o f revenue collection. The company managed to collect significant amounts o f arrears from its customers (mainly from the government). However, the other measures taken aimed at saving cash in the short-term went against the medium-term technical and financial viability o f the company. JIRAMA managed up to the end o f 2004 to maintain a quasi-normal electricity supply in most o f the country only by accumulating large amount o f debts toward its suppliers and the government (non payment o f taxes and non repayment o f financial debt). The lack o f funds also prompted the company to more or less halt much needed maintenance operations. Investments had already been severely restricted for several years. The pronounced deterioration o f JIRAMA finances was entirely predictable given the 27. increase in the price o f o i l and the absence o f tariff reevaluation. The need for an immediate and significant tariff increase should have been recognized much earlier. Indeed, the sector regulator had recommended in the fall o f 2004 to increase electricity tariffs by nearly 80% on average. It must be noted, however, that the (unaudited) financial accounts produced by JIRAMA did not adequately reflect the severity o f the situation. For instance, the accounts for 2003 presented a net positive result. Also, the management o f J I R A M A should have been clearer o n the seriousness o f the liquidity crisis. The lack o f sincerity o f JIRAMAs accounts and o f financial transparency played a part in the failure o f the GOM to recognize earlier the absolute necessity of a large tariff increase.

The historical financial results o f JIRAMA that are summarized in the table below must 28. be taken with caution. They originate from the annual accounts that have been reviewed but not been certified by external auditors (the audit firm Mazars). In particular, there are reasons to think that JlRAMA did not adequately depreciate its inventories and its customer receivables.

81

Table 5: JIRAMA Summary Income Statement (FY 2001-2005)

(in millions USD)

- - 2001 66,8 17,7 11,7 96,l 32,O 33,2 17,O 2002 64,9 16,7 7,3 89,O 32,5 25,s 17,3 2003 79,l 19,3 21,8 120,2 46,4 4,6 39,5 21,s

Actual - Accounts not certified

2004
62,5 14,3 13,3 90,l 50,9 5,O 26,O 15,4 3,5

Prov.

2005
69,2 14,5 14,O 97,7 79,3 7,5 51,6 18,5 935

Electricity Sales Water Sales Other operating Revenues Total Operating Revenues Fuel Power Purchase, excluding fuel Other operating expenses Personnel

EBITDA

13,8 8,2 -2,4

596 -10,2 -95 86% 8% 135
10,4

13,4 4,8 -4,3

-8,6 -,4 8,6

7,s

-7,2

-59,3

Depreciation

Operating Income Net Income

10,O
-6,4

-2,l

-10,7 -22,2
-1 1,l -34

-68,9
-3

Net Interests Company tax

-,1

Working Ratio (cash opex / op rev) Rate o return on assets f Average Electricity Tariff(Ar/kWh) Average Electricity Tariff (Usckwh)

85% 5%
149

93% 7%
143

3,l

-35

11,l

ll,7

108% -10% 141 8,2

-69,l

161%
-84%

I78 8,9

82

As the table above illustrates, JIRAMA operated in 2001 with a relatively l o w level o f 29. margin (in terms o f EBITDNsales) for an electricity and water utility. This meant that the level o f cash f l o w fi-om current operations was probably barely adequate to maintain and renew existing assets, but not to service i t s long-term debt and/or fund an expansion o f service. However, the situation became really dramatic in 2004, primarily due to the increase in o i l prices in local currency. (The abyssal deficit for 2005 is probably somewhat overstated and the deficit for 2004 underestimated due to lack o f proper provisions for inventories and receivables at end 2004).

Table 6: JIRAMA Summary Balance Sheet (FY 2001-2005)

(in millions USD)

2003 2004 - - - 2001 2002 102,7 116,8 875 -22,6 126,4 105,O 62,8 42,2 21,4 7,2 99,7 118,8 654 -25,6 137,7 112,7 76,l 36,6 25,O 12,9 141,O 157,4 18,8 -35,l 144,5 122,3 78,4 43,9 22,2 12,2 103,2 119,6 22,2 -38,5 85,l 61,3
27,a
33,4

Actual - Accounts not certified

Prov.

2005

Net Fixed Assets In operation W o r k in progress Concession Current Assets Accounts Receivables
o f which customers

81,6 118,9 275 -39,9 79,2 70,8

21,8
49,O

o f which others

Inventories

23,9
15,8

89 4 14,2

Cash

Total Assets
Suppliers Other

Current Liabilities

236,3

47,s 18,l 29,7 377

250,3

58,7 21,7 37,O

692

297,7

66,s 34,2 32,6 991

204,2
106,3
48,l 58,I

175,O
94,2

168,2
74,O

Short Term Financial Debt Long Term Debt

437 145,3

90

158,l

161,3

187,9

120,6

Total Liabilities

209.6
260% 85% 2 71

226.2
232% 87% 340

263.8
206% 84% 291

256.3 -52,a
91% 163% 132

288,8

26,7

24,i

34,o

-113,7
NA

56%

Financial Leverage

95

83

Faced with a liquidity crisis, JlRAMA was able to continue to operate in 2004 thanks to 30. improved revenue collection and a very large accumulation o f short-term debt.

Table 7: JIRAMA Performance Indicators (FY 2001-2005)

Electricity Generated (GWh)

% of Thermal Generation O f which Gas Oil O f which HFO

2001
32,4%

834

2002
31,4%

780

31,9%

898,3

2003

35,1%

981,l

2004

2005 1015,5
36,0% 90%

Prow

T & D losses (inc. non technical)

W a t e r produced (millions m3) Losses (YO)
Average Electricity Revenue (US centskWh) Average Electricity Revenue (ArkWh) Year on year increase o f average rev. in Ar/Ki Average Water Revenue (US centsim3) Average Water Revenue (Arsim3) IYear on year increase o f average rev. in Ar/m:

32,1% 91,3
10,4 135 28,5 3 70 27 1

35,9% 90,9
11,l 149 11% 28,7 387 4% 340

36,lYo 93,7
11,7 143 -4% 32,2 392 1% 29 1

34,0/o

93,31 l;3
82
141 -2% 23,2 398 2% 132 8,9 178 26% 21,5 43 0 8% 95

JIRAMAs operational performance, while unsatisfactory, did not deteriorate 3 1. significantly over the period for most parameters. The main causes o f the financial difficulties experienced by the company are the inadequate level o f tariffs and the bad investment choices for new generation capacity.

Situation of JIRAMA at the beginning of the management contract

32. A diagnostic study o f JEWMA carried out in 2003 revealed the severity o f the problems facing JIRAMA. The findings o f this report coupled with the insistence o f the World Bank, eventually prompted the GOM to decide on a two-year management contract for JIRAMA. This management contract, when i t became effective during the first semester o f 2005, had the effect of shedding light on the true extent o f JIRAMAs financial difficulties. 33. Summarized, the situation that became apparent can be described as follows: Extreme financial unsustainabilitv o f current operations: During the f i r s t semester (a) of 2005, the variable costs associated with thermal generation alone (fuel expenses and energy purchase costs) were superior to the total revenues o f the company leaving no

84

source o f funds to pay for other current expenses (maintenance, personnel.. .) let alone new investments or debt repayment.

(b) Rapidly buildingup arrears towards suppliers: given the structural disconnect between current expenses and revenues, could not continue to operate without increasing its level o f debt. Around the end o f year 2004, the company switched to a practice o f paying fuel o i l with letters o f credit allowing for a delay o f four months before the cash payment became due. The effect o f this practice was to postpone the liquidity crisis o f J I R A M A until after the management contract took effect.
Lack o f effective and reliable financial reporting and internal controls: Symptomatic illustrations o f these deficiencies are for instance: the absence o f reliable and audited annual accounts, the lack o f monitoring o f the cash position o f the company, the incomplete and late reporting from the isolated centers.
(c)

This does not mean that the company had no administrative infrastructure or procedures 34. in place. On the contrary, for most domains (commercial, technical, financial.. .), staff members o f J I R A M A were used to prepare numerous periodic reports to retrace the activities o f each department and o f each territorial level. However, this reporting, while very time-consuming, had become largely useless for operational purposes. Among the reasons for this were: excessive quantity and uneven relevance o f the information reported, long delays in producing the reports, lack o f geographical exhaustivity o f the information (missing data from several isolated centers), impossibility to adequately assess the reliability o f the data or cross reference it (impossibility for instance to assess the consistency between commercial statistics, and the actual cash revenue collected from customers). While the reporting system in place was very inadequate, there are reasons to think that 35. with limited investments in I T and office equipment and software, and an impulsion from the top management o f the company; J I R A M A administrative staff has the required capacity to maintain adequate reporting systems. One area where the lack o f effective control i s particularly damaging is the insufficient monitoring o f fuel consumption. A systematic reporting o n a monthly basis and for each electricity center o f the quantities o f fuel used, power generated, energy metered and billed, and o f the actual revenue collection from the customers would help to detect quickly problem areas within the company.
T h e recovery process supported by the project

The restructuring process i s materialized by a restructuring plan (plan de redressement) 36. supported by the GOM. The main dimension o f this plan are the following: (a) Financial restructuring o f JIRAMA: JIRAMA cannot realistically service the debt it has accumulated. The financial restructuring will entail substantial debt cancellation by the GOM, as well as an injection o f cash. Negotiations are underway with the other creditors o f JIRAMA (mostly suppliers), with the objective o f rescheduling the repayments o f capital by JIRAMA and transforming part o f the debt in equity. Overall, the plan entails significant budgetary costs ( o f which 50 billions AR in cash in 2006) for

85

the GOM. In addition, i t i s likely that an additional injection o f liquidity in J W A will be necessary before 2008. Tariff increase: successive and significant tariffs increase have been decided and implemented in 2005 (two increases o f electricity tariffs) and 2006 (increase of water and electricity tariffs). One obvious lesson fi-om the recent history o f JlRAMA i s the absolute necessity o f maintaining adequate cost-recovering tariffs. In addition to the front-loaded tariff increase that has already taken place, this should be achieved in the future through: (b)

(i) Maintaining transparency regarding the financial situation o f JIRAMA (see covenant on reporting obligations for JIRAMA); (ii) Vigilance from donors and from the IMF (considering the budgetary cost and the macroeconomic effects o f a collapse o f JIRAMA); (iii) The definition o f an indexing formula for electricity and water tariffs and a streamlined decision process to apply the formula and effectively implement necessary tariff changes: the volatility o f the currency and o f o i l prices will remain a problem going forward and JlRAMA, given i t s l o w or negative margins, will not be able to bear the cost o f this volatility (see covenant o n tariff indexing).
(c) Efficiency improvements. The k e y operational parameters to improve the financial viability o f JIRAMA are the following: (i) lowering the cost o f existing technical losses reduction; (iii) improved revenue collection. Those are generation; (ii) the three priorities for the initial investment component o f the APL. While relatively small, the investments to be financed under the first phase should have a significant financial impact, given their extremely high overall projected rate o f return. This situation reflects the past mismanagement o f the company, and the fact that modest investments with extremely rapid pay-back have not been carried out. The project also supports small investments in I T which should contribute to improved financial reporting and internal controls.

86

The assumptions regarding performance indicators for JIRAMA and k e y operational 37. parameters for 2005 - 2009 (including average tariff) are summarized in the table below.

Table 8: JIRAMA Performance Indicators (FY 2005-2009)

ity Generated (Gwh) Thermal Generation

7.................... Forecasf................. 1 ~~2~~~ 10155 10669 11352 12483 1345.4 41.8% 41.4% 37.2% 39.7% 36.0% 32% 33% 86% 6470 90% 68% 67% 14% 36% 10%
233% 23.4% 228% 223% 218%

& D losses (inc.M H technical)

ater produced (millions m3)

100.1 1036 107.1 110.6 114.1 328% 32.4% 3213% 2 9 5 % 2813%

8.9 178 26% 21.5 430 8%1 951

11.2 264 49% 26.0 612 43% 52

11.9 297 13% 27.3 680 11% 48

12.5 324 9% 28.1 732 8% 44

13.1 352 9% 28.7 77 1 5% 36

87

Under theses assumptions, JIRAMA would start to generate a positive cash-flow o n 38. current operations (EBITDA less interest expenses) in 2008, due to tariff increase, a better generation mix, and improved overall operational perfonnance.

Table 9 : JIRAMA Summary Income Statement (FY 2005-2009)

(iH

milfiow UXD)

2005
69.2 14.5 14.0 97.7 79.3 7.5 51.6 18.51 9 .J

-2

.................... I Forecast.....,........... J
2007
2008 91.5 18.2 14.5 1242 63.1 6.7 45.3 12.9 104.4 19.9 15.6 1399 62.6 12.7 44.9 13.0 120.8 21.9 16.9 i596 60.5 27.1 47.6 13.4

2009

E l e c t r i c i t y Sates Water Sales 3 U l e r o p e r a t i n g Revenues Total Operating b v e n u e s Fuel P o w e r Purchase, e x c l u d i n g f u e l 3ther o p e r a t i n g e x p e n s e s

bepreciation

-59.31
-68.9
-.1 -.1

-3.

Q~eratingLicoine Net I n t e r e s t s
::ompany tax

-11.8
-18.3

8.2

6.6
8.3

11.0 2.6
8.4 -7.4 -.2

137.6 23.5 18.2 179d 65.2 29.2 4x3 13.6

22.9

Working Rafio (cash opex /op rev) Rate o refum on assets f Average Electricity Tarij(hikwh) ,/lveraRe Electricity Tar$(Usc#c wh]

N e t Iiwoine

-69.1

-6.8 -.1

-1.7

161% -84% I78 89

103% -13% 268 II.2

-10.7

-8.9 -.l

12.0
-7.9 -1.2

10.9

95% g3% -I%2 % 297 328 11.9 12.5

-4.9

87%

11 -4

8% 352 13.1

88

However, JIRAMA will remain in a situation o f insufficient liquidity up to the end of 39. 2008 (current ratio below 1 and increase o f short-term financial debt), in part because o f the progressive reduction o f payment arrears towards suppliers.

Table 10: JIRAMA Summary Balance Sheet (Fy 2005-2009)

(in mimom USD)
N e t Fixed &sets In operation Work progress 2 oncession

2005~~072~
&16 118.9 2.5 -39.9 792 70.8
21.8 49.0

7....................
902 98.7 31.1 -39.4 43.4 36.8
15.6 21.2

Forecast............. ,1 ..,

1235 103.2 63.8 -43.5 479 43.5

1366 106.5 78.4 -4x.3 535 49.8

17.2 32.7

1442 134.7 64.8 -55.3 568 53.3

16.1 37.2

Current Assets A c c o u n t s Receivables

ofwhich customers ofwhich others

Inventories

8.4

6.6

16.5 27.0

4.4

3.7

3.5

Cash

142

5.1

a
43.7
36.9 6.8

a
338
27.1 6.8

a
200.9
296
23.1 6.5

T o t a l -Assets current Liabilities

suppliers

13.0

1682

13s.s
619
54.7 7.1

171.3 190.2

Other

94.2 74.0

Short Term FinancialDebt Long Term Debt

a
1206
I

a
506

10.8

246
l00a

23.1 1145

849

I T a t n l Liabilities

1SSn8( 112.4 -113.7

~~

139.4
31.9

158.3 167.3 31.5 33.7

26.3

89

40. The cash flow statement highlights the deteriorating cash position o f JIRAMA up to the year 2008 included. The support o f the government i s apparent in the equity increase. However, the cancellation of long-term financial debt by the GOM will not solve the immediate liquidity problem o f the company. The build-up o f short-term financial debt in the forecast i s not healthy and would be costly for JIRAMA (high interest rates) or impossible to finance. Therefore, as explained in the main text o f this appraisal document and discussed with the GOM, additional budgetary support of JIRAMA will probably be needed in 2007.

Table 11: JIRAMA Summary Cash Flow Statement (FY 2005-2009)

p-i#milfiois UXD]
EBITDA
f:omp any tax Variationin working capital(assets) Variation inworking capital@abfities) Net Interest expenses Cashflow b m current opemtions
Net Investments

2005 -59.3 -0.1 -6.1 76.9 -0.1 113 -2.5 88 -4.2 0.0 -42 46 142

2006 -3.7 -0.1 23.7 -80.7 -6.8 -67.6 -29.2 -968 -51.6 141.5 899 -69 5.1

2007 6.6 -0 1 -6.8 -14.8 -8.9 -2411 -46.5 -705 37.1 17.8 548 -15.7 -108

2008

2009 22.9 -1.2 -5.0 -3.1 -7.9 56 -22.9 -172 17.9 0.0 179 . 6 -23.1

Cash flow after investments Increase(+)/decrease(-) i LT f i n a n c i a l debt n Increase(+) in equity and subsidies Cash flow h m financing acthities Increase(+ydecrease(+) innet cash position N e t Cash Position at the end o f the FY (cash

11.0 -0.2 -7.7 -8.0 -7.4 -12.2 -26.7 -39A 18.6 6.2 248 -14.2 -24.6

90

Attachment 9.1

Jirama E l e c t r i c i t y TARIFF
Applied from April 2006
Exchange Rate Ar/USD
TA Tariff H V Heavy Usage Tariff HV Hourly

2100 Ar
I FF
Capacity Charae . . Energy _. Fixed Fee Caaacitv Charee
IJnit
-.. ..

31 -mars-06

I
I

:
t *

I US centsikWh I

US$kW

I 1

US$ US$ikW

I
I

Tariffs April 2006 Zone 1 I Zone2 I Zone3 $12.291 I 4.11 I

$52.381 $10.601

a M

Tariff M V Heavy Usage Tariff M V Short Usage Tariff M V Hourly

Tariff M V Heavy Usage

v1

05 6

Tariff M V Short Usage Tariff M V Hourly Energy Night Tariff L V General Others Tariff L V General Others Tariff L V L i f e Line Non Residential Subscribed Cap < 3 kW Tariff L V L i f e Line Residential Subscribed Can < 3 kW

B -i ;

$ ,

91

Annex 10: Safeguard Policy Issues MADAGASCAR: PowerWater Sectors Recovery and Restructuring Project

A. Overview
During the preparation o f the J I R A M A financial recovery and restructuring plan, the 1. Malagasy Government in collaboration with the Utility has developed an investment Plan for the period 2006 - 2012.

2. The investment Plan relates to all the activities o f JIRAMA: electricity, water, as w e l l as the activities related to customer management, financial and commercial issues. The part o f the proposed program to be supported by IDA focuses o n financing needs for the most pressing and high-priority investments and will be executed in two phases: the first phase APL-1 for the period mid-2006 - mid-2008 and the second phase APL-2 for the period o f mid-2008 - mid2012.

3.

Phase 1 o f the program (APL- 1 would assist JIRAMA recovery plan with:

(a) reduction o generation costs by rehabilitation o f existing hydroelectric and thermal units, as f w e l l as conversion o f some diesel generators to heavy fuel oil;

(b) reduction o technical losses in transmission and distribution by upgrading o f key sections o f f MV lines, replacement o f overloaded transformers and undersized distribution lines and cables;
(c) improvements in metering, billing and revenue collection by meter verification and replacement, high-value customer management, updating o f customer records, introduction o f prepayment meters and spot metering techniques in selected clusters; (d) modernization o JIRAMA 's information systems and IT equipment by installation o f a f company-wide computer network and associated hardware and software.

4. APL-1 would also support the long-term objectives o f improving the electricity and water sectors' performance by assisting Madagascar in providing funds: (a) for complementary actions needed to accompany the transaction advisor (IFC) in the process o f selecting and contracting a new private operator to take over JIRAMA; (b) for prolongation o f the current management contract to avoid any hiatus before the takeover by the selected strategic partner; and (c) TA to the Ministry o f Energy (MEM) to steer the above process to a successful outcome and for capacity building within MEM.
APL-1 will also support the technical and safeguard studies required for APL-2 as w e l l as 5. the due diligence requirements for private hydro generation investments to be eligible for IDAbacked guarantees in a subsequent PRG operation currently under preparation.

92

JIRAMA selected a consultant to carry out the preparation o f an Environmental and 6. Social impact Management Framework (ESMF) for investments to be implemented under APL1. The E S M F was prepared in accordance with Bank guidelines and national environmental policies (Environment Charter and Mecie decree related to the necessity o f investments compatibility with Environment).

7. Investments proposed to be financed under APL-1 concern rehabilitation and reinforcement o f existing installations. The reinforcements consist mainly o f replacement o f transformers and faulty equipment. As no new Greenfield sites will be developed or human resettlement undertaken by JIRAMA as an effect o f the investments under APL-1, it is unlikely that this Operational Policy (OP) will be triggered. This Operational Policy i s likely to b e triggered for the second Phase o f the project APL-2.
8. The environmental classification o f the APL-1 part o f the project i s Category B (partial Assessment). During the preparation o f phase 2 (APL-2), ESIAs with RAPSwill be conducted and submitted to ASPEN for review and clearance.

B. Methodology

The following methodology has been used in the preparation f the ESMF: (i) review f 9. investment plan; (ii) review o f legal and regulatory framework and analysis o f environmental safeguard triggered by World Bank policies; (iii) visit; (iv) data analysis, identification and field assessment o f the potential project impacts and mitigation measures; and (v) proposal for environmental measurements with mitigation measures.

C. EnvironmentalAssessment Findings
Rehabilitation o tlzermal power station f

Rehabilitation o f thermal power station o f Ambohimanambola, Mahajanga, Toamasina, 10. Toliary, Antsiranana consist o f the replacements o f machine parts, including the rehabilitation o f auxiliaries and general revision o f the generator Units. The environmental examination o f the projects related to the rehabilitation o f the power 11. station showed that the environmental impacts are generally neutral. However, the impacts o f the investments alone cannot be considered independently from the totality o f the installations and the current environmental situation in the site in which they are located. The main impacts are noise, the atmospheric emissions, the pollution o f ground and water due to non efficient management o f effluents, and poor r i s k management including absence o f an emergency plan.

93

MAIN IMPACTS Noise pollution

PROPOSED MITIGATION MEASURES Respect instruction security and

safetv

ACTIONS Wearing ear-protection obligatory in the power stations site Ensure adequate maintenance o f machinery Conduct a systematic check-up every six months Periodic control for noise level on the receivers

Installation o f a system control and follow-up the workers health

Atmospheric emissions

Installation o f a system control and follow-up the employee health Optimized and rigorous maintenance for the material and equipment

Creation o f a data base on employment health Inspect machinery and vehicles regularly and carry out necessary repairs on time to prevent and discharge o f o i l gasoline or other pollutants Respect times and criteria o f maintenance Replacement o f defective parts Envisage equipment for used o i l collection and disposal, as w e l l as fuel storage so as to avoid soil, ground and surface waters contamination

Soil and water pollution (solid Waste and effluents) Soil treatment

Temporary collect in tanks at the safety site Used Oil disposed by specialized companies (ADONIS or TOTAL services)

Improvement o f the processing system for liquid waste Risk and dangers Acquisition o f fire fighting equipment Strengthen worker safety measures b y the establishment o f an emergency plan for each site Training on the safety prevention

Conduct a study on the basin capacity according to the effluents quantity Purchase o f fire extinguishers Emergency plan made available Information and sensitizing staff including simulation Repeater course for staff systematic training Provide workers with protective gears

Dangerous waste (asbestos) Respect instruction security and safety

Provide worker protection equipment Tanks secured in safety site Elimination following National Plan for the POP with Malagasy Environmental Administration

Rehabilitation o hydroelectric power station f

Rehabilitation of the hydroelectric power station o f Antelomita 1, Ankazobe, Tsiazompaniry, Vatomandry, Andekaleka and Volobe, consist o f replacement o f used turbine and alternator parts, Turbine Cooling equipment, general revision o f plant, and rehabilitation o f the c i v i l engineering works.

12.

94

13. The analysis o f the environmental impacts o f the projects concluded that impacts are nonsignificant and reversible except for the environmental impacts o f the restoration o f the civil engineering works planned for the hydroelectric power station at Vatomandry. Specific attention needs to be given to the rehabilitation o f transformers in which the PCB (Polychlorinated Biphenyl) represents environmental risk. JIRAMA has agreed to comply with the action plan for the elimination o f Persistent Organic Pollutants (POP), elaborated in collaboration with the Malagasy Environmental Administration, the coordination committee o f POP and supported by the UNEP. JIRAMA will therefore ensure safe storage o f the old transformers.
For the hydroelectric power station in Vatomandry (192 KW), JIRAMA must meet the requirements o f the safeguard policy OP 4.37 on the Safety o f Dams. This rehabilitation will therefore only be realized after an expert report on the dam safety, carried out by an independent expert, judged satisfactory to IDA.
14.

M A I N IMPACTS
Soil and water pollution by used or old batteries Noise pollution

PROPOSED MITIGATION MEASURES

Waste Management Security and safety instructions enforced and adhered to

ACTIONS
Create a site for safe storage Noise-protectionobligatory in the site Ensure adequate maintenance of machinery Periodic control for noise level on the receivers Enforce the presence o f safety works signals Create a staffed and equipped dispensary accessible during working hours Provide material for protection of staff on site Strengthen worker safety measures by the establishment of an emergency plan.

Risks of work related accidents

Security and safety instructions enforced and adhered to

Chemical pollution risk

Transformer Security and safety instructions enforced and adhered to

Organized Training for workers on the PCB risk Ensure transformers storage in safe site Elimination following National Plan for the POP with Malagasy Environmental Administration

Dams silting up

Dams Clearing Minimize deforestation

Limit the interventions on land with high risk of erosion Install soil stabilizing vegetation Organize training programs targeted at all worker involved in the collection and elimination oil used

Soil and water pollution

Adequate management for the soil polluted by oil used or fuel

Rehabilitation o power lines f

15. The component rehabilitation o f power lines relate to the rehabilitation o f the distribution networks MT and BT o f the interconnected network o f Antananarivo (RI Tana) and other centres as well as the rehabilitation o f the 63 kV RI Tana Transmission line. These 95

projects include reinforcement o f the networks, replacement and repair o f transfonners and faulty equipment. The current problems are especially due to acts o f vandalism, dilapidating Structures o n the 63 kV line and out-dated equipment. Generally, the likely environmental impacts are n o n significant for the 63 k V Transmission line.

7 -

M A I N IMPACTS Landscape change

PROPOSED MITIGATION MEASURES Integrated Landscape Maintenance

ACTIONS Eliminationo f the faulty lines and dilapidating structures Repaint regularly Regular field visit

Risks o f accident with the pylon rusted

Assessment o implementation and monitoring capacity f

16. The execution o f the APL-1 will require JIRAMA to amend its organization to integrate environmental Management which i s currently missing from i t s management structure. An entity within JIRAMA should manage all environmental actions involving the Company. This environmental unit will report to the Managing Director o f JIRAMA or to a directly designated high level manager in the hierarchy. The Unit will be responsible for the supervision o f environmental management within the Company, as w e l l as to propose a revised environmental policy. The environment unit will be the focal point for the environmental Administration and will represent the Company o n all questions related to environmental issues. The Unit would be responsible for prior examination o f all projects undertaken by J I R A M A as w e l l as environmental monitoring o f the existing installations. 17. On site, compliance with the environmental action plan will be ensured by the heads o f operation who will submit a report to the environmental services. These tasks relate to the implementation o f environmental measurements as w e l l as the follow-up o f the environmental impacts o f the activities.

96

Annex 11: Letter o f Electricity Sector Development Policy (Abstract) MADAGASCAR: PowerNater Sectors Recovery and Restructuring Project
This is an abstract in English o the letter dated 29 May 2006 from the Minister o Energy o f f f f Madagascar to the Vice-president, Africa Region. A copy o the letter in French is contained in the Project Files.

Objectives o f electricity sector policy

a a

Contribute to economic growth; Accelerate access to electricity; Reduce the burden o f the sector o n public finances.

Short-term actions for JIRAMAs recovery The 2005-2009 recovery plan consists o f internal measures to reduce costs, improve JIRAMAs technical and commercial performance accompanied by restructuring o f i t s balance sheet, a recapitalization o f the company, injection o f working capital by the Government, exoneration o f certain taxes and duties and substantial tariff increases. I t i s to be accompanied by a highpriority program o f investments. Long-term management option for J W A The Government has decided to accept the recommendation o f the Task Force set up to review the institutional and management options for JIRAMA. Consequently:
a

a
a a

J l R A M A will remain state-owned; Water and electricity activities will not be separated; The enterprises electricity branch will not be unbundled but will remain vertically integrated; A private partner will be competitively recruited to operate J I R A M A under a type o f leasing contract (contrat daffermage).

Other Government commitments

a a a a a

Provide JIRAMA with additional working capital if required; Clear up payment arrears to J I R A M A o f public bodies and set up a mechanism to prevent a recurrence; Support JIRAMA in its efforts to improve its payment rate from industrial and household consumers; Launch an IPP program with the assistance o f IFC; Introduce an automatic electricity tariff adjustment mechanism.

97

Annex 12: Project Preparation and Supervision MADAGASCAR: Power/Water Sectors Recovery and Restructuring Project

PCN review Initial PID to PIC Initial I S D S to PIC Appraisal Negotiations Board/RVP approval Planned date o f effectiveness Planned date o f mid-term review Planned closing date

Planned February 28,2006 April 25,2006 April 25,2006 May 12,2006 May 3 1, 2006 July 13,2006 September 1,2006 September 30,2007 April 30, 2009

Actual February 28,2006 April 28,2006 May 10,2006 May 19,2006 June 2,2006

Key institutions responsible for preparation of the project:

Ministry o f Energy and Mining o f Madagascar Ministry o f Economy, Finance and Budget JlRAMA

Bank staff and consultants who worked on the project included:

Name
Task Team StCphan GARNIER Erik F E R N S T R O M Sunil MATHRANI Fabrice BERTHOLET Gervais RAKOTOARIMANANA Sylvain R A M B E L O S O N Paul-Jean FEN0 Amadou KONAFS Gilles VEUILLOT Wolfgang CHADAB Pierre V I E I L L E S C A Z E S Lily WONG CHUN S E N Saholy ANDRIAMBOLOLOMANANA Power Engineer, Team Leader Power Engineer Senior Economist (Consultant) Financial Specialist Senior Financial Management Specialist Senior Procurement Specialist Safeguards Specialist Safeguard Specialist Counsel Finance Officer Senior Financial Officer Program Assistant Senior Program Assistant

Title

Unit
AFTEG AFTEG AFTEG AFTEG AFTFM AFTPC AFTS1 AFTS1 LEGAF LOAG2 IEF AFTEG AFC08

98

Quality Assurance Team / P e e r Riewers

S. Vijay IYER Irene XENAKIS Ronald RIDKER Charles FEINSTEIN Michel LAYEC Prasad TALLAPRAGADA L u i z MAURER L i e f JENSEN Maria Isabel MARQUES-de-SA Nicola Ruggero SAF'ORITI Stefan RAJAONARIVO

Sector Manager, Energy Operations Advisor Consultant Sector Leader Lead Energy Economist Senior Energy Specialist Senior Energy Specialist Lead Financial Management Specialist Principal Investment Officer Investment Officer Business Development Officer

AFTEG AFTQK AFTQK LCSFP AFTEG AFTEG AFTEG AFTFM CASDR, IFC CASDR, I F C CASDR, IFC

Bank funds expended to date on project preparation:

1. Bank resources: US$lOO,OOO 2. Trust funds: U S $ O 3. Total: US$lOO,OOO

Estimated Approval and Supervision costs:

1. Remaining costs to approval: U S $ O 2. Estimated annual supervision cost: US$150,000

99

Annex 13: Documents in the Project F i l e MADAGASCAR: Power/Water Sectors Recovery and Restructuring Project

Letter o f Electricity Sector Policy dated M a y 29, 2006 from the Minister o f Energy o f Madagascar to the Vice-president, Africa Region.

Economic Internal Rate o f Return Calculation (EIRR) for the 2006 - 2012 JIRAMAs investments. Financial Internal Rate o f Return Calculation (FIRR) for the 2006 - 2009 JIRAMAs recovery plan. Financial Internal Rate o f Return Calculation (FIRR) for the APL- 1 investments. Environmental and Social Management Framework Report. Law Nr. 98-032 (Electricity Law) and Law Nr. 98-029 (Water Law) dated January 20, 1999 and implementation texts. Ordinance Nr. 75/024 dated October 17, 1975, establishing JIRAMA.
Study alternative forms o f structuring the water and electricity markets and o f restructuring Jiro sy Ran0 Malagasy (JIRAMA) - (Financed by PPIAF).
Least Cost Generation Master Plan.

100

Annex 14: Statement of Loans and Credits MADAGASCAR: Power/Water Sectors Recovery and RestructuringProject
Onginal Amount in USS Millions Project ID PO90615 PO83351 PO82806 PO74448 PO74236 PO74235 PO73689 PO76245 PO72987 PO72160 PO55166 PO51922 PO5 1741 PO52186 PO01568 FY 2006 2006 2004 2004 2004 2004 2003 2003 2002 2002 2001 2001 2000 1999 1998 Purpose MG-MultiSec STIIHIVIAIDS 2 (FY06) Integ Growth Poles MG-Transp Infrastr Invest Prj (FY04) MG-Gov & Inst Dev T A L (FY04) MG-GEF Env Prgm 3 (FY04) MG-Env Prgm 3 (FY04) MG-Rural Transp APL 2 (FY03) MG-Mineral Res Gov SIL (FY03) MG-MultiSec STIiHIViAIDS Prev APL (FY02) MG-Priv Sec Dev 2 (FY02) MG-Com Dev Fund S I L (FYOI) MG-Rural Dev Supt S I L (FYOI) MG-Health Sec Prgm Supt 2 (FYOO) MG-Microfinance (FY99) MG-Community Nutrition 2 (FY98) Total: IBRD
0.00 0.00

Difference between expected and actual disbursements Cancel.

0.00

IDA 30.00 129.80

SF

GEF 0.00

Undisb. 29.01 111.85 112.49 20.08 7.25 31.86 40.88 16.95 5.25 11.35 17.57 32.59 16.36 1 .so 2.17 457 16

Orig. 4.67 -10.09 49.93 5.64 3.17 8.61 -0.08 -2.36 -1 .os 7.08 -63.3 1 4.34 -3.32 0.86 -8.48 442

Frm. Revd
0.00

0.00
0.00

0.00 0.00
0.00

0.00 0.00
0.00
0.00 0.00

0.00
5.84

0.00 0.00 0.00 0.00 0.00 0.00

150.00
30.00
0.00

0.00
0.00
0 .oo 0.00

0.00
0.00

9.00
0.00

0.00 80.00 32.00 20.00 23.80 110.00 89.05 40.00 16.40 27.60
~~

0.00
-7.38

0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00

0.00 0.00
0.00
4.69 -9.74

0.00
0.00

0.00 0.00
0.00

0.00
-0.42

0.00 0.00
000

0.00
~

0.00
900

0.00
000

77865

000

0.00
7.01

MADAGASCAR STATEMENT OF IFCs Held and DisbursedPortfolio In Millions o f U S Dollars

Committed IFC
FY Approval 1997 1995 1991 2005
2000

Disbursed IFC
Partic. Loan
0.50

Company AEF G H M AEF Karibotel

Loan
0.50

Equity
0.00

Quasi 0.00

Equity
0.00

Quasi
0.00

Partic.
0.00

0.00

0.19
0.00 5.96

0.00
2.09

0.00 0.00 0.00

0.68

0.00 0.00
0.00

0.19

0.00
2.09
0.00

0.00
0.00 0.00

0.00
0.00 0.00

BNI
BNI BOA-M Cottonline Total portfolio:

0.00
0.00

0.00
0.82

0.00
1s o 8.15

0.00

0.00
1.50 2.19

0.82

0.68

0.00 0.00
0.00

2004

0.00
2.91

0.00
0.68

0.00
0.00

0.00
2.91

0.00
0.68

Approvals Pending Commitment

F Y Approval 2004 2001 2001 2004 Company LGA Besalampy COTONA I11 BP Madagascar Total pending commitment Loan Equity
0.00 0.00 0.00 0.00

Quasi

Partic.

0.01
0.02 0.01

0.00 0.00
0.00 0.00

0.00 0.00
0.00 0.00

0.00 0 04

0 00

0 00

0 00

101

Annex 15: Country at a Glance MADAGASCAR: Powerwater Sectors Recovery and Restructuring Project

Madagascar at a glance
POVERTY a r d S O C U L
2004 Poorlation. mid-war h h s ) GNI DW cada P#asme#md. U S 1 GNI (Adbsmehd. U S W m l

Ma6

Mahcascar 17.4 3m 52 29 29 71 31 5 3
78

S& Saharan Africa

imane 2338 510 1,184

1.8 1.1

LOW-

ta w lopinant dlarnond'

7 19 6m 432 22

Averam arrud uowth.199804

PoDdation rn) Labor bm f%I

in

M a n Damlation Wofhto$laao&hnI LiL wectacvat b i h f ~ r s l lnfart rmrtalh Lerl.PPOk bkhsl Ctild m l n u M o n f % o f M m n & e r S I k c e a t 0 animmved waerswme i%ofnoadaaknI Litencv & o f nao&bnace 7 S I Gross mmanfenrdlment E o f d i o o k o e aao&hnl Male Female

Mast r e c d estimate (latest v a audlatie. 1998.041 e Powm f$ d a o d a b n bdo w i - a h m / n o & v h I

3 3

37 % ' 101
ti 6 85 ICQ

120 122 117

45 8

s 3

31 58 79 44 75 61 94 101 88
2004

KEY ECONOMlCRATlOSard LONGTERM TRENDS 1984

GDP I U S b&mI Gross catital brrrdonlGDP Emom d a d s ard seMce&DP G r o n &msticsaunoslGDP G r o n rational suna&DP Clrrentacrcunt telanoelGDP Irtem9 DavrrertslGDP Total debtlGDP T m l debt seniekmork Presentdur o f b b l l G O P Present d u e o f debtkmrts
farerace a m ! w M ) G DP GDPoercaob Emark ofaocds ard seMces

--"*-

- &-me

Ilgdagasar

pup

1994

2003

-6 n 2.1 72 8 30 2

29 88 133 40 2 .I

zn
0.7

109

3n
33 1.4

55 I7 9 2 . 3 I 89 13 n
go6

4.4 24.3 32.6 8 .0 13.9 -10.8 0.7 79.4 5.6

moiioinlc tailox'

Trade

I
I

4.4
1378

49 08

93

5.4 288 1148

20M

133B94 193604

2003

2001-08

hdebtdnrn

1.2 -1.5 4.0

2.7 -03 0.7

9s 6.7 41.7

53 2n 15

6.1 3 .0 11.6

S T R U C T U R E d t k ECONOMY
hriCulbJre lrdustnf buharn'na Senices

i a t GDPl %

1984 353 13D 112 511 862 98 179

19% z18 9.7 8n

2003

2004

@5
B38 298

292 I5 3 13.7 555 82n g. I 32 . I

2003

28.8 16.0 14.2 55.2 82.5 g .6 4.2

2004

Hcusehold Inal mnarrration emmdmre Genml oorhfirel mmmdicn extoendlure lmcrtsofawdsand senices
(anrace a m / m&I &riculbJre Irdustn, bukdvina Seni-5

69

198434 1994-04

23 12
08

1.1

I9 25 32 3D 32 29 92 72

13 145 I5 3 10.4 125 242 338 328

3.1 6.6 6.1 6 .O

Hcusehold Inal mnwrrotion emmdmre General aorhfirel mmmdicn extendlure G r o a catital b d o n h c r t 5 0 f awdsand senices

0.4 -08 3.4 0.1

57.6
24.8

0.7 8.6

Nc&e:2004daaae prelrmrerye+t'ms TIE diamonds h o w fcur kevindcaors in the c c u m f i n boldloomared with rn i m o r n m x ~ a e . lfdata are mnim the d i a m r d w l l m be imomkte.

102

Xi1 81

X?

P2 3 3

44

46

48

50

M AD AGA SCA R

12

POWER/WATER SECTOR RECOVERY AND RESTRUCTURING PROJECT

EXISTING TRANSMISSION LINES: 138 kV, DOUBLE CIRCUIT 63 kV 35 or 20 kV MAJOR PRODUCTION CENTER WITH A CAPACITY OVER 1MW EXISTING HYDRO POWER STATIONS CANDIDATES FOR HYDRO DEVELOPMENT PAVED ROADS ALL-WEATHER ROADS
Ambanja Ambilobe

12

ANTSIRANANA

DIANA

Nosy-Be

Iharana

14

RAILROADS RIVERS SELECTED CITIES REGION CAPITALS PROVINCE CAPITALS NATIONAL CAPITAL REGION BOUNDARIES PROVINCE BOUNDARIES
Sofia
Boriziny Analalava

ANTSIRANANA
S AVA
Bealanana Andapa Antalaha

vy Mahava

Vohimarina

14

Sambava

Antsohihy

SO F IA
Befandriana Maroantsetra

MAHAJANGA

MAHAJANGA
16 Soalala Mitsinjo Marovoay

An

Mandritsara

jom

bo

Mampikony

ny
Mananara

16

Be

ma

B OE N Y
Besalampy

riv

Ambato Boeni

Boinakely Tsaratanana Maevatanana Andilamena

M ah aja mb a

ANALANJ IRO F O
SoanieranaIvongo Ambodifotatra

Mozambique
Ma

Vohitraivo

MELAKY
na mb ah o

Kandreho

B E T SI B OK A
Ambatomainty

Andriamena

Vavatenina

Bets ibo ka

Amparafaravola

Lake Alaotra
Ambatondrazaka

Fenoarivo-Atsinanana

ava

Channel
18

Morafenobe

Mah

Maintirano

Bemahatazana

Ankazobe Fenoarivo be

ANALAMANGA
Anjozorobe

ALAOTRA Amont Volobe MANGORO

Fanandrana

Vohidiala

Volobe

vy

18

TOAMASINA

B O N G O L AVA
Antsalova

Tsiroanomandidy

A N TA N A N A R I V O
ANTANANARIVO
Miarinarivo

TOAMASINA
Ampasimanolotra

Manjakandriana Andekaleka Perinet

INDIAN OCEAN

Manambolo

Lily

I TA SY
Faratsiho

M Moramanga AT S INANANA Antelomitas a n d r a ka I and II

Can
Ma ngo ro

al
Anosibe Vatomandry Antanifotsy Antanambao-Manampotsy

Belo Tsiribihina

Miandrivazo Mandoto

Tsiribihin
20

VA K I N A N K A R AT R A
Antsirabe

Lohavana
Mahanoro 20

ME N A B E
Morondava
Moron
Mahabo Malaimbandy

Manandona Antetezambato

Sahanivotr y Talaviana
Fandriana

Marolambo

dava

A M O RO N ' M A N I A
Ambatofinandrahana Manandriana

Ambositra

Ambohimahasoa Ikalamavony Manja Beroroha Morombe

Vohilava Ranomafana Ifanadiana

FIANARANTSOA H AU T E M AT SI AT R A

Namorana Manandray
Ambalavao

Irondro

Mangoky

Panga
Mananjary

VATOVAV Y F I TOVI N A N I

lanes

Nosy Varika

22

TOLIARA
Ankazoabo atm.

Ankarmena

Ikongo

22

I H OROM B E
Ihosy

F I A N A R A N T S OA
Ivohibe

Manakara
Vohipeno

ATS IM O A N DR E FA NA
c re h a an
Sakaraha Iakora Betroka Benenitra Betioky Onilahy

Vondrozo

Farafangana

TOLIARA

Fih

ATSIMO ATSINANANA
Vangaindrano Midongy-du-Sud

A N O SY
24 Berakete Bekily

Befotaka 24

50

TANZANIA

45

50

COMOROS
ave
Manantenina

Antsiranana

ndr

Ch ann el

SC A

AmboasarySud Beloha Tsihombe

ZA MO

A N D ROY
Tolagnaro Ambovombe Androy

15

BIQ

Ampanihy

Ma

UE

Mayotte (Fr)
Mahajanga
15

R
Toamasina ANTANANARIVO
20

MADA

20

Mozamb ique

GA

Fianarantsoa

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. 44

50

100 KILOMETERS

150

200
25

Toliara

IBRD 34815

JUNE 2006

25 40 45 50

46

48