The World Bank Second Rwanda Energy Sector Development Policy Financing (P166458) Program Information Document (PID) Concept Stage | Date Prepared/Updated: 03-May-2018| Report No: PIDC24397 Page 1 of 7 The World Bank Second Rwanda Energy Sector Development Policy Financing (P166458) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Project Name Parent Project ID (if any) Rwanda P166458 Second Rwanda Energy P162671 Sector Development Policy Operation (P166458) Region Estimated Board Date Practice Area (Lead) Financing Instrument AFRICA Nov 16, 2018 Energy & Extractives Development Policy Financing Borrower(s) Implementing Agency MINECOFIN MINECOFIN, MININFRA Proposed Development Objective(s) The Program Development Objective (PDO) of the proposed operation is to enable fiscally sustainable expansion of electricity services. The proposed operation is built around two pillars: (i) containing the fiscal impact of the electricity sector; and (ii) improving the operational efficiency, affordability, and accountability of electricity service. Financing (in US$, Millions) FIN_SUMM_PUB_TBL SUMMARY Total Financing 125.00 DETAILS -NewFin3 Total World Bank Group Financing 125.00 World Bank Lending 125.00 Decision The review did authorize the preparation to continue Following the corporate review, the decision was taken to proceed with the preparation of the operation. Page 2 of 7 The World Bank Second Rwanda Energy Sector Development Policy Financing (P166458) B. Introduction and Context Country Context Rwanda’s National Strategy for Transformation (2017-2024) aims to lay the foundations for achieving upper middle- income country status by 2035 and high-income status by 2050: achieving universal electrification is a fundamental step towards these development objectives. Rwanda’s current development strategy is laid out in its latest seven-year plan, the National Strategy for Transformation for 2017-2024 (NST1). The NST1 is guided by the Sustainable Development Goals (SDGs), the Africa Union Agenda 2063 and its First 10-Year Implementation Plan 2014-2023, and the East African Community (EAC) Vision 2050. NST1 identifies the importance of universal electricity access for achieving the envisioned social transformation and aims to expand electricity access to 100% households by 2024. The strategy envisages expansion of electricity sector based on least-cost principles and competitive procurement to provide quality, reliable, and affordable electricity to consumers, and aims prioritizing energy intensive industries and productive uses of electricity as measures to reduce the cost of doing business in Rwanda. The electricity sector targets underlying the NST1 are underpinned by Rwanda’s impressive progress in electrification. Investments in grid extension have increased grid connections from 6 percent in 2009 to 33 percent at the end of January 2018. Off-grid access has more than doubled since 2016 and is estimated at 12 percent at the end of January 2018. This puts the nationwide electrification rate at 43 percent, up from 6 percent in 2009. The expansion of access has been accompanied by tripling of generation capacity from 76 MW in 2010 to 213 MW in December 2017. This DPO series supports a Government reform program that proactively addresses the fiscal risks related to the expansion of electricity service to achieve universal access to affordable, sustainable and reliable electricity by 2024. Despite recent progress, Rwanda’s cost of electricity service delivery is among the highest in the region (around US$0.28/kWh in FY2017/18), and tariffs are barely enough to cover operating cost of the utility, Rwanda Electricity Group (REG). The Government of Rwanda has been stepping in to fill the gap between sector cost and revenues and provide grants for capital expenditure. Electricity subsidies are budgeted at 1.4 percent of GDP in FY2017/18 and at 1.5 percent of GDP for FY2018/19. Plans for rapid system expansion during NST1, already only possible at relatively high costs due to country’s lack of low-cost domestic energy resources, carried significant fiscal risks because (a) contracts with private developers to develop capacity were procured through bilaterally negotiated deals rather than competitive procurement; (b) the country prioritized costlier domestic sources over cheaper supply from neighboring countries (e.g., Ethiopia, Kenya, or Uganda); (c) investment planning was inconsistent with least-cost planning principles; and (d) there is limited scope for tariff increases as electricity is already unaffordable for much of the population. Subsidies could rise significantly by 2020 if the GoR adheres to its business-as-usual sector expansion practices, undermining the fundamentals of the sector, crowding out public spending on other priority areas, and imposing a major risk for medium- and long-term fiscal sustainability and macroeconomic stability in Rwanda in general. The reform program supported by the DPO addresses these fiscal risks through a Policy and Results Matrix underpinned by the principles of least-cost planning, competition, accountability, and operational efficiency. Relationship to CPF The focus on energy by this program is directly aligned with the most recent Rwanda Country Partnership Strategy FY2014–2018 (Report No. 87025-RW) and also with the World Bank’s twin goals. The series contributes directly to Theme 1 of the Country Partnership Strategy: “Accelerating economic growth that is private-sector driven and job- creating.� Under this theme, energy is highlighted as the key sector for World Bank support because increased access to electricity/energy services is core to both increased private sector investment and improved social welfare. Besides, increased access to reliable and affordable electricity supply lowers the cost of doing business, promotes job creation, improves citizens’ connectivity and access to opportunity, and strengthens resilience to climate change. Through these Page 3 of 7 The World Bank Second Rwanda Energy Sector Development Policy Financing (P166458) effects, the DPO is aligned with the World Bank’s twin goals of reducing poverty and promoting shared prosperity. C. Proposed Development Objective(s) The Program Development Objective (PDO) of the proposed operation is to enable fiscally sustainable expansion of electricity services. The proposed operation is built around two pillars: (A) containing the fiscal impact of the electricity sector; and (B) improving the operational efficiency, affordability, and accountability of electricity service. Key Results Result indicators under the three-part DPO series are categorized under the two pillars and constituting sub-pillars as follows: Indicator Baseline Target A1. Contain electricity subsidies as % of GDP 1.4% (FY2016/17) Not more than 1.4% (FY2019/20) B1. Ensure all generation and transmission projects initiated or accepted No Yes by the Government over the past 24 months are consistent with the (September 2017) (December 2020) LCPDP and comply with the PPP Law and competitive procurement procedures. B2. Initiate competitive procurement processes to implement 0 At least 1 investments identified in the LCPDP. (September 2017) (December 2020) B3. Expand electrification rate countrywide 40.7% 55% On-grid: 29.7% On-grid:38% Off-grid: 11% Off-grid:17% Of which, female- Of which, female- headed headed households: households: [TBD] [TBD] B4. Expand electrification rate among rural households 16.0 TBD based on the Of which, female- National headed Electrification Policy households: [TBD] Of which, female- headed households: [TBD] B5. Ensure REG’s financial statements are in full compliance with IFRS, No (September Yes (December their independent audit is without qualifications, and they are published 2017) 2020) within the first two quarters of the following year and distributed to key stakeholders. B6. Reduce total commercial losses as a percentage of electricity supply 11.95% (2013) 8.95% (FY2019/20) B7. Reduce average duration of interruptions (SAIDI) TBD TBD B8. Implement and publish annual customer satisfaction survey No (FY2016/17) Yes (FY2019/20) D. Concept Description The proposed Energy Sector DPO in the amount of SDR 88.5 million (equivalent to US$125 million) is the second in a programmatic series of three DPOs. The PDO of the proposed operation is to enable fiscally sustainable expansion of electricity services in Rwanda. The proposed operation is built around two pillars: (a) contain fiscal impact of the electricity sector and (b) improve the operational efficiency, affordability, and accountability of electricity service. Page 4 of 7 The World Bank Second Rwanda Energy Sector Development Policy Financing (P166458) To proactively address the fiscal risks from the electricity sector, this DPO series supports a program that includes measures to respond to the urgency of the situation but also lay the foundation for a sustainable sector capable of providing reliable and affordable energy services. This short- to medium-term reform program is underpinned by the principles of least-cost planning, competition, accountability, and operational efficiency and consists of the following main elements, captured through the prior actions: (a) Putting in place a fiscal policy for the electricity sector that balances the Government’s sector expenditure priorities and fiscal sustainability objectives (supported under Pillar A of this DPO series; see Figure 1) (b) Institutionalizing least-cost principles in the scheduling and procurement of new power plants, including in the short term, by moving from ad hoc, bilaterally negotiated investments to adoption of least-cost sector planning and competitive procurement, as well as including strengthened regional electricity trade in least-cost planning (Pillar B.1) (c) Promoting the transition to low carbon energy by reforming the legal framework for renewable energy generation and developing grid-connected hydropower and solar power (Pillar B.1), and by removing barriers for off-grid solar energy (Pillar B.2) (d) Reforming its electrification program to make electricity access more affordable, including by leveraging the private sector for mini-grids and off-grid solar (Pillar B.2) (e) Taking measures—including the transition to International Financial Reporting Standards (IFRS)-compliant accounting and commercial independence—to improve transparency of fiscal impacts and enable REG, which is in charge of electricity utility services provision, to tap commercial financing for sector expansion, and become a financially viable offtaker (Pillar B.3) (f) Improving operational efficiency of REG, through strengthened resource management in the utility, systematic monitoring of quality of customers’ commercial service and quality of electricity supply, and independent performance evaluation of REG (Pillar B.4) Figure 1: Link between DPO Pillars and Expected Outcomes (‘Theory of Change’) E. Poverty and Social Impacts and Environmental Aspects Poverty and Social Impacts The prior actions under this operation are expected to have substantially positive poverty and social impacts by Page 5 of 7 The World Bank Second Rwanda Energy Sector Development Policy Financing (P166458) providing access to reliable and affordable electricity service of improved quality to households and businesses. Relevant reform measures underpinning the prior actions of DPO-2 include establishing competitive procurement procedures for privately owned energy infrastructure, adoption of technically sound planning and investment procedures for expanding electricity access to all households, and improving overall quality of supply of electricity. Taken together, these measures are expected to bring down the cost of supply of electricity and enhance the availability, reliability, and quality of electricity supply to households and businesses. The development of new energy infrastructure, including of mini-grids, will follow international best practices with regard to land acquisition, an area where Rwanda has a good track record. A simplified licensing framework for mini-grids, currently being revised by Rwanda Utilities Regulatory Authority (RURA), will ensure that project implementation conforms to national standards and that consumers are protected. The development impacts of these measures are expected to be driven through the typical channels through which electricity access helps alleviate poverty. For instance, the Impact Evaluation of the Rwanda Electricity Access Rollout Program and Sectorwide Approach Development Project found several positive impacts of electricity access, such as: increased income and consumption spending, quality and value of houses, and asset creation. Electrification was also found to decrease household monthly energy expenditure (excluding electricity) and biomass collection costs and time and increase time spent on education by children and time used for tutoring children. Environmental Impacts The specific policies supported by this operation are not expected to have any negative effects on Rwanda’s environment, forests, water resources, habitats or other natural resources, while certain prior actions are expected to have positive environmental impacts by supporting the development of renewable electricity in Rwanda. By following least cost planning procedures and institutionalizing competitive procurement of electricity, the reforms under this operation are expected to improve the utilization of low-cost hydropower in the electricity mix and reduce the need for expensive and polluting fossil fuel capacity. Furthermore, adoption of planning and investment procedures to expand electricity access through off-grid sources would also facilitate substantial expansion of renewable sources of electricity. No prior actions under the operation are expected to have any negative environmental effects. Besides, Rwanda has in place adequate environmental controls and legislation under the mandate of Rwanda Environment Management Authority (REMA), providing support to line ministries including MININFRA in incorporating environmental guidelines in the operational manual for its programs. The World Bank is supporting REMA with technical assistance to take into account climate risks and opportunities and on land policy related issues, along with technical assistance to review sustainable land management practices. . CONTACT POINT World Bank Yadviga Viktorivna Semikolenova, Joern Torsten Huenteler Senior Energy Economist Borrower/Client/Recipient MINECOFIN Ronald Nkusi Director, External Finanace Unit, Ministry of Finanace and E Ronald.nkusi@minecofin.gov.rw Page 6 of 7 The World Bank Second Rwanda Energy Sector Development Policy Financing (P166458) Implementing Agencies MINECOFIN, MININFRA Ronald Nkusi Director, External Finanace Unit , Ministry of Finance and E Ronald.nkusi@minecofin.gov.rw FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects APPROVAL Task Team Leader(s): Yadviga Viktorivna Semikolenova, Joern Torsten Huenteler Approved By APPROVALTBL Country Director: Diarietou Gaye 22-May-2018 Page 7 of 7